Hydro subsidy 'breaks EU laws'

Hydro electric customers benefit from the subsidy

Electricity customers in the north of Scotland should not face a hike in their bills when an industry subsidy is axed, according to ministers.

Energy regulator Ofgem is to withdraw what is known as the hydro benefit following advice that it may not comply with EU legislation.

The subsidy is worth £38m a year, which translates to about £30 for consumers - or 10% of their annual bill.

Energy Minister Stephen Timms promised to do everything he could to ensure that those affected do not lose out.

Hydro benefit was brought in when the industry was privatised in 1991 in recognition of the difficulties faced in the north of Scotland.

The subsidy is paid from Scottish and Southern Energy's (SSE) generation business to reduce the cost of distributing electricity.

Difficult position

Ofgem has received legal advice that the practice is probably discriminatory and contrary to European Union law.

It plans to abolish the subsidy in April 2005.

Mr Timms acknowledged that Ofgem was in a difficult position.

But he said: "I am concerned about the potential impact this could have on consumers' bills in the north of Scotland.

The abolition of hydro benefit will remove a legacy from electricity privatisation which is no longer appropriate Ian Marchant Scottish and Southern Energy

"Due to the unique circumstances in this particular part of Scotland I have asked my officials, as a matter of urgency, to investigate all possible means whereby the effect of the hydro benefit can be best mitigated.

"I will be making a further announcement on their findings at the earliest possible time."

SSE chief executive Ian Marchant welcomed moves towards the development of a single set of arrangements for electricity transmission and trading in Great Britain.

"The abolition of hydro benefit will remove a legacy from electricity privatisation which is no longer appropriate as we move towards a modern, single British electricity market," he said.

He said the company knew "better than anyone" the difficulties in distributing electricity to customers in the north of Scotland.

"We will, therefore, work extremely hard with the Department of Trade and Industry, Ofgem and the Scottish Executive to encourage them to find the best solution for protecting the interests of customers in the north of Scotland following the abolition of hydro benefit," said Mr Marchant.