State aid rules put Scots green energy firms at risk despite rate relief

Among those in trouble is one of Scotland’s most remote and innovative businesses which runs five small hydro plants from one of Scotland's well-known country estates.

Hugh Raven, managing director at Ardtornish, Argyll, warned his enterprise is in a financial crisis because of the Scottish Government "failure" to resolve a business rates nightmare that has left him with a £500,000 annual bill after what he describes as following government advice and doing its best to be a good corporate citizen.

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Last week small hydro operators in Scotland broadly welcomed a move by the Scottish Government which extends an important rates’ relief scheme for more than a decade.

In her budget package the Cabinet Secretary for Finance, Kate Forbes MSP, responded to the recommendations of the Tretton Review, which was published a year ago. She extended the current 60% hydro relief scheme until March 31st 2032.

It came as small hydro power operators, which produce almost one-fifth of renewable electricity output in Scotland, had been calling for a long-term remedy to “punitive” business rates, which they say are harming Scotland’s 500 small hydro operators.

But not all operators benefit.

The British Hydropower Association say a handful of operations in Scotland are not covered by the relief scheme, because of state aid rules and for those small hydro businesses, the situation is said to be critical.

There have been two increases to the tax in recent years. The Scottish Government set up a relief scheme to reduce the rates by 60%, but it is not permanent and does not apply to all operations.

But despite a Scottish Government solution which benefits the vast majority of small hydro operators in Scotland and extends rates relief for the next decade, ministers have failed to resolve the "unintended" anomaly which has left Ardtornish with a bill of more than £500,000 this year.

The company at Ardtornish, Morvern, is now facing serious difficulties claiming it has become the highest rate-payer proportionate to turnover in Scotland because it complied with the Scottish Government’s advice to go green and develop renewable energy.

The owners had been led to believe that a solution might come with an announcement in the Scottish Government’s budget last week.

Hydro schemes were hit with rateable values, which are up to three times higher than small wind schemes and four times higher than solar energy schemes. Hydro operators have suggested rateable values of 8-10% being prescribed for the small hydro sector, or the wording in current legislation being changed to ensure key components of plant and machinery in hydro construction are not rateable.

Small hydro operators had warned that they were facing major economic uncertainty unless Scottish ministers took action to reduce "punitive" business rates being imposed on the sector.

Mr Raven said: "The Scottish Government’s recent update to its climate change plan places huge emphasis on fairness and the importance of private investment in our country’s transition to net zero emissions. The rates we are paying – at many times the level paid by other businesses – are grossly unfair. For a fragile business like ours, it seems helping Scotland reach net zero comes at a ruinous price.

“In our extensive discussions with the Scottish Government, we were given hope that they would use this opportunity to address our problems and we are extremely disappointed and shocked that they have chosen not to do so.

“As well as being the cabinet secretary responsible, Kate Forbes is also our constituency MSP. I will be seeking an emergency meeting with her to discuss what can be done now to stave off very, very serious damage to our business which will, without doubt, impact the local community here if it’s not resolved immediately. We were given positive signs by the Scottish Government, but our hopes have now turned to dust.”

Located on the Morvern peninsula in the village of Lochaline, Ardtornish is a multi-enterprise business with interests in farming, tourism, events management and the traditional country sports of deer stalking and fishing.

Mr Raven's company has invested heavily in hydropower and built five small hydro schemes which between them produce 3.4 megawatts of energy, enough to power several thousand homes.

Mr Raven added: “We work hard to be a good corporate citizen. We don’t always succeed but we have followed closely changing government policy and advice – and as a result we have been absolutely hammered.

“We think we are the highest rate-payer proportionate to turnover in Scotland, at £380,000 in rates demands for 2020/21. Our appeals for a level playing field and a sensible solution have so far fallen on deaf ministerial ears.”

In addition to the "whopping and unreasonable" rates bill, Ardtornish faces a further penalty – with repayment of hydro rates relief it was wrongly awarded in a previous year worth an extra £145,000, meaning well over £500,000 in payments this year.

As a proportion of enterprise turnover its rates are over 15% of revenue – well over three times that of retail operators.

State aid rules mean the new relief does not have the same impact on all small hydro operators, because there is an upper limit of €200,000 relief in any three-year period, after which the relief scheme ceases to apply and full rates become due. This is called the ‘de minimis’ provision.

Businesses like Ardtornish with rates payable of some £360,000 per year before relief, very quickly exhaust their relief eligibility, and are therefore subject to the rates in full.

Simon Hamlyn, chief executive of the British Hydropower Association, said: “A handful of operators are in a very precarious financial position because of state aid legislation and we urge the Scottish Government to listen again to our pleas to help them, and to deal urgently with this issue before those businesses have to consider their futures.

"Essentially, the government is discriminating against a handful of businesses like Ardtornish, which fall outside the relief scheme for one reason or another. The relief scheme should and must apply to all operators.

“With the political will, particularly in the run up to COP26 and the government keen to highlight its green credentials, ministers should give hydro operators all the support that they need.”

A Scottish Government spokesmansaid: “The Scottish Government delivers the most generous non-domestic rates relief for generators in this sector that offer community benefit, as well as to all small scale hydro generators.

“Responding to the findings of the Tretton Review of Small Scale Hydro Plant and Machinery, the Scottish Budget 2021-22 committed to guaranteeing the existing 60% hydro relief until the end of the 2031-32 financial year, in order to provide investor certainty.

“The new subsidy regime, under which reliefs that would previously have been capped by EU State aid rules will now operate, was established by the EU-UK Trade and Cooperation Agreement and not the Scottish Government.”