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If Scotland gains independence from the rest of the UK, what will it mean for the British energy industry, as the lion’s share of oil, gas, nuclear and renewable resources lie within its territory?

Kelvin Ross, Deputy Editor

The subject of Scotland’s independence from England is one of the hot topics of the year so far in UK politics, but it is one that many outside of Britain may not be aware of.

Yet if Scotland gains independence, it will have a profound effect on the UK’s energy market, European countries that trade power with Britain and international energy companies that choose to locate within its shores.

The Scottish National Party (SNP) has argued for an independent Scotland for years and when, in 2011, it won an overall majority in the Scottish parliament – devolved in 1999 – the subject was pushed to the top of the political agenda.

Now the SNP is demanding a referendum on the matter and in January 2012, the UK’s prime minister David Cameron stated that he would agree to let the Scots vote on the matter. All that remains to be set is a date.

Needless to say, the UK parliament in Westminster is far from keen on Scottish independence for all sorts of reasons, but it is realising that what was once a pipe dream could soon become a reality.

“The enormous success of the SNP in the last few years means that we now have to take the possibility of Scottish independence seriously,” says Tim Yeo, chairman of the government’s Energy and Climate Change Committee. “Before it has been hypothetical – but no longer.”

The implications of independence are huge, and one of the key areas vexing the minds of those in Westminster at the moment is energy.

Steven's Croft biomass power plant in Scotland is operated by Germany's E.ON Source: E.ON
Steven’s Croft biomass power plant in Scotland is operated by Germany’s E.ON Source: E.ON

Much of the UK’s offshore oil and gas reserves lie in the North Sea in what would become Scottish waters, while more than half of the UK’s operational nuclear power stations are ‘north of the border’. And Scotland is one of the renewables powerhouses of Europe, home to the best of the UK’s wind and wave power potential.

So the stakes are high and Cameron’s government wants to know what Scotland has planned for any post-independence energy mix.

Some answers to these thorny questions were given when the Energy and Climate Change Committee held a series of evidence sessions to quiz key players from the UK and European energy markets, as well as members of the Scottish government. And for much of time, the committee members did not like what they heard, particularly on the subject of the decommissioning of nuclear and oil and gas assets.

When asked if Scotland would take on the decommissioning costs for the nuclear reactors lying within its borders, Fergus Ewing, Scotland’s energy minister, gave a ‘yes-and-no’ answer. He said Scotland would pay a percentage of the decommissioning costs based of the lifetime of the reactor post-independence.

“We take the view that these nuclear power plants were set up by the UK, and therefore, if we take Torness for example, if there are ten years to go and 30 years have elapsed, then we have one quarter of the decommissioning costs. Some apportionment of that sort would seem to me to be reasonable.”

He applied the same rule of thumb to the decommissioning of oil and gas rigs in the North Sea, having already conceded that “the value of Scotland’s oil and gas reserves are absolutely extraordinary”. He said that as “the lion’s share of remaining oil and gas would accrue to Scotland as they fell within [its] international waters”, that in turn would make Scotland “an exceptionally wealthy country”.

Investor confidence

Yeo asked Ewing if he agreed that the drive towards independence by the SNP “has had the unfortunate consequence of creating a degree of uncertainty [among investors], and an industry like energy depends entirely on investors making very long-term decisions?”

Ewing was emphatic: “No I don’t agree with that. Ever since last May there has been very substantial investment in the Scottish energy sector and these decisions show that there is not a lack of confidence in Scotland.”

There are nearly 100 onshore wind farms in Scotland, forming the backbone of the country's renewable targets
There are nearly 100 onshore wind farms in Scotland, forming the backbone of the country’s renewable targets

To stress his point he named a list of companies which have taken key strategic decisions to locate in Scotland: Gamesa spending £125 million ($196 million) to build a base in Leith rather than in Hartlepool in England; Samsung setting up in Fife with an investment of another £125 million; and Global Energy in Nigg, creating up to 2000 jobs first in oil and gas and then in renewables. “Would these decisions have been made if the world was afraid of coming to Scotland? I don’t think so,” he said.

Yet there are many that disagree with Ewing’s view. In November 2011, global finance organisation Citigroup published a report into the potential impact of Scottish independence into investment into the country’s renewable energy sector. It claimed that the independence referendum debate was creating “huge uncertainty” and added that if independence was to happen, “renewable investors risk seeing their assets stranded in a newly independent Scotland”.

The report concluded: “Utilities and other investors should exercise extreme caution in committing further capital to Scotland.”

Several months on, Citigroup has not changed its mind. Citigroup Global Markets’ head of European utility sector research Peter Atherton says of renewables: “We are talking about a sector here that is highly regulated and highly subsidised. The most important thing for a company to make a decision on whether to build an onshore or offshore wind farm is the subsidy regime. We have a UK-wide subsidy regime, so if Scotland secedes from the rest of the UK, it is questionable whether that regime continues, and therefore there is an element of risk.

“When you are talking about multi-billion projects with offshore wind and hundreds of millions with onshore wind, clearly if you don’t have a 100 per cent guarantee that the support mechanism will be acceptable and legally binding and in place for at least a couple of decades, then you absolutely cannot and will not make the investment.”

Ready to go to the polls: Scotland's First Minister Alex Salmond and his deputy, Nicola Sturgeon, want to give Scotland's population a referendum on independence in 2014 Source: SNP
Ready to go to the polls: Scotland’s First Minister Alex Salmond and his deputy, Nicola Sturgeon, want to give Scotland’s population a referendum on independence in 2014 Source: SNP

He adds that “all the corporates” [that are] involved in investing in offshore wind in Scotland that Citigroup has spoken to in recent months have said that they will not progress with their projects “until that certainty is in place”.

Indeed, Atherton states that the SNP’s two flagship policies – the drives for both independence and a massive boost in renewable energy – are not actually compatible.

“The Scottish government has big plans,” he says, “and have decided that by 2020 Scotland will be producing around 45 per cent of the overall UK renewables’ target, with a total price tag of £45 billion. It’s that leap which is questionable – it would be questionable even if the constitutional position doesn’t change, but its highly questionable if the constitutional position does change, because who’s going to provide the £4 billion of subsidies to finance those assets?”

He adds: “If the UK parliament decides that the entire UK consumer base is happy to stand behind that, as we are currently, then investors will invest.

“But if the counter party to the agreement is Scotland without the agreement of the 92 per cent of the population that is not Scotland, then I see it as nigh-on impossible for that investment to be forthcoming.”

SSE, formerly Scottish & Southern Energy and based in Scotland, has also said there is an “increased risk” that it will decide not to start building new power stations and wind farms in Scotland before the referendum.

It said earlier this year “the additional uncertainty represents increased risk, of which SSE will have no alternative but to take account when making final investment decisions on those projects while that additional uncertainty remains.”

SSE stressed that it believes energy infrastructure, like pipelines and pylons, should be shared across England and Scotland whether or independence happens or not.

The date for a referendum on Scottish independence has not been set – the SNP wants it in 2014 but Cameron’s government in Whitehall believes it should be held much sooner. Whenever it happens, the power industry will await the result with keen interest and perhaps a degree of trepidation.