Energy Buzz: Ruling out zonal pricing and delivering a Reformed National Pricing Package

Optimising siting of new assets

At the core of the reformed national pricing package will be the Strategic Spatial Energy Plan (SSEP), designed to optimise the siting of electricity and hydrogen generation and storage infrastructure. A number of delivery levers are anticipated for the first SSEP in late 2026:

a) Planning reform: the strategic approach to spatial planning is intended to be aligned within national planning and consenting processes.

b) Seabed leasing: NESO will collaborate with government and The Crown Estate and Crown Estate Scotland on marine modelling through data exchange to assess optimal locations for offshore projects and thus optimise seabed leasing decision-making.

c) Network build: the outputs of the SSEP will feed directly into and be published ahead of the Centralised Strategic Network Plan (CSNP) which will set out specific network solutions to address SSEP-determined requirements.

d) Transmission Network Use of System (TNUoS) and connection charging: the government and Ofgem will support delivery of the SSEP via TNUoS and connection charging regime reform.

The first SSEP will focus primarily on electricity infrastructure, but future SSEPs are expected to expand to cover hydrogen and storage in more detail.

Ofgem subsequently published an open letter setting out its initial thinking on the potential TNUoS and connection charges reform. This includes providing price-based or policy-based incentives to encourage assets to site in areas where spare capacity is expected. This may also include fixing TNUoS or connection charges at the point of investment for a defined period of time, to improve predictability of network charges, although at this stage, these are options under consideration, rather than confirmed reforms.

Enhancing operational efficiency

To address existing operational efficiencies and constraint costs, the government is looking into the following options:

a) long-term contracts to incentivise new demand to locate behind constraints and technical measures which increase the flow of electricity over network boundaries; and

b) changes to balancing and settlement arrangements:

i. lowering the mandatory Balancing Mechanism (BM) participation threshold which would introduce smaller assets at NESO’s disposal to balance the system.

ii. alignment of the market trading deadline with the gate closure deadline, providing certainty for NESO to keep the grid balanced in real-time.

iii. Physical Notifications (PNs) to match the trades made in the market, giving NESO a clearer picture of what each asset is planning to generate and thus the overall balance of supply and demand.

iv. introduce unit-level bidding, which could support enhanced market power mitigation, balance the playing field between small and large market participants and give greater transparency of market behaviour.

v. shortening the current imbalance settlement period of 30 minutes to 15 or 5 minutes to produce a more ‘granular’ wholesale market temporal signal in the longer term.

vi. modify the Balance and Settlement Code by removing subsidies from being factored into prices through the BM, producing a more accurate picture of the cost of balancing the system.

Next steps and what to expect

In the coming months and years, the government will:

• publish a Reformed National Pricing Delivery Plan, setting out the next steps on design and delivery later this year;
• publish the final REMA analysis later in 2025, including a full cost benefit analysis (CBA) of the different wholesale market reform options;
• work in partnership with NESO to deliver the Strategic Spatial Energy Plan (SSEP) by the end of 2026;
• work with Ofgem to drive forward the review of Transmission Network Use of System (TNUoS) and connection charges; and
• work with NESO to launch a consultation on balancing reform (later this year) and complete their Constraints Collaboration Project.

Authored by Teofisto Consistente.