“We used to oppose every reform without considering its merits,” a former CEO of a significant company once remarked, half in jest. This statement underscores a vital truth: established firms tend to benefit from maintaining the status quo in their industries. In competitive fields, businesses remain agile due to the pressures of rivalry. For instance, the competition between Amazon and Argos or Aldi and Tesco drives relentless innovation. Conversely, in regulated sectors, progress depends heavily on the implementation of new rules and reforms.

These companies exhibit strong resistances to change, often raising alarmist concerns such as reform “will endanger investment” or “will harm consumers.” Similar arguments have surfaced in debates over topics like the minimum wage and smoking bans.

Now, these incumbents are reacting to the proposal of “zonal pricing,” which aims to transform the wholesale electricity market from a single national price to one defined by regional markets. The government ought to look beyond these exaggerated responses. A detailed analysis by consultancy FTI indicates that zonal pricing could result in savings of at least £3.7 billion annually, potentially increasing to £7 billion if companies adequately adjust their operations to optimize infrastructure development in favorable regions.

Under the current system, the national price for electricity is determined every half-hour based on the most costly units of energy generation. This method was effective when the majority of electricity came from coal and gas, as their costs were relatively uniform. However, in an age where approximately half of our electricity is produced from renewable sources, the system has become increasingly problematic.

There exists significant disparity in costs between wind, solar, gas, and nuclear power. For instance, during a half-hour period where 80% of our energy is generated from wind, which is relatively inexpensive, the overall price is still dictated by an expensive gas plant. The scenario worsens when, during windy conditions, excess wind power necessitates shutting down wind farms, all the while maintaining high prices determined by gas generation.

The System Operator, a government agency that was previously part of the National Grid, currently spends about £2 billion annually managing these complexities, with costs predicted to rise to £8 billion by 2030.

Implementing zonal pricing could help mitigate these issues, as regions with favorable wind or sunlight conditions would experience significantly lower electricity prices during peak generation times, while areas reliant on gas would still face higher costs. Electricity produced in low-cost regions would be “exported” at local prices rather than the elevated national price, translating to nearly £4 billion in annual savings.

People often inquire, “Who might lose from this reform?”

The inefficiencies of the current market present ample opportunities for manipulation, as evidenced by gas plants profiting excessively over short periods or wind farms earning more from being inactive than from actual production.

In essence, renewable energy is cost-effective unless we are compensating them to remain idle.

If energy providers react appropriately to regional pricing by constructing more efficient infrastructure, it could lead to an additional £3 billion in savings each year. For instance, embracing zonal pricing could result in the necessity for up to 2,800 km less grid development and fewer pylons.

Regions with limited energy generation, such as Birmingham or London, stand to benefit since we would no longer need to financially compensate Scottish wind farms for ceasing operations. Furthermore, operational efficiencies concerning large-scale batteries and interconnectors would yield substantial savings that benefit all consumers.

Currently, these large batteries are programmed to release their energy only when national prices are elevated, disregarding local surpluses. Similarly, interconnectors may transfer power to neighboring countries even when domestic regions face shortages. These practices accumulate significant costs.

It’s also noteworthy that a postcode disparity already exists, as Scottish consumers face standing charges 50% higher than those in London.

Countries that have successfully adopted zonal pricing models are witnessing positive outcomes, with lower energy costs contributing to economic growth across various sectors. Over half of the OECD’s electricity is now managed through this approach, including in the US, Norway, Australia, New Zealand, and Sweden.

In Britain, despite 55 established companies writing to the government in opposition to zonal pricing this past February, nearly 4,000 businesses have shown support for the initiative. The government should prioritize the voices of struggling households and enterprises that require more affordable energy, rather than catering to the interests of the incumbents resisting change.

Greg Jackson is the founder and CEO of Octopus Energy.