Development is being choked off, diversification impeded, investment discouraged and decarbonisation delayed. All because of a simple problem with an easy fix.
by Hugh Raven, managing director of Ardtornish Hydro
Scotland penalises small hydro generation
Scotland, we are told by our government, is good at hydro. “We are committed to making Scotland a ‘Hydro Nation’ to bring the maximum benefit to the Scottish economy,” says the Scottish Government website. Hydro would include hydroelectricity, you might think, in a nation that provides 85 per cent of the hydropower connected to the UK grid.
The country’s topography and climate are certainly well suited. In 2020 hydro provided around a fifth of Scots’ power needs, with scope for further expansion yet. But, for that to happen, the Scottish Government needs to show some love.
Hydro rates valuations are far higher than other renewables
Developing new small hydro capacity is risky, not least thanks to an anomaly of the government’s making. It is currently chilling investment.
Like other renewables, hydro stations – as they quite rightly should – pay non-domestic rates. The level of the rates is set by the valuation, conducted by a class of officials (assessors) supposedly entirely independent of their Scottish Government employers. But small hydro rates valuations are between 2.5 and four times higher than equivalent sized renewables plant harvesting sunshine and wind, indicating that assessors have a prejudice against hydro.
When in 2017 this problem arose, the government acted swiftly by introducing a 60 per cent hydro rates relief scheme. Rates bills were equalised across different renewable technologies. Many schemes that would have been uneconomic were saved.
Creation of the relief scheme was an acknowledgement that the rating system is broken, unfair and in need of reform. For most small scale hydro businesses the problem was solved. But for some it had barely begun. The Scottish Government then decreed that rates relief (the policy invented entirely to address an anomaly of its own making) under EU competition rules was state aid. And state aid to any particular business was strictly limited to avoid distorting trade.
Many larger micro hydro operations – like the one I manage at Ardtornish – quickly exhausted that limit. Thereafter, rates on these astronomical new valuations had to be paid in full. For us, it was almost ruinous: £525,000 from our small business in 2020-21 almost certainly made us, pro rata, the highest ratepayer in Scotland. Numerous jobs were lost through redundancy. Although the government’s action was the cause, its ministers, who said they were unable to contradict their officials, claimed they were powerless to help.
Brexit could be the salvation of smaller hydro schemes
Then came the UK’s exit from the EU. EU state aid rules ceased to apply. A new regime, under the UK-EU Trade and Co-operation Agreement, is in the process of being designed. Brexit is unpopular in Scotland, but it could presage salvation for the more ambitious small hydro producer.
In post-Brexit Britain, state aid is renamed ‘subsidy control’. A bill with that title is currently on passage through the Houses of Parliament. When it’s enacted it will provide the framework to supersede EU policy on state aid. That, in turn, will determine whether non-domestic rates relief will be permitted to hydro producers in full.
Yet the larger producers, ie those penalised by not receiving full rates relief, are on notice from the Scottish Government that relief from its own penal rates regime will continue to be limited. Because now in Scotland rates relief is defined as a subsidy.
We have legal advice to the contrary, so we dispute their interpretation. But we can’t see their workings because advice to ministers, we are told, is privileged: “the subsidy control team cannot share advice, or engage directly with funding recipients as this may create a conflict of interest,” I was told in a recent ministerial letter. Put another way, they are right, we are wrong, but they will not tell us why.
The new subsidy control bill should clarify the situation for hydro
Unless this point is clarified by the forthcoming bill, or its accompanying guidance, small hydro schemes will continue to be penalised. Further development of hydro in Scotland will be choked off. Developers will hold off new investment until the risk of rates penalties is removed.
Many existing hydro schemes could be enhanced by modifications to their catchments – by constructing water storage ponds, for example – or a turbine upgrade. Some such modifications make sound commercial sense, but why would their operators risk it? If the assessor were to increase the rateable value, and relief from excessive rates remains limited by government order, the returns from better hydro performance could be heavily outweighed by a penal increase in rates.
Revenues from those micro hydro producers who pay astronomical rates, according to the cabinet secretary for finance, are immaterial. But that unfair tax is preventing further decarbonisation by optimising renewables production in Scotland, creating an unnecessary barrier in the road to net zero.
If the UK and Scottish Government were to work together on the subsidy control bill, they have the tools at hand to solve this issue. It’s clear they could do it if they wished. For the Scottish Government to continue penalising well intentioned low carbon generation is perverse.
by Hugh Raven, managing director of Ardtornish Hydro
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