What happened when Italy tried Ed Miliband's ‘nightmare' plan for energy bills

Telegraph

21-04-2025

A war is raging between the most powerful men in Britain's energy industry, one which could result in a total upending of what households pay for their power use.
Ed Miliband is currently mulling over plans for a radical overhaul of Britain's energy market that would see the country split into 'zones' – each operating as its own energy market.
The issue has put the bosses of Britain's biggest energy firms at loggerheads. Octopus Energy's Greg Jackson argues zonal pricing will push down bills, but Chris O'Shea, of British Gas, alleges the complete opposite.
Under so-called 'zonal pricing', households and businesses would pay different rates depending on which zone they are in. Bills would be determined by how close they are to generators, such as wind farms and the quality of local grid infrastructure.
But in Italy, where ministers are in the early stages of a similar regional overhaul to the energy market, there are already warnings that it could backfire.
Italy's wholesale energy market has used zonal prices since 2004, however, households pay a single national price regardless of where they live, known as the Prezzo Unico Nazionale (PUN).
In recent years, Italian households have enjoyed comparatively low electricity bills. As the energy crisis caused by Russia's invasion of Ukraine has abated, electricity rates paid by Italian households have dropped to around €0.22 per kilowatt hour, equivalent to around 19p, and around 5p less than what Britons pay per unit under the current energy price cap.
But this year, to better align with the rest of the EU, the Italian government is phasing out the PUN, meaning household bills will vary based on how cheaply power can be bought and sold where they live.
So far, a compensation mechanism introduced to protect households for two years means bills have remained stable. But when it is removed, those in southern Italy, where there are more solar and wind farms, are expected to see bills fall, while those in the north will see a rise.
Or at least in theory. In practice, renewables are a volatile source of energy, and prices can fluctuate day by day, hour by hour. The charts below shows how drastically wholesale prices can shift over time in the different zones of Italy's market.
This volatility most obviously manifests itself first in the island zones of Sardinia and Sicily, with their limited connection capacity to the mainland, but is also increasingly seen in the mainland zones as well, according to analysis by SEC Newgate, an advisory firm.
This means that wind-dominated regions like Calabria have seen prices dip well below the PUN in winter months, but soar well above it in summer.
In Sicily, for example, energy prices have fluctuated between €87 and €151 per megawatt hour over the last two years – a difference of 73pc.
As for how this translates to households, a spokesman for SSE, a British energy firm, said: 'Countries where zonal pricing exists, customers can find themselves paying £200-£300 more than an equivalent household for energy based solely on where they live.'
Buyers and sellers on the wholesale energy market may be used to reacting to such massive changes in price, but for zonal pricing to work, households will have to adjust their own energy use to secure cheaper power. This means using electricity at times of low demand, by charging an electric car overnight, for instance.
Households who mistime their energy use could well be stung by extortionate prices. In Sicily, the zonal price for electricity plunged to €5 per megawatt hour on April 18, but rose to €137 just seven hours later under PUN.
Indeed, a research paper authored by the University of Pavia's Department of Economics and Management warned that households may not be ready for such a shift.
'The efficiency of zonal pricing [in Italy] is challenged by the fact that it does not take into consideration the behavioural perspective of the public good in network management, because of the indivisibility of network security,' the paper said.
'In addition, [zonal pricing] does not accommodate consumer behaviour in terms of price differentials, which impact on overall social welfare.'
Greta Maria Campisi, of Italian energy law specialists Sani Zangrando, said: 'The general concern both from a political point of view and specifically with regard to domestic customers' bills is that an increase in the price of energy in some geographical areas is foreseen, particularly in areas where there aren't many renewable energy plants at the moment.'
However, Ms Campisi said the shift away from the PUN was not intended to penalise those living in the north.
Instead, one of the benefits to the Italian government of offering lower bills to households living closer to renewable energy sources, Ms Campisi adds, is that locals in Italy's northern regions will be less likely to push back against future renewable energy projects.
Whether this will achieve lower bills, however, is unclear. A 2023 report by analysts Pexapark found that renewable energy producers were facing financial challenges due to unpredictable energy prices, which in turn hurt revenues.
The phasing out of the PUN does not appear to have evened out the distribution of wind farms either.
'We have not seen a substantial relocation of generation assets closer to demand in northern Italy', SEC Newgate observed. 'Rather, there continues to be strong build where renewable resources are highest in the south and the islands'.
The decision to move away from the PUN was made 'for technical reasons, rather than a push to lower bills', said Moller Simon Steen, of ERG, a wind power operator in Italy. Doing so would instead bring Italy more in line with the EU's market principles.
A divided Britain
In Britain, a shift to zonal pricing is being explicitly touted as the only way to drive down energy bills in the long term.
As it stands, there is one price for electricity across the UK. However, Ed Miliband is considering plans to overhaul this system in favour of zonal pricing. As with Italy, this would involve dividing the country into zones, each with its own separate power prices.
Supporters of zonal pricing, among them Mr Jackson, argue that overhauling the system would be fairer to those living in Scotland, where there is already an abundance of wind farms. Under a zonal model, Scots would benefit from the cheapest bills in Europe, Octopus has said.
Mr Jackson frequently argues in favour of zonal pricing on X, claiming that 'the many billions of savings come from system costs, which are enough to cut bills everywhere', and that companies opposed to overhauling Britain's energy prices are protecting vested interests.
He faces opposition from Chris O'Shea, chief executive of British Gas's parent company Centrica, who has said zonal pricing 'risks deep inequalities and higher prices for consumers' in regions with fewer renewables, adding that a new price model was only 'superficially attractive'.
Alistair Phillips-Davies, of SSE, another energy firm, has similarly argued that a shift to zonal pricing would be a 'political and economic nightmare' that would jeopardise the net zero transition and 'create a postcode lottery for bill payers'.
He said: 'In countries where zonal pricing exists, some customers find themselves paying £200-£300 more than an equivalent household for energy based solely on where they live.'
Indeed, a report commissioned by SSE and produced by consultancy firm LCP found that while wholesale prices in 2035 would be significantly lower in northern Scotland, costs in the rest of the country would be higher under zonal pricing compared to national pricing.
The higher price areas account for 97pc of the demand across the country, meaning that 'nearly all consumers will be paying increased wholesale prices for their energy', the report found.
Even Octopus has acknowledged that zonal pricing could mean households in the South East could face higher bills under a zonal model.
Speaking at a panel event organised by trade publication Utility Week, Rachel Fletcher, director for Regulation and Economics at Octopus, said: 'The focus should be on location pricing that matters and drives the majority of benefits of zonal pricing and not the fact that customers in the South East, on average across a year, might pay a bit more.'
Another draw of zonal pricing is that it would encourage investors to build renewable energy sources in areas that aren't already overcrowded by wind and solar farms. As with Italy, it is hoped that the lure of lower household bills will make locals more agreeable to future projects.
But critics argue that the uncertainty over zonal pricing will complicate investments and ultimately cost consumers more.
Jane Cooper, deputy chief executive of RenewableUK, said: 'The reality is that introducing regional or zonal electricity pricing is likely to lead to higher energy bills for households and businesses in parts of England and Wales – especially in the south of England – as well as disrupting new investment in clean energy.'
Research by the UK Energy Research Centre found that a shift to zonal pricing would drive up strike prices, the agreed-upon price for energy auctions, by as much as £20 per MWh, as investors factor in the additional risk.
These elevated strike prices could end up costing bill payers £3bn annually, the think tank said, offsetting any financial benefits from zonal pricing.
Professor Rob Gross, the think tank's director, said: 'Our analysis focuses on the risks for market participants if the Government tries to bring in zonal pricing at the same time [as the 2030 clean power mission].
'These are substantial, and there is no straightforward plan B. The key question is not whether zonal pricing has benefits, but whether the time to introduce it is now.'
A Department for Energy Security and Net Zero 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 homegrown power.
'We are considering reforms to Britain's electricity market arrangements, ensuring that these focus on protecting bill payers and encouraging investment. We will provide an update in due course.'