Scotland’s Energy Future

Scotland’s Energy future remains a central theme in the debate on Scottish Independence with a referendum now only months away.  In this article we present some analysis of the critical factors involved.

  • Uncertainty remains regarding the shape of the oil and gas fiscal regime in an independent Scotland.
  • With increasing tension between energy and climate change objectives, it remains unclear how policy development would evolve in an independent Scotland.
  • It is unclear what will stimulate the market to construct the 2.5GW of new thermal power generation capacity required in Scotland before 2020.
  • On 18th September 2014, Scotland’s population will be heading for the polls to decide Scotland’s future. Whilst there has been much made of the party political angles of this process there remains a lack of serious debate on the matter and it is difficult to find clear and non-partisan  material which illuminates the key issues to be discussed.

Energy in the White Paper

On 26th November 2013, the Scottish Government launched a White Paper for Independence. Key principles of energy policy would include a reliable energy supply, a fair outcome for Scottish consumers, the continued de-carbonisation of energy generation and the conditions for the continued sustainable growth of the energy industry in Scotland.

An Energy Partnership is proposed between the Scottish Government and Westminster whereby energy policy would be steered jointly and which expects the continuation of a shared energy market. All key aspects of support of renewables introduced by the Electricity Market Reform (EMR) will continue, with the continued system of shared support for renewables and of the capital costs of transmission.

The Scottish Government intends to stick to its current non-binding target of 100% of electricity demand to be met by renewables by 2020 and expects to export Scottish renewables into the UK grid. These aspects, along with other ambitious targets, demonstrate considerable commitment by the Scottish Government to tackling climate change.  Even so, this does not mean that Scotland will be 100% dependent on renewables generation.  Renewables will form a vital part of a wider electricity mix, supported by the need for a minimum of 2.5GW of new thermal (coal or gas) baseload power generation.

On oil and gas, the White Paper supports the objective to maximise the potential of the UKCS and recognises the need for fiscal stability and certainty for investors. The precise nature of any policy or financial incentives to maximise N Sea potential are yet to be developed and may follow conclusion of an Expert Commission on Maximising Return from Oil and Gas in an Independent Scotland and the ongoing Wood Review.

The arrangements for decommissioning are a key area where certainty and stability is required. Current suggestions of continuity of arrangements based on the existing fiscal structure, will need to be translated into specifics including the possibility of a change in effective guarantor of tax relief from the UK to Scotland.

Thermal Power Generation and CCS

With the closure of Cockenzie coal fired power station in 2013, Scotland is reliant on the Longannet coal plant for thermal generation baseload, itself due to close between 2018 and 2020. Current Scottish Government planning assumes the construction of 2GW of gas plant by the time Longannet closes and that in addition there will be a 500MW CCS on gas demonstration plant and that Peterhead gas fired power station will continue to generate.

It is unclear if the market will stimulate the construction of 2.5GW of new thermal capacity and recent announcements from SSE regarding mothballing of the Peterhead power station would suggest that it is unlikely to continue to generate. With the current UK approach to CCS unlikely to deliver any operational projects before 2020, there must be some questions over the ability to meet this thermal generation baseload.

If CCS activity could be stimulated under EMR arrangements or as a result of Scottish independence, potential exists to construct a clean coal plant such as the proposed Captain Clean Energy Project, which could mitigate part of this generation shortfall.

Conflicting Objectives

Whilst on the face of it the white paper presents a logical approach to energy policy, there could be perceived to be significant tension between energy and climate change aspects. Whilst these tensions are no different in an independent Scotland than in the UK currently, the way in which they addressed now or in the future may be.

Maximising the potential of the UKCS involves maximising fossil carbon production in the form of oil and gas.   Much of the oil and gas will be exported to the rest of the UK. The potential therefore exists for Scotland to progress its decarbonisation policies whilst producing and exporting carbon. One form of stimulus to maximise ‘UKCS’ potential could be tax breaks, potentially for exploration activity, projects with challenging reserves and to support enhanced oil recovery. It could be that without fiscal stimuli such oil and gas resources would be uneconomic and remain in the ground. An independent Scotland will have to balance these oil and gas fiscal costs/benefits against its climate objectives and principles.

In a similar manner if Scotland can produce more renewable energy than it needs, it could export this power to the rest of the UK. Whilst this appears to be supportive of climate change objectives, there are those who would prefer to minimise visual and physical disturbance from onshore wind developments. Offshore wind and, in the future, wave and tidal projects could also contribute to low carbon power generation. However if local needs have already been met, will the same incentive exist for an independent Scotland to invest in more expensive offshore renewables? Increasing environmental pressures and budget/value limitations may constrain future renewables export potential and hence project investments.

Uncertainties Arising

The current position leaves a number of uncertainties, which could threaten energy project investments until clarity can be achieved.

Given the emergent nature of EMR in general and then its translation into policy in an independent Scotland there are many remaining questions including how renewable power exports from Scotland will be handled.  These uncertainties could impact on near term renewables investment.

In oil and gas, the Independence White Paper leaves the door open for changes in the fiscal regime so, in effect, the industry has broad comfort but lacks specific detail or certainty. As a result marginal and innovative projects may be delayed until there is further clarity.

With increasing tension between energy needs and climate change objectives, it remains unclear how  policy development would evolve in an Independent Scotland. Although this is likely to be a longer term evolution, oil and gas project developments will need to take a long term view.

Whilst there is a need for 2.5GW of new thermal capacity to be constructed in Scotland before 2020, the current EMR uncertainty including the details over the transition of EMR to an independent Scotland, could prevent the market from making the necessary investments.

If Scotland is to avoid locking in long term CO2 emissions,  new thermal capacity, whether it be gas or coal, should be fitted with CCS. How the Scottish Government chooses to support CCS will directly influence investment in this area.

This article was written by Sam Gomersall.

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