More on energy and constitutional change

There has been a flurry of publications on energy policy and the independence referendum in recent weeks. Following my own initial thoughts last January, now might be a good time to assess how the debate has progressed.

Firstly, we have Jamie Carstairs’ chapter in ‘Scotland’s Future’ on ‘Energy and Constitutional Change’. He gives the reader a broad overview of UK and Scottish energy policy, focussing on the key issue of funding to pay for new generation and the associated infrastructure. Currently renewables are not viable against electricity revenue with the wholesale electricity price at roughly £50Mwh as against onshore wind at £94Mwh, or offshore wind at £140-180Mwh. This means support to the renewable industry has risen from £232m in 2002 to £2.2bn this year.

The existing subsidy arrangements benefit Scotland because it receives a higher share of the payments made by all UK consumers. If Scotland were independent there is a big question mark as to whether rUK would be prepared to subsidise renewable in Scotland, particularly the higher cost projects like offshore wind and marine technologies. On the other hand there may be some EU countries that have a shortfall under the Renewables Directive. The UK needs to spend £200bn up to 2020, with most of the financing coming from the private sector. Carstairs argues that independence is unlikely to be a great concern to equity investors who already operate across national boundaries.

Another problem might be evolving the market arrangements between the two countries because high wind penetration leads to high price volatility. Although he accepts this is not intractable as other markets cope with near 100% hydro and higher wind penetration. However, transmission constraints mean that Scotland’s costs rise when networks are congested. These costs, currently shared across the UK, will fall on Scotland, pushing up subsidy costs. There is also the long standing dispute over transmission charges. An independent Scotland might gain more influence over regulation, if an agreement can be reached on a single market such as the Irish model. But that is still a big if. Carstairs offers a number of issues for debate rather than providing many answers. Well he is a consultant!

'Future Scotland - Energy' is part of SCDI's contribution to the constitutional debate. As you would expect this is a very balanced paper setting out in some detail the challenges facing the industry, irrespective of constitutional change. These include replacement generating capacity, upgrading the networks, affordable prices and workforce skills. The latter is a point often missed in other papers. Combining replacement demand with new additional growth, there will potentially be a need for between 52,000 and 95,000 people with the necessary skills.

This paper focuses on the need for greater certainty on how the GB market might operate post-independence. In particular how the higher cost of renewables will be covered, spread across the GB customer base or more narrowly on Scottish consumers. Then there is the investment in networks and how these will be regulated. Finally how fuel poverty and climate change targets will be allocated. These are all valid points and the paper poses a series of questions that both sides of the debate will need to address.

Balance isn't a virtue I would normally ascribe to the right-wing David Hume Institute. However, they have commissioned a number of papers on energy and constitutional change from reputable academics. Professor Mark Schaffer and colleagues at Heriot Watt cover the rapidly evolving and complex external/global energy environment and its implications for Scotland; Professors John Paterson and Greg Gordon from Aberdeen considers the oil-related issues; and Professor Kim Swales and colleagues from Strathclyde University examine the electricity issue. They also have a paper by Trisha McAuley (Director, Consumer Focus) on consumer related issues and an over-arching paper prepared by SCDI.

The electricity paper is the most useful in this context. They firstly address the issue of security of supply as that should be the primary concern of government. Smaller economies find this more challenging and the Scottish Government's narrower choice of technologies makes cross border transfers all the more important, particularly if there are major outages. The Scottish Government also argues that England will need Scottish generation to keep their lights on. However, as this paper points out, rUK will have other, potentially cheaper options, should that scenario become a reality.

On the development of renewables the authors argue there are costs and benefits. The benefits include the potential, at least, of more policy instruments to encourage renewables/ discourage fossil fuel generation (such as a carbon tax), and to encourage inward investment. However, it seems likely that, in the long-run, there will be costs in the form of higher electricity charges for Scottish consumers relative to those in RUK.

So what do all these words (and charts) tell us about energy and constitutional change? In the main they do a good job identifying the issues. Given the range of uncertainties it is difficult at this stage to do much else. Factual analysis is important particularly when the politicians are making some pretty bold assertions. The Scottish energy minister has form on this, with his 'lights out in England' claim and yesterday's assertion that Scotland will have viable oil reserves to the end of the century.

Personally, I remain sceptical about the Scottish Government's plan. Being tied to UK market without any democratic say in its operation, doesn't seem to be a better option than greater devolution. There are real risks that the additional costs of their unbalanced energy strategy could be dumped on Scottish consumers, instead of the risks and costs being spread across the UK.

Other more radical solutions are ignored in all of these papers. In the next Red Paper book I will argue that we need to look at new ownership models for electricity generation and the networks. A UK public opinion poll for YGov showed 61% in favour of common ownership of energy and only 26% against. This shows the public are way ahead of the policy makers.


Cross posted at Utilities Scotland