Ed Miliband’s zonal power pricing plan would undermine net zero investment, Iberdrola has warned Rachel Reeves - Ian Forsyth/Getty Images
Billions of pounds of investment in British wind farms are at risk from plans to introduce regional power prices, the owner of Scottish Power has warned.
In a letter to the Chancellor, Ignacio Galan, chairman of Spanish energy giant Iberdrola, said so-called zonal pricing risked creating uncertainty and pushing up development costs.
The reforms, which would replace the UK’s national electricity price with differing regional prices set by supply and demand, are being considered by Ed Miliband, the Energy Secretary.
Mr Galan’s intervention comes at a critical moment, with intense lobbying underway by supporters and opponents of the policy. The Iberdrola boss drew attention to £24bn his company has pledged to invest in the UK in his letter to the Chancellor.
On Friday, sources close to Iberdrola denied “categorically” that the chairman’s letter represented a threat to cancel that spending, which he announced alongside Sir Keir Starmer at an investment summit last year.
A spokesman for Scottish Power and Iberdrola said: “Our chairman has regular meetings with senior ministers of the Government and is a huge supporter of their growth ambitions.”
However, Mr Galan has previously said electricity market reform could undermine his company’s investment pledge in separate public comments.
Speaking on a call with analysts last month, he said: “I committed with the Prime Minister a few months ago £24bn up to 2028.
“For such an investment we need stability and predictability, no noise, no disturbances in a theoretical discussion.”
Wind farm developers say the zonal pricing proposals will inject chaos into their business plans by creating greater uncertainty about the prices they can expect for power.
That risks undermining Mr Miliband’s plans to deliver a clean power system by 2030, they argue.
Led by companies such as SSE, developers have also warned the system will create a “postcode lottery” where households in the South – where power supplies are more constrained – pay more for electricity than people in the North and Scotland.
However, supporters of the reforms dismiss these claims as “nonsense” and argue that wind farm developers are seeking to protect their profits.
Under the current national pricing system, wind farm owners receive millions of pounds to switch turbines off when the electricity grid is too congested. Congestion occurs because many wind farms are stationed far away from cities and the main arteries used to transport power across the country become choked.
When this happens, power must be purchased elsewhere in the country nearer to demand – at great cost – to cover the shortfall.
These payments are ultimately footed by consumers and are expected to cost billions of pounds a year by the end of this decade.
‘Politically toxic’
On Friday alone more than £97,000 was paid to wind farms to switch off and another £889,000 paid to alternative generators, according to market data.
Zonal pricing would eliminate these payments, with households near wind farms instead paying rock-bottom prices when there was excess generation to encourage them to use more electricity.
Octopus Energy, which supports the reforms, says the changes would also force wind farm developers to build more turbines close to cities and require less transmission infrastructure to be built, resulting in bills that are lower overall for households in every region.
The company argues that switching to a zonal system is the only realistic way of cutting domestic energy bills.
Greg Jackson, chief executive of Octopus, said: “Electricity costs are a drag on the economy, with high bills for households and companies while we waste billions of pounds switching off wind farms on windy days.
“Most of those complaining happily invest in countries with zonal pricing. It’s nonsense to suggest Britain would be the exception to that.”
A switch to zonal pricing was previously considered by the Conservatives when Boris Johnson was prime minister, a former senior government adviser said, but was ultimately dismissed as regional prices were viewed as “too politically toxic”.
However, the adviser said the issue would become “unavoidable” as Britain’s grid becomes more reliant on renewable energy for power.
Mr Miliband has vowed that by 2030 only 5pc of Britain’s electricity will be generated by gas-fired plants, at maximum.
Despite suggestions that a final decision on zonal pricing may be only weeks away, an executive at another major wind farm developer claimed Mr Miliband’s views on the issue remained a near-total mystery.
The uncertainty was causing chaos ahead of the latest subsidy auctions for renewables, known officially as auction round seven (AR7), they added.
“Bidding opens in July. But we don’t even know what the potential model is or how many zones it includes,” the executive added.
“So at the moment, you can’t even work out what the risk is. They need to publish their decision very shortly – whatever it is.”
On Friday, a government spokesman said: “In an unstable world, the only way to guarantee our energy security and protect consumers from future energy price shocks is by moving towards home-grown power.
“We are considering reforms to Britain’s electricity market arrangements, ensuring that these focus on protecting bill-payers and encouraging investment.”
