Locational Network Charging: Building a Predictable Framework for Clean Power Investment

The future role and design of locational network charging is central to electricity market reform . The key policy question is:

• whether investment decisions should be guided primarily through connection capacity thresholds with limits that tightly control generation or storage capacity, by technology category, and geographic zone aligned with the government’s long-term Strategic Spatial Energy Plan (SSEP) ; or
• whether cost-reflective locational network charging should continue to play a role, with higher connection capacity thresholds and market signals working together to influence where projects are located and which investments, including new build, life extension and closure decisions, are economic.

Locational network charging is not just a technical issue. It influences where investors direct their time, capital and resources, helping to bring forward projects in the most suitable locations and shaping which projects progress. In turn, this affects the efficiency of network upgrades and expansion, and ultimately the overall cost of delivering the energy transition. The issue is therefore not simply about how network charges are calculated, but about how market signals support generation development in the right places and encourage efficient investment across the electricity system, helping to keep consumer bills as low as possible over time.

As central planning, through initiatives such as the planned SSEP, increasingly plays a more influential role, locational network charging should be considered within this wider framework. Strategic planning can identify the broad scale and distribution of future generation and network investment needs across Great Britain. Locational network charging complements this by ensuring individual investment decisions reflect the underlying costs and benefits to the electricity system. In doing so, it encourages development in the locations that deliver the greatest value for the system and consumers. Since project development takes time, investors need clear and cost-reflective signals about locational choices from the earliest stages, so they are ready to commit to their connections when they become available.

These approaches are not competing alternatives. Strategic planning identifies the broad shape of the future system for network expansion, while market signals help generators and demand project developers to progress opportunities in parallel, delivering decarbonisation efficiently by directing investment towards locations that provide the greatest benefit. Together they support a system that is both coordinated and economically efficient.

Relying on the strategic plan alone would place greater weight on the assumptions made by the central planner about future technology costs, load growth, network build-out, constraint patterns and the relative value of different technologies in different locations. If those assumptions prove wrong, as even the best models ultimately do, the system could lock in inefficient outcomes.

For example, a plan may identify a need for generation in a particular area, but without locational signals developers have little reason to distinguish between projects minimise transmission investment and those that re more remote from demand, requiring additional transmission capacity over longer distances. Similarly, decisions on storage, flexible demand or life-extension decisions could be driven by whether they fit within a planning boundary rather than by the actual value they provide to the network at that point.

Locational network charging helps avoid these risks by providing an efficient signal of each project's impact on the grid, enabling investors to form their own views on the right technologies, locations, and timing.

The key challenge for policymakers is how to update and improve locational network charging in a way that preserves and enhances effective investment signals, reflecting the cost drivers of reinforcing and operating the network, and therefore giving developers and investors more certainty about realistic future network costs.

¹ These policy decisions are being considered principally through the Government's Reformed National Pricing (RNP) Delivery Plan, Ofgem's work on locational charging and regulatory siting incentives, the development of the Strategic Spatial Energy Plan (SSEP), and wider market reforms.

² The SSEP is a long-term plan being developed for government by the National Energy System Operator to identify optimal locations, technologies and timing for future energy infrastructure across Great Britain.

Where the network is under-developed, constraint costs can exceed the cost of investing in transmission. Conversely, over-building the network can create sunk costs if assets are never fully used. In such cases, generators connecting to and using under-utilised assets may impose little or no additional cost. Until all network investment decisions have been made, and any spare capacity is demonstrably enduring, transmission investment costs should remain a relevant driver of locational signals. Most new generation and demand connections still impact future transmission investment costs, and this is likely to remain the case for many years.

Effective locational network charging can be achieved through a series of targeted improvements to strengthen the existing Transmission Network Use of System (TNUoS) framework. A key priority is to revisit and update the network investment cost assumptions and methodologies used to derive charges. This work has largely been paused during the wider market reform process and although the current assumptions have become outdated, the underlying principles remain sound.

Charges should reflect the latest Construction Planning Assumptions aligned with the Connections Reform process, ensuring locational signals remain accurate, robust and genuinely cost-reflective as the energy system evolves. These assumptions were originally set out in the Security and Quality of Supply Standard, but no longer reflect current planning approaches and should be updated and republished. Reforms should also improve predictability and investability by allowing generators to fix or hedge locational network charges against a NESO forecast, while maintaining effective market signals.

Existing TNUoS reforms that have already been developed or submitted to Ofgem should now be taken forward These include removing the zero price floor to restore locational demand signals, updating transmission cost assumptions to reflect recent reinforcement projects, considering how TNUoS should apply to solar generation, and allocating appropriate charges to sites with multiple generation technologies. Progress on these measures has been delayed by wider market reform considerations, despite broad recognition of their value.

A decarbonised electricity system needs sustained private investment. Generation, storage and flexibility assets are capital intensive and often take years to develop, meaning investors make decisions today based on expectations of future market conditions.

Network charges are an important factor in those decisions. Alongside planning frameworks, revenue support mechanisms and wider regulatory stability, they influence where projects are developed and whether they proceed at all.

Locational network charging also influences decisions about whether existing assets remain open, are upgraded, repowered or replaced. Cost-reflective locational signals can help ensure these choices account for network impacts, and where appropriate, encourage investment that frees up valuable network capacity and reduces the need for unnecessary reinforcement.

While investors understand that regulatory frameworks will continue to evolve, they need changes to be implemented in a clear and predictable way. Regulatory uncertainty carries a cost. If future charging arrangements are unclear, investors price additional risk into

This matters in an increasingly competitive global market for energy investment. Capital is mobile, and investors compare opportunities across jurisdictions. If network charging arrangements are perceived as unpredictable, investors may either require higher returns to compensate for the risk, or choose to invest elsewhere. Either outcome can increase the cost of the energy transition for consumers.

Market reform should strengthen the UK's long-term attractiveness as a destination for investment. The current framework has evolved in response to successive challenges and unintended consequences. Although some reform proposals may appear simpler in principle, experience shows that translating high-level concepts into workable market designs often introduces significant complexity and uncertainty. The evolution of connections reform provides a useful example. What began as a relatively straightforward, one-size-fits-all approach has required successive modifications to accommodate different technologies, project types and system needs. This highlights a broader reality: energy markets are inherently complex, and apparently simple reforms often become more complicated when adapted to real-world circumstances.

The objective should not be simplicity for its own sake, but a framework that provides clear, durable and reliable signals. Reforms that improve predictability while maintaining incentives for efficient investment can reduce financing risk, lower the cost of capital, support continued investment and ultimately reduce costs across the electricity system.

Good market reform should therefore create a system that is both efficient and investable: one that market participants can understand, finance and invest in with confidence over the long term. The current TNUoS framework, although in need of updating, is founded on sound principles, and is therefore a solid foundation for effective locational charges in future.

If predictability is essential for future investment, reform must also recognise investment decisions already taken under the current framework.

Existing assets and projects in advanced stages of development have committed significant capital based on the current network charging arrangements. Those assumptions are built into financing structures, Contracts for Difference (CfD), Capacity Market agreements, power purchase agreements and other commercial arrangements. In many cases, those commitments cannot simply be revisited once investment has been made.

Legacy and transitional arrangements should therefore be treated as a fundamental element of reform, not merely an implementation detail. Their purpose is to ensure changes are introduced in a proportionate and predictable way, that is consistent with the framework under which investment decisions were originally made.

In the context of RNP, this requires a clear grandfathering framework that protects existing investments, as well as those made before the final reforms are known. Existing assets should retain a charging framework broadly consistent with that understood by investors when capital was committed. One approach would be to base charges on the prevailing five-year TNUoS forecast, adjusted for inflation and incorporating known network reinforcements that are reasonably foreseeable at that point. Any grandfathering arrangement should also retain the existing adjustment charge that ensures the average charge across all tariffs does not exceed €2.50/MWh. This would avoid retrospectively altering the assumptions underpinning investment decisions and help maintain investor confidence.

The importance of this principle extends beyond projects directly affected by the reforms. Future investors will assess how existing investments are treated when evaluating regulatory risk. If reforms are seen to retrospectively change the commercial assumptions on which capital was committed, confidence in future investment is also likely to be undermined.

A successful transitional framework should therefore reflect meaningful investment commitments, such as securing a CfD or Capacity Market contract, or undertaking demonstrable repowering or life-extension investment, rather than relying solely on a narrow Final Investment Decision threshold. It should also preserve existing locational signals, recognising that both charges and credits have informed investment decisions. In practice, this means allowing existing generators to preserve the TNUoS charging framework that informed their original investment case.

Legacy and transitional arrangements are not an alternative to reform; they are essential to its success. By maintaining investor confidence and reducing regulatory uncertainty, they can help keep the cost of capital, and ultimately costs for consumers, as low as possible.

While transitional arrangements protect confidence in investments already made, the enduring framework must provide the certainty needed for future investments.

The UK's future electricity system will require sustained investment across generation, storage and flexible technologies. Strategic planning can help identify where infrastructure is needed, but developers and investors will continue to respond to market signals when making commercial decisions. Those signals must remain clear, stable and reflective of the costs and benefits projects bring to the system.

The objective should not be to replace market signals with central planning, but to ensure the two work together. Strategic planning can provide direction, while locational network charging continues to guide efficient investment decisions within that framework.

There is also scope for targeted improvements that improve the predictability of network charges without weakening locational signals. For example, greater visibility of future charges, allowing developers to voluntarily fix onshore elements of TNUoS charges against a forecast at key investment milestones, and applying rules consistently across

The voluntary nature of such an arrangement is important because investment decisions vary considerably in scale, risk profile and time horizon. New-build projects may require long-term certainty over network charges to support financing, whereas life-extension investments or major maintenance programmes may need certainty over a shorter period. Allowing developers to choose whether, when and for how long to fix charges enables the framework to reflect these differing circumstances rather than imposing a single approach on all projects.

While this could result in similar, adjacent assets facing different charges depending on when they fixed their tariff, each investment would have been made on the basis of the latest and best available information at the time. This approach could reduce financing risk and support investment while maintaining efficient locational incentives, and should be administratively manageable for NESO.

The enduring framework should build on the strengths of the current approach. Reform should make the UK easier to invest in, not harder.

Transitional arrangements and the enduring framework are often discussed separately, but they serve a common purpose: maintaining investment confidence throughout the market reform journey.

Transitional arrangements provide certainty for existing investments, while enduring arrangements support confidence in future investment decisions. Together, they reduce the risk of an investment hiatus during implementation.

Voluntary fixing could help bridge both regimes by giving assets a clearer way to manage exposure to future network charges while preserving the underlying locational signal.

The goal should be a coherent framework that protects existing investments while providing clear and predictable signals for future projects.

What is the Strategic Spatial Energy Plan (SSEP)?

The Strategic Spatial Energy Plan (SSEP) is a long-term plan being developed by the National Energy System Operator (NESO) to identify the optimal locations, technologies and timing for future energy infrastructure across Great Britain. Initially focused on electricity and hydrogen generation and storage, it will consider factors such as system costs, environmental impacts, land and sea use, and network requirements to support a coordinated, secure and cost-effective transition to a decarbonised energy system. The SSEP is intended to inform network and infrastructure investment, providing greater certainty for governments, communities and investors, but it will not determine or approve individual projects.

What is locational network charging?

Locational Network Charging refers to charges that vary by location to reflect the cost of using and investing in the electricity network. Generators and large users pay different amounts depending on where they connect to the grid and the impact they have on network capacity. The aim is to signal where connecting to the network is more or less costly and encourage efficient siting of generation and demand. In Great Britain, TNUoS charges are a key example of locational network charging. These charges affect network costs but do not directly determine wholesale electricity market prices.

How does Transmission Network Use of System (TNUoS) charging work

Transmission Network Use of System (TNUoS) charges recover the allowed cost of building, maintaining and operating the high-voltage transmission network. They are paid by generators and electricity demand users, with tariffs varying by location to reflect the different impact that connecting in each part of the network has on transmission costs. In broad terms, projects in areas that increase the need for network reinforcement face higher charges, while projects in areas that help reduce system costs may face lower charges or, in some cases, receive credits. TNUoS therefore provides a locational signal that sits alongside strategic planning: it does not decide where projects can connect, but it influences the commercial case for different technologies and locations by showing the network cost consequences of those choices.

What is locational pricing?

Locational Pricing refers to a market design where the price of electricity varies between different geographic areas based on local supply, demand, and network constraints. Areas with abundant generation may see lower prices, while areas with constrained networks or high demand may experience higher prices. The approach aims to provide stronger economic signals about where generation, storage, and consumption should be located. Unlike locational network charging, it affects the wholesale price of electricity itself rather than just network charges. Advocates argue it can improve system efficiency, while critics raise concerns about regional price differences and investment uncertainty. The Department has ruled out the introduction of locational pricing on the basis that the costs of uncertainty outweigh potential system efficiency benefits.

What is Reformed National Pricing (RNP)

Reformed National Pricing (RNP) is the UK Government's preferred electricity market reform model emerging from its Review of Electricity Market Arrangements. It retains a single national wholesale electricity price across Great Britain, while introducing targeted reforms to improve the efficiency of the energy system through better strategic planning, network development, and balancing and dispatch reforms. RNP is intended to support clean power investment, reduce system costs, and provide greater certainty for consumers and investors.

What is the €2.50/MWh cap adjustment charge, and how does it work?

The €2.50/MWh cap adjustment charge is a mechanism that ensures GB complies with the legal limit on average transmission charges. Under the retained (formerly EU) Limiting Regulation (Commission Regulation 838/2010), the average transmission charge paid by generators in GB must fall within a permitted range of €0–2.50/MWh. This rule was introduced to avoid excessive transmission charges distorting cross-border electricity trade and investment. To comply, NESO applies an adjustment tariff to all wider generation TNUoS charges in order to ensure that the overall average is within the €2.50/MWh limit.