Campaigns Financial

Financial Penalties Restrict the Development of the Scottish Renewables Sector

As we all face into an ever-worsening cost of living crisis there is no shortage of suggestions from opposition parties as to what the government could and should be doing to alleviate the worst affects for the most vulnerable in society. When the question comes round to how we pay for measures to help the most vulnerable there are two important considerations:

(1) is this a priority for the government?

(2) how do we pay for it?

When something is a priority money can usually be found to make it happen. Think weapons of war, think banker bail out, think dodgy PPE contracts. For governments it’s a question of making sure their priorities get the funding they need. History tells us that’s easier for some ‘priorities’ than others and is usually based on political considerations.

If reallocating resources to address a problem isn’t going to fix it, then generating new money from higher taxes is sometimes considered. A very topical suggestion in this cost-of-living crisis is the idea of applying a windfall tax on the oil companies. Higher oil prices have been a real boon for them!

There is little dispute that the oil companies are making windfall level profits. Shell made $9.13 billion in the first quarter of 2022 – 182% up on the same period last year. BP made $6.245 billion, up 137% (1). Should they pay more in tax to help the most needy and vulnerable in society? Most people would say yes, they should. You might expect the debate then to be about how much that tax should be, rather than IF we should have it. Yet here we are with the UK government refusing (so far) to act on it.

Most people would agree it can’t be at ‘punitive’ levels, after all they need to make a reasonable level of profit so that that they can invest in the business to help develop its future. The UK government, however, are really pushing the “investment in renewables” line to justify not applying ANY extra tax on the oil companies, even on the wind fall portion of profits they didn’t really work to get.

This argument about investment has some logic to it, but the extraordinary levels of profit that has fallen into their laps is surely reasonable to tax at a higher level. Every government spokesperson interviewed about it, however, insists they shouldn’t apply ANY additional tax ‘burden’ on them because, they say, they must be allowed to retain all of their profits to invest in the future and especially to invest in renewables.

The problem for the Tories comes when you apply that same logic elsewhere. Let’s stick to the energy sector and look at what it costs companies to transfer electricity to the national grid. That’s for all our benefits, right? There are 27 geographical zones for the purposes of the National Grid. If there is surplus energy in one zone it makes sense to share that to zones where they don’t have enough to meet local demand. It should be noted here that most of the transfers within the UK grid involve transfers out of Scotland – in fact over 90%!

How does the argument of not ‘over taxing’ companies to allow investment, apply in this sector? Is the UK government applying the same rationale they do in the oil industry? Do the companies that produce power for the National Grid all get an equal opportunity to invest in renewables by having similar cost burdens? Well, you would think so, given the Westminster government’s rationale for allowing the oil companies to keep even wind fall level profits. You would be wrong! Not only is there not a level playing field, but the zones who contribute a proportionately bigger share to the National Grid pay a significantly higher price for doing so. They therefor have less opportunity to invest in renewables. Why would this be the case?

First of all, National Grid plc is a multinational company listed on the London stock exchange and they aren’t going to do anything out of the goodness of their heart. We can thank the Tories for that when they broke up the state-owned Central Electricity Generating Board into four separate companies in the 1990s. But the government can legislate to level the playing field so that Scottish operators ar treated fairly and have an equal chance of investing for the future.

Scottish and Southern Electricity Networks Transmission and others have previously made representations to the UK government to put a stop to the unfair practice of charging Scottish electricity power companies much higher rates to connect to the National Grid than those in England and Wales. Pete Wishart, as Chair of the Scottish Affairs Committee at Westminster, has also been pushing for this to be changed.

Geographically, Scotland is uniquely placed to grow a significant renewables energy sector, especially for wind energy. These additional charges, however, place Scottish generators at a significant competitive disadvantage. The Scottish Government, the companies involved, and Scottish Renewables have all made representations to the UK government for them to create a fairer system for all companies operating in the UK market.

So where is the UK government in all of this, especially given their rationale for avoiding an oil profits windfall tax. Where is the fairness? Where is the consistency of approach? So far, nowhere to be seen. This additional cost is jeopardising the possibility of Scotland developing a significant renewables energy sector and needs to be addressed as a matter of urgency. It also makes a mockery of their rationale for not imposing an oil profits wind fall tax.

This chart shows the disparity in charges.

Scottish electricity generators pay a significant premium to transfer energy to the National Grid. They are being penalised for contributing to the UK’s overall energy needs. On average Scottish providers pay £28.84 per kilowatt versus just £0.61 on average for companies in England. Remarkably, the six zones in England with the best price deal receive a payment per kilowatt with West Devon and Cornwall receiving £9.61 for each kilowatt transferred to the National Grid whereas the Scotland North Zone must pay £38.42 per kilowatt transferred.

These are not marginal differences in terms of the different costs bases for these companies and unless the unfair advantage being faced by Scottish producers is address the development of the Scottish Renewables sector is in danger of losing out to more competitive companies in the south of England.

Musings from Milngavie

(1) The Guardian 13th May.

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