When you turn on a light, electricity comes from power plants down the road, on the other side of the country, and/or from overseas. The further it travels, the more it costs to move, balance and manage. Today, those costs are largely shared across all consumers, regardless of where electricity is produced or consumed.
That structure made sense historically. Following events such as the Great Smog of London, power generation was deliberately moved away from population centres for public health reasons. Over time, the system evolved to prioritise safety and scale rather than efficiency of location.
But the energy system has changed, and today, the UK’s power mix is fundamentally different. Renewable generation, that is widely distributed geographically, now plays a central role, but with a single national wholesale price that is indifferent to where the energy is sourced, we find ourselves with new problems. As the electricity system has evolved, this has prompted increasing debate about whether today’s market design provides the right incentives for tomorrow’s energy system.
Electricity generated in areas with limited grid capacity (for example parts of Scotland with high wind output) is often constrained, meaning it cannot always reach demand centres efficiently. At the same time, demand-heavy regions rely on power transported over long distances, increasing system costs, increasing the need for network reinforcement, balancing services and system management.
The impact of this becomes clear when looking at where costs actually sit. A typical UK household pays around £900 per year for electricity[1], but only around a third of that reflects the cost of generating power. A similar proportion is tied to the infrastructure required to move it across the network. As more generation is built further from demand, and as the system becomes more complex, the cost of moving and balancing electricity continues to rise. Recent system data highlights the scale of the challenge, with large volumes of renewable energy curtailed due to grid congestion, leading to billions being spent annually on managing constraints and balancing the system, and tens of billions more are earmarked for network reinforcement[2]. Therefore the question is not whether the system needs investment but how that investment can deliver the greatest long-term value.
One proposal that has attracted significant attention in recent years is locational pricing. At its core, locational pricing seeks to align prices with the physical realities of the system. Rather than relying on a single national price, electricity prices would reflect where power is generated, how constrained the network is, and how costly it is to deliver electricity to different parts of the system based on demand.
In practice, this could mean lower prices in areas with excess generation and limited export capacity, and higher prices in demand centres where supply is more constrained. This is not about penalising certain regions, but about sending clearer signals to the market. When prices reflect system conditions, they can guide investment towards locations where it delivers the greatest overall value.
Done well, this approach can encourage generation closer to demand, make better use of existing infrastructure, and accelerate the deployment of flexibility, in particular energy storage.
For investors and developers, the debate is particularly relevant because market design influences how projects are assessed, financed and developed. Advocates of locational pricing believe stronger price signals could improve capital allocation and encourage investment in locations where assets provide greater value to the system. Others question how effective those signals can be when investment decisions are also shaped by grid connection availability, planning constraints, land availability and wider project economics. This highlights that the debate extends beyond pricing alone and into the wider challenge of how the UK’s electricity system should evolve. That wider discussion is reflected in the Government’s recent decision to pursue Reformed National Pricing (RNP) rather than moving directly to zonal pricing. While RNP retains a national wholesale market, it seeks to improve system efficiency through a combination of planning reform, network investment and stronger locational signals elsewhere within the market. This illustrates how the conversation has evolved, towards how those signals should be delivered, and whether market pricing, network reform, planning policy or a combination of all three offers the most effective route forward.
The debate in the UK remains balanced. Supporters of locational pricing point to analysis suggesting it could deliver meaningful system savings (potentially in the range of £25–60 billion over time[3]) while reducing inefficiencies that are currently passed through to consumers. Others highlight the potential challenges, including increased market complexity, potential revenue uncertainty for existing assets, and the practical reality that stronger price signals alone may have limited impact if grid connection and planning constraints continue to restrict where projects can be built and by when.
Zonal pricing, which would divide the country into broad regions, has been proposed as one solution. However, constraints can vary significantly even within the same region. A generator located at the edge of a constrained network can face very different conditions to one that is well connected, despite being in the same zone. As a result, policymakers are increasingly exploring alternatives such as reformed national pricing, an approach that seeks to retain a single market while better reflecting locational costs within it. Ultimately, this is not just a question of pricing design but of how we build the future energy system.
The UK is firmly on a path towards a lower-carbon power system but the challenge is ensuring that generation, storage and network infrastructure are developed in a way that delivers reliability, affordability and long-term system efficiency.
Whether that is achieved through locational pricing, reformed national pricing or a combination of wider market reforms remains an active area of debate. What is becoming increasingly clear, however, is that location will play a growing role in investment decisions. For developers, investors and policymakers alike, understanding how location influences project economics, grid constraints and system value will be central to building the next generation of energy infrastructure.
[1] https://www.electricitybills.uk/, https://www.britishgas.co.uk/energy/guides/average-bill.html
[2] https://www.reuters.com/legal/litigation/britain-must-invest-89-billion-upgrade-power-grid-operator-says-2026-06-30/, https://www.neso.energy/document/362561/download
[3] https://assets.publishing.service.gov.uk/media/65ef6694133c220011cd37cd/review-electricity-market-arrangements-second-consultation-document.pdf p90
