Will Brexit derail Scotland's prospering renewable energy industry?
Published On Wed 25 Apr 2018 by Professor Peter Cameron
Around one-quarter of the UK’s current renewable energy generation capacity is in Scotland and it is estimated that a quarter of the renewable energy potential in all of Europe could be found here in the future, both on-land and offshore. If properly tapped, especially through offshore wind and tidal projects, this immense clean electricity source could contribute greatly to meeting the UK’s carbon reduction targets. Brexit, however, has the potential to derail this progress.
Our discussions of national and EU energy policy are usually influenced by a so-called ‘energy trilemma’: competitiveness, security and sustainability, and how to reconcile these priorities through the regulatory process. The reliance on government support makes the future of renewables in Scotland dependent on another trilemma: Holyrood, Westminster and Brussels. With an eye on once-lucrative oil and gas revenues, the UK Government refused to fully devolve all regulatory powers relating to energy. Hydrocarbon resources are, however, very different from the traditional power sector, and the Scottish Government has in the last ten years achieved spectacular growth in the renewables industry through the careful and sustained use of devolved legal powers over planning and the environment. Brexit will impact upon each of these focal points, though, triggering uncertainty for the industry and especially for future investment.
This alignment will diverge from 2019, but not only because of Brexit. Sweeping, new energy measures have been set out by the EU in a ‘clean energy package’, that includes a new, more ambitious Renewable Energy Directive, linked to plans for substantial electricity grid investment to foster improved interconnections, energy efficiency and measures to tackle energy poverty. This is all scheduled to become law in January 2021.
To some, the volume of this pending legislation will surely confirm their negative views about the EU. However, it is worth dwelling on the motives behind the new proposals. The success of wind and solar across Europe brings into question the traditional centralised model of electricity provision that underlay previous legislation. The intermittency of renewable supply requires more flexibility and responsiveness. We are, arguably, still at the beginning of a very extensive transformation of the energy economy, one which requires new rules to make it work properly and effectively, with a sub-set of rules to provide for vulnerable customers. The old rules are designed around a relatively simple model of centralised service, with a small number of large generating plants. A new set of rules is needed as the number of generating sites grows exponentially, and to deal with the increasing complexity of balancing supply and demand.
Scotland’s renewable energy sector is intimately linked to the rest of Europe in its corporate ownership links, the sale of its power and the purchase of its equipment and infrastructure. Contracting, financing and trading will all be affected. Negotiators have yet to secure the conditions which allow private parties to trade energy across borders. Uncertainty will become a fact of life for the sector.
At a conference on Brexit and Renewable Energy, held at the University of Dundee recently, one speaker after another voiced concern about the effects of Brexit on renewables: a loss of access to research funding in a sector that relies heavily on the application of innovative technologies, a decline in ideas and expertise coming to Scotland and drop in funding clean energy projects after existing EU commitments come to an end. Yet, Holyrood, Westminster and Brussels all recognise that government action in subsidies, infrastructure tariffs and regulations is required in the post-petroleum energy mix. There is one significant difference however. Holyrood and Brussels are much more closely aligned with respect to how fast the transition to a low carbon economy should proceed. Everyone recognises that the transition will be driven by regulation, which in turn means there is a need for legal jurisdiction over the renewables sector. The transition will not happen quickly in a competitive market. Broadly speaking, both Brussels and Holyrood have focussed more than Westminster on exercising regulatory power rather than letting the market function more freely. Intervention in the power sector was the driver which created the renewables growth. The free market would not have achieved that result.
The SNP government saw the potential for a rich energy mix that went well beyond the oil and gas-centred perspective of Westminster. The future of jobs related to the fading oil boom, rather than the prospect of future revenues, was a driving concern. Their vision of a mixed energy economy – at the time derided by many – has become a reality and attracts wide public support. The sharp fall in the oil price underlined its economic sense and the folly of relying exclusively on domestic supplies of fossil fuels as an income generator.
It is hard to see any future Scottish Government failing to promote a strong renewables sector, but real risks lie ahead in terms of the key legal arrangements that make energy markets work. Energy markets are defined by their regulatory structure. The energy companies participate in a market which has common rules to ensure a level playing field. The idea behind a competitive market is that the most important outcome is a price which is as low as possible for consumers, and that other non-tariff issues are not able to damage that or artificially raise prices. Regulation harmonises the non-tariff issues, leaving the companies to compete on price. The regulator creates the rules of the game and leaves the companies to play the game – i.e. compete in the market - with little or no influence over the rules or changes to the rules.
So, the repatriation of powers from the EU becomes a very important matter indeed. It determines which body will have regulatory powers. With Westminster less committed to renewables than Holyrood, demands to ‘take back control’ from EU institutions without a clear sense of what that means for the devolved nations is more than a little concerning for one of Scotland’s remarkable success stories of recent years. The real fear is that if Westminster is successful in getting hold of the powers currently residing with the EU, the Scottish renewables sector will become exposed to unavoidable policy risk. Future investors are risk averse. Increasing policy risk can only mean that there will be less investment.
Professor Peter Cameron, Director of Centre for Energy, Petroleum and Mineral Law and Policy at the University of Dundee.