Settle as counterparties – govern as equals?

Published: 7 August 2014
Author: Nicola McEwen

In a research briefing paper published today, Professor Nicola McEwen evaluates the prospects for energy market integration and a formal energy partnership between the Scottish and UK governments after independence. She concludes that cooperation is inevitable and wholesale market integration likely, but a deeply integrated energy partnership may come with costs as well as benefits.

For the Scottish government, independence is embedded in a vision of transnational interdependence and renewed partnership among the nations of the British Isles. The White Paper on Scotland’s Future proposed that an independent Scotland would continue to participate in a GB-wide market for electricity and gas, with continuation of the current trading and subsidy arrangement, a single GB Transmission Operator to balance electricity supply and demand, co-operation between regulators, and a formal energy partnership between the Scottish and UK governments. These key priorities were broadly supported by the Expert Commission on Energy Regulation, and set out in detail in its final report last month.  

A degree of energy market integration in the event of independence seems highly likely, especially for the wholesale market. There are many examples of integrated energy markets across Europe, and EU energy legislation commits all member states to working towards an integrated EU electricity market.

Both the Scottish and UK governments would also face considerable industry pressure to ‘grandfather’ existing commitments and contracts agreed with generators and suppliers. In the longer-term, socialising costs among GB consumers for renewables and grid networks may be more problematic. EU law provides a mechanism and a joint Swedish-Norwegian Green Certificate scheme provides a precedent. But the UK government has already signalled its opposition to continuity, and the politically charged issue of energy bills could make it difficult to deviate from this stated position in the event of a Yes vote, even if it were minded to do so.

Market integration of whatever degree would require intergovernmental coordination. The deeper the integration, the more coordination and cooperation would be required. The Expert Commission on energy regulation went further than most in considering how such a partnership might work. It recommended a Memorandum of Understanding setting out the areas for joint decision making and a subsidiarity agreement outlining where each government’s autonomy would prevail. Once up and running, this energy partnership would require formal structures to manage it, such as an intergovernmental agency or a common committee and a ministerial liaison forum. Crucial would be that both partners could be confident that whatever cooperation agreement was reached during independence negotiations, it would not be unilaterally altered or nullified – in the Expert Commission’s view, they should establish the agreement as counterparties, but govern as equals.

Even if there was a will on both sides to form such an energy partnership, it is difficult to envisage it being a genuinely equal one where the Scottish government could be a co-pilot in ‘steering’ the GB energy system. That would imply giving the Scottish partner veto rights over the direction of key areas of GB energy policy, substantially reducing the authority of the UK government and Westminster parliament. A more likely prospect may be a partnership which provided forums for the Scottish government to voice its preferences and concerns, and try to influence the direction of GB policy through lobbying, consultation and persuasion. A formal energy partnership may be less appealing and difficult to sustain if the two governments were to diverge fundamentally in their energy policy preferences. A Scottish government could not deter the rUK government from investing in nuclear generation if this continued to be a policy priority, or retreating from renewables.

Energy partnership and deep market integration may come at the price of autonomy. The alternative of independence with a looser form of interdependence could have other cost implications, especially if it meant financing renewables from a smaller consumer or tax base within Scotland. But there would be opportunities too. Policies that prioritised greater investment in energy efficiency would reduce energy demand and can be expected to produce savings for consumers, while greater control over energy policy can provide future Scottish governments with more opportunities to design and shape an energy system to suit their own policy ambitions.

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