Hydro-electric schemes under threat from state-aid rates relief loophole

A handful of operators are now said to be facing bankruptcy and campaigners are appealing for minsters’ help in the crisis.

Hydro-electric generation in Scotland has a heritage going back to the days when it drove aluminium smelting plants at Kinlochleven and Fort William.

This led to the construction of the Laggan dam and a hydroelectric system in 1934. At 700ft (210m) long and 157ft (48m) high it was one of the first major hydroelectric schemes in Scotland.

But the British Hydropower Association claims that heritage is being tarnished as small renewable schemes were originally exempt from rates until 2016 to encourage green projects.

Scotland currently has around 500 small hydro schemes, mainly in rural and remote communities and provide employment to hundreds of workers.

It is estimated that 30% to 40% of the UK’s renewable generation is provided by hydropower.

Scotland now has 85% of the UK’s hydroelectric energy resource, much of it developed in the 1950s by the North of Scotland HydroElectric Board It says that while hydros are helping provide green electricity, they are facing a significantly higher business rates burden than other parts of the renewables sector.

The industry leaders describe a “crazy” situation where hydro schemes are being hit with Rateable Values (RVs) two to three times higher than small wind schemes and four times more than solar energy schemes. The result puts rateable values for some at between 25 and 35 per cent of turnover “making it impossible for a commercial scheme to operate”.

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The Scottish Government announced a 10-year rates relief extension in the last Scottish budget which guarantees to maintain 60% relief for businesses with small-scale hydro schemes.

But the British Hydropower Association said that 5% of hydro schemes in Scotland would not qualify for the 60% rates relief.

Ardtornish Estate, in the southerly corner of the Morvern peninsula, is among the estates who have lost out because it has five hydro schemes which together produce a total of 3.4mW of electricity - a scale that does not qualify.

The total amount of relief would then exceed agreed EU state aid limits of €200,000 over three years. It is therefore seen as competition distorting.

The local MSP is the finance secretary Kate Forbes who has come under fire for failing to sort out the hydro anomalies which have angered hydro owners who could have qualified for the relief if each of their schemes had been treated separately.

Hugh Raven, managing director at Ardtornish warned his enterprise is in a financial crisis because of the Scottish Government “failure” to resolve the 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.

Also understood to be affected are the four hydro-electric schemes built on the Highland estate of Corrour on the edge of Rannoch Moor and the private Lochgilphead estate of Ormsary, with its ancient Viking connections.

Mr Raven said: “It’s those firms that own either a single large or several hydro schemes in single company/trust ownership.

“This matters to Morvern because the removal of over half a million pounds in rates this year from a rural business in one of Scotland’s remotest mainland communities will have a catastrophic effect on our business, and huge implications for the local economy.

“Kate Forbes is the relevant minister, and our local MSP. Last October she issued a statement regretting population loss in our district, and appealing for help in reversing it. We can help – if she helps us. So far she has declined to do so.

“It matters nationally because it’s now clear that a group of renewable energy producers are by far the most heavily-taxed businesses in Scotland.

“In November Scotland hosts the world’s most important ever summit on climate change.

“To persecute the businesses that have done precisely what they were encouraged to do by the Scottish Government – some of the very businesses that have helped Scotland decarbonise its economy – is perverse.

Hugh Raven

“No-one saw this nightmare coming, so we and others kept our schemes in single ownership.

“It’s now not possible to divide ownership to get the revenues without being liable to the rates. We have strong legal advice to that effect.

“If we divided ownership but they all remained under the same ultimate corporate structure, the law would not allow rates exemption. If we sold one or more – investors in the City would love to get their hands on them and the revenues would be lost to the ultra-remote and super-fragile community.”

Operators last year expressed dismay at the conclusions of the Tretton Review published after a two-year inquiry which suggested temporary government reliefs should continue, rather than recommending an industry-preferred permanent solution to an “unfair and ill-founded” rateable value increase in 2017 which far outstripped what was faced by other businesses.

The Tretton Review said that while a relief system “may be imperfect” it could help provide “greater certainty” for investors.

In her budget package the Ms Forbest responding  to the recommendations of the Tretton Review extended the current 60% hydro relief scheme until March 31st 2032 but without resolving the state aid loopholes.

Simon Hamlyn, chief executive of the British Hydro Association said: “Scotland has a significant hydropower base and a hydropower heritage. Whether it is run of river, or pump storage or micro-hydro.  “Because of that, the Scottish Government until 2016 exempted hydro stations from paying rates.

“It was a way of encouraging employment and allowed people to create these schemes to create green schemes and promote hydropower.

“In 2016 out of the blue without any consultation with any industry body such as the BHA, the Scottish Government decided to withdraw the rate relief scheme, withdraw the exemption, and from 2016 onwards the hydro schemes were then asked to pay the full amount of rates.

“In a space of the year the rates went from nothing to some in excess of £500,000 a year.

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“When the schemes were being built they didn’t factor in the level of business rates they are now being charge for.   “We approached the Scottish Government and lobbied them hard because it was insane. 

“What was put in place was a relief scheme that is a 60 per cent discount on all hydro schemes up to 1MW of capacity.  It sounds great, but what about the guys that are above 1MW.    “Now you have a situation where you have one scheme that is getting 60% and a mile down the road they are paying the full amount.   “The anomaly that nobody thought out, was there were a handful of schemes that would not get the benefit.

“So you are getting schemes like Ardtornish and others who are paying hugely excessive rates.

“We have this wholly unlevel playing field where a handful of estates are being discriminated against.   “We still have a challenge from some who will possibly go bankrupt if this situation doesn’t change.”

Last week, Oxfam Scotland said Scotland has lessons to learn from a landmark ruling that found France at fault for failing to take enough action to tackle the climate crisis.

It said that while there there was “significant progress” in Scotland the last annual carbon reduction target was not met and “time isn’t on our side “ in advance of the UN Climate Change Conference (COP26) in Glasgow in November.

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.

Mr Hamlyn said: “Ardtornish is a historic estate with the owner diversifying to all the good things that the government wants you to do, forestry, low carbon, electric vehicles, everything you could possibly want.   It is iconic. A tourist attraction. And to leave that estate in the situation it is in because of an anomaly is just disgraceful.

“Collectively all the hydros provide a contribution towards reducing greenhouse gases, because it doesn’t give up any CO2. The more hydro we have, the better chance we have of meeting those targets. The less hydro we have, the less chance we have of meeting the targets.

“The Scottish Government have tried to be helpful but they really need to do more.”

A further irony comes as a new subsidy system was unveiled by UK business minister Kwasi Kwarteng.

The system will empower local authorities and devolved governments to decide whether they can issue taxpayer subsidies.

Mr Kwarteng said it was a clear departure from the inflexible and bureaucratic state aid regime. He added that the new system would support innovative, research-and-development-focused industries to support and encourage growth in jobs across the UK.

A Scottish Government spokesman said: “The Scottish Government delivers the most generous non-domestic rates relief for renewable generators that offer community benefit, as well as to all small-scale hydro operators. This relief is estimated by the Scottish Fiscal Commission to be worth £36 million to renewable operators between 1 April 2021 and 31 March 2026.

“Responding to the findings of the Tretton Review of Small Scale Hydro Plant and Machinery, the  Scottish Budget committed to guaranteeing the existing 60% hydro relief until 31 March 2032, providing investor certainty and estimated by the British Hydro Association to benefit 95% of hydro operators.

“The 60% relief is available to all small-scale hydro operators, with state aid being the only restriction. The new subsidy regime, which caps relief at approximately £350,000 over three years, was established by the EU-UK Trade and Cooperation Agreement and not the Scottish Government.

“Every penny of non-domestic rates raised is retained locally for investment in public services.”