Peter Jones: Doubt makes risky business riskier

Alex Salmond sees the development of renewable energy from offshore wind, wave, and tidal power as something that will reindustrialise Scotland. I think he could well be right. But two recent events add up to a pretty strong argument that independence could throw the whole project off track.

One, the statement by Perth-based Scottish & Southern Energy (SSE) that the looming referendum on independence created uncertainty for its business, put flesh on the bones of a theory advanced last year by Citigroup’s energy analyst Peter Atherton. Mr Atherton argued that if Scotland became independent, then any post-independence renewable energy project would not gain access to the subsidies financed by UK consumers.

He assumed two things. First, that all existing renewable projects would have their rights to secure their subsidy through the Renewable Obligation Certificate (ROC) system (paid by all UK electricity consumers through their bills) guaranteed regardless of whether Scotland is independent or not.

Second, he reckoned that post-independence, a government of the rest of the UK (rUK) would be disinclined to carry on making its voting taxpayers pay a subsidy to a foreign country. So Scots, he argued, would have to stump up the £4 billion or so subsidy that he reckoned would be needed if the Scottish Government was to meet its target of generating the equivalent of 100 per cent of its electricity consumption from renewable sources by 2020.

At the time, a lot of people, including myself, thought that this was stretching things a bit. But now along has come SSE and said, in effect, that Mr Atherton is right. The statement, written in careful legal circumlocutions, was hardly a ripping read. But translated into plainspeak, it said changes to the laws and regulations under which it operates are one of the biggest risks it has to deal with.

Those laws and regulations cover how SSE earns its money from investment in new long-term electricity and gas plants. Some of those earnings come from consumers in England and Wales, and new laws and regulations would have to be put in place if Scotland became independent.

That creates uncertainty (over whether English and Welsh consumers would continue paying), which increases the risks, and hence the costs, of investing in Scotland. Those costs would have to be taken into account when making a decision about whether to invest in Scotland or elsewhere.

Thus it becomes quite reasonable to assume that if the uncertainty makes a Scottish investment more expensive, or less likely to earn a decent return, than an investment in England, the Scottish investment won’t happen.

SSE went on to note that this uncertainty could last long after the referendum in 2014 because negotiations between the governments of Scotland and rUK would be needed to settle a new legal and regulatory framework for the energy industry. So, even if there was a satisfactory outcome to those negotiations, there are at least three years of political uncertainty ahead, which risk holding up investment in renewables.

But, irrespective of whether this turns out to be a real risk or not, turning offshore renewable energy into a big industry faces another and rather more fundamental problem – the electricity it may produce is, at the moment, likely to be much more expensive than gas-fired power, certainly, and possibly also nuclear power.

Making it more competitive and reducing the cost of people’s electricity bills depends critically on reducing the costs of offshore wind power by, I am told by experts, between 30-40 per cent. Much of the engineering involved is fairly well understood, but experience of the offshore wind farms that have been built so far has not produced the cost reductions that were expected when trials first began.

It means that the technical challenge of achieving those cost reductions is enormous, even more so for harnessing wave and tidal energy where current costs look to be about three times higher than for offshore wind.

The second and significant event, which announced how this challenge would be tackled, was the establishment by the UK government of a network of expertise. It is called the Offshore Renewable Energy Catapult (the “Catapult” bit signifying an attempt to drive the industry into a cheaper future at high speed) and is to be headquartered in Glasgow, using Strathclyde University’s acknowledged energy engineering expertise. Financed with £10 million a year of UK government money over five years, it will also involve every last bit of offshore energy expertise that the whole of Britain has. The best brains in universities and companies are being harnessed in a team effort to crack a problem which, if it is solved, could indeed see a big industrial renaissance in Scotland.

This effort includes work being done at the National Renewable Energy Centre in Northumberland, where the world’s biggest facility for testing the complex drive trains (which connect turbine blades to generators) of offshore turbines (which are three times the size of onshore turbines) is now being built. Marine energy testing centres in Orkney and Cornwall are also involved, as are the universities of Edinburgh, Sheffield, Plymouth, and Exeter.

To those readers who demand evidence that the union is working to Scotland’s benefit, my point is that this is a good example of it. Since Scotland has most of the offshore energy resource, and two big companies – SSE and ScottishPower – at the forefront of developing it, it also seems reasonable to think that Scotland will gain a disproportionately large benefit from it. Now, I can’t see how independence could improve on this. I suppose you might contend that it would continue regardless of political change. The Scottish and rUK governments would have much to gain and might be expected to sign collaboration agreements, just as David Cameron and Nicholas Sarkozy have signed a UK-France nuclear energy accord.

That assumes that the interests of both the Scottish and rUK governments would continue to be aligned. But if it turns out that, say, it turns out to be cheaper to exploit the huge reserves of shale gas under northern England and to build a few nuclear power stations, England could well to say to Scotland: no thanks, you can keep your expensive renewable energy.

It also assumes that an rUK government, which the SNP has for decades accused of cheating Scotland out of oil revenues, would suddenly change its spots and start doling out generous dollops of money to its foreign neighbour. Why would it do that? Its priority would be to look after its own citizens, not foreign Scots.