The Politics of Energy

map of the UK

The next 3 days are pretty pivotal in the history of the island nation that is the United Kingdom. This is a country that less than a year ago was disparaged by some unnamed Russian bureaucrat as just “a small island no one listens to”. Which begs the question that if the UK is a small island what do the Russians think of Scotland if they think of them at all?

It is an interesting co-incidence that if you scratch the surface of the big geo-political stories dominating the news headlines right now you end up discovering an oil or gas coloured boil either festering beneath the surface or proudly on display. Whether we are talking sanctions and the Russian gas stranglehold on Europe; or Scotland and the divvying up of the North Sea oil and gas resources; or ISIS and their drive for a medieval caliphate atop the Middle East’s oil reserves; what links all these things together is energy, the money (and therefore power) it represents and the fear of losing it.

Map of the British Isles

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The Russian and ISIS based energy conundrum has been picked over and dissected more often than the shortcomings of the English national football team; but perhaps less interrogated by the media or the public at large is what, if any, impact a Yes vote in the Scottish referendum would have on electricity and gas suppliers, costs, regulations, markets and prices both North and South of the border.
The UK government has produced a wide ranging and comprehensive paper on the subject which at 101 pages makes for a somewhat soporific read but the main thrust of the paper is pretty easy to digest. Broadly speaking Independence is not too good for electricity and gas costs north of the border but has very little impact (possibly even a beneficial one) to those households south of the border. This is principally due to two aspects of energy in the UK; the first is around the nature of subsidies and the second is to do with how the markets are integrated.

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As it stands at the moment the whole of the UK subsidises the Scottish Highlands electricity infrastructure because of the population density needed to justify reasonable costs for electricity delivery simply doesn’t exist in these remote geographies. In the absence of the rest of the UK, hereinafter referred to as the rump Kingdom or RK for short, the lowlands will need to pick up this subsidy on their own. This will add £36 additional cost per Scottish householder in the event of independence. The other point to appreciate is that renewable energy investments in the UK are funded through a system of government regimes that are paid for, in the end, by the bill payers. I specifically refer here to the Renewable Obligation, the Feed-in-Tariff and the new Contracts for Difference (CFD’s). The important point to note is that much of the generation benefitting from these various regimes and schemes is located, or is planned to be located, in Scotland. Indeed the “Yes” campaign has made the strength of Scotland’s renewables sector a pretty fundamental economic plank along with North Sea oil and financial services.
However this all relies upon having a customer or group of customers across which you can spread the cost subsidy for utilising renewable energy sources rather than traditional ones. So it works (leave aside for the moment the scale and frequency of the complaints that have already been documented highlighting the economic costs of the carbon neutral agenda) with 62 million households bearing the burden but I doubt it would stack up spread over only 5 million.

Moreover it is highly risky to simply assume that RK will happily pay their subsidies to a foreign country. The strategy is likely to be re-focused upon RK based renewable generation with any shortfall being ruthlessly market tested for best value. So Scotland may then have to compete with French Nuclear Power, French renewables, Irish Renewables, international carbon offsetting schemes and other as yet untested options. This is because whilst Scotland is part of the UK it makes sense to become as self-sufficient in these technologies as possible, even if that means we incur a “home-grown” premium; that logic no longer applies if they are a foreign country.

The second worrying aspect for an independent Scotland is infrastructure investment in the brave new world. Scotland currently has £6billion earmarked for its high voltage electricity infrastructure in the years 2015 – 2020 which represents a third of the planned electricity infrastructure upgrade already approved. Now it will be able to maintain some of this investment due to the fact that RK will undoubtedly continue to buy significant volumes of gas from Scotland and will need to pay the gas transportation costs and investments associated with that. However we need always bear in mind that they will nonetheless be competing with Norwegian, Dutch, Belgian and dare-we-say-it Russian pipeline gas as well as North American Shale gas, Middle Eastern LNG and quite possibly RK shale gas. This all points to a potential funding deficit on infrastructure that might need to be covered by a price rise to consumers.

Almost as an aside quite what will become of Scottish and Southern Electricity – a business headquartered in Scotland but who will post independence have the majority of their customers in RK – is an interesting question to ponder. Then there are the capacity payments which currently favour Scottish generators but which would undoubtedly be renegotiated post-independence. So much of the debate has been about who owns the North Sea Oil revenues and how much oil actually sits in reserve under Scottish waters; which is a perfectly sensible question and to which there are a wide range of answers. However there is a separate question in the electricity markets, which is important if you believe renewables to be an important part of an independent Scotland’s future, and that is who owns the customers? And it is to understanding the implications of this irrefutable fact that I fear no-one north of the border has fully applied their thinking. You can have all the wind and waves you like, but without a customer base prepared to pay an artificial premium for the electricity it generates then Scotland’s renewable bonanza is simply a utopia built on fool’s gold.

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