Take one snapshot modelled by FTI, which forecasts what might happen on a typical March morning in 2030.
At 8am, demand for electricity spikes as millions of people switch on the kettle and get ready to leave for work. There is plenty of wind power in Scotland for this demand to be met. Yet it cannot all travel south to where demand is highest because of grid bottlenecks, requiring the ESO to source power from elsewhere – potentially from gas-fired plants.
In this scenario, the national pricing system exacerbates the problem by sending the wholesale cost of electricity to £13.90 per megawatt hour across the entire country. That leads to market quirks, such as Scotland importing electricity via a planned interconnector from Norway – where power is notionally cheaper – even though it has abundant wind power of its own.
Meanwhile in the South East, the electricity price is artificially low. This makes it less expensive than the cost in France, resulting in power being scheduled to go across the Channel via interconnector, even though it is technically needed at home. To reverse this and keep the lights on, the ESO has to step in and pay even higher rates.
Under a locational pricing system, the results are very different. The power price in wind-abundant Scotland plummets to zero, leading power to be exported to more expensive Norway.
And in the South East, the price temporarily jumps to £81.40 per megawatt hour, ensuring power is pulled in from neighbouring European countries.
“So instead of trying to export from Britain to France we are now importing,” says FTI’s Mann. “Hence you have less strain on the British transmission system.
“Over the long term, this may also mean you need fewer electricity pylons.”
In a report published last October, Ofgem forecast billions of pounds of benefits for consumers in every scenario under locational pricing.
According to Mann, these numbers are highly conservative and are likely to be bigger in reality.
He says Britain’s national electricity market, along with those in France and Germany, is a global outlier which directs assets such as batteries and interconnectors to “do the wrong thing” roughly half of the time.
In Texas, Mann says locational pricing has spurred power-hungry data centres to set up in cheap areas, while new wind farms are being built in the more expensive zones. Likewise, a green steel plant is under construction in an area of Sweden where the cost of power is low.
However, Ofgem has warned that the longer it takes to introduce a zonal system, the lower the eventual pay-off will be, because so much cash will have already been spent on transmission upgrades.
Octopus and others also argue that adopting the change now would act as an effective “hedge” against possible failure to overhaul the electricity grid in time for 2030.
Yet the proposal is already proving controversial with powerful lobby groups that Mr Miliband needs to work with to hit his targets.
Wind farm developers, via industry body Renewable UK, have come out strongly against zonal pricing, arguing that making such huge changes so close to the 2030 target would be madness.
They say it will make it difficult for wind farm developers to gauge the future profitability of projects, injecting massive uncertainty into the investment process just when it needs to accelerate.