Insight: Can SNP deliver green energy at a fair price?

For hard-pressed Scottish families who have seen energy bills double over the past decade, it's not hard to see why Nicola Sturgeon's plan to establish a new state-owned energy firm was met with some enthusiasm. The First Minister's announcement last week that her government was to become a player in the increasingly crowded energy supply market was certainly radical and went some way further than Prime Minister Theresa May's move to impose a price cap on bills.

Torness power station, one of the two remaining nuclear installations in Scotland. Picture: Gordon Fraser

The politics of this are a marked shift to the left by both leaders to meet the seeming appetite among sections of the electorate, particularly in Scotland, for the politics of Jeremy Corbyn. The Labour leader has already proposed a network of public energy companies. But as energy generation shifts towards a de-carbonised, green network, can a state operator really do much more than other providers to keep down prices?

The prospect of such a company breaching EU state-aid rules, aimed at preventing governments from distorting the market place, has been raised by industry figures. But Scottish ministers point to the example of the arm’s-length company David MacBrayne, wholly owned by ministers, which runs the CalMac ferry brand and has operated effectively for decades with some delicate manoeuvring to navigate EU procurement rules. Similarly Scottish Water, another publicly owned Scottish utility, seems to get along without a problem from Brussels. The French government is also an active player in the energy market with its majority stake in the power giant EDF, although this is a profit-making enterprise unlike Sturgeon’s proposed body. EDF is also a player in the energy generation market and operates a number of major nuclear plants around Europe – including the two remaining in Scotland at Hunterston and Torness.

Could the Scottish Government become an active player in the generation market, possibly establishing it’s own state-owned network of wind farms? These have tended to be established by private operators and individual landowners, but Sturgeon’s speech to the SNP conference on Tuesday, when she set out her plan, was ambivalent about the prospect of ministers getting involved directly in the generation business through this new venture.

The SNP leader’s stated intention is that prices will come down, insisting power will be sold to customers as close to “cost price as possible”. If the new firm is to have a focus on renewables, which Sturgeon hinted at, this is likely to be more expensive. Specific agreements may have to be struck with renewable generators and much could hinge on the commercial deal secured. Otherwise, the new Scottish venture will be in the same boat as current operators like Scottish Power and Scottish Gas who buy their electricity and gas from “wholesale markets” – along with the 40-odd other suppliers in the UK today.

The UK domestic commercial energy market is split into geographical PEZ (public electricity supplier) regions and the Scottish Government could operate a Scotland-only outfit targeting customers north of the border, covered by the North and South PEZ regions here. This may operate in a similar manner to other small local firms such as Robin Hood south of the border, which covers Nottinghamshire. Or in Scotland, there is the Musselburgh-based People’s Energy Company, which opened in August and already has several thousand customers. It pledges to give 75 per cent of its profits back to customers, eventually rising to 100 per cent. Its founder, David Pike, a former Scottish Government official, said Sturgeon’s announcement surprised him because his venture had already stepped into the fray. Within three years, the firm will be wholly-owned by customers, providing green electricity and gas. He is not fazed by the idea of the Scottish Government firm coming along four years down the line and is sceptical about it undercutting People’s Energy.

“I’d like to be optimistic that a civil servant organisation will be as efficient as we are, but there’s a bit of a doubt in my mind that will be the case,” he said.

“The shareholders are the customers, which I think, personally, is better than the state.”

This is not the Scottish Government’s first venture in the domestic energy market. Two years ago the then Social Justice Minister, Alex Neil, unveiled £2.5 million of funding to help launch Our Power Energy, the first non-profit distribution supplier to operate in the UK. It was founded by 35 organisations, including some of Scotland’s largest housing associations. Ambitious plans were unveiled to sell gas and electricity to tenants in 200,000 homes across Scotland by 2020. Now it seems ministers are keen to extend those plans to the wider population.

It’s easy to see why the First Minister felt compelled to act as average domestic gas and electricity bills in Scotland have increased by up to 114 per cent and 50 per cent respectively between 2004 and 2015. And while the cost of a unit of gas is similar across Scotland and the rest of the UK, consumers in the north of Scotland pay between 8 and 9 per cent more than elsewhere in the UK.

But leading energy experts fear the ability of politicians to tackle the vagaries of Scotland’s power bills are limited. Far greater forces are at play here. The Scottish Government has taken a lead in shifting the way the country generates and consumes its energy in an effort to “decarbonise”. Traditional “dirty” power stations fired by coal and gas , such as Longannet in Fife, are gone or on the way out. Fracking has also been banned in Scotland to address global warming concerns. Oil and gas production levels have slumped in the North Sea and it remains to be seen how much life remains in this ageing, mature basin. Some say a decade, others that it could last between 20 to 40 years.

The SNP government has instead placed its faith in renewables. Wind, hydro, tidal and wave energy are the future. This has meant a proliferation of wind turbines emerging across Scotland, sparking concerns that much of the country’s dramatic landscapes are being scarred by developments. The shift to new forms of generation costs money. Renewables are still heavily subsidised with consumers facing an “environmental surcharge” on their bills to meet the cost of green energy. The new Hinkley Point C nuclear plant in the south of England will also hit all consumers in the pocket with estimates of a £10-20 charge on everyone’s annual bill.

But this is the cost of policies like the Scottish Government’s plan for a 90 per cent cut in emissions on 1990 levels by 2050 which is at the heart of the Climate Change Bill. Westminster has similar targets. Scottish ministers have also set out ambitious targets for half of Scotland’s heat, transport and electricity energy needs to be met by renewables by 2030. For many this seems a wildly ambitious target.

In Scotland today, electricity only accounts for about a quarter of the country’s total energy demands. About the same proportion is used to power the transport system as petrol and diesel for cars, trains and buses. This leaves about half of Scotland’s energy needs, heating our homes and offices, largely being met by burning natural gases, producing carbon dioxide emissions which drive up global warming levels.

John Scrimgeour, Director of the Aberdeen Institute of Energy at Aberdeen University, said Scotland, like the UK, is “more and more reliant” on gas imports as North Sea production winds down.

“There’s a connector to Holland and you could say, in a way, that that’s Russian gas,” he said.

“If the Russians turn off the taps, there is gas supply in Holland and North Africa, but if the Russians turn off the taps, they’re not going to pump gas all across the continent when they’ll be shorter of power then we are.”

The problem with the Scottish Government’s emphasis on wind turbines is “intermittency” of supply. In other words, when the wind is not blowing and they’re not rotating, they don’t produce any electricity at all.

The recent Scottish Government draft energy strategy claimed the country is a “net electricity exporter” to the rest of the UK. But Dr Rob Westaway, senior research fellow in energy engineering at Glasgow University, says the situation is not that simple.

“On some days the wind is blowing strongly and the output from the very large capacity of wind farms that are already there – with more in the process of being commissioned – is very great.

“It can actually get so great that it raises the possibility of destabilising the National Grid. In those circumstances it is becoming standard to pay wind farm operators to shut their turbines down.

“The problem is for days when it isn’t windy, the supply is not there and so Scotland then has to draw its power from England over the links for the National Grid. What is quite important is on a typical day is Scotland self-sufficient for electricity – or is it relying on England?”

Since the UK energy market is all part of one UK grid, these statistics don’t routinely break down the net flow of energy between Scotland and the UK.

“It is quite widely suspected that on many days, Scotland is a net importer of energy rather like Ireland is,” he said.

This energy means power from coal and nuclear plants south of the border are effectively still keeping the lights on in Scotland.

At the moment, there seems no obvious escape from the quandary that Scotland is reaching the point where there a “great excess” in generating capacity, when all the wind turbines operating at full tilt on a windy day would produce far more electricity than the country needs or can export. The “holy grail” is storing electricity. Although this can be done through techniques like pump storage reservoirs, to do so on an industrial scale would be decades away and highly expensive.

“Having supply that’s intermittent and quite unreliable is quite problematic,” Westaway added.

It means we need the security of a “baseload” supply, largely from nuclear, which doesn’t aid global warming. But that brings environmental concerns over radioactive waste and is opposed by the SNP government. Plants like Hunterston and Torness, whose lifespan has been extended, provide a constant supply of power which can be relied on when the wind dies down. And the prospect of prices coming down when such major, transformational changes are happening in the way we get out energy and all the infrastructure costs seems unlikely.

“In the short term as we de-carbonise, energy prices will increase, gas and coal currently being the cheapest sources of energy,” Scrimgeour added.

Ongoing investment in renewables technology is likely to both increase its market share and reduce costs, meaning they could become competitive against gas and coal but consumers are facing a “ten to 20-year timeframe” before this happens.

Westaway agrees that prices are only likely to rise in the immediate term.

“The current wholesale price for electricity in the UK is about 5p per kilowatt hour,” he added.

“Consumers pay roughly double this amount, or thereabouts. The UK government predicts that the wholesale price for electricity will rise to maybe 7p per kWh in 10 years’ time; the increase will presumably be passed on to customers.”

Sturgeon may seek to do things differently, but the bigger picture suggests that the lot of energy customers in Scotland is likely to be intrinsically linked with the wider UK.

Professor Gareth Harrison, of the Institute for Energy Systems at Edinburgh University says in the energy world, Scotland “isn’t an island”.

Regardless of the political situation, there will be a “need for close working on energy supplies, particularly with electricity, where if you get it wrong the consequences can be very bad very quickly.”

The Scottish Government white paper on independence envisioned the country remaining within a British market after a Yes vote and retaining an integrated energy network.

Harrison added: “It can’t isolate itself fully in the same way as it can’t isolate itself from the effects of carbon dioxide and so on. We need approaches where people aren’t taking a hyper local view of energy, because you can’t.”