Navigating uncertainty: key regulatory changes shaping the UK business energy market

This is our first edition of a regular bulletin that delves into key policy and regulatory updates shaping the UK's energy markets to help businesses navigate changes coming up. Here we are focusing on three policies that commercial and industrial energy customers should watch closely: i) Review of Electricity Market Arrangements (REMA), ii) Market-wide Half-hourly Settlements, and iii) the Carbon Border Adjustment Mechanism. We will also touch on other policy developments to monitor.

As part of the British Energy Security Strategy, launched in 2022, the UK government initiated the review of electricity market arrangements (REMA) with the ambition of transitioning towards a more decarbonised, cost-effective and secure electricity system. REMA aims to reform the electricity market to deliver upon the sector’s 2035 net zero ambitions. The second public consultation, which took place in March 2024, narrowed down reform options, with a clear direction for evolving Great Britain's electricity market. The policy development phase is expected to conclude within the next few months, laying the foundations for full-scale implementation.¹

One notable proposal under REMA is the introduction of zonal pricing, which would divide the national wholesale electricity price into up to twelve regional energy price zones. This would see costs dictated by local generation and demand; for example, high generation and low demand would result in lower electricity costs localised to that area.² The introduction of zonal pricing could have significant implications on wholesale energy prices. According to the Department for Energy Security and Net Zero (DESNZ), responsibility for balancing local supply and demand would be transferred from consumers to generators, and this fragmentation could impact wholesale liquidity by reducing the amount of energy available to trade.

Critics warn that this could lead to uneven and volatile prices, creating a postcode lottery effect and potentially deterring long-term investments in energy infrastructure.³ Energy-intensive industries, such as those in steel manufacturing, have also expressed concerns that zonal pricing could result in higher wholesale prices, especially if they are located in higher-priced zones and unable to relocate.⁴ Proponents of the initiative argue this could lower bills by enhancing system efficiency and encouraging energy projects closer to demand centres.

In preparation, businesses with high energy requirements would benefit from taking a proactive approach in assessing their exposure to regional price variations. Conducting a detailed analysis of energy usage patterns and location-based pricing risks can help businesses understand how their costs might change under a zonal system. Where possible, companies should explore options for optimising energy consumption through demand-side response strategies, on-site generation, or procurement agreements that provide price stability.

Engaging with policymakers and industry groups can also be beneficial in shaping the conversation around zonal pricing, ensuring that the needs of high-energy users are considered in the final policy design. Additionally, businesses should stay informed on policy developments and be ready to adapt their energy procurement strategies in response to regulatory changes.

Over the next few years, the energy market will switch to a system that settles electricity usage based on real half-hourly consumption data for all customers, marking a significant shift from the current reliance on estimated profiles for most users. Designed as a mechanism to help the UK accelerate progress towards reaching net-zero targets by 2050,⁵ the market-wide half-hourly settlements (MHHS) programme is expected to enhance market efficiency, offer a more affordable electricity framework, encourage energy flexibility and promote the widespread consumption of renewable energy.

All in all, MHHS will change the way electricity is billed and managed across the UK. By providing more accurate data on electricity usage, encouraging flexibility and promoting renewable energy, MHHS has the potential to create a more efficient and competitive energy market. So how can businesses begin preparing for this transition? While industrial and commercial energy users will typically already use half-hourly metering and billing, we now expect the rest of the market to begin heading in the same direction. This means that energy management strategies like load shifting – moving electricity consumption from peak demand periods to off-peak – will become more mainstream for smaller energy customers, likely resulting in impacts on the wider energy market. For example, previously off-peak periods may become pricier as the demand increases; likewise, we may see previously peak periods begin to smooth out.

In preparation, we recommend that businesses of all sizes review their energy procurement strategies, as greater visibility into usage patterns can enable smarter purchasing decisions, such as optimising contract structures or taking advantage of time-of-use tariffs. Engaging with suppliers and energy consultants early in the transition process will help businesses understand potential cost implications and develop strategies to mitigate risks while improving operational efficiency.

In October 2024, the UK government outlined plans to introduce a Carbon Border Adjustment Mechanism (CBAM), which will come into force from January 2027. The mechanism, which emulates an initiative of the same name already live in the European Union, aims to prevent carbon leakage by imposing charges on imports of specific goods – such as aluminium, cement, fertilisers, hydrogen, iron and steel – based on their embedded carbon emissions.

CBAM ensures that imported goods are subject to equivalent carbon costs as domestic products, helping to maintain a level playing field for UK companies by making it more difficult for international competitors with poor emissions standards from undercutting on price. Businesses importing these goods must report emissions data and may face additional costs if the carbon price in the country of origin is lower than the UK's.

To begin preparations for the new levies, manufacturers that import goods into the UK may wish to begin considering the commercial and operational impacts that CBAM will create. Businesses that export to the EU may have already begun integrating carbon monitoring and reporting processes into their supply chains, and those that are within scope of both UK and EU mechanisms will need to understand the differentiated requirements for each. As the policy continues to evolve, UK commercial and industrial businesses should familiarise themselves with CBAM and closely monitor the scheme, especially during this period of unpredictability with regards to international trade and tariffs. Now is the time for businesses to start developing a solid, day-to-day understanding of CBAM and how to manage compliance with the scheme. CBAM could offer numerous opportunities for UK businesses to remain competitive against exporters from overseas, and industries will need to start planning how the mechanism will affect cost structures, supply chains and procurement strategies in preparation for UK CBAM’s commencement in 2027.

• Clean Power 2030: The UK's commitment to achieving a net-zero power sector by 2035 underscores the transition to renewable energy sources. Initiatives under Clean Power 2030 aim to accelerate this transition, impacting energy procurement strategies and necessitating a focus on sustainability. Ofgem revealed that the new connections system – a policy to end the first-come, first-served system where clean energy generation or storage projects cannot be connected to the grid fast enough - could begin as early as spring 2025.⁶ The policy consultation closed in March, and we’ll be monitoring closely for the outcome.

• GB Energy: The establishment of GB Energy reflects the government's efforts to boost energy security and affordability. This development may influence market dynamics, offering new opportunities and considerations for large energy consumers as it evolves. The GB Energy board met for the first time in mid-March to discuss the scaling up and kickstarting of clean energy investments. While we’re awaiting publication of results from the meeting, the publicly owned company is expected to receive £8.3 billion in backing and to make headway in targeting strategic investments in renewables and supply chains – particularly in Scotland’s energy hubs – to support new technologies and help drive economic growth.

• Nuclear Regulated Asset Base (RAB): As part of the Nuclear Energy (Financing) Act 2022, the UK government proposed a nuclear RAB model whereby investors would receive a guaranteed return on their investment into new nuclear plants across the entire lifecycle of the asset. With conversations ongoing, there is no current start date for nuclear RAB. However, once initiated this model will offer a new, diversified approach to clean energy generation and could help provide businesses with an additional avenue for reliable, low-carbon energy procurement.

• Energy intensive industry (EII) support levy: Under the EII network charging cost compensation scheme (NCC), businesses in energy intensive industries can be compensated for up to 60% of their network charges. Costs are funded by a levy on electricity suppliers, known as the EII Support Levy, which commenced in April 2025. Now open to applications, eligible EII businesses can register for the scheme online through the NCC Portal and will need to submit a separate online application for each quarterly electricity support payment.

The current landscape of uncertainty in the UK's energy markets presents both challenges and opportunities for high energy customers. As such, staying abreast of regulatory changes like zonal pricing, settlement reform and carbon pricing is essential for informed decision-making and forming long-term energy procurement strategies.

Proactively engaging with these developments, preparing for these transitions and aligning strategies with sustainability goals will position businesses to navigate these policies effectively. Working with experienced energy partners like Shell Energy can provide valuable insights and support in managing these complexities, ensuring that your organisation remains resilient and competitive in the face of change.

References

1 https://www.gov.uk/government/collections/review-of-electricity-market-arrangements-rema

2 https://www.argusmedia.com/en/news-and-insights/latest-market-news/2547151-uk-consults-on-zonal-power-pricing-cfd-reform

3 https://www.thetimes.co.uk/article/regional-energy-pricing-wont-work-says-scottish-power-zv7ljhjcw

4 https://www.uksteel.org/steel-news-2024/government-abandons-power-pools

5 https://commonslibrary.parliament.uk/research-briefings/cbp-9888/

6 https://www.ofgem.gov.uk/press-release/clean-power-2030-one-step-closer-proposed-new-fast-track-grid-connections-system-unveiled

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