Get real: Postcode pricing won’t reduce energy bills – and I should know

Octopus’s proposed solution to high energy bills is a pipe dream, writes Ecotricity CEO Dale Vince. No wonder a ‘coalition of the unlikely’ has formed – it would do no good for anyone

When something sounds too good to be true, it usually is. In recent weeks, the CEO of Octopus Energy Greg Jackson has been in the media, claiming almost evangelically that he has the solution to the nation’s high energy bills – zonal pricing. Now Ed Miliband has confirmed the government is looking at plans to implement this scheme.

I hate to burst both their bubbles, but fragmenting our energy market into 12 different regions that will need to trade with each other to balance out the national system won’t help us reduce our energy bills, which is what the country expects from this Labour government. It’s a fantasy that would only bring complexity and delays.

Jackson’s assertion that “every region would be cheaper” under zonal pricing is unrealistic. Octopus’s own report gives the lie to that, indicating that wholesale market prices – the most significant factor influencing energy bills – would rise in five of the 12 proposed zones. Over 40 million of us live in these five zones. Zonal pricing, the fragmentation of our national supply system, would thus create a postcode lottery for energy bills.

Then there is the rather naive claim that businesses will relocate to places like the north of Scotland, where most of the renewable energy is, for a lower energy bill. This completely ignores the real-world issues businesses would face in such a relocation and the time it would take for these price signals to have that effect, if ever.

We have already seen a warning from UK Steel that steel plants will be unable to relocate in this way. Who knew? Not the technocrats behind zonal pricing, it would seem, and one of the five zones highlighted for higher energy prices is south Wales, home to a significant part of our steel industry. Businesses unable or unwilling to relocate could find themselves paying higher energy bills as a result of this proposed fragmentation.

It’s not for nothing that a coalition of the unlikely has lined up against the idea. It comprises unions and business organisations and energy companies and investors: Unite, GMB, Make UK, Renewable UK, SSE, Scottish Power, Centrica and the Global Infrastructure Investor Association.

When you drill deeper into the headline-grabbing numbers, the argument for zonal pricing starts to unravel. While Octopus claims that zonal pricing would provide benefits of £3.7bn annually in bill reductions, this £30 per household per year is built upon the idea of a new trading charge to be levied between the 12 zones and the fantastical notion that this new money, paid by zone owners to other zone owners, would be given to consumers. Should that fail to happen, then the £3.7bn evaporates to be replaced by a near £1bn overall loss. Meanwhile, a new government-funded report says that zonal pricing would add £3bn to our energy bills by increasing the prices of something known as contracts for differences. That’s a lot of uncertainty for a small prize, if anything.

‘Research found that 70 per cent of people in Britain prefer national pricing, with 85 per cent believing zonal pricing is inherently unfair’ (PA Archive)

And then there’s the issue of time and implementation costs – these are important matters Octopus neglected to mention in their report.

In any case, there is little chance that zonal pricing could be completed before 2030. In the interim, this would create significant uncertainty for investors and market participants which will jeopardise Labour’s drive towards a net zero power grid by that date. For a government focused on securing economic growth, why would they want to pursue one of the most complicated reforms to our energy system that could be dreamt up, one that risks creating significant market instability for such measly and far from certain gains?

Not only does zonal pricing not make economic sense, it makes no political sense. Research from Fairer Energy Future found that 70 per cent of people in Britain prefer national pricing, with 85 per cent believing zonal pricing is inherently unfair. This perception rises to 90 per cent among those over 65, a demographic already impacted by cuts to the winter fuel payment.

If the government is serious about lowering energy bills, something they must achieve before the next election, we have far more sensible, certain and effective options – chief among them “breaking the link” between the price of gas and the price of all our electricity.

Britain’s energy market doesn’t serve the interests of homes or businesses in this regard. We have an absurd situation that allows the price of gas, which is set by global markets, to set the price of electricity in Britain – even that generated from our wind and sun. If we “break the link” that enriches generators at the cost of consumers and businesses, we can slash our energy bills, bringing them down for everyone, rather than creating winners and losers.

This is an opportunity to end our dependence on global fossil prices, to get ourselves off the energy price rollercoaster and achieve true energy independence – not just by making our own energy here but by pricing it here too. This is the only way we can protect ourselves from future global energy crises and it’s as vital as increased defence spending, this is economic defence. I urge Ed Miliband and the government to focus on lowering the bills for all with proper market reforms of the simple and feasible type.

Dale Vince OBE is the founder of Ecotricity