Outrage at new 'postcode pricing' plans for Scottish energy

The Locational Marginal Pricing system if approved is being seen as one of the biggest overhauls of the energy market in decades and would involve wholesale electricity traded at local prices that vary from city to town.

The National Grid has indicated that could reduce the cost of energy in the UK and consumers because it would reduce its reliance on 'expensive' power plants to get energy to the most in-demand areas.

But Scottish Renewables has expressed concerns that it will lead to a rise in costs to the energy firms which will put off investment, especially in renewable energy projects and hinder Scotland's net zero ambitions.

They say the pricing system throws energy suppliers into an "unpredictable situation where almost anything can happen and investors will say it is too risky".

They would either not invest or raise the cost of lending to new power projects, pushing up the price of the electricity they generate for consumers and "potentially hindering investment in low-carbon generation when we need it most".

They say that in the past fossil fuel power stations were built close to, or even in, cities and towns. Fuel was brought to them and burnt to produce electricity.

But it says that UK's renewable energy ‘fuel’ - its winds, rainfall, tides and more – is primarily located further north, in less populated areas, while most British electricity demand is in the south.

The group says the pricing system would see renewable energy generators told by the rules of the market to locate their projects – wind and solar farms, for example - close to population centres, which are mainly in the south of Britain.

But the projects need high winds, rainfall and strong tides which mainly exist in the north.

Scottish Renewables said this "contradiction" creates "huge risk for investors and would dramatically reduce the likelihood of those projects – and the jobs and investment they bring – being created in Scotland, or at all".

In an analysis Nick Sharpe, Scottish Renewables' director of communications and strategy warns: "We believe it is senseless to propose a new system that hampers renewable energy deployment, and make the electricity market more volatile and complex at a time when security of supply, cost and carbon emissions are demanding more renewable energy generation be built than ever before.

"Introducing Locational Marginal Pricing now, at a time when the current system is on its way to being fixed, would harm the UK’s net-zero journey and the security of its future energy supplies."

Analysts say households have been hit with hikes to energy bills because of a surge in subsidy payments to switch off Scottish wind farm turbines and solar farms in remote locations partly caused by them producing too much power.

Major power plants can sell electricity on the national market, even if the infrastructure is insufficient to take the power to where there is higher demand.

That is forcing National Grid’s control room to pay to switch off at times when the network cannot cope and to pay expensive gas plants closer to consumers to switch on and replace them.

These 'constraint costs', which are passed on to consumers through energy bills, have risen sevenfold since 2010 as more renewables have been built, hitting £1.2 billion in 2021. The National Grid says those costs could reach as much as £2.3bn by 2026 if changes are not made.

It has warned that keeping supply and demand in balance across the nation was "becoming more challenging" and was resulting in "dramatic and rising costs for consumers".

The electricity system operators say that those constraint payments could be removed with a new local pricing structure that varies in areas called "nodes" around the country.

It would see power plants getting paid only for electricity that was needed locally or could be transmitted elsewhere through the cabling network.

The National Grid has said it would encourage energy-intensive industries to be located near wind farms to take advantage of cheap wholesale electrity prices that might otherwise be wasted.

That could pave the way for households to be charged variable local prices, which could reduce household energy bills in remote areas near renewable energy suppliers.

But the move has been seen by some as controversial, as differing bills across the country would be seen as a 'postcode energy tax'.

The National Grid is expected to make formal recommendations in the spring but has said that local pricing was the only effective solution and could be implemented within five years.

But in suggesting it it said: "We need to achieve net zero at lowest whole system cost. The current market was not designed for net zero and left unchanged will impose excessive costs to consumers.

"Even with significant transmission investment, constraint costs are rising at a dramatic and accelerating rate."

The UK government is expected to consider local wholesale pricing as part of a Review of Electricity Market Arrangements while Ofgem has commissioned a study on the proposal.

Scotland produces more electricity than it uses, from a mix of renewable and non-renewable sources.

Overall it is a net exporter of electricity, last year sending 18 times more to England than it received back. A small amount is also exchanged between Scotland and Northern Ireland.

Scottish Renewables has called for further research to assess the net benefits of the new pricing system against "uncertainties such as risk investment and decentralised planning decisions, particularly in a system dominated by renewables".

It also wants a review over its compatibility with the Scotland and the UK's net-zero targets.

Morag Watson, Scottish Renewables' director of policy added: “The regulations which govern how the electricity network is paid for are 30 years out of date and penalise Scottish renewable energy generators. While the need for reform is recognised by the UK Government, this new system of pricing, which is being suggested separate to this reform, could see the situation worsen rather than improve.

“Scotland has the potential to be Britain’s green energy powerhouse, but this new pricing system would introduce a postcode lottery for generators, therefore damaging our chances of meeting net-zero and tackling climate change.

“Replacing a broken system with one which is equally if not more flawed is wrongheaded and puts at risk the growth of an industry which is a vital part of Scotland’s economy, supporting thousands of jobs, bringing socio-economic benefits to some of our most remote regions and offsetting millions of tonnes of carbon every year on our journey to net-zero.”

Meanwhile, less windy weather has been blamed for a fall in renewable energy production in Scotland in 2021.

Ministers had hoped that the country would be generating the equivalent of 100% of its "gross electricity consumption" from renewables by 2020.

It reached 98.6% that year, but in 2021 the figure fell back to 83.7%.

The Scottish government said that milder weather was a factor but added that many new projects were in the pipeline.

Last year about 27.2 TWh of renewable electricity came from wind, solar and hydro sources, 15% lower than the record figure achieved in 2020.

The renewables industry concerns have surfaced as agreements for 17 Scotwind offshore projects have been agreed and are now moving to the development phase.

The Scottish Government programme concluded in January, with major energy companies including Scottish Power, Shell, SSE and BP among those who won the almost £700m in contracts.

At the time, First Minister Nicola Sturgeon said the announcement was “possibly one of the most significant days in energy and industrial terms that Scotland has seen for a very, very long time”.

The Scottish Government’s climate change plan aims for net-zero emissions by 2045, with interim targets that include a 75% reduction from 1990s emissions levels by the end of this decade.

The National Grid has put forward the 'postcode pricing' plan saying a radical change was needed because the UK's national electricity market "if left unchanged will impose excessive costs to consumers".

The National Grid ESO was approached for comment on Renewables Scotland's concerns.