Independence will not derail Scotland’s stellar renewables success

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There is no doubt this is a day that belongs to Scotland’s people who have begun voting on whether the country should stay in the U.K. or become an independent nation.

There have been plenty of doubts expressed in recent months about whether the stellar Scottish renewable energy success could continue if the country opts for independence. There is evidence independence may have boosted the sector.

Renewable energy, the outcome of several factors

Renewable energy (RE) development is the outcome of several separate factors, including most significantly political commitment, planning policies, financing and the resource itself. The Scottish government and parliament’s commitment in favour of renewable energy combined with a great use of their devolved powers (mainly planning policies and the right to promote renewables use) and the rich Scottish resources have led to astonishing progress in renewables development.

According to Scottish Renewables, the Scottish renewables industry association, Scotland had installed 6.823 GW of renewable energy capacity at the end of March 2014 at a 660 MW average annual installation rate. Of this, onshore wind is the biggest single technology, accounting for over 68% of installed capacity, while hydro and biomass are Scotland’s two other major sources of renewable power. Solar PV, on the other hand, had installed a tiny 121 MW in the same period.

Record electricity output

Scotland’s installed renewable power capacity generated 17,047 GWh of energy in 2013 providing about 47% of the country’s domestic electricity consumption, up from 5% in 2002. The Scottish government’s 2011 target of 31% was surpassed within ease, while its next target includes 100% domestic electricity consumption from renewables by 2020.

Future installations

To achieve this, Scotland needs to install by 2020 a stream of new projects. Scottish Renewables says there is a pipeline of RE projects amounting to 13 GW either in planning or already consented. Of this, Scottish Renewables says, capacity increases in the short term will come again from onshore wind, while in the longer term, it is very likely to see major increases in offshore wind and wave and tidal projects.

At a recent energy debate in Edinburgh, local NGO Friends of the Earth Scotland Director Richard Dixon said solar PV and wave are Scotland’s next big thing. Specifically speaking of solar PV Dixon told pv magazine that “we will soon experience the growth of the Scottish solar PV sector” with rooftop projects been the first to benefit.

Financial risks: the past case

The financing component of Scotland’s major renewable energy development success stems from U.K. policies. Energy policy is not devolved in the Scottish Parliament, thus it is decided upon by Westminster, the U.K.’s parliament in London.

To finance renewable power the U.K., including Scotland, until recently used the Renewables Obligation Order, a mechanism that requires electricity suppliers to source a specific percentage of the electricity they supply to retail customers from RE. For each MWh of generated RE, a tradable certificate, the Renewables Obligation Certificate (ROC), is issued to the generator. Therefore, renewable power generators are remunerated according to the number of ROCs they are selling in the market, with the ROC price also linked to the Retail Prices Index.

The ROC scheme has often been criticised that it doesn’t provide the necessary confidence to businesses to invest in high risk new technologies. Most investors prefer instead the feed-in tariff remunerations systems of other countries, which provides them and the banks financing their projects greater assurance.

It is safe to conclude that Scotland’s stunning onshore wind success is the result of a great resource – Scotland has the highest onshore wind potential in Europe – the Scottish government’s continuing and stable RE support and the technology’s cost decrease in recent years.

New financial risks and the case for the No vote

The U.K. government recently passed the Electricity Market Reform (EMR) policy changing RE projects financing altogether.

According to the new policy, RE generators are obliged to sell electricity into the market, but in order to reduce exposure to variable wholesale market prices, the government also established the Contracts for Difference (CfDs) mechanism providing a variable top-up from the market price to a pre-agreed “strike price.” If the strike price is lower than the wholesale market price, RE generators will be asked to return the difference. CfDs will be implemented via bilateral contracts between the generators and the Low Carbon Contracts Company, a state institution.

Under the CfD scheme, subsidies will be spread across three different pots of technologies. Large-scale solar (>5 MW) has been grouped in Pot 1, where it must compete with onshore wind and conventional-waste-to-energy technologies for the £50 million ($85 million) per year allocated to it.

Pot 2, in contrast, has been allocated the bulk of the funds — £155 million ($263 million) — and comprises less-established and more expensive technologies that must compete for the allocated funds.

The renewable energy lobby has been split over the allocation of CfDs funds. Some have expressed relief for the assurance EMR provided to large offshore wind and wave projects. Others though, such as solar PV and onshore wind advocates, have expressed concerns and anger, arguing the U.K. government has sent the message it is backing nuclear and expensive forms of renewable energy.

A great angle in the story is that should capacity markets – the other fundamental component of the EMR policy – achieves its goal to drop the wholesale electricity market price, then according to the CfD scheme, this will raise the required premiums to be paid to the renewable sector. Given the total subsidy sum to the RE sector is capped, the number of RE projects might decrease.

Last but not least, senior Conservative party members have told the U.K. press that if the Conservatives win the 2015 general election they will not subsidise new onshore wind farms.

Therefore, should Scotland vote to stay part of the U.K. does not mean its RE sector is free of risks. Most possibly, it appears that Scotland will secure CfDs for some key, large offshore wind farms, but will struggle to attract large solar PV investments (PV investors able to obtain CfD funds will most possibly prefer the sunnier south), while there is also the risk of a post-2015 Conservative-led U.K. government cutting the onshore wind subsidies altogether.

The case for the Yes vote

Should Scotland’s voters decide to exit the U.K., Scotland and England will need to negotiate how to divide payment for electricity.

U.K. energy secretary Ed Davey has warned the U.K. will not continue to subsidise Scottish RE plants if Scotland votes for independence.

Scottish First Minister Alex Salmond has argued that there should remain a single U.K. power market post-independence and that England would risk blackouts without access to Scotland’s power plants.

According to a U.K. government report, “Both Scotland and Wales are net exporters of electricity, with England importing electricity from both countries and from continental Europe (via the France and Netherlands interconnectors).” Scotland also exports electricity to Northern Ireland via the Moyle interconnector.

In 2011, the report adds, “Scotland exported 26.1% of the electricity generated there to consumers elsewhere in the U.K., the same as in 2012.”

The future does not look brighter for England either. The country is facing a looming energy supply gap as aging nuclear power plants and many polluting coal-fired stations are due to close this decade and will need to be replaced. England has two choices: either to build the necessary infrastructure at home that allows it to be self power reliant, or seek power from abroad.

In the short term, it will be absolutely necessary for England to import power from Scotland to fill its electricity shortage. In the long term, England will need to judge whether it is better off building interconnectors to continental Europe or relying upon Scotland. There is also a chance offshore wind, wave and nuclear power become so cheap that England installs the necessary amount of its own capacity. But this looks rather unlikely.

For all these reasons, it appears more likely that should the two countries separate, they will continue to co-operate and rely upon each other. The exact form and details of such a co-operation cannot be known now. But the two countries need each other. Given Scotland’s persistence on the RE sector, its stable rhetoric for a renewables-based energy economy and its need for income, the future of renewable energy in any post-independence era does not appear threatened.