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Roula Khalaf, Editor of the FT, selects her favourite stories in this weekly newsletter.
It is a familiar conundrum. One confidently sets off in a direction that turns out to be wrong: is it better to press on and try to make the best of the chosen route, or to write off the time and money and turn back?
That is a pertinent question for the UK. The country’s energy costs are high and rising, with household bills expected to hit three-year peaks. International gas prices are mostly to blame, but the structure of the market doesn’t help.
Almost exactly a year ago, the UK rejected zonal pricing, a market system in which electricity costs in a particular area reflect local supply and demand, in favour of a single national price. That looks increasingly misguided.
Local prices are the preferred system in much of the US and European countries including Italy, Sweden and Norway because they provide a market signal. By depressing electricity costs in areas where there is excess renewable generation, they incentivise consumers to move there and new wind and solar plants to site themselves elsewhere.
By sticking to a national price, the UK essentially bet that regional prices wouldn’t diverge enough to make it worthwhile plonking lots of turbines in the south rather than in windy Scotland, or for energy-intensive industry to up sticks and move closer to the power generators. The shape of the ideal system was essentially set, and a national price would give renewables developers more certainty, lowering their cost of capital and speeding up construction.
But markets move in unexpected ways. Most obviously, AI has created lots of new potential demand that can be relatively flexible on location. Give tech entrepreneurs low enough power prices in Scotland, say, and they may well come up with solutions that elude central planners.
The current policy doesn’t just potentially lead to a sub-optimal destination: the route is also circuitous. Renewables are being built far faster than the power lines that transmit their output, so the country is writing large cheques to pay for wind that gets wasted in the north while gas-fired plants kick in to ease bottlenecks in the south.
Yet for all that, it is probably too late to turn back. The UK has gone a long way down its chosen route now, given the amounts of renewables it has bought and sited and the giant network upgrades already under way. Having to honour its commitments would reduce the benefits from switching direction.
Instead, it is putting in place patches and workarounds to minimise the cost of sticking with national pricing, including a plan to better place generation and storage assets and discounts on power prices in designated AI growth zones in renewables-rich areas. Delivering “Reformed National Pricing” is a laborious process. But if it’s too late to pick the right road, the best the UK can do is progress down its existing one faster.
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