Constitutional Change and the Electricity Industry: Constraints and Opportunities Aileen McHarg University of Strathclyde

Electricity Policy in Scotland Electricity policy goals tend to be fairly consistent: Security of supply Affordability and access Economic efficiency Energy efficiency Environmental sustainability Economic development

Electricity Policy in Scotland Policy variation due to differences in: Geography and climate Housing stock Historic legacy Natural resource endowment Economic conditions Political values

Electricity Policy in Scotland Key areas for policy differentiation: Energy efficiency Fuel poverty Greenhouse gas emissions reduction Generation mix: – No new nuclear generation – Renewable energy targets Equivalent to 100% of Scottish consumption by 2020 (UK target = c.30% by 2020) 500MW of community and locally owned renewables by 2020

Current Legal Competence: Legislative Powers Reserved Matters (Sch 5, Scotland Act 1998) D1 Electricity – Generation, transmission, distribution and supply of electricity – Subject matter of Pt II EA 1989 (now redundant?) D4 Nuclear energy D5 Energy conservation A1 Energy taxation The Crown estate (Sch 5, Pt 1, para 1(a), 2(3))

Current Legal Competence: Legislative Powers Devolved Matters Express exceptions: Subject matter of Pt I Environmental Protection Act 1990 (air pollution/integrated pollution control) Radioactive waste disposal Encouragement of energy efficiency, other than by prohibition or regulation (?demand-side regulation) Implied exceptions: Promotion of renewables (other than via market/regulatory rules) Promotion of carbon capture and storage Tackling fuel poverty (other than via supplier obligations ) Related powers, e.g.: Planning and building control Marine licensing Housing policy Scottish private law Climate change

Current Legal Competence: Executive Powers Various executively devolved functions - most significant: Renewables obligation – RO level and technology bands Ss. 36 and 37 EA 1989 – consent to new generating stations >50MW onshore and > 1MW offshore; overhead lines >20kV (n.b. an energy policy power not merely a planning power) Also some concurrent functions/requirements to consult Scottish Ministers before exercising powers

Current Legal Competence: Overall Competence Scottish Parliament/Government cannot act contrary to EU law/ECHR Limited scope for legislative initiative by Scottish Parliament – e.g.: – Housing (S) Act 2001, s.88 – Climate Change (S) Act 2009, s.38; Pt 5, ch 3 – Marine (S) Act 2010, s.35 Executively devolved functions must be exercised within boundaries of UK legislation: – No power to alter regulatory framework to support policy goals – Scope of Scottish Govt competence depends on UK legislative choice – cf. Energy Bill/Contracts for Difference Consent to UK/GB legislation which alters legislatively or executively devolved functions via Sewel Convention Can exert pressure on UK govt/Ofgem to ensure market/regulatory rules take account of Scottish needs/ambitions or provide Scotland- specific solutions

What Can Scottish Government do to Meet Renewable Energy Target? Facilitate renewable developments through planning system/property rights Send signals about acceptable generation mix: – Consents policy – ? Emissions performance standard Financial subsidy (subject to EU state aid rules), e.g.: – Renewables obligation – Saltire Prize – CARES – Renewable Energy Investment Fund Advice and assistance ? Demand-side measures But cannot guarantee a supportive regulatory and market environment: Planning and other market/regulatory issues are linked Reasonable certainty of adequate return crucial to investment in long-lived electricity assets

Future Competence: Further Devolution v. Independence Further Devolution (Almost?) full energy policy competence (cf. N. Ireland) ? continued reservations of related competences No foreign policy competence Independence Full policy competence

Constraints: EU Law Policy Continuity Internal electricity market: Liberalised wholesale/retail markets Third party access Unbundling Independent system operation Independent regulation Non discrimination and transparency Compliance with competition law/state aid rules Other EU regulation, e.g.: Renewables target Environmental regulation Emissions trading

Constraints: EU Law Policy Change Different market design/network rules Priority to renewables/ CHP/indigenous fuel sources Stronger public service obligations/consumer protection (possible derogation from competition rules, subject to proportionality test) Long term planning A different kind of regulator EU law not static – opportunity to influence future policy direction (e.g., post-2020 renewables target)

Constraints: Trade with England and Wales Why continued integration with England and Wales? System balancing – esp. important where high penetration of renewables Security of supply Greater competitiveness  lower prices EU policy encourages development of regional markets Renewables target depends on export strategy Policy continuity = reduced regulatory risk = greater investor certainty Limited regulatory/policy capacity

Constraints: Trade with England and Wales Cross Border Trade Separate markets/regulatory regimes Voluntary cross border trade, driven by market conditions/regulatory incentives EU law facilitates cross-border trade: – Third party access rules – Reg 714/2009 – detailed regulation of network access for cross-border trade; disputes between NRAs can be referred to ACER – Dir 2009/72/EC - duties on MSs/NRAs to promote cross- border trade, interconnection and regulatory co- operation Further devolution – regulatory/SO cooperation required to facilitate internal cross-border trade

Constraints: Trade with England and Wales Single GB Market Precedent – all Ireland wholesale electricity market Parallel legislation required to establish trading rules and oversight requirements (again underpinned by EU duties to cooperate and facilitate market integration) Could be separate regulators or joint regulator No need to align other aspects of the regulatory system. But: – Need to ensure no discrimination in design of regulatory obligations – More stringent regulation may reduce competitiveness of Scottish generators/attractiveness of Scottish consumers – Market distortions/increased complexity for market participants may produce pressures for harmonisation

Constraints: Financing Renewables Do E&W consumers subsidise S renewables policy? Cost of renewables obligation/network investment feed into GB wholesale market price Not a direct geographic cross-subsidy – infant industry support, justified by reference to climate change/security of supply objectives – Only one direct geographic cross-subsidy - hydro benefit; socialisation of transmission costs rejected; may be indirect cross-subsidies from S to E&W But: – indirect geographic benefits (and costs) – Scottish Government (currently) has limited power to influence level of subsidy paid to Scottish generators

Constraints: Financing Renewables Post-independence: Costs will fall on de facto customer base Scottish renewable generators could not be excluded from E&W market, if there was a willing buyer Scottish generators could not be excluded from relevant renewables support mechanisms (cf. Fossil Fuel Levy/French nuclear electricity) But there may be alternative, more financially attractive options for E&W buyers rUK renewables policy may change (n.b can meet EU renewables target through domestic consumption or ‘flexibility mechanisms’)

Constraints: Financing Renewables Could Scottish consumer/taxpayers bear the additional costs? Already do bear some additional costs Infant industry support assumes current high costs will come down/other sources will become more expensive – i.e., longer term benefits May  be in interests of rUK to continue to support relatively expensive Scottish renewables May be alternative export markets in the longer term A political/economic judgment for the Scottish government – do long term benefits outweigh short-term costs? (n.b., additional support subject to EU state aid rules) Can independent Scottish government offer sufficient/better investor certainty?