Why ownership is crucial to Scotland’s energy future

Last week Scotland’s national academy of science and letters, the Royal Society of Edinburgh (RSE), published a report on Scotland’s energy future. The report is the outcome of a two-year Commission Inquiry and involved taking evidence from a number of stakeholders, including a roundtable discussion which the STUC attended. The Inquiry was financially supported by BP, Centrica, EDF and SSE, although the RSE says these energy companies had no input into the content of the report.

The report is frank about the scale of transformation and investment needed to meet the ‘energy quadrilemma’ of tackling climate change, ensuring affordability, safeguarding security of supply and developing policy that is socially acceptable and economically sustainable.

It uses a traffic light rating system to assess how technologies such as carbon capture and storage, offshore wind and nuclear perform against the four aspects of the energy quadrilemma, highlighting the trade-offs and hard choices that need to be made – and made soon.

There is much therefore in the report to welcome.

Yet the report is silent on some key issues.

While it acknowledges that ‘low-carbon transition requires massive, long-term investment and presents significant challenges to the market model’, it is silent on questions of ownership. Indeed, in response to questions about ownership during the launch event, the Commission Chair, Muir Russell, simply said ‘we are not in that space.’

Ownership isn’t simply an ideological concern. It is an issue of economic efficiency and value for money for the taxpayer.

The energy sector is a capital-intensive business and the cost of capital – through dividends and interest payments – represent a significant part of the cost of energy. Yet the cost of capital is far lower for government who can borrow at much cheaper rates than the private sector.

Take the new nuclear plant Hinkley Point C, funded through the UK Government’s Contract for Difference (CfD) scheme, which is costing more than £20 billion. It is estimated that it would have cost £10 billion if the government had been borrowing at 2%, rather than EDF’s cost of capital, which was 9%.

The CfD mechanism ties the Government into subsidising the private sector based on the current cost of technology rather than future costs. For example, EDF’s Neart Na Gaoithe (NNG) windfarm soon to be built ten miles off the coast of Fife using turbine jackets from Indonesia, is being funded at £114 per megawatt hour (an even higher price than Hinkley Point C). Yet the cost of offshore wind turbines have come down hugely since the 15 year contract was awarded in 2015 and EDF are about to coin it in, while refusing community and trade union demands to bring manufacturing jobs to the local area.

If we are to ramp up investment in energy infrastructure, as the RSE report demands, then it will be far cheaper for the infrastructure to be developed by the public sector rather than the private sector.

Questions of ownership within our energy system are not simply questions of ethics but questions of economic efficiency and value for money. Although a number of companies and shareholders currently benefit from the system as it is, if we are to meet the energy quadrilemma, we cannot afford to neglect the question of who owns our energy.

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