The government is set to decide shortly on whether to split Britain into a number of regional energy markets. It could be one of the biggest changes in the industry since privatisation. The future of UK renewables investment is at stake.

Proponents of regional pricing include Ofgem and the National Electricity System Operator. In part, their enthusiasm reflects the pressures they face. Ofgem has to cope with relentless criticism over our bills, and in the near term those bills would probably fall – on average and in aggregate – if regional pricing were introduced. Both Ofgem and NESO endure criticism over constraint payments – especially compensation payments to generators for being constrained off at times when the grid cannot cope with their output. Constraint payments would be alleviated, to a large extent at least, by regional pricing.

Opponents include the major power companies, whose existing and future renewable generation projects would become less profitable. Some of the latter would be cancelled under regional pricing, threatening both the government’s Net Zero targets and our bills in the longer term.

Numbers matter. In 2025, annual constraint payments are on course to amount to around £1bn; NESO estimates that the amount will rise to around £8bn by 2030 under current market arrangements. The National Grid is set to spend £12bn per annum on average over the next 5 years upgrading the grid to reduce these constraint costs (and, in so doing, the rationale for regional pricing). The government is seeking investment in new renewables of around £40bn per annum.

Both the necessary investment in new renewable generation, and the amount being spent to alleviate constraints, are looking large compared to the costs of the constraints themselves. Regional pricing could turn some of those power and grid projects into white elephants. It’s hard for green energy to be in the black if its revenue is zero.

Some people in the industry argue that the current system is ‘stupid’. But the argument is one of degree, not of kind. Inevitably, a power market is going to cover a certain area, within which there are likely to be grid constraints. The ideal number of electricity markets in Britain is not obvious. Britain is a small and topologically-unchallenged country with a national grid, so at least we should be able to say we don’t need many. Maybe if we already had, say, five regional markets the right course of action would be to keep the number at five. But we have one; and there is a lot to be said for (relative) stability, unless the benefits of change are obvious.

Advocates say Sweden managed the switch to regional pricing (four zones) in eighteen months. But the relative economics of investing in wind power in Sweden in 2011 and the UK in 2025 are quite different. Plus Sweden is twice the size of Britain, with a much lower population density. And regional pricing remains contentious in Sweden today.

It’s not an easy decision for the government. A switch to regional markets would probably have political benefits in the near term. For that reason, coupled with the backing of Ofgem and NESO, it is looking likely. But it would be a historical mistake to go down such a path, which could give the government a red nose as soon as the next election. Leaving aside the thorny issue of whether it’s fair for consumers to pay different amounts depending on their post code, a major shift to regional pricing would ultimately be damaging to investment, environmental targets, long-term costs and energy security. It would be better to make less-convulsive improvements to our imperfect single market.