Section 9 - Prosperity: Affordable Energy
Contents
Long term outcome 2 Secure Affordable Energy: Secure all Shetland energy consumption from affordable islands-based generation
The current high cost of energy combined with the cost of living crisis are emphasising how important it is that we get the transition right. People on the lowest income are being effected the greatest, and have the least opportunity to make change themselves.
One of the overarching themes of ensuring a Just Transition is:
Spreading the benefits of the transition widely, while making sure that the costs do not burden those least able to pay.
The transition to net zero is an opportunity to make things fairer. Shetland has been an energy hub for over 40 years, yet we pay the highest prices for energy in the UK and that is unfair. It is therefore essential that, while we build on our past successes, we also learn from past problems.
Delivering affordable energy will require engagement with a wide range of stakeholders, throughout the energy supply chain, along with regulatory change. We must also consider the significant cost of transition and how it will be paid for. There is a close relationship between energy transition and the ability to meet the costs of the transition at all levels from individual households through to the enabling infrastructure projects.
Cost of living and the role of energy
Current situation
The cost of living is rising. Partly driven by energy costs and international conflict, but also by factors such as the cost of raw materials, supply chain issues and recruitment challenges. For further information on support available see Cost of Living – Shetland Islands Council.
The cost of living in Shetland is between 20-65% higher than the UK mainland. The rising costs of fuel, food and other essentials are combining with existing disadvantages and vulnerability within our community to put many households at greater risk of both immediate hardship and reduced opportunity and wellbeing.
What is fuel poverty?
The Scottish Government use a two part definition to define fuel poverty:
A household is defined as being in fuel poverty if, in order to maintain a satisfactory heating regime, total fuel costs necessary for the home are more than 10% of the household's adjusted net income (i.e. after housing costs), and if after deducting those fuel costs, benefits received for a care need or disability and childcare costs, the household's remaining adjusted net income is insufficient to maintain an acceptable standard of living. The remaining adjusted net income must be at least 90% of the UK Minimum Income Standard to be considered an acceptable standard of living with an additional amount added for households in remote rural, remote small town and island areas. If more than 20% of net income is needed, the household is defined as being in extreme fuel poverty.
The simple definition of fuel poverty is: a household is defined as being in fuel poverty if they spend more than 10% of their income on energy to heat their home. Extreme fuel poverty is when this figure is above 20%.
Fuel poverty in Shetland
The current figure for household in Shetland that are in fuel poverty is 30.9% from 2019 figures, with 21.7% in extreme fuel poverty. However, the cost of energy has increased significantly since these figures were collected in 2019. The Council estimates fuel poverty could be as high as 66% with extreme fuel poverty around 33% of households in Shetland. This figure is based on the average energy consumption, average energy prices and household income based on CACI paycheck data for 2021.
What is Affordable Energy?
Securing access to affordable clean energy is a key commitment in the Shetland Islands Councils Corporate Plan 2021-26 “Our Ambition“
“We will campaign to ensure that regulations and arrangements allow Shetland-generated green energy to be made available to Shetland consumers and businesses at affordable prices to close the current energy affordability gap.
Developing new and innovative arrangements where renewable energy generated in the islands, in particular electricity, could be consumed locally at affordable prices could transform the fuel poverty levels in the islands.
We believe that could create a solution with significant economic, commercial and social benefits for communities, business and government and provide a much-needed growth stimulus for the islands at a very concerning transition point for the oil and gas industry.”
Energy transition provides an opportunity to produce our own fuels locally. While the energy will still be subject to global energy markets, there should be a reduction in cost as it will not be necessary to import energy.
Factors driving Affordable Energy
1. Energy consumption
Annual household energy consumption has been estimated as being around 21,071kWh in Shetland (Shetland Household Energy Review 2021) as compared to the c14,200kWh (Reduced from 14,900kWh) used for the UK price cap analysis (OFGEM UK Price Cap). This is backed up by the UK Governments regional and local authority electricity consumption statistics which state the GB mean domestic electricity consumption (kWh per household) is 3,709kWh compared to 9,011kWh for Shetland, the highest of any Local Authority area.
The high use of energy due to our climate (greater wind chill, lower average temperature and darker in winter), our housing density (more detached properties and fewer flats) and the very mixed quality of Shetland housing (draughty and poorly insulated houses). Shetland is one of the worst performing local authority areas for the performance of domestic properties. In the Scottish House condition survey Local Authority tables 2017-2019 Shetland had one of the highest proportions of low performing buildings and the lowest proportion of high performing buildings. That projects Shetland at 141% of the UK estimate for annual average household energy consumption.
Section 6 provides further information on energy consumption, how this can be reduced along with projects which are being undertaken to reduce energy consumption.
2. Cost of Energy
The unit cost of all energy used in Shetland is linked to global energy markets. The vast majority of energy used in Shetland has to be imported at additional cost. These additional costs are exaggerated as we need to use more energy, and they add to the high cost of living.
Another factor leading to the high cost of energy in Shetland is due to the high use of electricity as there is no access to the UK gas grid. Electricity prices tend to be around four times the price of gas, 28p/kWh compared to 7p/kWh for gas.
The compound price of energy in Shetland provides a summary breakdown of current fuel consumption with electricity at nearly 2/3, nearly 1/3 for oil, with 8% district heating and 1% other fuels including gas. Compared to a typical household which uses 81% gas to 19% electricity.
3. Household income
The Shetland Partnership report that according to CACI paycheck data (2021), 47% of household in Shetland do not earn enough to live well, based on the minimum income standard for remote and rural areas. Workforce and participation are covered in section 10.
The recent report A Perfect Storm: Fuel Poverty in Rural Scotland, has further broken this down to four drivers:
- High fuel costs
- Poor energy efficiency of homes
- Low household income, and,
- How energy is used in the home.
Which are further compounded by our cold and wet climate, the high cost of living, employment and training along with a shortage of affordable housing, ageing demographics and limited access to support services.
A second report Fuel Poverty in Rural Scotland: The Solutions has identified a number of solutions, these have been referenced as part of the action planning resource in Annex 2.
Ofgem price cap and the energy price guarantee
The energy price cap sets a maximum price that energy suppliers can charge customers for each kilowatt hour of energy they use, with some variation due to differences in Network charges. It does not cap the consumers total bill.
The energy price guarantee was established by the national government as a backstop to protect customers for rising energy prices. It is expected to remain in place from 1st October 2022 to April 2024. The energy price guarantee added a subsidy to the rates a supplier can charge for their default tariff,
The energy price cap starting January 2024 is £1,928 per household a slight increase from the previous quarter but still below the energy price guarantee. A typical energy bill for a Shetland household is over double.
Breaking down the Cost of Electricity
Reducing the unit cost of electricity or any energy needs to be approached on a number of fronts, as there are a number of costs incorporated into the unit cost.
Ofgem have produced the following graph for a typical multi rate domestic electricity customer to demonstrate how these costs stack up. These costs are a mixture of p/kWh and fixed costs, with variations due to payment method and region. A full spreadsheet of data is available from the Ofgem website.
Wholesale energy costs
The cost of generating electricity from renewable resources has reduced significantly over the past 10 years. This decline has been driven by steadily improving technologies, economies of scale, competitive supply chain, government incentives and improving developer experience. The cost of electricity generation from fossil fuels has increased.
Despite the decreasing cost of renewable electricity generation, the wholesale cost of electricity is linked to the global gas market which is currently volatile. This volatility is linked to the Russian invasion of Ukraine. As energy markets decouple from global oil and gas markets, there will be an opportunity for the wholesale cost of electricity to decrease. Electricity market reform is required to allow this to happen and for a closer link between electricity generators, distribution companies and customers local to one another. At present suppliers purchase their energy in advance through forward markets and power exchanges but the markets operate for the whole of the GB without taking location into account. Further information on electricity market reform can be found below.
Wholesale energy costs only represent around half of the cost of electricity. It is therefore important to give consideration to the other elements.
Network costs
Ofgem set price controls on electricity network companies, to balance the relationship between investment in the network, company returns and the amount they charge.
At present we benefit from the Hydro Benefit Replacement Scheme, which protects consumers in the North of Scotland from high electricity distribution costs, and Common Tariff Obligation which ensures that electricity suppliers in the North of Scotland are not able to charge comparable domestic consumers different prices solely on the basis of their location within the region.
High levels of investment will be required in our energy distribution and transmission networks as we transition to distributed generation, with high levels of renewable energy from a system of centralised generation. It is essential that these costs are passed on in a fair and transparent manner. The energy system in Shetland and across the GB Network must be considered in a holistic fashion to maximise efficiencies and avoid duplicate infrastructure, which will ultimately need to be paid for by the energy consumer.
Policy costs
These are the cost of programmes to save energy, reduce emissions and provide financial support to the fuel poor, paid through household energy bills. According to a study undertaken by Cornwall Insight for the Climatexchange the majority of levies are only on electricity and are done on a volumetric basis, putting all electric customers at a disadvantage. Levies for an all-electric domestic property can be up to 28%, excluding VAT, the study was published in September 2021 prior to the wholesale cost of electricity increasing significantly. However analysis of the data from Ofgem backs this up and is discussed further in the recent Energising Shetland Appendix 1, presented to Council on the 27th September 2023.
These factors along with recent discussions on a hydrogen levy highlight an opportunity for a saving on the cost of electricity and the need for these costs to reflect the carbon intensity of the energy being supplied to help incentivise the transition to clean energy.
Operating costs
The administrative costs of running the supply business, including customer service, marketing metering, plus profits. These are reviewed by Ofgem, who set allowances as part of the price cap. As part of Energising Shetland the Council will investigate the potential of an energy supply company, which could potentially; reduce operating costs or return some of these back to Shetland, if some of the services can be provided locally.
Route to Affordable Energy
Energy and other costs have increased, and are projected to remain volatile for the foreseeable future. The current situation is set to continue and we are going to see changes to energy consumption as electric vehicle use increases. There are also wider health implications, as households ration their energy to keep costs down and make the impossible choice between eating and heating. This can cause or exacerbate existing physical and mental health problems which will lead to wider health and social care challenges.
As part of Shetland Forward, Energising Shetland sets out the ambition to achieve the outcome of a Shetland Tariff. It sets out how the Council wishes to enter discussions with the Scottish Government, the UK Government and with industry stakeholders, with a view to negotiating a new settlement and receive a fair return on energy costs given the substantial contribution Shetland is making to clean energy generation.
The Council also agreed on a new programme in September ‘Energising Shetland – Affordable Energy and a Shetland Tariff’ to investigate mechanisms of achieving lower energy costs for Shetland homes and businesses. Some of these potential mechanisms are discussed below.
Case studies
Here are five examples of where an energy company, developer or community group have offered an alternative option to try and reduce energy prices to the customer by either disconnecting from global energy markets or linking the customer closer to wholesale energy prices.
Ripple Energy
Ripple acts as a facilitator setting up the wind farm co-op and deals with everything from the construction to the maintenance of the wind farm. Electricity customers can buy a share in a cooperative wind farm, with their investment linked to their annual electricity consumption. Note the wind farm is owned by the co-op members rather than Ripple. The saving to the electricity customer is the difference between the wholesale energy price and the wind farms operating costs.
Agile Octopus
Agile Octopus is a unique electricity tariff which is linked to half hourly energy prices, tied to wholesale prices and updated daily. When wholesale electricity prices drop, so do customers’ bills. The tariff also has a world first, Plunge Pricing, which lets customers take advantage of negative price events, and get paid to use electricity. Unfortunately, as wholesale energy prices are currently at a record high most homes are better off staying on a standard fixed or variable tariff. The tariff does, however, give an insight into a transition to smarter, greener energy. For more information see.
Octopus Fan Club
This scheme offers discounted electricity prices to customers within certain postcode districts near an Octopus ‘fan’ (wind turbine). The level of discount varies depending on wind conditions, with up to 50% discount offered when the turbines are operating at their maximum. This mechanism allows pricing to be more reflective on where electricity is generated.
Heat Smart Orkney
Heat Smart Orkney is a partnership project matching otherwise curtailed energy output from a community wind turbine to local domestic space and water heating. Properties received a rebate from the generator for using power which would otherwise have been curtailed.
District Heating
One affordable energy success story for Shetland is the Lerwick district heating scheme. SHE&P have been able to keep the price of heat stable for the past 20 years. This is because they are protected from global energy prices as the vast majority of the heat comes from the burning of waste at the Energy Recovery Plant. In addition, as the scheme is owned and operated by SHE&P, all revenue generated or saved by the scheme is returned to the local economy. Further discussion on district heating can be found in Section 5.
We will statements on affordable energy:
- We will have full access to clean, affordable and secure energy produced in Shetland.
- We will engage with energy suppliers to understand the challenges to the roll out of smart meters in Shetland and engage with regulators to find options for Shetland and other areas which face similar challenges.