It has been a mixed month for the electricity industry in Scotland. On the negative side, DONG Energy announced its withdrawal from the joint venture planning to build a new coal-fired power station at Hunterston.
And, in addition, Scottish Power’s Longannet power station missed out on European Commission (EC) “recovery plan” money to assist with carbon-capture and storage (CCS) projects in the European Union.
However, on the positive side, media reports indicated that the EC was willing to provide £67million towards a transmission hub off the north coast linking Shetland and mainland Scotland, and also £37million towards the proposed Aberdeen project – the European Offshore Wind Deployment Centre.
Media reports also stated that the Scottish Government was set to approve the £350million upgrade of the Beauly-Denny power line, which will enable more wind electricity generated in the Highlands and Islands to be exported to consumers in central Scotland.
I believe that policies for the electricity industry in Scotland are currently very confused and need to be clarified as soon as possible. One of the basic problems is that responsibilities for energy policies are divided between the Scottish and UK Governments. Further, the electricity industry is now largely in the private sector, so both governments have relatively limited influence over it.
I have been very disappointed by the lack of investment in Scotland’s power sector over the last several years. That will create serious problems in the near future.
Scotland has abundant energy, as we all know, but that potential is being increasingly constrained by the lack of capital investment in both generating and transmission capacity.
It is ironic that two of the dominant companies in the UK electricity industry are Scottish, namely Scottish and Southern Energy (SSE) and Scottish Power (now owned by Iberdrola of Spain).
The electricity industry in Britain was largely privatised under the last Conservative Government, with the main exception being the nuclear sector. I believe that most economists believe that the privatisation has been very successful and the UK is often cited as an excellent model for electricity industries in other countries.
However, the cracks are beginning to show, both in Scotland and the rest of Britain. The lack of investment has resulted in a massive rise in imports, notably of gas for electricity generation, and there are increasing fears of energy shortages if there are very cold winters over the next few years.
New generating capacity is urgently needed in both Scotland and the rest of the UK, but there are long lead times to build new power stations, notably nuclear plants. The massive delays in obtaining planning permission are an additional problem.
The industry is regulated by Ofgem (the Office for Gas and Electricity Markets). In my opinion, it has failed to ensure that the industry has invested in new capacity.
The confused energy policies of both the UK and Scottish Governments have made things worse and, unfortunately, continue to do that. Both governments have set very ambitious targets for renewable energy but, as I have argued in previous editions of Energy, those targets are both unrealistic and unachievable in the timescales set.
Both governments’ policies towards the coal industry are also very unclear. There have been many statements about reducing CO emissions and encouraging clean coal technology, but little or nothing to help the electricity industry in Scotland take serious investment decisions.
They have also detracted from the recognition of the need in Scotland to build new power stations, whether they be gas, coal or nuclear.
The situation in Scotland is further complicated by the SNP Government’s opposition to more nuclear power. Even if that policy were more widely accepted, there is little sign of investment in new gas or coal-fired stations, as illustrated by the recent announcement by DONG Energy.
The two nuclear reactors at Hunterston and Torness typically generate about 30% of Scotland’s electricity. Hunterston is currently scheduled to end production in 2016 and Torness in 2023. The Cockenzie coal-fired station may close by 2015.
The lives of all three plants may be extended further, but if not, up to 50% of Scotland’s generating capacity would need to be replaced in the near future. Wind energy and other renewables can, and will, make increasingly important contributions, but not sufficient to compensate for these three power stations.
Energy policy is one area where the Scottish and UK Governments should be able to work constructively together, but they are not doing so. Ofgem’s failure to ensure that companies such as SSE and Scottish Power invest in new generating capacity makes the problems even worse.
I fear some difficult years are in prospect.
Tony Mackay is MD of economists Mackay Consultants
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