THE renewables industry has given a cautious welcome to proposals to cut transmission charges for green energy projects in the north of Scotland but warned that development on the islands would be uneconomic if the new fees are imposed.

Ofgem is proposing "fairer" charges for generators of variable, low-carbon power and set out a formula that would reduce transmission costs in the north of Scotland by up to 60%, saving a large wind farm £1.5 million a year.

But Scottish Renewables said under the proposals renewable electricity generation on Orkney, Shetland and the Western Isles would be vastly more expensive than on the mainland, with a wind farm on the Western Isles paying £77,000 for every megawatt of capacity in 2012 compared to a charge of £2000 per MW in south-west England. 

Angus Campbell, leader of the Western Isles Council, said there was a risk that renewable developments would be stifled in some areas and he warned: "This would in effect be discrimination against island areas, which is illegal under European legislation."

Niall Stuart, chief executive of Scottish Renewables, said the proposals were a "step towards fairer charges for projects on the Scottish mainland".

But he added: "The charges quoted for the islands potentially make development uneconomic, meaning a number of highly, highly productive wind farms may not go ahead – a blow to communities in Stornoway and Shetland which would have benefited from significant revenues over the coming years.

"Neither is it good for consumers, with onshore wind on the islands being an extremely competitive source of clean, renewable energy.

"It is also a blow to our emerging wave and tidal sector. Orkney, Shetland and the Western Isles all have major plans for marine energy developments as they have the best resource, but they also have the heaviest charges."

It has long been an issue of bitter dispute between Holyrood and Whitehall that the areas which produce most renewable energy are charged most to transmit the power, while a generator in the south of England is subsidised.

Ofgem has always defended the approach but yesterday it said it is asking for industry views on proposals to change the current formula because of all the new low-carbon generation that needs to connect to the grid.

Ofgem now wants to rule out using a "postage stamp" formula where all generators pay the same charge regardless of where they are located. Instead it wants to retain a location-based charge but with improvements taking into account the type of generator and how often the network is used to transmit power, allowing for variable production from sites such as wind farms.

The islands face particularly high payments because they still have to pay connection charges and underwrite an interconnector cable to the mainland.

Scottish Renewables said under the new charges the proposed Stornoway Wind Farm would pay more than £11m annually compared to a £300,000 charge for an equivalent-sized project in south-west England.

Energy Minister Fergus Ewing said there had to be a charging regime that did not penalise generators and developers in the very areas with the best renewable resource.