It is actually that simple. The current pricing system was created for a grid that no longer exists. There is now lots of wind generation, solar, battery power, etc. And growing rapidly. Both on the grid and domestic. And soon large amounts of batteries with wheels capable of powering houses and delivering power to the grid.

All this means lots of fluctuations in power availability and cost. Pretending that it costs the same all the time everywhere is irrational. If you give people incentives to adapt to these fluctuations, they will. Energy providers like Octopus prove that at scale. They by the way are a big proponent of more localized power. Because it's just more optimal.

Price incentives cause people and companies to adapt their behavior. Including when to to use power and where to use power. Likewise, it incentivizes power companies to invest in power generation where the demand is instead of where the NIMBY's are not (like Scottland). Speaking of NIMBY's, if they could benefit from lower pricing, they'd probably love wind power a lot more. Buy more electric cars, do the laundry when it's windy, etc.

As for base load. Nobody ever specifies a number in GW or GWH. It's a very fuzzy notion that people just assert is needed in huge (unspecified) amounts. If you put actual numbers on it, you would be able to have a sane discussion on (much) cheaper alternatives. But that never happens. Most discussions around base load center on the notion that we allegedly need a lot of it. What's the budget we need to reserve for that? How much? When? Where? Why? Are there any alternatives? The debate is mostly completely irrational and hand wavy on this.

There is a basic notion that power companies don't mind charging the same rate nationally because that means they make lots of money charging for mostly cheap power available everywhere except in a handful of places. The way the system works is that everybody pays the highest price on the system. Localized prices would introduce lots of variation and cause lots of reasons for power companies to optimize their power delivery and pricing. High prices mean unhappy customers voting with their feet. They are being shielded from that currently.

It's a big reason they are resisting changes on this front. In some cases they actually get paid to not generate power or discard it. That's wasteful. Scottland has plenty of base load. They are exporting their power surplus most of the time.

For base load one obvious reason to be sceptical is that in country A you may find that a generation technology is "base load" and so we can't possibly throttle it up or down, that's just how it works, and then in country B the very same technology is indeed throttled up and down as needed.

The UK has a lot of combined cycle gas burners. You will sometimes see US claims that these generators are only baseload and it wouldn't make sense to throttle them up and down. Over the course of an ordinary day in Britain you might see power output from these "baseload" generators vary between 2GW and 20GW and it's no big deal.

What £/kWh rate could we achieve at 2am, if we had the perfect localised modern pricing model?

It really isn't that simple.

Every decision is a trade-off. The trade-off here is between on the one hand the savings from additional network reinforcement, the savings from reduction in aggregate Dx/Tx costs, and increasing the optimality of placement of generation wrt load; on the other hand, the cost of renewables generation being placed in areas with lower potential, the cost of increased price instability due to smaller markets, and of course, the switching costs. There is also the question of what incentives a zonal electricity market would actually provide to renewables developers.

With regards to the network reinforcement savings, it is worth noting a few things. A major obstacle to increasing network reinforcement is not the intrinsic investment cost, but inadequate and restrictive planning, which, the grid being a natural monopoly, results in artificially constrained connection supply (not out of malice but policy failure). Just as an illustration, the way DNOs currently determine whether to pay for flexibility services or upgrade the network is done on the basis of a _5 year_ calculation (ludicrously short!). The current waiting lists for new grid connections are on the order of a decade. Fundamentally, there is a short-sightedness in the planning system, and the long term is catching up.

As for the optimality of placement of assets, price signals already exist to reflect local needs -- there isn't exactly one single price for electricity for the whole of the UK (though it's a decent approximation). Transmission and distribution costs are baked into the settlement system. For grid constraints, both distribution and transmission use of system charges vary in space and time to reflect constraints (and flexibility services also introduce a local price signal, although I have earlier expressed skepticism of the procurement process).

If these price signals exist, why don't they cause renewables generation to become more distributed across the UK? The answer is that they probably do, but that grid losses are just smaller than the increased capacity factor of building in Scotland. Grid losses (both Dx and Tx) is on the order of 10%, and wind farms in Scotland will have a capacity factor about 30-40% greater.

Finally, to touch on the incentives question. The justification for pay-as-clear pricing (which is what you refer to as paying the highest price on the system) is actually to _incentivize_ the construction of cheaper, _renewable_ and nuclear energy. Sure, it doesn't especially disincentivize the construction of marginally-priced gas plants, but it doesn't incentivize it either. You could argue that maybe power companies are keeping this market structure to profit from their renewable assets instead of moving the whole grid to renewable, except for a simple fact: there is no monopoly on power generation in the UK.

Let me be clear: I am not actually arguing against zonal pricing. There are plenty of good arguments being made by people who have studied this more closely than me. What I'm fundamentally trying to do is provide a different perspective: that there is a lower-hanging fruit in the form of improving grid planning, a point which may be argued. But it is _not_ a simple problem with an obvious solution that's only being held back due to a conspiracy of energy suppliers.