State aid and renewables post independence

Draft guidelines on state aid add a new twist on the cost of renewables if Scotland votes for independence.

The Scottish Government’s ambitious targets for renewable energy come at a price to consumers, of about 11%, or £57 to the average Scottish household bill of £520 last year. At present that price is spread across UK consumers, although the green levies actually get paid to generators. Gordon Hughes, professor of economics at Edinburgh University has calculated that Scottish generators received a total of £779 million this way in 2012-13. Of that sum Scottish consumers paid only £246 million, leaving £533m to be paid by electricity users in England and Wales.

Both the current energy minister and his shadow have both said that they might not be able to justify continuing to pay these subsidies to what would be a foreign country. All the more so now that energy prices are such a hot political issue with consumers and a concern that they are dampening economic growth.

The Scottish energy minister Fergus Ewing describes this as another scare story and repeats the mantra that the lights will go out in England without Scottish electricity. This ignores the ability of England to import electricity through interconnectors, not to mention fracking and in the longer term, nuclear power.

Another Ewing defence is that EU rules will force the rest of the UK to treat Scottish electricity in a non-discriminatory manner. Of course buying your electricity more cheaply is not discriminatory, but Ewing might also want to take a close look at the recently published draft guidelines on state aid. I will put to one side for now the question of whether or not Scotland will even be in the EU!

State aid rules are designed to prevent distortions of competition between member states. The new guidelines have been significantly broadened to include support for renewable energy, district heating, energy infrastructure, carbon capture and storage. The Scottish Government has only today announced £10.5m of support for district heating. Governments are only permitted to provide support in a manner compatible with these rules and it is the European Commission that decides, not individual governments.

Aid schemes can only be authorised for a maximum of ten years, after which they need to be re-notified. Contracts for difference in the UK are currently longer than this, perhaps adding some uncertainty to investment plans. The guidelines are also clear that there will be no obligation on member states to open up their renewable support schemes to other member states. That could impact on any cross border arrangements post independence.

At the very least this puts another potential problem in the way of renewables in a post independence world.