On 18 September 2014 a referendum on Scottish independence will take place to decide whether Scotland should leave the UK and become independent, ending the 305-year-old political union with England.
How would a positive vote for Scottish independence on 18 September impact the UK’s renewable energy market and will it be advantageous for a new independent Scotland? This article focuses on three areas that will be significantly affected by the referendum, whether “yes” or “no”.
Background to Scottish renewables policies
The Scottish National Party‘s policy is for an independent Scotland to be 100% green by 2020.
Alex Salmond is quoted as saying: “Our energy resources can power much of Europe; our energy innovation can power the world. It's a time for Scotland - working with nations and companies from across the planet – to become the intellectual powerhouse of green energy.”
The policy goal may be achievable given the right incentives and wholesale market configuration. Scotland currently generates 25% of the EU’s offshore wind and tidal power, 10% of the EU’s wave power and 90% of the EU’s hydro-electric capacity.
About 34% of the UK’s renewable electricity capacity flowed from Scotland at the end of 2013, with 34% of the UK’s wind power capacity generated in Scotland. Scotland also exports as much as a quarter of its electricity.
A ‘post-independence’ wholesale market and transmission system
The Department of Energy and Climate Change (DECC) suggests that if, following Scottish independence, the UK does not operate a shared “all-Britain” energy market then the UK’s reliance upon Scotland may be diminished. Edward Davy, the Secretary of State for Energy and Climate Change says that “the decision to import energy from an independent Scottish state would be taken on a commercial basis and in the national interest of the continuing UK”. He continues: "I think Britain's single energy market - where we are integrated as we are now, where energy flows across the border very easily - makes our energy more secure, it keeps costs down and it will enable us to go green, to go low carbon. Split that up and all those benefits go."
This is a view shared by the Expert Commission on Energy Regulation, established by the Scottish Government, in their report “Energy Regulation in an Independent Scotland”
If this consensus exists post a “yes” vote the direction of travel will be clear. There would have to intricate negotiations around joint system operation and regulation (the Scottish Government would likely use the joint Swedish/Norwegian model as a guide) but the basic structure of the wholesale market and settlement process could be retained.
The Expert Commission acknowledges that a consensus may not be reached but states that the Agency for the Cooperation of Energy Regulators (ACER), an EU agency, has “a duty to intervene to make binding individual decisions on terms and conditions for access and operational security for cross border infrastructure…” If Scotland is no longer in the EU and remains on the “waiting list” for entry then ACER’s jurisdiction is questionable.
To the extent the existing system is not maintained – the benefits of which include economies of scale and avoidance of duplicative arrangements – costs associated with new transmission arrangements would fall on consumers in the respective countries.
Investment and the incentives regime
The Expert Commission suggests that:
- Projects which were funded pre a “Yes” vote on the assumption of the ROCs/FiT regime continuing in place should be “grandfathered” such that the current incentive regime remains with consumers in an independent Scotland and the reminder of the UK continuing to bear the cost of those incentives;
- Scotland would seek to take advantage of the Electricity Market Reform (EMR) including the Contracts for Difference regime and capacity market; and
- Scotland would want to “explore different approaches to grid charging, access and investment” to protect consumers from the effects of disproportionately high investment costs when compared to the rest of the UK and ensuring Scottish transmission constraints do not prejudice entry into the new capacity market. Currently UK policies such as the Hydro Benefit Replacement Scheme socialise the higher costs of distributing electricity in the North of Scotland across all UK electricity suppliers.
The Expert Commission states that “grandfathering existing investment is a fundamental principle of good governance”. It must though be debatable whether “good governance” always applies in a divorce.
The issues of the wholesale market and renewables investment can – and Westminster may decide should – be kept separate. It is in Scotland’s interests to promote wind power to meet its renewables targets and capitalise on a favourable planning regime and geographical positioning to attract investment and employment in the renewables sector.
Currently Scottish energy projects receive a significant amount of UK investment including renewables subsidies:
- In 2012/2013, Scotland received 28% of UK subsidies while Scotland only accounted for 10% of electricity sales.
- Between 2013 and 2014, 30% of investment earmarked for the British grid has gone towards Scottish grid improvements.
- In the fiscal year ending 2013, of the £2 billion of support paid through renewable obligations, Scotland received 560 million pounds (representing 28% of total UK funding).
- Of the £34 billion worth of investment that was set aside for large scale renewable power projects between January 2012 to Feb 2014, about £14 billion was allocated for Scotland.
To continue on a “business as usual“ basis requires socialisation of renewable investment subsidies across all suppliers both in Scotland and the remainder of the UK and would have to be in the political interests of Westminster. But is that the case?
- Does the UK want ever greater intermittent power placed onto the system with attendant price volatility and imbalance issues?
- If the English/Welsh nuclear projects progress as planned could this reduce reliance on intermittent sources?
- Could other European sources of power delivered through interconnectors reduce the UK’s reliance on Scottish renewables?
To the extent Westminster gives a “No” in negotiations, Scotland will be left socialising costs across its own population.
The UK Government believes that a reduction in renewables subsidies currently received from Westminster would cause the average Scottish electricity bill to rise between £38 and £189 per year.
Investment and regulatory uncertainty
There will be a two year period between the referendum this week and the inception of a newly independent Scotland. In that period a “conscious uncoupling” will take place and arrangements for energy markets and renewables subsidies will have to take their position in the negotiating pecking order - some way below defence and the pound.
Right now the manner in which those issues will be resolved in unclear.
Renewable power projects currently support £14 billion pounds of investment and 12,000 jobs in Scotland. Regulatory uncertainties in Scotland could cause project developers to refrain from investing in Scottish renewables projects until the regulatory regime, connection costs, routes to market and renewables subsidies are clarified and negotiations between Westminster and the Scottish government have concluded.
Doug Stewart, CEO of Green Energy Plc believes that “projects in the pipelines that are planned in Scotland could get cancelled because who is going to pay?”. This could have a significant impact for future renewable generation across the whole of the UK as about 12 GW of power projects are on the drawing board in Scotland totalling 15% of total UK capacity.
In the short term, however, whether these issues are resolved is to some extent irrelevant. For funders and developers considering projects now, independence simply means uncertainty and potential effects on cost of capital. Not an ideal investment landscape.
It is clear that, should the Scottish voters follow Alex Salmond towards an independent Scotland, the future of the UK renewable energy market may be significantly affected. Not just in terms of the flow of green energy between the countries and the granting of subsidies for such power, but also in terms of investment appetite both in the short and long term.
 Bloomberg: http://www.bloomberg.com/news/articles/2014-09-07/scotland-yes-vote-seen-risking-23-billion-in-power-work – 07 September 2014