ImageThe Scottish energy sector is facing the same, difficult challenges, as the rest of the UK, such as attracting new investment, securing long-term supply, and tackling fuel poverty and affordability.

But how might Scottish independence affect its energy sector, and the complex pattern of UK-wide energy interdependencies that currently exist? And is there already a risk that solutions which might suit the UK as a whole may well prove to be sub-optimal from a Scottish perspective?

These were among the questions discussed at a recent half-day workshop on energy and Scottish independence, held in Edinburgh by the UK Energy Research Centre, the ESRC and the Edinburgh Centre for Carbon Innovation. The event Energy Independence and Interdependence, sought to highlight issues and generate debate on energy-related matters related to the possibility of Scottish constitutional independence, and to feed into the work of the Scottish Government’s Commission on Energy Regulation, due to report in March.

In the short term, Scotland faces the prospect of losing its ability, under the Renewables Obligation, to set different levels of support from RUK and, in probably the first instance of policy powers being taken back to Whitehall since Scottish devolution, Contracts for Difference rates, under the Electricity Market Reform arrangements, are being set by the Department of Energy and Climate Change (DECC) for the whole of the UK.

Looking ahead, the Scottish Government and civil service face a significant challenge, and something of an expertise problem, in pursuing Scotland’s distinctive energy policy ambitions and targets within an electricity / energy system that will still be physically integrated with the rest of the UK (RUK), and  introducing differential support measures at sufficient scale and impact.

Significant differences are also emerging on energy policy across Europe: for example, for and against nuclear power. Energy policy is still being largely determined at national rather than European level, and despite the slow emergence of the single energy market, there are big national differences in market regulation arrangements across Europe.

Scotland has particular strengths within European energy systems, such as offshore technologies, renewables and carbon capture and storage, but uncertainties exist in relation to integration, and the extent to which member states and regions can best exploit their relative strengths, because of the absence of a common policy package on European energy policy after 2020. The possibility of a UK referendum on membership of the EU also needs to be considered, in terms of its potential impact on Scotland’s ability to achieve its energy ambitions.

Partnerships and Regulation

The Scottish White Paper on independence proposes establishing an Energy Partnership between an independent Scotland and the rest of the UK. There are precedents for this, such as the all-Ireland arrangements under the British-Irish Council, and the UK-Norway partnership arrangements (mainly on oil and gas interests), and arrangements between Spain and Portugal, which provide a ‘thick’ institutional structure from the bottom up, mitigating against political risk.

Some cross-border partnerships work well. There are challenges – for example the differing statutory duties, and changing remits, of regulators across jurisdictions – but these are not insurmountable. There are already different approaches to licensing and regulation between Scotland and the rest of the UK, within a single system operator. To succeed, the remits of different regulatory bodies must be very clear, particularly on the issue of whether they are representing their ‘national’ consumers, or working with in a wider UK / European framework.

A question-mark hangs over the consistency of some Scottish energy policy targets with those of the UK as a whole. Are Scotland’s commitments under the Renewables Directive, for example, consistent in terms of their implications for network configuration and management? Do they provide equally affordable outcomes for consumers? Contracts for Difference rates are being set by the UK government to deliver UK, rather than Scottish, policy targets, but we still don’t know what a Scottish-only target for the EU Renewables Directive might be: the Scottish White Paper assumes a 30% target for Scotland, but clarification will be needed.

There are also potential cross-border complications: one proposal is for renewables plants in Ireland to count to UK renewables directive targets, but this isn’t yet clear. And would independence mean that Scotland’s target for 100% renewables of electricity and 30% of energy would be paid for entirely by Scottish energy consumers and taxpayers?

At the European-level a renewables-only target for 2030 appears unlikely, but an EU-wide decarbonisation and emissions reduction target, favoured by the UK Government could happen.  Already, there are big divergences across Europe on energy system configuration, with some parts of Europe enjoying greater penetration of decentralised and community-owned systems than others. In the UK, governance links between decentralised and centralised systems are weak, and there are inconsistencies and misalignments; DECC’s Heat Networks Delivery Unit, for example, operates only in England and Wales. For the UK, a shift to a highly decentralised system could lead to stranded assets and sunk costs at the system level – as has been seen in Spain and the United States.

Emerging technologies on storage and IT for energy and demand management have the potential to transform the energy system. The Capacity Mechanism within EMR has ambitions to bring in demand-side management (DSM), but UK electricity network management is still stuck in 20th Century mode, rather than 21st. DSM changes are being tested out in trials rather than having a big system-level impact, and the temptation for politicians is still to support large technology projects rather than more intelligent system management.

The political geography of energy

In energy matters, geography is political. For example, for political reasons there is no local pricing of electricity in the UK. This may be challenged by moves to Scottish independence, as pricing will become a more visible issue, and this is also changing and becoming more controversial at the European level. Plans for greater European integration on energy represent a technical vision, but for member states this will challenge existing market arrangements, such as BETTA (British Electricity Trading and Transmission Arrangements). These challenges can be addressed, but they require political will.

Pooling – the challenges

There are different degrees of market integration, and questions of how far Scottish-RUK markets should be reformed, to allow for looser ties to reflect diverging policy objectives.  In Ireland, a mandatory pool imposes something of a ‘straitjacket’ on cross-border markets. The Spain-Portugal ties are looser, in terms of their market architecture. Another interesting analogue is the pool model operated in the north east USA, which operates across different states.

The European Commission encourages regional market pooling in Europe, but there are technical challenges for EU-wide pooling. There are also issues at the political level, in terms of how investment costs might be socialised across members states, as well as the difficult matter of eligibility for subsidies outside juridical areas.

Ultimately, anything less than full market integration will inevitably create issues and potential problems; different wholesale prices for energy between Scotland and RUK, for example, will clearly be politically sensitive.

In Summary

There are ongoing UK-wide concerns about energy affordability which are playing out against the referendum question. In addition, there is a trend to socialising costs in general taxation rather than bills, so the Scottish Government’s plans for ECO reform have already met with response at the UK-level.

UK energy policies and politics are now very dynamic, so mapping this against emerging Scottish priorities is not straightforward. The UK Government has been accused of neglecting energy efficiency and conservation – a ‘supply-side bias’ – but this has also been evident at the Scottish-level, in terms of levels of support for supply technologies outweighing those for those on the demand side.

Scotland has made greater efforts to support community-ownership, for example, for local recycling schemes and insisting on part-community ownership of some renewables projects.  The proposed Scottish Energy Fund, supported by oil and gas revenues, might enable greater penetration of part-community schemes. It also offers significant potential, but only in the medium and longer term, as it accumulates reserves and the promise of revenue smoothing. This will take some time to become significant, and to impose fiscal discipline, it must operate outside the wider economy.

A distinctive element of Scottish energy policy since devolution has been its greater involvement in innovation and technology-specific support since devolution. In practice, this has been intertwined with support at the UK level, especially as energy policy at the UK level has become increasingly driven by business development opportunities. This crystallises the wider theme of the workshop: the complex pattern of continuing interdependencies within a possibly more independent future.

Dr Mark Winskel is Research Co-ordinator of the UK Energy Research Centre, and a Senior Research Fellow in the Institute for Energy Systems, University of Edinburgh.