The Energy Transition | UK government lays out delivery plan for Reformed National Pricing

This week's edition explores the government's delivery plan for Reformed National Pricing and the upcoming application window for the Clean Industry Bonus ahead of Contracts for Difference Allocation Round 8.

UK government lays out delivery plan for Reformed National Pricing 

Through the Reformed National Pricing (RNP) delivery plan, the government aims to encourage the private sector to develop energy infrastructure closer to areas of higher electricity demand. The plan addresses the current mismatch between areas with the highest density of generation and the location of network assets, which are not always situated in areas of greatest demand.

Siting and investment levers 

The delivery plan identifies reform to siting and investment levers as being essential to facilitate the strategic spatial energy plans (SSEPs). It is designed to minimise total energy system costs by encouraging the strategic placement of generation. 

The government has commissioned National Energy System Operator (NESO) to produce a SSEP every three years with the first covering the whole of Great Britain split into 19 regional zones. The SSEP will set out a nationwide electricity and hydrogen production and storage strategy with forecasts to 2050. NESO plans to consult on the draft SSEP in early 2027, with final publication expected in autumn 2027. The delivery plan identifies six levers to facilitate delivery of the SSEP.

Network build 

The SSEP will provide the foundation for a centralised strategic network plan (CSNP) for the development of transmission infrastructure. The CSNP will outline new reinforcement projects which will be delivered through Ofgem's electricity network price control regime. 

Seabed leasing 

Although seabed leasing is well established, future leasing rounds will aim to align the process with the SSEP, taking into account the compatibility of certain zones with the connections regime, Contracts for Difference (CfD) allocation rounds and other siting and investment levers.

Planning reform

The SSEP will be formalised within domestic planning regimes and has been referenced in the consultation on updates to the national planning policy framework. 

The connections regime

Through the queue management TMO4+ reforms, NESO and Ofgem are already prioritising generation and storage projects with strategic value. Further SSEP reforms are expected to build on this regulatory framework through a methodology that takes the SSEP into consideration when determining connection offers for generation and storage.

Locational charges 

Ofgem manages the Transmission Network Use of System (TNUoS) and connection charging regimes, which currently apply locational charges for generation assets connected to the transmission system. These regimes are designed to allow network companies to recoup the costs of building, maintaining and operating projects from users in different areas. The government is considering amending both regimes to align with the SSEP. 

Generation and storage investment support  

Government and Ofgem support schemes, such as the CfD scheme, may be amended to include additional locational elements to achieve the zoning aims of the SSEP. The government has acknowledged the need for careful consideration of the interactions between locational charge mechanisms and investment support schemes, including the need to preserve liquidity in the market, minimise the impact of excess locational charges on consumer costs, and maintain predictability and adaptability in the system.

The government has proposed four options covering the combination of primary levers of connections reform and locational charges. It considers options two and three to be most likely to deliver the SSEP.

Option two focuses on aligning the connections regime as the primary lever for driving siting outcomes with the SSEP by introducing capacity thresholds to filter the volume of connections grouped by both technology and SSEP zone; under option two, locational charges play a secondary role. Option three builds on option two, retaining the concept of connection capacity thresholds but introducing locational charging as a further lever  to determine how much capacity to buy within those thresholds.

The government's consultation on these points is open until 2 June. 

Constraints management action plan 

The government is pursuing three approaches to reduce constraint payments: increasing grid capacity, making best use of the existing network and reducing the cost of constraint adjustments. 

On grid capacity, network infrastructure is currently being developed at a far slower rate than the expansion and diversification of generation assets. The government is working to accelerate network build and connections and, as a result, increase network capacity. To date, the government has introduced the 'first ready-and-needed, first-connected' connections reform process and introduced measures in the Planning and Infrastructure Act 2025 and the sector growth plan as set out in the industrial strategy. The Department for Energy Security and Net Zero (DESNZ) also plans to work with the TOs and Ofgem to look at ways to accelerate construction schedules for critical transmission works.   

The second strand concerns making best use of the existing network. DESNZ is rolling out dynamic line rating (DLR) technology to determine the actual capacity of overhead transmission lines; current ratings tend to take a conservative view of the electrical capacity that can be safely carried. NESO has completed its assessment of viable DLR sites and has requested the installation of 40 circuits. The grid code approval process, STCP 11-4, which governs and incentivises DLR installation, will be monitored to ensure it remains effective. Ofgem has identified the rollout of DLR as a priority for the next electricity transmission price control period, RIIO-ET3, to reduce constraint costs. NESO is also relying on its market review of demand-side flexibility routes to reduce consumer costs and prevent thermal constraints in the system.

The government is also focused on reducing what is paid for constraint adjustments. DESNZ is working with NESO and Ofgem to explore options that would allow NESO to take action ahead of gate closure; in particular, by identifying potential opportunities to increase generation or reduce demand. NESO will consider additional pre-gate closure measures in consultation with industry. Earlier intervention would assist with managing and lowering the price of constraints, as this should reduce how much balancing is required following gate closure.  

The government also recognises the role of flexible consumer demand to help manage localised constraints through the demand flexibility service, as well as the role of interconnectors. Strategic planning of new interconnectors, coupled with countertrading them to assist with managing system constraints, are proposed as part of the solution to reducing constraint payments. 

Balancing and settlement reform 

The government seeks to reform balancing payments to take account of the greater capacity of the grid and the variety of different technologies that are connected. The first package of proposed reforms covers four areas, with the aim of encouraging "self-balancing" prior to gate closure to improve the geographical detail of information available to NESO and to increase the amount of flexible capacity.

The reform concerns the mandatory participation threshold for the balancing mechanism (BM). Given the increase in smaller assets connecting to the grid, such as small-scale batteries, this is a necessary step to improve NESO's oversight of the network, allowing it to receive final physical notifications (FPNs) from more assets and thereby improving their analysis of system requirements.

The second area of reform addresses the relationship between FPNs and traded positions. In times of price volatility, some market participants have sought to deliberately instigate system imbalance to profit from such volatility, potentially causing network constraints. This practice, known as net imbalance volume (NIV) chasing, would be prohibited under the proposed reform. FPNs would have to match traded positions, reducing the volume of re-dispatching required by NESO.

The third reform aligns the market trading deadline with BM gate closure. Moving the electricity market trading deadline back in line with gate closure will "remove the incentive for non-BMUs to trade closer to real-time" and encourage more volume to be offered to the BM, thereby increasing liquidity and competition. Furthermore, as trading would not be permitted after gate closure, this will mitigate NIV chasing.

The fourth area covers unit bidding and shortening the imbalance settlement period (ISP) to 15 or five minutes. The ISP reforms will follow in due course.

A cost benefit analysis is under way into the P462 code modification. As currently drafted, P462 requires market participants to account for subsidies when issuing prices to reduce their output in the BM. Critics argue that this distorts the true cost of balancing the system. Code and licence modifications are expected to be introduced across these BM reform areas, aligning with Ofgem decisions following a NESO Call for Input. 

CfD update  

The government has concluded that the deemed CfD which had been proposed as part of the REMA programme poses too many disadvantages to be taken forward. 

Clean Industry Bonus application window to open in May 

The application window for the Clean Industry Bonus (CIB) will open on 13 May and close on 21 May, ahead of CfD Allocation Round 8 (AR8), which is anticipated to take place in the summer.

The allocation framework for the CIB for AR8 includes several reforms from the framework for AR7, primarily relating to how funds can be used. The government published its response to the consultation on reforms to the CIB earlier this year.

This article was written with the assistance of Alice Smith and Maggie Hudson, trainee solicitors.