How Scotland could have “the cheapest electricity in Europe”
Power companies are regularly paid millions of pounds to turn off wind turbines in Scotland - while at the same time the UK electricity systems operator spends more millions on importing far more expensive electricity from the national power companies of France and Norway. That waste makes bills for Scottish businesses far higher than they need to be - but without independence, we have to wait for the UK to update the system.
Last week Greg Jackson, the Chief Executive Officer of Octopus Energy made the headlines when he told Laura Kuenssberg on the BBC’s Sunday morning programme: “If we had regional pricing in the UK for electricity, every region would be cheaper than it is now. Scotland would have the cheapest electricity in Europe.” Under the current system, Scots pay the highest energy bills in Europe.
Many countries including the US, New Zealand and Italy years ago moved to regional or locational pricing. That means energy is cheaper closer to where it is produced and these powerful price signals attract business investment and innovation. Instead of being wasted, the energy is turned into cheaper products that can be sold at a competitive price. It also attracts energy storage innovation.
If the UK government is serious about boosting economic growth, moving to a smart grid with locational pricing is a no-brainer. It can unlock the power of Scotland’s renewables while reducing some of the pressure on the grid.
1 What is the UK's current pricing model?
The UK currently operates an old-fashioned UK-wide, one-nation tariff for energy. Businesses in the middle of London pay the same tariff for energy as they do in Orkney or Inverness.
(Domestic consumers in the energy-producing areasof the north of Scotland actually pay more than in London - the tariff is the same but standing charges are higher. More importantly, most of rural Scotland has no access to the gas network so their energy bills are typically double the much-quoted UK ‘average’ and fuel poverty is a real issue - in the Western Isles fuel poverty is the highest in Scotland at 57%).
The UK’s one-price tariff made sense 30 years ago when the grid was connected to large coal fired power stations which were centrally located and served all consumers. But it doesn’t make sense in today’s world which has more diffuse sources of power, often located a long way from population centres.
2 Why does the UK pay to turn off cheap power production in Scotland while importing more expensive power from elsewhere?
Scotland is producing huge amounts of renewable energy from offshore and onshore wind. But the grid connectors are not strong enough to move that power to the south of England. That is in part because of lack of investment in the privatised national grid. It is partly because of opposition to building pylons and interconnectors to take the power to England.
That in a nutshell is why the UK pays to turn off cheap power in Scotland while importing more expensive electricity from abroad. That is not going to change any time soon under a UK pricing model.
Power-producing projects in Scotland are backed up for decades waiting to get connected to the National Grid. Most of the offshore wind permissions in the controversial ScotWind auction currently look like they will never be built because the grid just can’t take them.
Power generation companies that do get a grid connection have to pay ten times as much as those in the south of England - that is another disincentive to make the most of Scotland’s energy potential.
It is wasteful that on a windy day in the Northern Isles the wind turbines are switched off - because the companies are being paid NOT to produce power. At the same time, Scots are forced to pay the highest energy bills in Europe. It is a crazy situation which has been allowed to drag on for too long by Westminster - because, essentially, they have not cared enough to do anything about it.
There needs to be more investment in the physical grid - but that is only a partial solution to the problem. Rethinking how we use, distribute, and store energy is also important.
3 What is locational pricing?
Many countries including Italy, the USA and New Zealand have another way of addressing this issue - locational pricing. If you make energy cheaper for businesses in areas where it is plentiful that sends price signals to the market. They can base energy-intensive businesses there from green steel to hydrogen to databases, and in turn that helps to make their products cheaper to produce and more competitive globally.
An example of an industry that needs cheap power is aluminium smelting. Aluminium is the most common metal in the earth’s crust but the process of refining it is energy intensive - there is only one plant in the UK that is still economically viable. That is near Fort William and it is still there because of its legacy of hydropower creation, which allows it to create its own cheap energy. Making more cheap energy available could boost aluminium production - and that metal could go into the production of electric cars, for example.
When it comes to the locational pricing model, you can use technology to make the areas where different prices operate quite granular - that is called nodal pricing. You can also modify prices by time period or even more dynamically - emerging energy storage technology will be able to respond quickly to take more energy when it is available and store it.
- You can keep the tariff the same for consumers while just offering cheaper energy to businesses. Or you can offer it to consumers too, perhaps with special incentives to use power at certain times, e.g. during the night in northern Scotland. That might encourage more people in those areas to shift to electric cars, knowing they would be very cheap to run. It would also be fairer for households in those energy-producing areas, to address the real problem of extra-high bills, which many resent.
Conclusion
If Scotland was independent it would not be forced to see its energy potential go to waste due to political inaction at Westminster, If the UK’s new government is serious about being ‘pro-growth’ they will immediately grasp the nettle of energy price reform.
Many countries have already moved to more flexible pricing. That encourages businesses to mop up some of the energy that is being produced in areas that are not well served by the legacy grid infrastructure.
Most of the experts in the Scottish and UK energy sector have, like Jackson, long been advocating for this - but so far their pleas have fallen on deaf ears. This is outside the scope of the Scottish government to fix - the UK government would have to act by empowering the ESO, the UK’s Electricity System Operator to invest in new technology to underpin a smart and flexible pricing structure. Doing this would be an important step towards achieving net zero.
It would also boost Scotland’s economy - a government which cares about Scottish prosperity cannot afford not to do this - and soon.
Further Reading
For a more detailed explanation of locational pricing, listen to this podcast
Octopus Energy commissioned a report on locational marginal pricing (LMP) - download it here
The National Grid will also require investment in physical infrastructure to connect more power - read an article about why it is so weak here
