Ed Miliband has abandoned plans to charge southern electricity users more than those in Scotland, after senior officials warned it could put off investors and make it more difficult to build renewables.
Sources have told the Guardian that the government has decided not to proceed with the scheme, known as “zonal pricing”, and that the decision will be announced once it has been signed off by the cabinet.
The plan was first proposed by the Conservatives as a way to encourage heavy electricity users to relocate to areas where there is more generation, such as Scotland, and windfarms sometimes have to switch off because of a lack of demand.
The proposals were heavily backed by Greg Jackson, the founder and boss of Octopus Energy, but triggered a backlash among many other energy companies including SSE, Scottish Power and RWE.
One source said: “The government has been weighing this up carefully and concluded that the benefits of delivering the clean power mission at pace, particularly given the expected impact of imminent grid upgrades; the need to deliver on the coming renewables auctions; and the significant risk premium being attributed to the UK by international investors, would outweigh the purported benefits of zonal pricing – which at any rate would take beyond the next election to implement.”
The energy department declined to comment.
The proposals would have set lower electricity prices in areas where supply far outstrips demand, in an attempt to encourage industry to move into those areas and reduce the need to switch off generation. Windfarms are sometimes paid to power down when renewable energy threatens to overwhelm the grid.
Zonal pricing could have cut the cost of renewing and updating the country’s electricity grid by billions.
A report by FTI Consulting predicted overall savings of £52bn for consumers over 20 years, while another, which was commissioned by Octopus, found the UK would need to spend £27bn less on major grid upgrades in the future.
The plans threatened an outcry from the sector and the wider public, however.
Alistair Phillips-Davies, the outgoing chief executive of SSE, said recently the plan would be a “huge mistake”, saying it would create a “postcode lottery” where some households would pay £200 to £300 more because of where they live.
An independent report co-authored by Rob Gross, the UK Energy Research Centre director, found the benefits of zonal pricing could easily be wiped out if renewable energy developers demanded higher subsidies to offset the risk of the new scheme.
Miliband is already under pressure from Downing Street to show when his sweeping reforms to the energy system will bring down bills for ordinary consumers, with No 10 officials increasingly concerned about the threat of Reform UK.
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Downing Street intervened in the zonal pricing debate after aides to the prime minister, Keir Starmer, became concerned about the possible effect of rolling out plans which could lead to price rises for some consumers.
Some also worried about the impact on international investment, which is seen as key to building the energy infrastructure that the government has promised.
The French company EDF confirmed on Tuesday it would take a 12.5% stake in the Sizewell C nuclear plant, boosting ministers’ promises of a “golden age” of nuclear power.
Advisers recently held meetings with a number of energy companies to discuss potential alternatives, and the government has now decided to abandon zonal pricing altogether.
The decision has gone to senior ministers in a process known as “write-round”, and will be announced before the next renewables auction which is scheduled for early August.
Officials are now focused on finding alternatives to zonal pricing which might encourage businesses and manufacturers to locate to electricity-rich parts of the country. They include paying battery storage companies to build major capacity in Scotland, or paying them to turn up their capacity on particularly windy days.
One government source said the search for other plans was “where all the brain power is now being expended”.