How might Brexit affect the supply of energy in Scotland?


Grant Allan, Department of Economics and Fraser of Allander Institute


The Scotland energy system is currently in the process of an unprecedented restructuring. The implications of the UK’s Brexit vote for these changes over both the short and long term are critical to the future shape of Scotland’s energy mix.

This matters for three reasons: first, energy policies have implications for the price of energy faced by households and firms; second, the Scottish government have identified the “transition to a low carbon economy” as an area which can deliver economic (as well as environmental) benefits in the short and medium term; third, Scotland has environmental (domestically-set) targets, paramount to which is reducing the carbon intensity of energy production and use.

Scotland’s energy sector is changing

Scotland’s electricity generation fleet is evolving rapidly at the moment. What has changed recently? The closure of the Longannet facility station at the end of March removed the last facility producing electricity from coal in Scotland (and one of the EU’s most polluting stations). The latest figures show that coal provided over 20% of the Scottish electricity generation mix in 2014.

Over 406MW of renewable electricity capacity was added in 2015 – a 5% rise – with the equivalent of almost 58% of Scottish electricity consumption generated from renewable technologies (and 28% of the electricity generated in Scotland).

The Torness nuclear plant saw its lifetime extended to 2030 announced earlier in the year, after it was initially expected to cease production in 2023.   Taken together, these events alone are sufficient to radically alter the level and mix of electricity generation in Scotland, making this both more low-carbon as well as more variable.

 Scotland is already fundamentally integrated into the GB electricity system

Fundamentally however, Scotland’s electricity system retains its security of supply through its interconnectivity with the GB electricity system. Integration with this larger system bring benefits for consumers and also supports the greater use of renewable stations in Scotland taking advantage of stronger natural renewable energy resources (with – increasingly – baseload electricity supplies imported from the rest of the GB system).

Recently Scotland has been a net exporter (over the year as a whole) of electricity. Reductions in Scotland’s generation capacity and changes in the generation mix are already producing a reduction in net exports – down from 28% of all electricity generated in 2013 to 24% in 2014 – as Scotland becomes a more frequent importer from the rest of GB. This inter-regional configuration shares economic and environmental benefits (as well as costs) across the broader GB system.

The EU internal energy market (IEM) envisages countries having interconnection equivalent to 10% of their domestic capacity, and at 4% the UK lags this target currently, however there has been a surge of commercial interest in further connection options. The benefits of interconnection across the EU were well put by the National Infrastructure Commissions report in March of this year (page 32):

“Linking European electricity markets through interconnection can also enable low carbon sources of electricity, particularly renewable electricity, to be deployed at a lower cost. It allows renewables projects to be sited where they are best suited, for example offshore wind in the North Sea and solar power in Southern Europe, with the electricity exported to where it is most needed.”

 What does leaving the EU change?

Into this system, comes the referendum vote to leave the EU. What changes?

We consider three areas: environmental targets, new energy investments; and what this means for the costs of energy.

Targets

Fundamentally, Scottish and UK energy policies are driven by Climate Change Acts (2009 and 2008, respectively) which enshrine ambitious long-term decarbonisation targets in law. These are not affected by Brexit as they are domestically set, but would only be impacted were a future UK policy stance outside of the EU to seek to roll back on such targets.

Investment in new capacity and infrastructure

Second, the UK energy sector requires significant investments over the coming decade in both new generation and infrastructure. These are likely to become more expensive as a result of Brexit, both as firms seek higher returns and also the now greater political risk around these long-term investments in the UK. It has been claimed that the nuclear plant at Hinkley Point due to begin production in 2025 is now “extremely unlikely” to proceed, for instance. UK funding for renewable energy projects is secured may also come under pressure if fiscal conditions in the UK worsen.

Additionally, much of the investment for these projects comes from overseas investors, and not only from private firms. The EU’s own European Investment Bank provided a loan of £525million to the Beatrice offshore windfarm, announced only in May of this year, and a total of more than £4billion for investment in Scotland specifically in the last decade. Over the longer-term, Scotland’s continued access to European funding has also been placed into doubt, including low carbon technology funding currently managed by the Scottish government.

As much of the content of new investments are imported to the UK, the falling pound makes such investments additionally expensive. This could – although not in the immediate term – serve to increase the UK content for those components which might be available in the UK, although for some technologies current UK content is relatively low.

These factors suggest that the transition of the UK (and Scotland) to a low carbon economy will become more expensive under the UK outside the EU. If the currently configured investments in secure energy supplies for the UK are delayed, such as nuclear, the alternatives in the short and medium term come in the form of more-heavily polluting technologies, such as gas.

The internal energy market

Third, if Brexit means departure from IEM – and the associated benefits of further integration with European capacity markets – this will further place an additional cost on UK electricity users. In February, Poyry reported the growing commercial interest in GB interconnection projects and the economically enhancing benefits of market integration.

Losing this access to the IEM was estimated by Vivid Economics as costing “up to £500m per year by the mid-2020s”. Gas supplies and markets are likely to be more modestly affected, as the UK has significant interconnectivity to European markets already, these are not congested and the UK has a diversified supply of gas (both from the North Sea and through geographically diverse imports).

 

In conclusion

Taken together, what can we conclude? These three factors suggests that the vote to leave the EU (and particularly any departure from the internal energy market) will likely result in: higher energy prices for Scottish electricity consumers; raise the cost of meeting the UK and Scotland’s current decarbonisation ambitions; and reduce energy security for Scotland (as new necessary investments in baseload generation in the rest of the UK – and to which the Scottish energy systems is increasingly interconnected – may become more expensive).

Critical to avoiding a more negative outcome will be ensuring access to the internal energy market and the benefits of access and market integration that will help support Scotland and the UK towards their long-term environmental ambitions.