The UK government recently made a headline grabbing statement on energy- backing the Sizewell C nuclear plant with £14 billion, plus commitments to Small Modular Reactors (SMR) and fusion technology. However, despite these decisive steps, energy policy and the energy market in Scotland and the UK are broken. Although some of this is due to geopolitical issues, there are also significant policy issues. I want to highlight three areas in particular. Firstly, the promise of ever increasing generation of renewable electricity is being challenged due to increasing costs and public backlash. Secondly, the domestic oil and gas industry is being hammered by the Labour government’s approach to domestic oil and gas. Thirdly, and most importantly, continuing high electricity prices are impacting on UK households and industry leading to populist politicians questioning New Zero. Fundamentally, the promises of renewable energy being introduced through a ‘Just Transition’ that will automatically lead to new jobs and lower energy costs are not coming to fruition.
There are key, structural elements in the UK energy market that do not work. Most critically, the electricity price is set by the last therm generated which, about 80% of the time in the UK, is from gas. Therefore, there is an intimate link between the gas price and electricity price which means that the notionally lower price of renewables are not being seen by consumers. This is the key reason why electricity prices remain high in the UK. To be clear, this is a feature of the system not a bug- it ensures that we should always be producing enough electricity as there will always be gas generators available to generate the final therm at a price that makes economic sense for them. In time, this issue should decrease. As more interconnectors are installed from the north of Scotland to east of England, as currently under construction by National Grid and the Scottish operators, renewables will be able to deliver more of the time. Storage capacity will also come onstream- be that pumped hydro storage, including plans to upgrade Cruachan and newer schemes in the Highlands, or battery storage. California essentially shows the future in this regard- enormous generation of solar during the day fills batteries which are then discharged in the evening and overnight.
A second live issue is ‘zonal pricing’. Under this proposal, the UK would be split in to a number of regions. If there is excess generation in a region which cannot be exported consumers in this area would get cheaper electricity and vice versa. Zonal pricing should reduce curtailment charges and drive investment in new generating capacity to areas with higher prices (eg new nuclear power stations in the south of England) and new consumers to areas with lower prices (eg new data centres in Inverness). Some people in the industry, in particular the CEO of Octopus Energy, are strongly advocating this in support of consumer rights. Many of the incumbent generators and companies with plans for large developments are vehemently against it. Although it has not yet had much publicity, I assume there will be some pressure (?!) against the concept in the south of England which is likely, at least in the short term, to see higher prices. And, in time, if the market works properly, this approach will decimate the renewable industry in Scotland without even greater investment in grid infrastructure or storage. The proposals are therefore highly contentious in the industry.
The growth of renewable electricity generation over the last few years has been remarkable. According to the SNP government, Scotland now generates more than 100% of its total electricity consumption from renewables. A better figure is that in 2024, renewables accounted for 70% of Scotland’s total electricity generation with about 40% of the total electricity generated exported to England and Ireland. Despite the SNP claims, Scotland still relies on base load nuclear generation and imports from England because the wind doesn’t blow all the time. Further, as is widely known, huge amounts of money (£500 million year to date in 2025 according to a study by Octopus) are paid to generators in curtailment charges when there is an overcapacity of generation in the system. These issues could become a key factor in the Holyrood elections next year particularly in rural communities facing an onslaught of wind farm proposals with locals realising that most of the new generation will either be exported or shut in as there is insufficient grid capacity.
The removal of coal from UK electricity generation is the most important factor in the UK’s reduction in CO2 emissions in the last 30 years. For many years, this was driven by the replacement of coal by gas but has more recently been due to the huge increase in wind and solar generation. The last few years have seen a huge expansion in offshore wind. The last licencing round, Allocation Round 6 in 2024, had bidders for 9.6GW of capacity- this is against a current total of about 75GW. However, very significant increases in costs are meaning that developers’ economics are being challenged. Within the last few weeks, Oersted announced that they will not be progressing their Hornsea 4 wind development offshore Yorkshire- one of the largest windfarm developments in the world. This development was underpinned by a Contract For Difference (CFD), awarded in September 2024, which provides guaranteed electricity prices to the developer. However, very significant cost increases in the sector have led to decisions such as that on Hornsea 4 and likely on other developments. There will presumably be less impact on onshore developments which are much lower cost- but which are also likely to foment much more local opposition. In principle, renewable electricity should be cheaper than gas or nuclear generation- the cost of the inputs are free- and not subject to variable international commodity prices. However, due to capital costs increases, the requirements for storage- as the wind doesn’t blow the whole time- and essential upgrades to the grid, consumers are not yet seeing cheaper electricity.
Another fundamental energy issue is the impact of Energy Profit Levy (EPL) on the North Sea oil industry. The EPL, which is a marginal tax rate of 78%, was introduced as a windfall tax when oil and gas prices were substantially higher. Although certain capital allowances were retained at the last budget, the tax rates are crippling for new capital expenditure. There have been substantial job losses over the last few months at a number of the large operators- not necessarily the household names but the companies which now dominate the North Sea industry. Uncertainty about licencing and field development approvals have also led to a haemorrhaging of capital investment. The Labour government has removed some clarity last week by providing guidance on how developers should account for downstream, or Scope 3 emissions. However, there still remains significant uncertainty on the actual approval of these projects and on oil and gas licensing generally. This framework of general unfriendliness to the industry is in contrast to other countries, including the Netherlands and New Zealand, which have backtracked on their previous de facto bans, and near neighbour Norway which is maximising its production. Last week Centrica signed a deal with Equinor to import £20 billion of gas over the next 10 years. Only a small proportion of this gas could be produced in the UK- however, even a small proportion would be helpful for the UK Treasury, UK jobs and UK shareholders. Noone in the industry is pretending that the UK oil and gas industry will ever be the scale it was 20 years ago. However, they are pointing out that it seems ludicrous to be importing increasing volumes of oil and gas from international markets including Liquid Natural Gas (LNG) from countries like the USA, Qatar and Peru, which have significantly higher CO2 emissions related to transportation than North Sea produced gas. The Scottish government talks about a ‘Just Transition’ – there seems to be nothing ‘just’ about prematurely curtailing UK oil and gas production while replacing this with imported gas and oil. The UK government is considering changes to the regime but there does not seem to be the necessary urgency.
The combination of all these factors, with a dose of blatant political opportunism, are placing the Net Zero commitment of the Scottish and UK governments in the cross hairs of right wing parties and populists questioning the principle of Net Zero in its totality or at a minimum questioning the timeframes. Even the Tony Blair Foundation seemed to get in on the act with the headlines around their recent publication stating that current net zero policies are ‘doomed to fail’- although in this case the headlines missed the key points of an incredibly well thought out set of proposals which do not in any way question the need to tackle climate change. And who can blame people? Households are seeing ongoing high energy costs because we still link the electricity price to gas price. UK industry is saddled with the most expensive electricity in Europe. Local communities throughout Scotland are facing proposals for windfarms and electricity pylons to export electricity to England while seeing little benefit. This is compounded by the Scottish government stating that renewables are the new North Sea- with the key differences being the number of jobs created during the supposed ‘Just Transition’, most of the infrastructure for the oil and gas industry being hundreds of miles offshore rather than back gardens in Angus and unspoilt Highland glens, and that we actually still need North Sea oil and gas.
However, what consumers are not yet seeing is reduced electricity prices as a result of supposedly cheaper forms of generation. Why would local people agree to new windfarms or huge electricity pylons when they know the electricity is being exported south and they are not seeing cheaper electricity bills? No Scottish manufacturing of wind turbines- so where are the just transition jobs actually going to come from?
So what can be done? Well, a positive conclusion is that most of the issues and problems I have highlighted can be solved by policy interventions rather than tricky new technology- albeit policy interventions requiring a huge amount of investment.
From a Scottish perspective, the government needs to get real about the ‘Just Transition’. As my colleague Neil Gilmour wrote on this forum last week, the report from the Just Transition Commission has ‘No timeline. No costs. No specific accountabilities. No integrated road map for the overall journey.’ It is therefore doomed to failure. Enlighten have previously highlighted the plethora of targets, strategies and initiatives from the Scottish government which do no link up. The Scottish Government need a reality check.
Secondly, the Scottish Government, working with Scottish SNP and Labour MPs (and indeed Conservatives MPs and MSPs), must be much more forthright with the Westminster government about the North Sea oil industry. It is difficult to identify another sector which can demonstrate highly paid jobs, UK capital investment, tax revenue, reduced import costs and lower carbon emissions for the next twenty years. The current consultation has to result in a new tax structure and licencing framework which will be implemented very quickly to protect the industry.
The Scottish government needs to think realistically about base load electricity generation. Although supposedly self-sufficient in renewable electricity, Scotland still relies on base load capacity from Torness nuclear power station and imports from England. The UK government has committed to nuclear plants at Sizewell and investment in Small Modular Reactors and fusion to underpin the base load capacity and Ed Milliband, UK Energy Secretary’ has stated that he sees no reason why there shouldn’t be nuclear in Scotland. Although principally involved in planning decisions, the Scottish government should support the UK position. The construction of new nuclear capacity at existing sites at either Torness or Hunterston, close to Scottish population centres with grid connections would be transformational for the Scottish energy system. The Scottish university sector, with its own severe financial challenges, would benefit from a resurgence in nuclear engineering requirements. Scotland currently generates more electricity than it uses. However, much of this is in wrong place- requiring huge impact on remote parts of the country and transmission lines to the population centres. Better to place the generation close to the central belt.
The UK government needs to redesign the electricity market to a system which will lower prices in the short to medium term. Disconnecting the electricity price from the gas price, as is the case in other countries, would be a first step. Zonal pricing may be a short term fix to placate some objectors who see local windfarm developments but do not see the benefit of local pricing and may also encourage local businesses. However, it would also have a devastating effect on the renewable sector in Scotland. At a minimum, the UK Government should publish its Review of the Energy Markets as soon as possible to remove ongoing uncertainties from the sector.
The single most important way to achieve Net Zero in the UK is electrification of everything that can be electrified- home heating, transport, industry. This requires investment in generation, storage and transmission. However, as Enlighten have written previously, even more important is the hearts and mind campaign to demonstrate to individuals that this energy can be delivered reliably but cheaper than currently, into a daily experience similar to how people live now. It still strikes me as amazing that the need for change- to electric cars and heat pumps, district heating projects, demand side management, domestic generation and storage of electricity, improved domestic insulation- are still geeky, niche topics much like homemade yoghurt in the 1970s. Until these interventions and solutions become mainstream, alongside the policy changes outlined above, we are not going to have a chance of delivering Net Zero.
Stuart Paton is an energy industry advisor and former Chief Executive of Dana Petroleum. He is also an associate of Enlighten