Peter Jones: Green dream needs a reality check

When it comes to renewable energy, Scots can’t have their cake and eat it in the event of independence, writes Peter Jones

Scotland continues to grow its green energy sources such as the Sloy Hydroelectric plant at Loch Lomond

For the life of me, I cannot work out how the prospects for the renewable energy industry would be better under independence. The only way things could be better is if Scotland gets all the benefits of existing arrangements under the Union, but then is able to use the fact of being politically separate to tweak the internal Scottish energy market. A classic case of having your cake and eating it, which is to say it almost certainly isn’t going to work.

This appeared to be the argument behind the recent report of the Scottish Government’s expert commission on energy regulation. It made some good points – that a single utility regulator covering gas, electricity, and water could be a better deal for Scottish consumers than the present UK-regulated system.

And it correctly notes that across Europe, energy markets are moving towards being more integrated across national borders, because this helps reduce energy costs. So, the commission contends, it wouldn’t make sense to break up the single gas and electricity market that operates in England, Wales, and Scotland.

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Since the GB market was introduced in 2005, it has brought Scottish electricity prices down and given Scottish generators much easier access to markets south of the Border. It is the major reason that renewable generation has been able to flourish in Scotland.

But to conclude that this arrangement will continue regardless of constitutional change is wrong. This is because, in electricity generation, there are, in effect, two markets, not one. There is the wholesale market, trading electrons in the shape of megawatt-hours, and there is a subsidy market, trading renewable energy obligation certificates (ROCs) and feed-in tariffs (FiTs).

This division in the energy market suddenly became very important because of a recent ruling by the European Court of Justice. In 2012, a wind farmer on the Aland Islands, a self-governing part of Finland in the Baltic Sea, complained to the court that Sweden’s energy agency, which pays Swedish wind farmers a subsidy via a system similar to ROCs, was refusing to pay him money for the green energy he was producing.

This case has particular relevance to Scotland, because the Aland Islands, on which about 29,000 people live, are connected to the Swedish grid. Now, you would think that the Swedes, keen to be green, wouldn’t object to paying a few bob to some tiddly wind farm just because it happens to be in Finland. They are all Scandinavian chums, aren’t they? Moreover, the Swedes, the Finns, the Norwegians, and the Danes have joined all their domestic electricity grids into one, called Nord Pool. It seems to work very well.

But object the Swedes did. They argued that, while their energy industry might be governed by the EU’s renewable energy directive, and while they were part of an international electricity market, the subsidies paid to support wind energy are a matter for domestic national policy.

Rubbish, said the Aland wind farmer. He pointed out that Sweden’s energy agency pays Norwegian wind farmers green subsidies, and they aren’t even in the EU, so he should be entitled to the same deal, otherwise the Swedes were in breach of EU inter-member state free trade rules.

The Swedes disagreed. They said the Norwegian deal was just a bilateral accord they had made as an extension of their national renewables policy. Surprisingly enough, the court agreed: “The court finds that the restriction is justified by the public interest objective of promoting the use of renewable energy sources in order to protect the environment and combat climate change,” it said. Government measures to reach that objective “justifiably target” power generation on their own territory. That ruling, in the event of Scottish independence, means that the government of the rest of Britain would be quite entitled to say that it isn’t going to pay green subsidies to Scottish generators.

The main reason that commentators like me think that the UK won’t pay these subsidies is the cost. Gordon Hughes, professor of economics at Edinburgh University and an internationally acknowledged expert on energy economics, estimates that in 2012-13, consumers in the rest of the UK paid £533 million towards the total of £779m paid in green subsidies to Scottish generators.

If Alex Salmond’s renewable targets are reached, he calculates the cost to consumers south of the Border will rise to about £3 billion by 2020. Since consumers are objecting already to the size of their bills, and politicians are responding, both by transferring some to general taxation and trying to limit them, it doesn’t seem impossible there would be big political pressure to stop transferring English taxpayers’/consumers’ money to Scotland.

Mr Salmond’s commission said analysis like this ignored the fact that for wind power, Scotland offers the most cost-effective sites. That may be true, but it is too narrow a basis from which to dismiss the cost argument. Judging by where power companies have sited most offshore wind farms, the southern North Sea off the English coast is the most cost-effective location for offshore wind.

The Severn estuary, because of its huge tides, is potentially the UK’s most cost-effective location for tidal power, and shale gas, which the UK government seems determined to exploit, could both be cheap and replace a lot of coal-fired generation. Then there is the problem that Mr Salmond’s government says it won’t pay subsidies for new nuclear power. So why would the rest of Britain’s government pay Scottish wind subsidies?

To keep the lights on? Maybe, if none of the developments noted happen. But maybe not even then, since the scenario of possible “brownouts”, which is now worrying Ofgem, the regulator, is one of a cold winter day when the wind isn’t blowing, therefore no Scottish wind power to keep the lights burning.

To meet EU renewable targets? Maybe, unless the rest of UK government renegotiates the target downwards, as it would be entitled to do, on the grounds that Scotland has departed the UK.

Well, of course, you could take the view that none of these awful things will happen and only nice things will occur in the bright new independence world. If you believe that, there’s a wind farmer in the Baltic Sea who will tell you to go count the fairies in the bottom of your garden.”