Blog: How might zonal pricing influence heat network development in the UK?

There’s been lots of discussion recently around the government’s impending decision on Zonal Pricing for electricity. To summarise briefly, UK wholesale electricity prices are currently agreed at the national level, while a zonal system would set these at a regional level. In theory, this results in cheaper electricity where there is higher generation, but potentially higher prices where the balance between demand and supply is less favourable.

It’s interesting to examine how this could potentially influence heat network development in the UK.

Two shorter-term impacts:

• Supporting the case for electrified heat networks
• Regional divergence in supply technologies

Supporting the case for (some) electrified heat networks

Where we don’t have conveniently located industrial waste heat, deep geothermal resources, or energy-from-waste incinerators, the future of decarbonised heat networks relies on electrification. Predominantly, this electrification is likely to take place via large-scale heat pumps.

The challenge is making these heat pump-led schemes stack up economically. Under the current market arrangements, wholesale electricity prices are routinely ~5–6 times the cost of wholesale gas, which means even hyper-efficient heat pump networks struggle to match the variable costs of gas heating systems. Couple this with higher capital costs, and the economic performance gap grows further. Making these networks an investable proposition then usually requires some combination of the following:

• Grant funding from the government
• A higher heat tariff
• Unique technical characteristics

In a world of zonal pricing, you might be able to break this paradigm. While the cumulative effects are up for debate, it seems undeniable that a zonal system would result in certain regions where the electricity price falls significantly. This is while the gas price continues to be set nationally, which means the cut-price areas will see a narrowing of the cost gap between gas heating and electrified heat networks, shifting heat pump networks towards economic viability.

Regions with a surplus of electrical generation could become hotbeds for the development of these networks, reaping the rewards (investment, skills, air quality) without having to rely on large grant allocations or punishing prices for consumers. Historic markers of scheme viability, like linear heat density, might become secondary in lieu of the huge variances in primary energy costs.

Regional divergence in supply technologies

So what happens where generation is less abundant? Regardless of whether a zonal system causes some regions’ prices to rise, what we can be sure of is that there would be more of a difference between regions.

Correspondingly, heat-pump schemes in areas with higher electricity prices might struggle to attract investment—particularly if government support (like the Green Heat Network Fund) continues to be secured competitively. Ensuring these regions don’t fall behind in heat decarbonisation might rely on alternate modes of supply.

It’s fitting that Veolia and STAR Energy announced a collaboration agreement last week, as Energy-from-Waste and Deep Geothermal are two key alternatives.

Energy-from-waste: a compelling economic proposition

Energy-from-Waste (EfW) incinerators continue to see growth and rollout across the country. Paid to take waste, paid to burn waste, paid for the electricity from burning, and paid for the leftover heat, it’s a somewhat irresistible economic offering. It’s not unreasonable to think that this becomes even more compelling in the world of zonal pricing, where flexible options for generation will be critical.

Incinerators represent a location-agnostic option for electricity and heat supply which is—under current reporting/accounting regimes—often considered low carbon. Setting that aside for this blog, wherever incinerators are present it’s hard not to attach heat networks to them. Some of the largest emerging schemes across the country are tied to EfW, as it provides a low-cost supply of high-grade heat at scale. In a world of zonal pricing, EfW schemes may see accelerated growth in certain areas of the UK, offering a cost-effective supply option for heat networks which can also mitigate regional limitations in electrical supply.

Deep geothermal: a risky but rewarding bet

Deep geothermal is another alternative for heat supply at scale, though with more uncertainty. With millions of pounds in drilling costs to access the resource and an inherent non-zero chance of the well coming up dry, it can be a scary proposition for any investor or developer. But when it delivers, minimal operating costs, low-carbon heat, and long-lasting infrastructure make it an incredibly appealing solution.

For this Zero or Hero resource, it’s a question of appropriately sharing risk. Zonal pricing could drive a more regionally coordinated approach to exploiting geography-specific resources like deep geothermal, providing a route to collaborative risk-sharing. If multiple networks within an area will benefit significantly from deep geothermal access (i.e. due to high electricity prices), they can share resources, information, and risk to give the opportunity the best chance of coming forward.

What it might mean for long-term planning?

It’s unlikely that Zonal Pricing presents an existential threat to the development of heat networks in the UK, but it could drastically change the way in which they develop. A zonal system could result in specialised regional markets differentiated by network supply technologies.

There is a case this fits with the emerging approach to national energy planning driven by Local Area Energy Plans (LAEPs), and Regional Energy Strategic Plans (RESPs), but there are plenty of challenges associated too. We can’t have parts of the UK dominated by EfW plants without being cognisant of risks in air quality, and while deep geothermal could be unlocked by a regional approach to risk-sharing, it’s still a geographically situational and constrained resource.

While a zonal system might lead to some regional divergence in supply technologies, if we want to hit the national target of 20% heat provision via heat networks, then electrification and heat pumps will be needed beyond those areas where an excess of generation supports the case for investment. Knowing this, is it better to create centres of excellence and activity before wider rollout? Or do we want to ensure a nationally distributed deployment?

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