England needs Scotland's wind power to keep the lights on. Photo: wind farm at Ardrossan by Gordon Cowan via Flickr.
Government hostility to renewables and Scottish independence may put the lights out
Peter Strachan & Alex Russell
1st August 2014
As the UK's electricity supply margins drop to new lows, the government's punitive approach to renewables will only make matters worse, write Peter Strachan & Alex Russell. Likewise its threats to boycott Scotland's wind power is utterly irrational - we will need it to keep our lights on.
The UK government is significantly underplaying the important role that Scotland's electricity plays in keeping the lights on across the UK.
Westminster has failed to control rising electricity and gas prices. Between 1997 and 2013, UK households saw combined electricity and gas prices rise by 54% in real terms.
In contrast, family income has fallen in real terms by approximately 7% over this period.
Little wonder families are under financial pressure. And according to the charity Age UK, 20% of pensioners are being forced to reduce their energy bills by cutting back on heating their homes.
The future could be even bleaker, with families and pensioners facing the very real possibility of blackouts in the next year or two.
Both the industry regulator Ofgem and the Scottish government in its recent paper 'UK energy policy and Scotland's contribution to security of supply' have pointed to the looming danger of widespread power shortages across the UK.
Ofgem's report 'Keeping Britain's lights on' published in June highlighted that spare electricity capacity has declined even further, and notes that "Margins are still expected to drop to their lowest level in 2015/16 resulting from closure of older power stations."
How did they let it get this bad?
So why have Westminster and the power sector allowed this crisis to arise? The coalition government's flagship initiative, electricity market reform (EMR), has failed lamentably to help protect electricity supplies. Ageing power stations are not being replaced fast enough and there has been a hiatus in energy infrastructure investment.
The UK government's rubbishing of the case for Scottish independence at every available opportunity seems to have contributed to a climate of market uncertainty, not least from its recent paper 'Scotland analysis: energy'.
Recent decisions by leading UK and international utility companies to restructure their portfolios and cancel projects illustrates clearly the lack of market confidence.
The UK government's more general coolness towards renewables is measured by the now well established Renewable Energy Country Attractiveness Index. Its May edition said:
"the prospect of solar market reforms has sparked another period of uncertainty for developers and investors in the UK, pushing it down to sixth place [in the renewables rankings] below Canada."
Government antipathy to renewables raises risk of power shortages
Westminster's intention to curb solar power subsidies and to possibly abandon future UK onshore wind subsidies completely has heightened the risk of power shortages. If more developers and investors withdraw, it also risks increasing electricity prices in the face of supply shortages.
The irony is that both solar and onshore wind have established themselves as mature, clean and relatively cost-effective power options.
Unlike the adverse public perception of fracking and nuclear power, opinion polls, including those produced by the Department of Energy and Climate Change (DECC), consistently show very high levels of public support for renewables.
The upshot of these problem policies is that the UK will need large amounts of renewable electricity both to keep the lights on and to meet the 2020 green energy targets.
Options for keeping the lights on
One option would be to build more capacity in England and Wales, but as mentioned before, this is not on the coalition's agenda. Assuming this doesn't change, and it would take a long time if it did, the UK will have to get it from elsewhere.
The situation is different in Scotland, where the large amounts of wind power capacity already mean that it has an electricity generating surplus of some 25%.
Within the union, this means that Scotland is preventing a bad situation from being worse. In 2012 Scotland exported 10,717GWh to England for example, plus another 2,179GWh to Northern Ireland. England also relied heavily on imports from its European interconnectors, which supplied 12,197 GWh that year.
As National Grid said in its March report, 'Getting more connected: the opportunity from greater electricity interconnection', "with the current programme of power station closures ongoing, and demand potentially picking up as economic growth returns, the need for imports is set to continue."
UK's threats to Scotland defy logic
The UK government has long threatened that in the event of a 'yes' vote for Scotland's independence, it would source its electricity from France, the Netherlands and Ireland instead of Scotland, to the extent it was cheaper.
Not only is it already relying on these European interconnectors for about 5% of its power, the argument goes that it will get more in future through plans to build new links over the next few years.
In reality, expanding this network further is fraught with difficulties. These include cost, planning, technical challenges and complex legal agreements. As Ofgem said last year,
"Great Britain is not the only European country expecting de-rated margins to fall in the next six winters. France, Ireland, Germany and Belgium are also facing security of supply challenges."
So security of supply constraints are also becoming very prevalent in the markets that supply power via interconnectors. This will reduce what they can sell over the English Channel.
Buy Scottish power, or the lights will go out
In all likelihood, a rump UK would have no choice but to buy Scotland's electricity generating surplus of around 25%. The UK government is significantly underplaying the important role that Scotland's electricity plays in keeping the lights on across the UK.
And while the English may baulk at effectively subsidising Scotland's green power sector, there is the consolation that purchasing this spare power will actually make very good commercial sense for Westminster.
Compared to both English offshore wind and new nuclear build, Scottish onshore wind is much cheaper. Carrying out the threat in the energy paper would be as clear a case of cutting off your nose to spite your face as one can imagine.
The nuclear option
The coalition's other panacea to the looming energy crisis has been to hail the birth of the next generation of new nuclear build - but that doesn't even begin to address the issue of imminent power shortages. Even one new nuclear plant is likely to be 10 years away.
A new generation of nuclear stations also requires hundreds of billions of pounds of financial investment - the experience with Hinkley Point C is that the government would potentially end up underwriting large proportions of these costs to bring its vision to life.
Meanwhile the waste and decommissioning costs will raise electricity bills for households and business even higher. Already 42% of DECC's annual budget is spent on the UK's nuclear legacy.
In short, to avoid blackouts and further electricity price increases, Westminster now needs to stop the political posturing and take preventative action by raising its commitment to renewables and accepting the importance of Scotland in the equation regardless of whether it chooses to vote for independence.
Are we going to see this any time soon? Don't bet on it. On this vital matter of national energy security, the government appears totally out of touch.
Peter Strachan is Strategy and Policy Group Lead, Department of Management at Robert Gordon University.
Alex Russell is Head of Department of Management and Professor of Petroleum Accounting at Aberdeen Business School, Robert Gordon University.
The authors do not work for, consult to, own shares in or receive funding from any company or organisation that would benefit from this article. They also have no relevant affiliations.
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