The npower renewables wind farm at Farr, Scotland

An independent Scotland and the renewable power industry

Scotland has a rich seam of renewables and leads the UK in alternative energy projects. What would a Yes vote in the Scottish or European referenda mean for meeting renewables targets?

The UK faces a series of key dates which could have far-reaching constitutional effects. The first of these is the Scottish Independence referendum in September 2014, followed by a UK General Election in May 2015. David Cameron has promised that, if returned, his government will give the electorate the opportunity to vote in 2017 on whether or not the country should stay in the EU. Quitting could have profound ramifications for the UK, with or without Scotland.

John Grady of law firm Shepherd and Wedderburn told E&T: “We are focused on the Scottish referendum, but I see leaving Europe as potentially a bigger issue for the power industry.”

Opinions differ on whether if, in electing to dissolve the Union, Scotland would be able to remain in the EU, or whether it would have to undertake the lengthy business of applying to join. Thus, looking beyond 2017, there is no certainty whether Scotland will part of the UK and, if not, whether it will be in or out of the EU. The possibilities range from maintaining the status quo (a united UK in the EU) to the UK leaving the EU and Scotland splitting and doing the opposite.

The Treasury says negotiations with the Scottish government will not start before the result of the referendum. There is plenty of speculation but absolutely no certainty as to how arrangements might be untied in the event of a ‘yes’ vote. Pronouncements from the Bank of England and Westminster politicians ruling out continued currency union in the event of independence add a significant major area of uncertainty to future arrangements.

One Scottish lawyer reflects: “The allocation of rights and liabilities and how the countries will work together in the future is complicated. It is hard to call what the negotiations are...

“Power is one part of these negotiations and negotiations involve compromise and trade-offs. We can’t say that power will be dealt with as a discreet thing... it may be traded off against other things.”

Evolution of electricity markets

Over the last 25 years, the UK electricity industry has been steadily becoming more international. This applies both to the ownership of the assets and the development of transmission connections allowing electricity to be traded across national boundaries.

The UK pioneered the unbundling and privatisation of the state-owned electricity industry at the beginning of the 1990s. Other countries have followed. The electricity industries of Scotland, Northern Ireland and England and Wales operated independently until 2005 when the Energy Act 2004 (BETTA) integrated the electricity systems of England and Wales and Scotland

The Renewable Obligation was introduced in 2002 to incentivise large-scale renewable energy generation. This requires suppliers to source a specified proportion of electricity they supply from eligible renewable sources.

The UK government estimates that over £100bn of further investment is needed to decarbonise the electricity sector to 2020. This investment will not be forthcoming without certainty and incentives. The Energy Act 2013 heralded the arrival of the complex Electricity Market Reform (EMR), intended to encourage investment in a range of low-carbon technologies with the aim of reducing carbon emissions by the 2030s.

The EMR will use two key mechanisms to provide incentives for energy infrastructure investment: Contracts for Difference (CFDs), which provide long-term price stabilisation to low-carbon plant; and the Capacity Market, which will provide a regular retainer payment in return for available capacity when the system is tight. The first renewable projects were awarded Investment Contracts under the EMR in April 2014. Industry awaits further developments to see how the new system will work in practice.

Renewable energy goes south

Plentiful wind and rain and lively seas mean that Scotland has excellent renewable energy potential and the devolved government has set a target of generating 100 per cent of its electricity from renewables by 2020. Nearly one-tenth of its electricity capacity comes from hydro-power while onshore wind-farm capacity makes up about one-third of Scotland’s electricity consumption, providing the UK’s cheapest large-scale source of renewable power. Harnessing wave and tidal resources is in its infancy, but with an estimated quarter of Europe’s tidal potential and 10 per cent of its wave potential, and the backing of its devolved government, Scotland is the global leader in developing ocean energy technology.

Scotland is a net exporter of electricity, sending up to a quarter of its total generation south. The Scottish transmission system is linked to the English system by two overhead electricity transmission lines, but as these are running at full capacity additional capacity is needed to enable the new sources of renewable energy to connect into the transmission system.

Modern subsea high-voltage direct current (HVDC) interconnectors will be used to update and augment the north-south transmission system. The first of these, the Western Link a £1bn - a joint venture between National Grid and ScottishPower to build a 1.2GW HVDC system connecting new substations at Hunterston in Scotland and Deeside via 385km of subsea cable, is currently under construction.

Scotland’s energy policies diverging from rest of UK

There is a growing divergence in the energy policies of the UK and the devolved Scottish governments as each takes a different approach to developing a low-carbon energy mix in pursuit of the EU 2020 emissions commitments.

The UK government is backing new nuclear power and talking of scaling back support for onshore wind. Although existing nuclear power stations contribute over a third of electricity capacity, the devolved Scottish government opposes building new nuclear reactors and is committed to ambitious renewables targets. Scotland’s two operational nuclear power stations (the 965MW Hunterston B and 1190MW Torness) are due to cease generating within 10 years.

While policy is determined at Westminster, energy has been a priority of the devolved Scottish government. Developers have found it easier to get planning permission for onshore wind in Scotland than in England and Wales and the Scottish government has been very supportive of the development of ocean technology, of which the European Marine Energy Centre on Orkney is a world leader.

Scottish government White Paper

The Scottish government’s White Paper, ‘Scotland’s Future – your guide to an independent Scotland’, published in November 2013, sets out its vision for an independent Scotland. It says that the single UK-wide electricity and gas market trading and transmission arrangements would continue, provided that they meet Scottish requirements for security of supply.

The cost of supporting energy investments such as new wind and nuclear generation is recovered on a UK-wide basis. The White Paper proposes that costs of existing and new renewable generation would continue to be shared but is concerned that “investment in Scottish generation is not compromised by the Westminster government’s proposals to... enter into expensive, long-term contracts for new nuclear generation”.

What would have to change if Scotland took control of its own electricity system? Ross Fairley, head of energy at law firm Burges Salmon says: “The regulatory regime will almost certainly need to be revisited both sides of the border. This may not be that difficult because, for example, Scotland and the rest of the UK may decide that business as usual makes sense. The issues around renewable energy are more complicated. 

“Will the incentives remain the same? There may be a view that certain technologies no longer need to be supported in a jurisdiction. Looking at the overall amount of incentives that renewables receives a lot goes to Scotland because, to its credit, this is where the projects have been built. Customers throughout the UK pay for much of the renewables incentives through their energy bills and so there is the potential for this to be amended or unwound.”

Grady of Shepherd and Wedderburn says: “Complicated arrangements are put in place that cannot be rewritten overnight. They have to be written in a way that avoids legal challenge. Making changes involves putting in place transitional arrangements. There are a range of practical issues, some easily surmountable but others more difficult.”

Since 2007 Northern Ireland generators have sold their electricity into the all-Ireland Single Electricity Market shared with the Republic of Ireland. The two jurisdictions cooperate within a single market while retaining their own separate policies. Could this be a model that an independent Scotland would wish to emulate?

David Toke, reader in Energy Policy at Aberdeen University, told the Scottish Parliament Economy, Energy and Tourism Committee: “There is little disagreement that trading would continue; that is a requirement of the European network of transmission system operators for electricity, which includes non-EU members as well as EU members.

“If the UK did not have a common system operator, it would lose real reserve capacity from Scotland. Of at least equal importance is the fact that it would lose the ability to manage the variable pulses of renewable electricity that come from Scotland, which would mean always closing down its own power stations when there was excess supply.”

Eric Machiels, CEO of Infinis Energy told the same meeting: “Essentially, we need two grown-up governments that sit down together and agree on a long-term plan for the continued management of that integrated market for the benefit of both countries. Scotland exports about 25 per cent of its electricity production. The obvious client for those exports is the UK market. Indeed, the UK cannot comply with its 2020 targets without Scottish renewable power. The interdependency is very strong and we assume that, even with a ‘yes’ vote, it would be to the benefit and in the interests of both to agree on a continued integrated market model.”

Funding new transmission capacity

The historic model of the electricity industry was for large centralised power plants to be built near coal fields with transmission lines built to carry the load to the cities. The changing pattern of generation requires reinforcing and extending transmission infrastructure to transport electricity from outlying and offshore areas where renewable energy is generated. Upgrading the infrastructure is a costly and slow process. Scottish renewable generators also face higher charges for transmission than their English and Welsh counterparts.

Burges Salmon’s Fairley explains: “One of the issues Scotland faces is inadequate grid connection in areas where the potential renewable generation is sited. The costs of transmission upgrades is holding back development of Scotland’s renewables industry, something that Scotland is keen to resolve. In principle, an independent Scotland could move this on, but how it would play out over a shared transmission network and how costs would be met would surely be a matter of debate.”

Martin McAdam of Aquamarine calls for a new approach to funding transmission costs. “Exploitation of the resource on the islands around Scotland, even just the onshore wind resource, must be at least as cost effective as, if not more cost effective than, exploitation of the offshore wind resource around the rest of the UK, so we have to think creatively,” he says. “For offshore wind plants, we created the offshore transmission owners arrangements and we should consider how the transmission lines should be built differently... the situation is incredibly frustrating.”

The electricity market regulator Ofgem devised a system for bringing capital into offshore wind farms by auctioning the offshore transmission assets of new offshore wind farms. Ofgem says £2.9bn has been tendered in three rounds since 2009. Nine offshore wind farms currently have Offshore Transmission Operators in place.

Upgrading the UK’s electricity generation, transmission and distribution to make a low-carbon system needs massive investment. Investors like certainty and clarity when making investment decisions. Uncertainty about the implementation of the new EMR, about Scottish independence, and about UK disengagement from the EU, all contribute to an investment hiatus.

As the referendum approaches, lobbying intensifies. The outcome of the vote is too close to call. However, it is neither practical nor desirable to separate Scotland’s electricity system from the rest of the UK. United or apart, the two entities need each other. Scotland needs to export its renewable energy while England needs Scotland’s energy to help meet its renewable targets. The transition to a low-carbon economy requires massive investment and continuity and a managed transition will be essential.

Scotland leading the challenge of generating energy from the sea

The Orkney Islands’ European Marine Energy Centre (EMEC) is leading the quest to develop technology to harness energy generated from the sea. The Pentland Firth, which separates Scotland’s mainland from Orkney, has one of the fastest tidal races in the world with up to one million tonnes of water rushing between the Atlantic Ocean and the North Sea at speeds of around 120 metres per minute. 

Opened for business 11 years ago, the centre received funding of around £30m from the Scottish government, Highlands and Islands Enterprise, the Carbon Trust, UK government, Scottish Enterprise, the European Union and Orkney Islands Council, but the not-for-profit centre is now self-financing. A ramp up in the level of interest, activity and turnover has brought developers from all over the world.

The pioneering centre leads the world in providing a full-scale open-sea test facility for wave and tidal energy converters. Developers of wave and tidal devices can arrange to install their demonstration models in consented and approved grid-connected test berths for full-scale testing in ocean waves and tidal currents. The centre has supported the deployment of more grid-connected devices than any other single site in the world. However, huge challenges lie ahead learning how to construct and deploy multiple devices that can operate economically offshore for years.

EMEC’s Billia Croo wave energy site experiences the force of the Atlantic Ocean. Five cabled test berths lie 2km offshore in water up to 70 metres deep, with another in shallower water nearer the shore. The subsea cables feed into an onshore substation which houses the main switchgear, backup generator and communications room. The electricity generated by the wave energy converters feeds directly into the national grid.

The tidal energy site at the Fall of Warness is in a narrow channel buffeted by very strong currents as tides flowing from the North Atlantic Ocean to the North Sea funnel through gaps between islands. The site consists of eight tidal test berths in water of between 12 and 50 metres. Underwater cables connect to a substation on the island of Eday which feeds into the national grid. The cables also contain fibre-optics for communication and monitoring.

New scale test sites for wave and tidal provide the opportunity for developers to test smaller-scale prototype marine energy devices, techniques and components in conditions that are less extreme than the main sites. 

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