On Thursday, September 18 2014, the Scottish people will make an historic choice – should they remain part of the 300 year-old United Kingdom, or become an independent country?
In the two long years of the campaign, everybody – from Obama to Bowie – has had their say. Inevitably, a good proportion of the debate has focused around energy economics.
Scotland is an energy rich country. Since the 1970s, the UK Continental Shelf has produced more than 40 billion barrels of oil equivalent (boe), and there is a lot left – although the estimates of just how much can be extracted vary significantly.
What we do know is that production has fallen from more than 4m boe per day in 1999 to less than 1.5m now – and costs of extraction are rising rapidly. However, an independent Scotland would claim approximately 90% of this output, and with oil changing hands for around $100/barrel, the future tax revenue is a hot topic.
Scotland’s natural resources don’t stop at oil and gas. It boasts a quarter of Europe’s offshore wind and tidal energy potential, and a good chunk of onshore wind and wave power too. In 2012, Scotland exported 26% of its generation, mainly to England. A rapidly growing proportion is coming from renewable power, however these technologies currently depend on subsidy support to make them viable.
Scottish green projects benefit greatly from the UK-wide subsidy system of Renewable Obligation Certificates and Feed-in Tariffs. The cost of this support is spread across the UK consumer base as a whole, and here’s the rub. While 30% of subsidies attach to Scottish renewable generation, Scotland only has around 10% of the consumer base. The UK Government, keen to keep the union together, argues that the ‘remaining UK’ wouldn’t continue to provide this support to an independent Scotland. If this were the case, and the Scottish bill payer had to bear the costs of current and future subsidies – not to mention grid infrastructure costs – domestic bills could rise by hundreds of pounds. Future projects would be in grave doubt.
Ah, but hold on, claim the Scottish Government – the rest of the UK (rUK) has signed up to legally binding carbon reduction targets, and needs Scottish renewable power to comply. The interests of all are best served by maintaining the current integrated system.
So who is right? Well, the benefits of an interconnected power grid across borders are clear, and there are many other examples in Europe alone. The direction of travel in the continent as a whole is towards increasing integration to smooth out the effects of demand spikes and supply shocks. It makes sense for Scottish energy to travel south.
However some argue that there would be a choice of where to go for energy imports – and that Scotland relies more on rUK as customer than rUK relies on Scotland as a supplier. Are legally binding green targets really set in stone if they mean paying huge subsidies to a foreign country? Could there be a situation where rUK would be happy to import the energy at market rates but without paying the crucial subsidy, knowing that at least in the short term Scotland is short of other customers?
To cast more light on a tricky question, we turn unexpectedly to the Aland archipelago in Scandinavia. Although it is part of Finland, Aland is connected to the Swedish power grid and a wind energy company there has been battling to receive Swedish green subsidies for energy fed into the Swedish network. In July, the EU’s Court of Justice ruled that Sweden had not broken laws against the free movement of goods by restricting its green subsidy scheme to within its national borders.
Does Aland have implications for the UK? It may be too early to say. However the case has been rumbling along since at least 2009, and that may be a clue to our answer. If Scotland chooses to go its own way today, discussions over energy matters may be complex and protracted. However within the context of wider negotiations on separating the assets and liabilities of the present United Kingdom, each strand – like energy – could be a bargaining chip towards a final settlement.
> Read my colleague Steve Wilhite’s post on transparency in energy consultancy.