Written evidence submitted by Octopus Energy (REM0049)

Executive summary

The Government rejected zonal pricing last summer. The best option for ‘breaking the link’ between gas and electricity prices without breaking the market, “zonal” was backed on the record by the new DESNZ Permanent Secretary, the National Energy System Operator, the Energy Systems Catapult, Citizen’s Advice, the Resolution Foundation, the Regulatory Assistance Project, the Association of Decentralised Energy, Tech UK, and many more organisations, along with Octopus Energy.

The only published fully-transparent full-system modelling suggests zonal pricing would save at least £4.6 billion per year, or £68 billion over 20 years. But in practice, savings could reach up to £10 billion per year, not least as zonal could have saved up to £27 billion on total grid investment.

There has still been no Impact Assessment released to demonstrate the Government was confident it could save the country more money by reforming the national market than by introducing zonal. The decision was made to stick to a design that is structurally driving up bills through waste and inefficiency.

After several years of procedure, the Department has confirmed it has now gone “back to the drawing board”. With gas prices spiking yet again, we do not have time for more years of deliberation. British bill payers want and deserve real action to rebalance the energy market in their favour.

We suggest the Committee should request the Impact Assessment be published, and recommend the Department reverses its decision to reject zonal pricing. If not, Britain will be left with far higher energy costs than necessary.

If the Government insists on retaining the single national wholesale market, then swift and decisive change is needed along the lines we set out in Section C of this response. The worst possible outcome for consumers is several more years of needless inefficiency. There is a real danger that this is where the Reformed National Pricing programme is taking us.

The Government rejected zonal pricing on three grounds: less risk for investors, lower costs, and equal pricing for consumers. All three grounds have since been overturned by the government’s own actions.

1. Less risk for investors: The Government suddenly reindexed Renewable Obligation and Feed-in Tariff contracts in a bid to net off self-inflicted bill rises. This has further spooked investors, who are already now in uncharted territory in terms of GB policy risk, having rejected all precedented reforms.
2. Lower costs: The growing cost of uncertainty, gas price volatility, and supply chain inflation means capital costs are going up regardless of the Government’s rejection of market reform.
3. Fairness for consumers: The Government said it wanted a uniform price for consumers. This did not exist anyway. Even so, the Government has since confirmed plans for region-specific real-time bill discounts for households near wind farms, as well as discounted power for datacentres in Scotland, proxying the outcomes of zonal pricing without truly realising the benefits.

The government’s alternative pathway, Reformed National Pricing (RNP) is already experiencing severe delays across the board which will inevitably lead to failure.

1. RNP delivery plan: This is indefinitely delayed and has become a black box.
2. Strategic Spatial Energy Plan (SSEP): Delayed another year since zonal’s rejection until at least 2027.
3. Transmission Charging Reform: Not expected until at least 2029, following decades of inaction, with the outcome out of DESNZ’s hands.
4. New grid infrastructure: Critical North-South links are already stalled and there is a growing risk of widespread slippage.
5. Gate 2 grid connections: 62% of 2026/27 projects delayed. The connection queue remains a bottleneck.

Meanwhile, the evidence base in favour of locational signals in the wholesale market has improved:

1. The European Commission: estimated EU-wide locational pricing could save up to €59bn annually.
2. The International Energy Agency: recommended strengthening locational pricing signals.
3. The Agency for the Cooperation of Energy Regulators (ACER): identified zonal markets as a cornerstone of efficient electricity market design.
4. The EU Commission’s Joint Research Centre: concluded that without granular locational signals, system operators cannot effectively operate demand-side flexibility.

Introduction

Britain’s electricity bills are unsustainably high[1]. We enthusiastically welcomed the Autumn Budget’s levy reforms, whilst calling for more as the only means for quick, lasting, effective bill cuts. Moving levies into taxation is necessary, but it does not fix underlying, structural issues within the electricity market that burden the economy. Locational signals - through nodal or zonal pricing - are also needed.

Volatile gas prices have become the linchpin of UK economic welfare, driving not only high household bills and energy debt, but also heavily influencing national inflation and interest rates. GB’s world-leading energy transition is being held back by a structurally dysfunctional electricity market.

Households and businesses have little incentive to electrify their heating and transport while electricity unit costs are several times higher than their fossil fuel equivalent[2]. Until that happens, Britain’s dependence on imported oil and gas will stay high. Zonal helps provide that incentive.

We have structured our submission and our answers to the Select Committee's questions across three parts:

a)     Part A: The limited rationale for rejecting zonal and slow progress on implementing reforms under RNP.

b)     Part B Addressing the flawed arguments against zonal. RNP as currently designed will not provide the improvements it promises.

c)     Part C: Measures that could improve the national wholesale market.

Part A - Limited rationale for rejecting zonal and concerns on progress on implementing reforms under RNP

Here, we set out the lack of published analysis supporting the decision to reject zonal pricing in favour of RNP and our concerns about the lack of progress on implementing RNP. This is driving investor uncertainty and prolonging the costly inefficiencies in the electricity system.

The Government still has not published its Delivery Plan or Impact Assessment. We know the previous Energy Secretary was advised that zonal pricing would cut bills in every part of the country by the Civil Service, hence her saying so in a speech she gave in March 2024, mentioning specific bill cut figures[3]. We are yet to see the analysis the Government relied on when it made the decision to dismiss zonal pricing last summer, nor nodal pricing a year prior.

Zonal and nodal pricing are internationally proven[4], thoroughly analysed, decades-old market designs. Reformed National Pricing (RNP) is an unprecedented and ill-defined collection of bespoke reforms. We are unclear about the detail of what it entails, nor is there any detail of its expected costs and benefits.

Conversely, since the Government announced its decision on zonal pricing, numerous pieces of new evidence from official sources has come out in favour of locational pricing in global markets:

1. The European Commission: estimated EU-wide locational pricing could save up to €59bn annually[5].
    
2. The International Energy Agency: recommended strengthening locational pricing signals[6].
    
3. The Agency for the Cooperation of Energy Regulators (ACER): identified zonal markets as a cornerstone of efficient electricity market design[7]. It also found the European Network of Transmission System Operators for Electricity (ENTSO-E) underestimated pricing benefits by up to 80% in its 2025 report recommending Germany switches to zonal pricing[8].
    
4. The EU Commission’s Joint Research Centre: concluded that without granular locational signals, system operators cannot effectively operate demand-side flexibility[9].

Early warning signs for the RNP package

The alternative pathway to zonal pricing chosen by the Government is becoming increasingly undeliverable. RNP’s core pillars are not functioning as intended.

1. RNP Delivery Plan: This was due in July 2025. It is still not published. Markets, companies, and investors are still in the dark about design, staging, and interactions of the elements of RNP, including how it affects both existing and upcoming investment. This increases policy risk and therefore capital costs.
2. Strategic Spatial Energy Plan (SSEP): This has been delayed another year, until at least 2027[10]. We are still, therefore, building generation in sub-optimal places, increasing long-term costs.
3. Transmission Charging Reform: This is out of DESNZ’s hands and Ofgem only expect to deliver in 2029. This is also leading to higher long-term costs as generation is sited in the wrong places and TNUoS volatility premiums are baked into CfDs.
4. Grid upgrades: There is widespread slippage in delivery, including among projects critical for keeping constraint costs down[11]. There is a growing risk we reach the worst-case NESO scenarios of £8 billion+ per year constraint costs, up from £1.5 - £2 billion per year today.
5. Grid Connections (Gate 2): 62% of 2026/27 projects delayed[12], incurring costs for many developers of between £50mn to £1bn (up to 30% of project costs)[13]. The connections queue remains a bottleneck. This is preventing demand coming online, which will raise bills for all already connected to the grid.

RNP relies on large-scale coordination. That coordination is not happening sufficiently well to avoid large cost rises. The cost of any frictions, delays in construction, and inefficiency is passed directly to the consumer.

Part B: The arguments against zonal are flawed. RNP as currently designed will not provide the improvements it promises.

In this part, we examine five claims made against zonal, the first three of which the Government cited as the reason for its decision to reject it. We refute each in turn.

Claim 1: Zonal pricing is too risky for investors. Government said that retaining a system with a single national price would reduce investor uncertainty and support long-term investment.

Answer: As above, its central pillars are all delayed or not going to plan.

The consequence is Government scrambling for minor cost cuts, leading to higher policy risk to investors. For example, to net off a rise in bills to subsidise high electricity costs for businesses, the Government breached the regulatory "grandfathering" principle[14] that has underpinned British renewables for decades in reindexing Renewables Obligation and Feed-in Tariff contracts. As per Richard Stone (CEO, Association of Investment Companies), this decision "drove a coach and horses" through Britain’s commitment to a stable investment environment[15]. The financial fallout could reportedly result in a net burden to consumers of £600 million[16]. Overall, we are seeing an economic disconnect where "robust underlying performance" of UK renewables is being overshadowed by "depressed sentiment"[17].

Most of the largest infrastructure firms that lobbied against zonal pricing on an investor risk basis already operate in countries with locational signals. CfDs and the promise of grandfathering throughout the transition to zonal pricing would have provided world-beating levels of assurance given it fixes prices.

Claim 2: A single national price is fairer for consumers. Government was concerned that zonal pricing would create regional variations in the retail cost of energy, resulting in a so-called ‘postcode lottery’.

Answer: The Government is no longer committed to this principle. It is “launching a new, innovative trial, which would mean that using the generated power would become a more cost-effective option compared to turning turbines off”[18]. At the same time, it is proposing to give specific discounts to households located near new grid infrastructure (at a cost of £1bn[19]), and targeted discounts on power prices for AI datacentres in Scotland[20]. In other words, Government is attempting to proxy the outcomes of zonal pricing, but through unclear, piecemeal reforms largely paid for by other energy consumers.

In any case, as the table below shows, a postcode lottery already exists in GB today. A typical electricity bill varies by around 15% across the country[21], a factor which Savills likens to a ‘postcode lottery’ for businesses[22].

Figure 1 - Regional variation in electricity costs for a typical household in July 2025[23]

Ultimately, how or if zonal wholesale prices are passed through to households would be entirely in the control of policymakers. Even if we did zonal pricing, a single price could still be offered or given to bill payers, as Italy[24] used to do, and as Norway currently does[25]. The Government could gain all of the back-end cost benefits of zonal pricing while maintaining a single national price, if it wished.

Claim 3: Reformed national pricing lowers the cost and complexity of investing which will mean lower bills for consumers.

Answer: Again, for all of the reasons above, RNP is not lowering the cost or complexity for investors. These savings for customers will not materialise.

Zonal pricing would deliver £4.6bn per year in savings, or £68 billion over 20 years[26]. This is a conservative estimate. Benefits from improved future siting decisions, reductions in network build, and added protection from gas price shocks mean, in practice, zonal savings could stack up to £10 billion per year.

In February, gas prices nearly doubled overnight due to the Iran War, adding up to £300[27] to annual household bills from July whilst halving GDP growth[28]. Zonal pricing provides an insurance policy against gas price spikes by reducing variable market costs by up to 43%, as seen in Figure 2. It effectively de-couples electricity costs from gas prices by:

●       Reducing the total amount of gas burnt in the system by around 30% [29];

●       Reducing the proportion of the country where electricity prices are set by gas;

●       Converting bill-raising grid constraints into bill-cutting ‘congestion rents[30]’.

Figure 2 - Variation in variable electricity market costs under zonal and national pricing, under normal and high gas price scenarios[31]

Claim 4: New grid infrastructure is the best way to fix things.

Answer: The decision to retain the national wholesale price rests on the argument that grid constraints can be solved efficiently by building more transmission. But as Figure 3 shows below, rising grid costs (and their sensitivity to both inflation and interest rates) from this build out threatens to neutralise all of the wholesale benefits of cheap renewable energy on bills.

Figure 3 - Estimated range of changes to key elements of the annual electricity bill from 2024 to 2030 (Real terms, £2024)[32]

Building grid is important but it must be cost-effective. Zonal helps with that. Evidence from NESO[33] and FTI Consulting[34] suggests that up to £27bn of post-2030 network investment could be avoided or re-staged to cut costs.

Claim 5: It would take too long to implement:

Answer: It would not need to take any longer than 18 months based on international precedent. Sweden’s transition took 15 months, and in any case, zonal would start to influence investment decisions well before go-live provided the zone layout is published and known to the market. Given bills are set to rise sharply, there’s no time like the present for pro-customer market reform.

Part C: Reforms needed under RNP

RNP will always be inherently less efficient than zonal because we are paying to fix inefficient market outcomes after they occur, rather than preventing them from occurring in the first place.

There is also a large political risk that British households will increasingly subsidise European bills because, as the Government admitted, inefficient interconnector flows can only be fixed with zonal (or nodal) pricing[35]. These inefficient flows already mean British customers pay more to effectively export Scotland’s cheap wind power to France via cables in the power-poor south-east England, necessitating gas plants quickly firing up there to meet the remainder of local demand.

Both being said, Octopus’ priority is lower bills for its customers in general, and lower electricity prices to help electrification. Electrification of demand, particularly low grade heating and transport, is by far the biggest priority for both energy security and net zero in the British context. We are supportive of any policies that help to cut bills.

If the Department wants to retain the national wholesale market then we suggest swift action to implement the following decisive measures.

1)     Implement effective regional markets for clean flexibility

Flexible demand and storage assets, such as batteries, can save billions per year. But with a single wholesale price, flexible assets are incentivised to support the system less than a third of the time[36]. Octopus Energy is working closely with NESO and other industry partners to develop a set of regional open, competitive, data-driven flexibility markets to allow NESO to procure low carbon flexibility up to 2 days before need.

2)     Make the SSEP effective but agile

At present, the SSEP does not factor in complex demand-side variables, and can only react at best on a 3-year cycle despite being used to justify investments in 40+ year grid infrastructure. This makes it inherently rigid. A ‘heavy-handed’ SSEP is therefore risky. Octopus Energy believes that the SSEP should be a ‘light touch’ mechanism, providing a guide to investors on major infrastructure development while not restricting innovation and agility.

The SSEP should be at least used to design locational pots with separate clearing prices in consumer-backed procurement schemes such as the CfD. Aligned with prioritised grid connections, this ensures that the most system-beneficial projects procedurally move to the front of the queue.

3)     Provide predictable and strong locational network signals

To align with an agile and market-led SSEP, network charging reform must remain cost-reflective[37]. We should not reward sub-optimal siting that ultimately raises bills. More predictable long-term signals are important, however.

For demand, we encourage fast-tracking removal of the £0 floor on demand charges, incentivising strategic demand (e.g., data centers) to locate in constrained areas and reduce costs[38].

For generation, year-on-year TNUoS uncertainty forces developers to apply 'risk multipliers' in national pay-as-clear auctions such as the CfD, charging consumers for hypothetical worst-case scenarios. Ofgem’s plans for TNUoS reform by 2029 will come too late, locking today’s uncertainties into consumer bills well into the 2050s.

Ahead of fundamental reform, further disaggregation of auctions into locational pots with separate clearing prices, guided by the SSEP, would help limit these premia. We tentatively welcome further exploration of fixing TNUoS at the point of investment, but the length of any ‘free’ fixes should be carefully considered to avoid pushing excessive long-term cost risks onto consumers.

4)     Break the link between CfDs and metered generation

The current CfD model no longer works. Generators are incentivised to produce power whenever they physically can rather than when the system needs it. This drives up costs for consumers.

Capacity-based CfDs[39] are a simple and effective fix for this. They move toward a model where generators are fully exposed to market prices, promoting more efficient operational decisions and long-term price hedging. It is the best way to move from the current 'subsidy culture' to a mature energy transition.

5)     Relentlessly bear down on network costs

Under the existing regulatory framework, network developers are shielded by guaranteed returns. The billpayer acts as the financial backstop for cost overruns, planning delays, and regulatory inefficiencies. This drives up bills.

At the same time, technology and cost changes, such as the falling cost of batteries, raises growing questions about how much fixed network infrastructure the country needs and when. We should:

●       Optimise existing network utilisation using efficient market signals, low carbon flexibility, and low-cost technological solutions (i.e., dynamic line rating) through RNP.

●       Re-stage when and where the network gets built to reduce the impact of network outages and the likelihood of delays.

●       Further scrutinise regulatory price controls used to fund network projects, and the methodology of the CSNP used to justify the need.

6)     Reform the capacity market to manage the role of gas

The Capacity Market in its current format is expensive, costing around £2.3bn annually and rising[40]. It is distortive to market signals and it fails in its ultimate objective to ensure capacity adequacy at lowest cost to consumers.

More fundamentally, we don't have a plan for the future role of unabated gas. If Government decides it is primarily needed for security of supply (i.e., to manage Dunkelflaute[41] risks in the 2030s), a Strategic Reserve or Regulated Asset Base (RAB) model would be a more targeted approach, without distorting competitive flexibility markets.

March 2026

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