How will hydro fare if Scotland votes yes?

1 August 2014

On 18 September 2014 the people of Scotland are taking part in an historic vote: a vote that will have implications for the whole of the UK. The question they will answer is whether Scotland will stay in the UK - or leave and become an independent state. Suzanne Pritchard seeks representatives from both sides of the border to see how the hydro power industry may fare after the votes have been counted.

The Scottish Government

Fergus Ewing is the Minister for Energy, Enterprise and Tourism and a member of the Scottish Parliament.

IWP&DC: Following a yes vote - what would you do differently?

Fergus Ewing: The Scottish Government would seek an immediate end to the flaw and defect in the hydro Feed in tariff (FIT) which is threatening to cause potentially terminal damage to the industry, which is largely based in Scotland.

The UK Government has failed to act to rectify this defect, despite being well aware of the arguments surrounding the degression maximum trigger of 20%, and recognising that this arises because of the way in which they have constructed the FIT.

This failure to act comes despite lobbying by the industry and the Scottish Government, and illustrates why Scotland needs its own government, in order to act reasonably and swiftly when such issues occur, and to work far more closely with the industry.

As part of the planned Energy Partnership, the Scottish and Westminster Governments will have a shared objective to increase the deployment of renewable generation, requiring the continued support of consumers throughout these islands, as renewable energy competes with more established, higher carbon, forms of generation.

The planned continuation of a GB-wide market will ensure that Scotland's renewable energy resources continue to support the low carbon ambitions of the rest of the UK - supplied at the cost-effective prices that Scottish renewables can offer. This would include continuation of the Feed-in Tariff (FIT) scheme.

Independence will also offer Scotland a far greater degree of oversight of the market arrangements for energy and the ability to ensure that Scotland's long-term interests are better served.

If Scottish independence is secured do you think that this may affect how funding is obtained for projects and research in this industry?

As Audit Scotland's report on renewable energy published last year made clear, the major uncertainty for the sector has been that associated with electricity market reform at a UK level. The Scottish Government remains committed to renewable energy pre and post-independence and we continue to see investment - over £13.5 billion since 2010.

In Scotland, we will need a mixed energy portfolio to provide secure and affordable heat and electricity for decades to come. The Scottish Government is therefore committed to supporting a range of renewable energy technologies, as we believe that Scotland's energy future, in common with the rest of the world, lies in renewable energy.

IWP&DC: Will a yes vote have an effect on any rules and regulations regarding hydro and marine projects?

Following independence Scotland will continue to be protected by strong health and safety measures. The legal system that is in place immediately before independence will continue after independence. Thereafter, decisions on health and safety law will be made by the parliament and government of an independent Scotland.

A Scottish Health and Safety Body, as proposed by this government if elected as the first government of an independent Scotland, will continue to deliver the functions currently performed by the UK Health and Safety Executive (HSE) and enable policies to be better tailored to Scotland's economy, geography and particular needs.

Will hydropower trading be affected in any way by a yes vote?

This government proposes that Scotland will continue to participate in the GB-wide market for electricity and gas, reflecting the integrated transmission networks between Scotland and the rest of the UK. There is a common interest in sharing our energy resources with our neighbours: Scotland can continue to provide safe and secure supplies of electricity and gas and can assist the rest of the UK in meeting its renewable energy targets.

This government proposes that Scotland will continue to participate in the GB-wide market for electricity and gas, reflecting the integrated transmission networks between Scotland and the rest of the UK.

The recently published Expert Commission on Energy Regulation report highlighted the cost-effective contribution that Scottish generation is making towards the UK's target with Scotland providing between 30% to 40% of the UK's total renewable generation for only 28% of the subsidy. We are also providing a greater proportion of the UK's total renewable generation output which shows the mutual benefits of our current market arrangements.

In an independent Scotland continuing the single electricity wholesale market, transmission and distribution arrangements will be in the interests of all consumers and investors in Scotland, England and Wales. The UK Government still has much to do to achieve legally-binding EU renewable energy targets and it is clear that Scottish renewable energy is a cost effective way to do this.

And what about employment opportunities within the industry?

Skills and training are matters that are already devolved to the Scottish Parliament, and there are distinct and separate approaches in each nation to address their diverse skills needs. Scotland, and in particular Glasgow, understands and appreciates the strategic importance of renewable energy and is rapidly emerging as a leading international hub for energy expertise, particularly due to its well-developed R&D and technical engineering capabilities. We do not envisage that changing in the future, in fact we want to build on this progress to date and continue to work collaboratively as we collectively reduce the cost of offshore wind.

Will a yes vote have an effect on climate change targets and hydropower production?

The Committee on Climate Change's recent report highlights how Scotland is doing much better in reducing climate change emissions than the UK as a whole - with almost a 10% reduction in Scotland's greenhouse gas emissions between 2010 and 2011 compared with a 6.9% reduction for the UK as a whole.

It also showed the good progress being made in terms of reducing climate change emissions from Scotland's energy sector. Further developments in both energy efficiency and in renewables development will help us continue to reduce the carbon impact of our energy sector. With independence Scotland can contribute more directly to the international debate on climate change and encourage transition to a sustainable low carbon future.

The view of the UK Government

Compiled from Scotland Analysis: Energy. April 2014. Presented to Parliament by the Secretary of State for the Department of Energy and Climate. April 2014

Scotland, Wales and England currently enjoy a fully integrated energy market which is ten times larger than Scotland's alone, and which spreads costs across 30M households and businesses. The scale of the UK economy provides an attractive environment for investment and makes it easier and cheaper to achieve the UK's energy goals.

If Scotland becomes an independent state, the current integrated GB energy system could not continue as it is now. Both an independent Scottish state and the continuing UK would understandably be focussed on securing outcomes that best serve their own policy objectives and consumers. This would make it difficult to agree a common approach to energy policy which would be required to maintain a fully integrated energy system, as proposed by the current Scottish Government.

Scotland is currently a net exporter of electricity to other parts of the UK; however this is only a small proportion of demand in England and Wales (4.59%). In the event of Scottish independence, the continuing UK would need to consider how to meet this electricity demand in the best interests of its consumers. An independent Scottish state would be one of the countries the continuing UK could source energy supplies from but decisions would be taken on a commercial basis and in national interests. With a range of generation sources within its own borders and elsewhere, a continuing UK would not be obliged to purchase energy from an independent Scottish state.

Without unrestricted access to the integrated GB market, the costs of supporting Scottish energy network investment, small-scale renewables and programmes to support remote consumers would fall on Scottish bill payers alone, and bills would rise considerably.

At present Scotland benefits from some £560M of support for the renewables sector (28% of the total) in 2012-13. Scotland also benefits from schemes which support the costs of supplying electricity to those in more remote areas. The Hydro Benefit Replacement Scheme protects consumers in the North of Scotland from the high costs of distributing electricity over a remote and sparsely populated area. This scheme provided annual savings to 690,000 domestic consumers in North Scotland, in addition to bill savings for 70,000 non-domestic consumers. The scheme is paid for by all domestic and non-domestic consumers across GB.

In the event of Scottish independence the government of an independent Scottish state would need to decide whether it would continue providing support to schemes which are specifically designed to assist remote Scottish communities, since these would be for the benefit of consumers in what would become a separate country.

The size of the UK protects Scottish customers from the full cost of Scottish power.

Edward Davey, Secretary of State for Energy and Climate Change, said in March 2014: “When it comes to energy the positive case for Scotland in the UK is simple. The size of the UK protects Scottish customers from the full cost of Scottish power.

“Scotland has a tenth of the households in the UK as a whole. But over a quarter of all UK support for renewable generation goes to Scotland. If Scotland were to choose to go it alone, maintaining this level of support would take up a greater proportion of national finances."

The Power Company

Power company SSE is involved in producing, distributing and supplying electricity and gas across the UK. It operates more than 60 hydropower projects, and is involved in four marine schemes, which are all located in Scotland. During 2013 the company's conventional hydroelectric schemes and onshore and offshore wind farms produced 9.2TWh of electricity, confirming SSE's position as the biggest generator of electricity from renewable sources across the UK and Ireland.

In SSE's Annual Report 2014 it gives the following statement about the forthcoming vote on Scottish independence:

SSE employs people, serves customers, owns and operates assets and has plans to invest in England, Wales and Scotland, which together have a single energy market established through the United Kingdom Parliament and regulated by Ofgem.

SSE believes that the interconnection and integration of the electricity and gas systems and markets in Scotland and in England and Wales should continue regardless of the outcome of the referendum on Scotland's future this September. This means it believes that there should continue to be a single energy market for the island of Great Britain, just as there is a single electricity market for the island of Ireland.

Nevertheless, arrangements for the future of the energy market would have to be agreed by the Scottish government and the UK government in the event of Scotland becoming independent. In addition, other issues that would have to be resolved and which could affect SSE's business, include the currency that an independent Scotland would use, the process for determining Scotland's position with regard to the European Union, and arrangements for recovery of capital investments currently socialised across GB, such as renewable energy and the transmission network.

If Scotland votes to become an independent country, the process of negotiation with the UK government and the European Union on these and other matters is likely to be complex and will take some time. This means that the risk of legislative and regulatory change, which SSE has previously acknowledged will remain one of its principal risks, is heightened until the Scottish referendum and will continue to be so for some time if there is a 'Yes' vote.

SSE has already put in place arrangements to ensure that it takes account of the increased uncertainty in its decision-making and has a clear view of the issues that would arise should there be a 'Yes' vote, and is in a good position to engage constructively with the Scottish and UK governments in that event. Its approach is to ensure that it continues to meet the needs of its networks and energy supply customers in particular, while safeguarding the interests of investors.

The British Hydropower Association

Scottish politicians have been very supportive of the hydro industry, lobbying Westminster and the Department of Environment and Climate Change on our behalf. It is possible that independence or further devolution could lead to a more favourable support regime for the industry.

However, we believe that the whole UK industry would benefit most from a 'No' vote. We can see that the complexities of continued appropriate support for the industry could be a reduced priority in the maelstrom that would follow independence, and the likely uncertainty would be significantly disturbing for many investors. If Scotland were separate the non-Scottish hydro industry would be left with a much weakened voice in London.

We cannot see that Scottish independence will make project funding any easier. One of the key attractions to funders is the stability of the support mechanism backed up by the UK Government. We also don't expect any effects on rules or regulations if there is a 'Yes' vote. The majority of these affecting hydro development are already devolved at a Scottish or regional level. The approach of the Scottish Environmental Protection Agency is historically significantly different to that of the English Environment Agency, with a much higher level of consultation with the industry.

It is hard to say whether hydropower trading will be affected by independence. In the end it will depend on the decisions regarding long term support for further development. Either with or without independence, a continuation of the current degression regime for the Feed in Tariff will lead to a rapid decline, if not abandonment, of future small and medium scale development.

Employment opportunities within the industry are also linked to the decision above on support for future development. If a 'Yes' vote brought about better support this would lead to a continuation of the growth of the industry which by its nature brings significant employment and investment to the rural areas of Scotland.

The current Scottish Government is very committed to renewables and, as long as that commitment was retained post-independence, we would hope that hydro would play a significant part of their plans. Conversely, with a 'No' vote, we would hope that the enhanced powers expected to pass to Scottish Parliament, as a result of the independence vote process, would also lead to stronger support for the sector.

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