The Labour government is weighing up cutting energy bills for Scots or keeping renewables investments on track.

Energy bosses are pleading with the UK government to rule out a radical shake-up of pricing that would hand Scotland the cheapest electricity bills in the UK, warning the move could put the “most significant economic opportunity in decades” at risk.

Labour ministers are having to weigh up the interests of Scottish households with energy giants as they face a “trilemma” over how to reform electricity pricing.

Wind power is an important part of Scotland's renewables project (Picture: Andy Buchanan / AFP)

A system of zonal locational marginal pricing (LMP) is being considered by the UK government, which would essentially put Scottish householders into a zone that resulted in the cheapest electricity bills due to the booming renewables sector north of the Border.

But concerns have been raised the long-term overhaul could give Scotland’s fragile, albeit successful, renewables investment stream the jitters.

Labour has insisted cutting energy bills was always a long-term aim despite the party’s election manifesto stating “we will save families hundreds of pounds on their bills, not just in the short term, but for good”.

Renewable energy such as wind, solar and tidal is the cheapest form of electricity.

But wind energy doesn’t always meet 100 per cent of electricity demand when it is traded. The price is set by the last unit required to fill total demand at any one time, and that is often gas, which has soared in wholesale price amid the energy crisis.

Under a zonal system, either one or two zones drawn up for Scotland, would reduce the price of electricity bills north of the Border due to the proximity of relative vast amounts of renewables.

Dr Nicholas Harrington, from the UK Collaborative Centre for Housing Evidence at Glasgow University, has told The Scotsman the wholesale electricity price “could be 50 per cent less than what it is now”, with zonal pricing alongside other measures such as battery storage ramped up.

He said: “If we look at zonal and you just take Scotland, it produces the overwhelming majority of the renewables-generated electricity.

“There are times across the day when this total demand is met by the supply of renewables. So under a zonal system, there will be many times the price of electricity is simply set by renewable-generated electricity, so you’re not paying the gas price.

“That’s why zonal will reduce the price of electricity for Scotland. There have been many studies that have confirmed that this is the case.”

Dr Harrington added: “It gets even cheaper if you start using time-of-use tariffs and if the Scottish Government invests in storage, whether that’s in a domestic use at home or apartment blocks themselves having their own storage.

“It’s quite clear cut and all the evidence using proper empirical analysis demonstrates convincingly that the prices of energy would be lower in Scotland with a zonal energy scheme.”

But the expert acknowledged there has been some “pushback” from the energy sector, which has warned the channelling of renewables investment poised to continue at pace over the coming decades could be thrown off kilter by such a radical change to pricing.

Dr Harrington said: “One of the realities is it creates a very patterned distribution of pricing across the UK. Some areas will just stay the way they are right now - relying on imported electricity or gas-generated electricity.

“If zonal pricing is signalled as the future and they start putting that in process, there’s really not much economic logic to say that would scare off investment.

“That would start to send a signal that this is a place where you can expect there to be lower-priced electricity. You’d think that would be a pretty strong signal that investment in data centres and high-energy requirements.

“What they are more worried about is more changes to existing investment structures and things that are already in train, because it does disrupt that to a certain extent.

“This isn’t much of a surprise, but not all companies that are both suppliers and generators want to see prices come down. I think that’s a huge part of it. You’re not getting pushback from consumer groups. Consumers are the big losers, pricing-wise in the current system.”

In general, the energy sector is not convinced, despite Octopus Energy coming out in support of a zonal pricing scheme.

Andrew MacNish Porter, head of economics and markets at Scottish Renewables, said: “Zonal pricing would actively disincentive the development of wind farms and other renewable energy technology in Scotland, derailing progress towards net zero and meaning Scotland would miss out on its most significant economic opportunity in decades.

“The economic opportunity presented by renewable energy is not just about lower bills, it’s also about the growth and high-skilled jobs the transition to a clean energy system can bring to all regions of Scotland.

“The renewable energy sector supports reforms, which both unlock investment and deliver affordable bills to ensure all aspects of this opportunity are captured.”

He claimed “zonal pricing would not deliver a significant reduction in bills” and “would lead to reduced investment in Scotland and would be a major distraction from delivering the reforms which are actually necessary for Scotland to realise its clean energy ambitions”.

Mr MacNish Porter added: “It would also take at least five years to implement, so is not the solution to the challenges consumers are facing right now.

“The UK government’s clean power 2030 action plan has identified that we need £40 billion of private investment every year starting now.

“We urge the UK government to urgently rule out zonal pricing, so that this investment comes to Scotland and our industry can continue delivering the jobs and economic growth crucial for securing Scotland’s future prosperity.”

Energy bills could be cut in Scotland under a zonal energy pricing system

A spokesperson for SSE added: “The introduction of zonal pricing would see Scotland miss out on multi-billion pound investments in energy infrastructure, while at the same time driving up the cost of the energy transition for everyone.

“It is a lose-lose proposition, which is distracting focus from the urgent need to deliver mission-critical energy infrastructure that will actually support the long-term health of the Scottish economy.”

One industry insider told The Scotsman they “don’t see how zonal fits in with that growth strategy” being pursued by the Labour government, adding the "implementation timeline” of any zonal scheme was a concern.

There are fears any zonal system wouldn’t be delivered until 2032 amid concerns the UK government is “not intending to tell people what zone you will be in until 2030”.

The source added: “If we’re being asked by Labour to say, can you invest £30bn a year in low carbon generation up to 2030, at the stroke of the pen, that will just get more expensive straight away.

“If the capital markets don’t like it and it gets more expensive to finance, then overall it’s more expensive to invest.”

Opponents within the energy sector are also concerned that other costs could “just pop up somewhere else”. But Dr Harrington suggested “the only really dramatic change left is zonal”.

He added: “The other changes are just simply more sort of efficiency gains within the system - it’s more tinkering within the existing system.”

Dr Harrington said there had been talk about “a green power pool” where you “pool the electricity through renewables separately and create a separate market and price that on its own generation costs”.

The idea would be “that generation is available to certain categories” such as the “fuel poor and industry”.

The UK government is expected to announce by the summer whether it will pursue a zonal LMP pricing system when it publishes its finalised Review of Electricity Market Arrangements.

Dr Harrington said: “I don’t think it’s a foregone conclusion that they will do zonal. They are looking at an energy trilemma. They are trying to balance security of supply, net zero decarbonisation and pricing. So pricing isn’t a single concern.”

The Scottish Government remains on the fence about the potential of zonal pricing, at least publicly, despite the policy poised to significantly cut bills north of the Border.

Speaking to The Scotsman, First Minister John Swinney, said: “It’s a live discussion about the economic benefits of energy generation and what are the implications of that.

“The understanding of the need for the economic benefit of that energy generation potential to be felt within Scotland for it to circulate through Scotland and other opportunities rather than just generate the electricity, it goes elsewhere and we don’t get the economic footprint.”

A Scottish Government spokesperson said: “We are committed to working closely with the UK government as it develops a package of market reforms to ensure it delivers real benefits for Scotland’s consumers, communities and economy and supports our ongoing efforts for a just transition to net zero and future investment in renewables, flexibility and networks.

“We believe that reforms from the UK government need to deliver tangible benefits for Scottish consumers, to ensure our communities feel the benefit of the energy transition, while also protecting investment in our renewables industry.”

A UK government spokesperson said: “In an unstable world, the only way to guarantee our energy security and protect consumers from future energy price shocks is by moving towards home-grown power.

“We are considering reforms to Britain’s electricity market arrangements, ensuring that these focus on protecting billpayers and encouraging investment. We will provide an update in due course."

Exclusive:Renewables investment fears over Labour's energy price plan that would cut Scots' bills

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