Come autumn 2014 and the people of Scotland will head to the polls to vote in a referendum on independence. They will be asked to weigh up the positives and negatives of having complete control over the economy and national policies, and to consider the practical implications of disentangling integrated organisational structures. Should Scotland vote for independence, the energy industry will also face significant challenges.
Integrated electricity and gas transmission grids span the length and breadth of Great Britain, and even those with separate ownership north of the border have a system operator in common: National Grid. There is a nationwide electricity market, common tax arrangements, and complicated sets of UK-wide schemes and subsidies in place to promote renewables. Moreover, the European Union has set targets for the UK as a single entity, for instance, to reduce greenhouse gas emissions by 20 per cent and to generate 30 per cent of energy from renewable sources by 2020. And there is a common regulator in Ofgem.
How Scottish energy would be regulated alone is problematic. The British government has been clear that an independent Scotland would have to join the EU as a new member state. Scotland would thus require its own regulator, a Scottish Ofgem. How this would work in practice, given that Scotland, England and Wales operate as a single market, is unknown. Industry experts say it is likely to remain unknown this side of a referendum.
“If you have an interconnector, for example coming from Norway into Scotland, how would that interconnector be regulated?” asks Haley Hutson, head of service regulation at IPA Energy and Water Economics. “I would have thought Ofgem would want some say. However, I suspect the Scots would see this as a purely Scottish issue.”
Separate regulators would also mean different licensing regimes, which could be a major headache for companies operating on both sides of the border. Walter Carlton, partner, energy and resources at Deloitte, says there could be “conflicts and contradictions” between the issued licences. But he muses: “One would hope if there are two licensing authorities there would be some mechanism for recognition of other licences, so that companies won’t have to go through the pain twice.”
Energy secretary Ed Davey is keen to uphold the interconnection and integration of electricity and gas systems and markets across the UK. In the face of separation, experts say it would be prohibitively expensive to return to the arrangements that existed before the 2005 British Electricity Trading and Transmission Arrangements united electricity markets in England and Scotland. Some have pointed to Ireland’s Single Electricity Market (Sem) as a viable alternative model.
Davey argues that Sem was designed to integrate the markets of two separate states and that it would not be a match for the fully integrated single market that operates across Scotland, England and Wales. However, Hutson says it could work. ” worked by setting up a single market operator and some co-operation between The Commission for Energy Regulation and the market operators for Northern Ireland and the Republic of Ireland,” she says. Scotland and the UK could do the same. “The structure is near enough in place to work, but it is dependent on some sort of co-operation in the same way as in Ireland,” she says.
In terms of investment, Hutson believes Scottish independence could result in a hiatus because of the uncertainty it would generate. SSE has raised this concern, asserting that uncertainty around regulatory and legislative changes would have an impact on its investment decisions. It is a big investor in renewables, particularly onshore wind, and would be apprehensive about the durability of existing subsidy schemes for renewable generation.
Indeed, renewable subsidies and targets are contentious. There is currently UK-wide commitment to reach Europe’s renewable targets. What would be the situation post-independence? Fergus Ewing, Scotland’s energy minister, says: “It will be a matter for the EU as to how the targets are split, but Scotland has a target of delivering the equivalent of 100 per cent of domestic demand from renewables “. Davey counters that these ambitions are only viable because Scotland has the wider UK consumer base to provide the demand.
Peter Atherton, utilities analyst at Liberum Capital, says the targets could be split 90/10 with an independent Scotland taking the smaller percentage. “Scotland, having over-built renewables to meet their share of the targets want to share those renewables into the UK,” he says, noting that England and Wales could be willing to buy Scottish renewables but equally might want to source renewable energy from another member state at a cheaper price.
“Scotland would have all this power and won’t be able to sell it a price that it needs,” Atherton says. He says Denmark has a similar problem in that when it is windy there is a big surplus of renewable power for which consumers in Denmark are paying a high price. It is unable to sell this energy to Germany because the Germans will only buy it at their own wholesale price. This, he says, could be detrimental to Scotland’s hopes of continued investment in renewables.
Of additional interest is the future of the government’s Renewables Obligation, feed-in tariff subsidy and contracts for difference schemes. There are a disproportionate number of renewables projects in Scotland and a disproportionate number of energy consumers in England, meaning English consumers would be subsidising Scottish projects post-independence. Experts are in agreement that in the event of a split, it is unlikely the UK would want to subsidise Scotland, potentially leaving Scottish consumers with a hefty bill.
This article first appeared in Utility Week’s print edition of 22nd March 2013.
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