It might be midsummer, but already Grace McDonald is looking ahead with trepidation towards the long, cold winter days. The retired primary school teacher from Inverness just about gets by on her £9,000-a-year pension, but with last week’s massive rises in energy bills — anything between 22% and 35%, depending on your supplier — her electricity bill now accounts for more than a tenth of her income. With food and travel costs also on the rise, the 79-year-old widow fears she may soon slide below the poverty line.

“The government needs to do something about this now. They have a responsibility to pensioners and to poorer families,” she said. “The energy companies are making huge profits and their executives are making millions in bonuses. I think people will end up not having much of a life at all. It’s almost like going back to Victorian times.”

It is the plight of people such as McDonald that has prompted the government to consider imposing a windfall tax on energy companies, which are continuing to reap massive profits while the cost of their products soar. Despite warnings from business groups, including the Confederation of British Industry, that such taxes could add to instability in the economy and reduce the budgets available for investment in renewables, Gordon Brown may have no choice.

Beleaguered by a series of election defeats and the subject of plotting by disaffected members of his own cabinet, there appears little doubt the prime minister will yield to public outrage.

In Scotland, he faces problems of a different magnitude. Without much effort, Alex Salmond, the nationalist first minister, has found his next big stick with which to beat Westminster. In a country that pays a hefty premium for its cold climate and sparse geography, the price of domestic fuel and petrol is set to dominate the political agenda more than elsewhere.

Salmond will demand higher winter fuel payments for pensioners, adding to Brown’s woes but, more significantly, he has a question for the prime minister he intends to repeat frequently — and laboriously — in the run-up to a referendum on independence in 2010, and it is this: why should a country that produces more oil and gas than any other in western Europe be paying the continent’s highest prices for these products? Brown’s ability or otherwise to answer the question may well decide the fate of the union.

Farmer James Leslie from Sumburgh in Shetland pays £1.50 a litre for diesel to run his vehicles — the dearest pump prices in Europe. With costs rising, he has had to take on a second job — scanning pregnant sheep — to make ends meet, which entails travelling from farm to farm. “I will have to put my rates up again if this trend continues, and I am sure that will mean some people will drop out, they just won’t bother,” he said.

Since the discovery of oil and gas fields in the North Sea in the 1960s, the issue of energy has always been intensely political north of the border. For years, the SNP argument that Scotland, like some compliant sheep, was being shorn of its golden fleece, was dismissed by successive UK governments as paranoid and resentful. However, recent archive releases have shown the nationalists’ instincts were largely correct.

In 1974, Gavin McCrone, the Scottish Office’s chief economist, told Edward Heath’s Tory cabinet that oil could make Scotland one of the richest nations in Europe, endow it with an “embarrassingly” large budget surplus and give it one of the strongest currencies in the world.

“For the first time since the Act of Union was passed, it can now be credibly argued that Scotland’s economic advantage lies in its repeal,” said his report, which remained hidden from the public for 30 years.

Labour’s Jim Callaghan was equally determined not to publicise the extent of Scotland’s potential wealth. Fearful of an oil bonanza fuelling the independence cause, and needing oil revenues to bail out the UK’s crippled economy, in 1977 the then prime minister went to extraordinary lengths to ensure that all the income from the North Sea headed directly south to the Treasury, ordering the designation of an entirely new economic region — the UK Continental Shelf (UKCS) — to which all North Sea revenues were to be assigned instead of to Scotland.

If the money had been assigned to Scotland, it would have doubled the country’s GDP overnight. Instead, all North Sea revenue was assigned directly to the UK exchequer, with small slices specifically allotted to the Isle of Man and Northern Ireland.

None was earmarked for Scotland, which still relies on an annual block grant from London funded out of general taxation, with the Barnett formula guaranteeing slightly more than a strict share based on population would dictate.

Now, 30 years on, and with Scotland ruled by its first SNP government, energy has once again shot to the fore of the voters’ consciousness.

Rising energy prices were identified as a concern by all the parties in the recent Glasgow by-election, but that contest was only a foretaste of bigger electoral battles to come. In the wake of record crude oil prices earlier this year, the first minister has returned to his party’s most successful slogan — “It’s Scotland’s oil” — and demanded Brown hand over a 10% share of the estimated £5 billion extra that will flow into Treasury coffers this year as a result. Salmond has also signalled his desire for a 10% share of the £10 billion revenue which had been projected originally.

AS it did in the 1970s, when the SNP first campaigned on the issue, asking why an oil-rich nation such as Scotland should pay through the nose for its petrol, Salmond’s posturing struck a public chord.

The staggering insensitivity of the energy companies has also proved a boon to the nationalist cause. Last week, Shell and BP announced profits for the three months to June of £3.4 billion and £4 billion respectively. While Centrica, which owns Scottish Gas, posted a half-year profit of £992m a mere 24 hours after jacking up gas prices 35% and electricity 9%. At the same time, Centrica announced a 16% rise in the dividend to its 800,000 shareholders.

The changes, and those of other energy suppliers, mean the average household fuel bill is now estimated at £1,320 a year, more than double the amount in January 2003. The problems in Scotland are already acute. According to government figures, a fifth of the population — about 1m people in 540,000 homes — is classed as fuel poor, meaning 10% or more of their income goes on household fuel. Among pensioner householders, one in four is fuel poor.

For every 1% rise in fuel prices, about 8,000 more homes enter fuel poverty, according to the Scottish House Condition Survey. That means a 35% rise in energy costs would push a further 280,000 homes into fuel poverty. There is little prospect of those supplying the energy feeling the pinch, however.

According to the latest company accounts, Ian Marchant, chief executive of Scottish and Southern Energy, earned £1.2m in salary, benefits and bonuses last year; Bill Coley, chief executive of East Kilbride-based British Energy earned £1.4m; Sam Laidlaw, head of Centrica, earned £1.87m; and Phil Bentley, managing director of British Gas £1.1m.

This winter, the government’s fuel allowance will be a maximum of £400 for pensioners. Those aged 60 to 79 will get £250 per household. Those aged 80 or more will receive £400 per household.

Cold weather payments of £8.50 a week are also available to the over-50s on benefits, but the criteria are so narrow they are rarely triggered — seven consecutive days at or below 0C at specified weather stations between November 1 and March 31, 2009.

The idea of “regional weighting” for winter fuel allowance and cold weather payments was recently floated by Energy Action Scotland, the charity dedicated to ending fuel poverty.

“We think there should be a tiered system for these payments so that the further north you go, the higher the sums,” said Elizabeth Gore, Energy Action Scotland’s deputy director. “That would compensate people for the longer heating season, as well as the colder temperatures. It’s definitely something that should be picked up in light of the recent energy price hikes.”

Gore’s idea received a sympathetic hearing from MPs on the Commons select committee on Scottish affairs, when it took evidence on poverty north of the border last year. In its report, the cross-party group recommended “consideration should be given to establishing a form of regional weighting that would recognise the increased burden in fuel costs to colder parts of the UK”.

However, in its response in April, the UK government rejected the plan.

“The winter fuel payment is a national scheme available to most people aged 60 or over and the amounts paid from it are the same throughout Great Britain. It would add complexity and expense to take account of regional differences in temperatures, given variations between areas of the UK are not extreme,” it said.

SUCH refusals to engage with the changed energy landscape are now causing the government problems in all sorts of way. Dissent is growing within the Labour party over excess energy profits, with some on the left suggesting a windfall tax is only a beginning, and what is needed is a cap on domestic prices. The calls will inevitably rekindle memories of Labour’s grimmest hours in the 1970s, inflaming splits within the government.

Michael Connarty, the Labour MP for Linlithgow and Falkirk East, said it was time for a new era in energy policy. “Regulators such as Ofgem have allowed energy prices to soar. It’s virtually a cartel now. Yet in every state in America they regulate domestic fuel prices.

“I want to see a windfall tax on the massive profits being made by the oil companies, and bring the fuel prices down. I would regulate domestic fuel prices again. I would govern. We’re letting regulators run the world. We have got to get back to governing.”

This weekend, Jim Devine, the Labour MP for Livingston, went further still, calling for a revival of the Prices and Incomes Board last seen under Harold Wilson.

The issue has also cropped up in the Scottish Labour leadership contest, with Cathy Jamieson and Andy Kerr both calling for a windfall tax, and Iain Gray urging the energy companies to set more socially responsible tariffs that take account of householders’ circumstances.

Kerr said the windfall tax should be spent on long-term investment that will ultimately reduce domestic energy bills — such as insulation — as well as solar power and micro-generation, such as wind turbines on roofs.

“I hope there will be a windfall levy. I hope that the UK takes that decision and uses that windfall for long-term support for those in energy poverty. I also hope that the winter fuel allowance will be part of the discussion.”

Tavish Scott, the frontrunner in the Scottish Liberal Democrat leadership race, has also locked on to the subject, spotting a sure-fire populist cause.

“Both Labour and SNP ministers are toothless, powerless and hopeless,” he said, calling for not just a windfall levy, but the break-up of the big firms’ hold on the UK energy market.

“The energy market is not working. There is a compelling case for referring the gas and electricity markets to the Competition Commission for inquiry.

“High fuel prices are a fact of Scottish life. That means ministers — in London and Edinburgh — must act both to protect the most vulnerable in the short term and to ensure we take the necessary steps towards creating a low-carbon economy and society. Reducing our energy needs and generating from genuinely renewable sources is the only realistic, long-term solution”.

The Conservatives, for the time being at least, are trying to sit out the row, avoiding calling for higher taxes on businesses.

A spokesman for the Scottish party said: “We remain to be convinced that a windfall tax is the right approach. We are looking at a variety of measures to help families cope with rising energy bills, and to improve the energy efficiency of homes and businesses across the country.”

But as thermometers drop and consumer pressure rises, Brown can look forward to a long, hard winter.

http://www.timesonline.co.uk/tol/news/uk/scotland/article4449089.ece