The dulcet tones of Scotland’s first minister, Alex Salmond, as he puts a persuasive case for Scotland’s independence, may sound beguiling. But if the referendum, which would take place in 2014 (possibly on the anniversary of the battle of Bannockburn in 1314), endorsed the path to independence, various utility issues would surface.
Scotland’s two integrated energy suppliers are the Spanish-owned Scottish Power, and SSE, the majority of whose assets are located in Scotland. Over the next decade, the UK needs to invest up to £200 billion in the energy sector, which will require a step-change in annual capital expenditure, and at a time when all six integrated energy companies, save Centrica, are heavily indebted. Similar comments apply to monopoly transmission company, National Grid, whose net debt is currently around £20 billion.
Both the holding of a referendum and a subsequent vote for independence for Scotland would have a major impact on investment considerations, notably the assumed weighted average cost of capital.
Understandably, SSE has publicly declined to give a view on the independence question, although
there is clearly some nervousness about the outcome of any referendum. Indeed, SSE recently stated
that such a referendum “increases the risk of regulatory change and legislative change with regard to
the electricity and gas industry in Scotland because
it means there is additional uncertainty about the future”.
However, SSE sought to reassure its stakeholders by confirming that: “The additional risk of regulatory and legislative change does not mean that SSE will not invest in projects in Scotland whilst its future is being determined. The development of SSE’s existing projects in Scotland will continue as planned.”
As a heavy investor in renewable generation, especially in onshore wind power, SSE will be particularly concerned about the durability of the existing renewable generation subsidy schemes, notably the Renewables Obligation Certificates (Roc) mechanism. If Scotland was to become independent, real doubts would arise about the survivability of the existing renewables investment financing structure, as Citigroup, a leading City financial institution, has pointed out.
Peter Atherton, Citigroup’s head of European research, has calculated that each Scottish consumer would pay an extra £875 a year if Scotland was to move to a 100 per cent dependence on green energy by 2020, which is an SNP aspiration.
Atherton goes on to ask the energy equivalent of the West Lothian question: “Why would consumers in England and Wales pay subsidy for renewable power produced in what would then be a foreign country?” Currently, a substantial proportion of the annual £7 billion renewables subsidy is directed towards Scotland, especially via Scottish Power and SSE, both of which have embraced renewable generation with gusto.
A rising proportion of Scotland’s electricity passes though the interconnector to England, whose capacity – over a decade ago – was substantially raised. Clearly, a newly independent Scotland would need revised contracts with a foreign customer: these arrangements would presumably be similar to those for the English- France Channel interconnector.
In the lead-up to the proposed referendum, Scotland’s gas industry would be widely debated. Given its beneficial access to North Atlantic production facilities, its role is pivotal in delivering wholesale gas supplies. Again, revised contracts would be needed to reflect the new relationship between England and Scotland after any vote for independence.
Scotland’s water sector may also see changes. Currently, unlike England, its water sector is publicly-owned – a scenario that seems unlikely to change, unless there is a move towards the Dwr Cymru not-for-profit model.
However, Scotland’s water sector also receives an element of subsidy from general taxpayers, which helps keep prices close to those of Yorkshire Water, but far lower than those currently applicable in the South West. Some adjustments would be required, which would presumably be part of a much broader redrawing of the often-criticised – but never replaced – Barnett public expenditure allocation formula devised in the 1970s.
In summary, Scotland faces a rather uncertain future, both with respect to the proposed referendum and to any vote for independence. Undoubtedly, much of the debate will focus on financial and energy issues, notably oil and gas. With financial markets and investors disliking uncertainty, there is real concern that the independence issue could open up a veritable can of worms – to the detriment of Scotland’s future.
Nigel Hawkins is a director of Nigel Hawkins Associates which undertakes investment and policy research
This article first appeared in Utility Week’s print edition of 20 April 2012.
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