Clean Power by 2030? Only with Renewable-Led Electricity Market Reforms
It’s a grim irony that almost 200 years after spearheading the industrial revolution, the UK now has the world’s highest industrial electricity prices. Recent government figures show British companies are paying around four times as much as their US counterparts and 50% more than in France and Germany. The response from our commercial sector has been exactly what you might imagine: many firms have started or are considering moving abroad to escape our crippling energy costs and regain their market competitiveness. One key example is Unwasted, a producer of high-performance, 100% recycled panel boards. When planning its new £60+ million production plant, Unwasted opted to leave the UK for Denmark’s GreenLab industrial park, where clean energy is not only freely available – but far more affordable.
Of course, outrageous electricity prices aren’t just an albatross around the neck of every UK business; they also further inflame our cost-of-living crisis. A 2024 survey by PwC found that 81% of UK companies plan to increase their prices over the next two years due to energy costs alone. After COVID, Russia’s war on Ukraine, surging inflation, and many other challenges, how much more can we really take?
Building a greener and more competitive economy starts with fixing our broken electricity market. Following Denmark’s lead, introducing flexible and zonal pricing reforms would give businesses access to low-cost renewables and enable power-to-heat systems and heat reservoirs to decarbonise our heating system.
“71% of UK businesses expect high energy costs to reduce their ability to compete internationally”
Vicky Parker, Power & Utilities Leader, PwC UK
Driving Renewable-led Market Reforms
The Starmer government recently announced their “Clean power by 2030 Action Plan”, a monumental step towards a net zero future. The main problem, however, is that we’re trapped in the paradox of building solar and wind farms in an electricity market designed for coal and natural gas. For example, the UK now boasts over 30 GW of wind capacity, around ten times as much as we had just 15 years ago. But all of this cheap, zero-carbon electricity is sold in a market where the most expensive generators- typically natural gas – set the prices for the entire country. The common outcome is that cheap renewables are sold at high fossil fuel prices, a market failure that hinders our industrial sector and undermines our decarbonisation efforts.
With our goal of achieving clean power by 2030 only a few years away, the government is reviewing various models of how to get there. Notably, some retain significant gas-fired power generation and seek to balance its climate impact with carbon capture, utilisation, and storage (CCUS). However, not only has CCUS failed to prove effective – despite many years and billions of pounds of funding – but this approach merely prolongs our addiction to natural gas and helps fossil fuel supermajors retain the balance of power.
The only sustainable pathway to clean power by 2030 is combining renewables with grid flexibility infrastructure that decouples demand from supply. Electricity pricing reforms are central to achieving these goals, as they can foster a more holistic and efficient national energy system and build key synergies between industrial sectors. Targeted reforms will also unlock the potential for power-to-heat systems to generate vast amounts of green heat, which can help eliminate fuel poverty, bolster energy security, and keep more money in our economy
European Electricity Zones and Day-Ahead Pricing
Day-ahead markets allow electricity providers and users to plan generation and consumption one day in advance. These markets optimize supply and demand, minimize costs, and enable utilities to secure prices, reducing the impact of price fluctuations.
In the EU, day-ahead electricity prices are set hourly across geographical zones, which often align with countries or regions. Some countries, like Sweden (4 zones), Norway (5 zones), Italy (7 zones), and Denmark (2 zones), use sub-country zones to reflect regional differences. These zones are interconnected, allowing electricity to flow between areas. If connections are unconstrained, prices across zones equalize, ensuring efficient market operation.
Comparing the UK and Danish Electricity Markets
One key factor that makes Denmark so alluring to UK companies is its electricity market design, which consistently delivers lower costs and emissions. Compared to our archaic, one-price-tries-to-fit-all system, Denmark’s aims to supply the greenest and cheapest power available, irrespective of time or location
Electricity pricing in the UK:
- System marginal pricing: The price of our electricity is based on the cost of the most expensive unit needed to meet demand at any given time. This structure often results in gas-fired power stations setting the market price, even when much cheaper renewable sources are available.
- Uniform national pricing: Our electricity prices are uniform across the country and don’t reflect regional variations in supply and demand. This blanket approach leads to inefficiencies such as grid bottlenecks and the underutilisation or curtailment of
local renewable energy sources.
Electricity pricing in Denmark:
- Dynamic pricing and demand flexibility: Denmark’s real-time electricity tariffs more accurately reflect current market conditions and incentivise consumers to adjust their consumption patterns. This method improves demand flexibility and supports the integration of more intermittent renewables like wind and solar power.
- Zonal pricing: Unlike the UK’s uniform, nation-wide pricing, Denmark’s power market is divided into multiple bidding zones. This segmentation allows each zone to balance supply and demand at the local level, encouraging more efficient use of the grid and supporting the integration of renewable sources.
Denmark’s real-time and zonal pricing models enable – and in fact, encourage – the local use of low-cost renewables. They allow industrial customers to take advantage of surplus wind and solar generation while providing vital demand flexibility – factors that, in turn, support the growth of renewables and the electrification of heating, industry, and transport.
Green for Good: Heat Reservoirs and Urban Heat Grids
Along with reducing power costs, reforming our electricity market can drive investments in future-proof green infrastructure such as thermal energy stores, known either as heat batteries (located above ground) or heat reservoirs (located below ground). These silo- or even stadium-sized systems use power-to-heat technologies like heat pumps and electric boilers to convert cheap electricity – often surplus renewables – into green heat and store it for later use. This safe and sustainable approach completely decouples supply from demand, reduces renewable energy curtailment, and can slash heating carbon emissions.
But while power-to-heat systems and heat reservoirs are highly effective in Denmark, they’re unviable in the UK due to our exorbitant power costs and inflexible market design. By integrating zonal and dynamic pricing, heat reservoirs could thrive during periods of high renewable generation – when clean power is at low or even negative prices – and produce significant volumes of green heat.
When connected to long-range heat transmission highways, these thermal stores can feed urban heat grids, reducing costs and emissions for homes and businesses. This approach would accelerate our transition from natural gas and allow the UK to deploy clean and affordable heat, street by street. It’s also vital to ensure that our heating and electrical infrastructure advances in tandem, helping
us maintain a balanced and integrated energy system that utilises all available resources.
Potential Pricing Reforms
There are several pricing reforms that could help modernise and decarbonise our national electricity market:
- Flexible electricity pricing: Implement dynamic pricing models that adjust based on supply and demand, encouraging industries to shift energy-intensive operations to periods of surplus renewable generation.
- Zonal electricity pricing: Adopt regional pricing structures that reflect the local availability of renewable power, providing cost benefits to industries in renewable-rich areas.
- Direct access to renewables: Facilitate ‘private wire’ arrangements that allow industrial and heat utility customers to access renewable energy sources directly, which can reduce transmission costs and ensure a stable, low-cost energy supply.
- Tiered pricing: Offer lower pricing to industrial customers to support electrification, particularly those that provide a socio-economic benefit, such as supplying waste heat to heat highways.
Making some or all of these reforms can help align industrial and commercial activities with our renewable energy supply, incentivise the deployment of power-to-heat systems and heat reservoirs, and support the UK’s development of Green Energi Havens.
Variable Generation Demands Flexible Consumption
The UK may have the world’s highest industrial electricity prices, but it doesn’t have to be this way. Achieving clean power by 2030 is well within our reach, but only if we build a smarter and more dynamic electricity market that allows renewables to thrive.
The solution is replicating Denmark’s highly flexible, zone-based market design. Along with ensuring electricity prices reflect local supply and demand, this approach incentivises the deployment of green power-to-heat technologies and large-scale heat reservoirs. Supported by intelligent market reforms, these systems can convert low-cost renewables into large volumes of green heat, available on demand for heat grids in our cities and towns. By putting renewables first, we can honour our industrial legacy and build a United Kingdom where all energy drives social, economic, and environmental progress
Dave Pearson, Group Sustainable Development Director, Star refrigeration, UK:
We know that a large share of gas use goes towards heating, despite being surrounded by waste heat. While most waste heat needs boosting via heat pumps, their reliance on electricity should be viewed as an opportunity, not a drawback.
Heat is flexible—it can be produced now and used later. By running heat pumps flexibly, we support the grid, serve customers efficiently, and enable flexibility to benefit others. We need to stop thinking of flexibility as a cherry on the cake, as this doesn’t make a party.
“We need a new sector of electricity consumers created on the promise of cheaper electricity (close to production price) but only if it is windy and no bonus for being flexible. Heat pumps can be this sector coupler, but they won’t be adopted if they’re losing money to gas at current electricity prices. Or we can just ban gas – but that’s not a practical or popular route.”
Dave Pearson, Star refrigeration, UK
“Just as we value local produce, we should value local energy. Regions rich in renewables shouldn’t subsidize those reliant on fossil fuels. It’s time for a fairer energy system.”
Adam Juel Fabricius, EnergiRaven, UK
