Why Scottish businesses are paying the highest energy costs in the world

Scotland is an energy-rich country - but its businesses are being forced to pay the highest prices in the world for using it. Almost every company in Scotland is feeling the pain, from high street hairdressing salons to farmers to whisky producers. 

But, while exorbitant energy bills are forcing Scottish business leaders to make increasingly difficult decisions such as laying off staff, more than £200 million of public money has been paid by the UK energy systems operator to turn off wind turbines, most of them in Scotland, this year alone. 

This problem is getting worse all the time. As more renewable power comes on stream, the times when Scotland is producing more power than it currently uses are becoming more frequent. The interconnectors between Scotland and England can only carry so much power - and so when there is an excess the Electricity Systems Operator pays Scottish energy generators to go dark.

If energy was cheaper in Scotland then businesses could expand. It would reduce the extortionate bills for current operations and also provide incentives for entrepreneurs to find new ways to use it - including smelting metal, building data centres, splitting water molecules to make hydrogen and more. That would benefit the economy and boost growth. 

If Scotland were an independent country, Scottish businesses would certainly not pay what they are currently charged. Scotland is a renewable energy powerhouse being penalised by the way energy is managed for and by vested interests in the south of England. Hanging onto one UK tariff is old-fashioned and unfair to Scotland. Energy companies make money from this arrangement - but the Scottish economy loses. 

Here we set out four key points explaining the position. 

1 - Scottish businesses are paying four times more for energy than US businesses

The cost of power for industrial businesses has jumped 124 per cent in just five years, according to the Government’s figures, catapulting the UK to the top of international league tables for energy cost. It is now about 50 per cent more expensive than in Germany and France, and four times as expensive as in the US.

The Scottish Chamber of Commerce surveys hundreds of firms and their latest data shows that energy costs are one of the biggest headaches facing Scottish businesses. The findings showed half of firms surveyed said energy costs was one of their biggest concerns. 

2 - This winter will be the worst yet for Scottish businesses' energy costs

This coming winter will be an extra headache for small and high-energy-use Scottish businesses. The cap that applies to domestic energy charges does not apply to businesses.  

An Energy Bill Discount Scheme for UK businesses which started in April 2023 and ended on 31 March 2024 is not available this year. 

Before last year, there was a price cap for the unit cost of gas and electricity available to small and medium businesses, but this ended when the discount scheme was introduced in 2023. Now there is little help for non-domestic users - the Scottish Government offers a business energy advice service but it has no control over the price of energy.

There is no funding in place to compensate businesses in Scotland for the fact that it is colder here, standing charges are higher and much of rural Scotland has no access to the gas network - so they have to pay more to heat their premises. Because of these factors, Scottish businesses pay higher bills even than England.  

3 - More than £200m spent turning off renewable power so far in 2024

The Renewable Energy Foundation (REF) published data on “constraint payments” recently, which show windfarm developers throughout the UK – mainly in Scotland – have received more than £200m this year alone. Energy producers often oppose localised pricing (offering a cheaper price where energy is produced), partly because the payments they get to turn it off are so lucrative. 

Despite not yet being fully operational, the Viking Energy wind farm has received more than two million since 2nd August, according to REF. The payments are almost as much as Viking will pay out in community benefit – for the entire year.

The payments are made by the Electricity System Operator (ESO) to windfarm developers during times when the amount of energy being generated exceeds the capacity of the network to transfer it where it is needed – mainly England. But ultimately consumers are the ones who foot the bill. 

Scotland’s businesses could obviously use more energy - they just can’t afford to at the moment because it is so expensive. Scotland retains only one aluminium smelter, for example, whereas Iceland has three. That is because it is energy-intensive to make aluminium. The sole surviving plant has its own legacy hydropower. That kind of model shows what can be done when renewable power can be used by local businesses. That is not allowed today because of the current rule that electricity be sold at the same price throughout the four nations of the United Kingdom. 

Analysis by the REF concluded: “Increasingly more electricity is being generated in Scotland than can be used in Scotland, and the grid interconnections between Scotland and England are insufficient to take the excess electricity which is generated, usually at times of, often unexpectedly, high winds and low Scottish demand.”

The energy producers say that a new subsea cable from Peterhead to Drax means that localised pricing won’t be needed. It will certainly allow more energy to be moved. But there is still likely to be a gap between what can be produced in Scotland and what can be moved in traditional ways. Other solutions like using a pricing mechanism to attract businesses to where the energy is made should also be employed. 

4 Other countries sell excess renewable energy cheaply to local businesses

Sweden has made energy in the north of the country cheaper in order to attract business there. The FT reported recently: “Blessed with copious green energy from its extensive network of hydropower, the far north of the Scandinavian country has experienced nothing short of a green rush. Thousands of people have flocked to this often snow-covered region that straddles the Arctic Circle to work for companies using the surplus power, such as battery maker Northvolt and H2 Green Steel, set up by Mix and business partner Carl-Erik Lagercrantz. “It is a Klondike situation, where the gold is green electricity,” says one executive working there.”

California, which controls its own energy regulation unlike Scotland, allows surplus energy to be sold very cheaply. The New Yorker reported: “To meet peak demand in places like California, you need to build a lot of solar panels, which means that when demand is lower you are producing more power than you can use, which, in turn, means that during those hours the power is very cheap. Magnesium can be smelted intermittently, partly because its melting point is low: you can start to heat up the feedstock in a smelter during the afternoon hours when solar productivity is at a peak, and then, when people come home and turn on their ovens and their washing machines, and the price of electricity goes up, you can turn off the smelter.” 

Zonal or locational pricing, where there are different charges for areas which produce a lot of energy, is in place in other European countries such as Italy, Norway, and Denmark. It is also being used in New Zealand and several US states.

Conclusion

Scotland does not control how energy is produced and regulated. Westminster and its energy bodies such as the ESO dictate that renewable power made in Scotland has to be sold at the same high price as in England. That limits the market for it in Scotland. The UK government is planning to upgrade the weak national grid by building a network of pylons to take power south. But even with planned upgrades there will be a growing excess because Scotland has huge potential to generate wind, solar and tidal energy. 

If sold at a low cost near to where it is made, through locational or zonal pricing, this extra renewable energy could boost Scottish businesses and the Scottish economy, But the UK won’t allow that. The energy can only be sold at the same price throughout the four countries of the UK. That rule means that energy has to go to waste instead of boosting Scotland’s economy. Only if Scotland was an independent country could it manage its energy in a way that benefits Scotland. 

The Believe in Scotland Campaign has launched their 2025 Independence Calendar designed by graphic artist Stewart Bremner. You can get your 2025 calendar here or by clicking the image below.