The prospect of a second independence referendum, like the first in 2014 (see our Routes and obstacles to a second Scottish independence referendum briefing), raises a number of issues for Great Britain’s single integrated energy markets for electricity and gas. This briefing takes an initial look at some of those issues.
Currently, Great Britain (GB) has single integrated energy markets for both electricity and natural gas. A single System Operator for the GB’s electricity and gas transmission systems (National Grid ESO and National Grid Gas Transmission respectively) is responsible for stable and secure operation across the country including real time operation, efficient supply and demand management, maintenance and longer term development. GB’s integrated energy markets are regulated by the Office of Gas and Electricity Markets (Ofgem) with a single set of standards, regulations and network codes applied for each market, with many costs shared between consumers across GB.
GB’s integrated electricity market
In 2005 the British Electricity Trading Transmission Arrangements (BETTA) were introduced and created the single integrated GB electricity market for the first time. Prior to this, Scotland’s electricity market was separate to the rest of GB with electricity traded between Scotland and the rest of GB via interconnectors (analogously to the cross-border interconnectors that the UK has with France, the Netherlands and the Republic of Ireland ). The reforms meant that electricity generators in Scotland could trade in the wider GB market without reserving specific capacity on the interconnectors. As a result, generators across GB became equally part of the full GB system. This improved efficiency, reduced costs and increased security of supply.
Costs sharing for electricity transmission
A key feature of the GB’s electricity market is that the costs of building and maintaining its transmission system are, for the most part, spread across the whole of GB. This largely relates to the Transmission Network Use of System (TNUoS) charges, but other costs such as balancing-costs are also shared across GB. These balancing costs include constraint costs, which disproportionately arise in Scotland due to the large amount of intermittent wind generation connected there.
Sharing the costs of decarbonisation through GB’s integrated electricity market
The vast majority of support mechanism funding to encourage low carbon generation in GB, including the Renewables Obligation and Contracts for Difference have their costs shared across GB.
Strengthening and extending the electricity transmission network is an increasingly important part of decarbonisation (eg to enable more remote renewable generating assets to be connected to the system and keep the system stable with increased intermittent generation, facilitating the achievement of renewables commitment, or to provide the infrastructure to support the switch to electric vehicles).
GB’s integrated gas market
Scotland has produced oil and gas since the 1970s. For decades since, England, Wales and Scotland have had a single gas transmission network. There are six major beach terminals in GB: five in England and one in Scotland (St Fergus).
Since the 1990s, natural gas has traded as a single GB market. The UK national balancing point (NBP) hub is the second most actively traded gas hub in Europe, after the Dutch TTF.
While the GB gas transmission system was established and designed primarily to transport gas supplies from the North Sea to the rest of GB it has been transitioning to a more import focussed system.
Costs sharing for gas transmission
The cost of building and maintaining the GB’s gas transmission system are also shared across GB consumers. As with electricity, these costs are higher in remote locations.
What were the Scottish Government’s proposals for the GB’s energy markets during the 2014 referendum?
During the 2014 Scottish independence referendum the Scottish government proposed, as set out in its Scotland's Future white paper (2014 White Paper), that a single GB-wide market for each of electricity and gas should continue and that an Energy Partnership with the continuing UK should be established to ensure a joint approach. In support of its proposals the 2014 White Paper argued that:
- “regardless of its source, Scottish generation is now essential to ensuring the lights stay on across these islands;” and
- “the continuation of a system of shared support for renewables and capital costs of transmission among consumers in Scotland and the rest of the UK is a reasonable consideration for meeting the UK’s ongoing green commitments”.
The 2018 Sustainable Growth Commission report, commissioned by the Scottish Government to make recommendations for the policies of an independent Scotland has led the Scottish Government to update its positions in many areas since 2014, but the report did not make recommendations for the areas of energy policy discussed in this briefing.
What was the UK Government’s response during the 2014 referendum?
The UK Government argued, that it saw no basis to justify continued cost sharing between GB consumers for shared renewables support or for the costs of electricity or gas transmission following independence. More generally, it argued that the integrated GB energy market for electricity and gas “could not continue in its current form”.
Impact on GB electricity & gas markets
The 2014 White Paper proposals are not clear whether the current full integration of the energy market (whether in relation to electricity or gas) between Scotland and the continuing UK is proposed to, or could, continue in the event of Scottish independence.
To maintain full integration, an independent Scotland would have to agree with the continuing UK to dynamically align standards, regulations and industry codes across the whole of the current GB. This could become increasingly difficult over time particularly if, as proposed in the 2014 White Paper, Scotland requires a “far greater degree of oversight of the market arrangements for energy and firmer safeguards over Scottish energy security” – backed up by a separate regulator. Over time there would be increasing likelihood of divergence in standards, regulations and network codes as different priorities were followed and judgements made. Even having a single regulator would likely raise considerable challenges in this context - having to be accountable to two governments with different priorities. For analogous reasons, while certainly not impossible - as the example of the Integrated Single Electricity Market (I-SEM) for the island of Ireland has shown, a single system operator (as proposed in the 2014 White Paper) would also raise challenges. Such challenges would increase if Scotland were to join the EU (see further below).
In any event, following independence, the arrangements that are put in place for the energy market between an independent Scotland and the continuing UK will be part of wider discussions on an exit and future relationship agreement.
Impact on renewables
During 2019, renewable generation reached 37% of total generation for the UK as a whole, representing:
- 33% in England;
- 61% in Scotland;
- 27% in Wales; and
- 45% in Northern Ireland.
This meant that in 2019 Scotland, with approximately 8% of the UK’s population, produced 25% of its renewable electricity. Scotland is, therefore, currently leading the way in terms of renewables generation, particularly with respect to wind power.
However, the impact of Scottish independence on the continuing UK’s net zero targets in relation to the energy sector is not as straightforwardly negative as it might first appear. Even if full integration of GB’s electricity market is unwound following Scottish independence, it would be in both Scotland’s and the continuing UK’s interests that electricity would continue to be traded. To the extent that the continuing GB continues to be a net importer of electricity from Scotland, such generation (regardless of how it was produced) will be considered carbon free for the purposes of the continuing UK’s carbon targets. In addition, the continuing UK’s domestic renewable electricity generation, excluding Scotland, would still meet the minimum 30% renewable energy (of total consumption) target the UK has set for 2030.
Scotland also faces its own challenges in further decarbonising its energy sector. Scotland, in contrast to the UK government, plans not to proceed with new nuclear plants. With 24.5% of its electricity generated by nuclear during 2019, Scotland has a substantial low carbon gap to fill once its two remaining operational nuclear power stations cease generating.
Furthermore, although subsidies required for low carbon generation have been falling, the loss of payments to Scotland from continuing GB consumers to support the renewable subsidy costs (as would be argued for by the UK Government as discussed above) would need to be considered by any independent Scottish Government when developing its renewables policy.
How will jurisdiction over North Sea renewables projects be determined?
The location of any future land and maritime boundary between the rest of the UK and Scotland will be a significant issue. Under relevant international law, coastal states have sovereign rights to exclusive exploration and exploitation of the natural resources within their Exclusive Economic Zone (EEZ), as well as over offshore wind, wave and tidal and carbon capture, usage and storage (CCUS) projects. The maritime boundary between Scotland and the continuing UK will therefore determine the jurisdiction of both sides over such projects.
There is no agreed maritime boundary currently. The 1982 UN Convention on the Law of the Sea (UNCLOS) sets down the approach to delimitation of maritime boundaries between adjacent coastal States. UNCLOS encourages parties to reach agreement, and contains mechanisms for the resolution of disputes, commonly based around the line of equidistance. While resolution is pending, UNCLOS provides that States must “make every effort to enter into provisional arrangements of a practical nature and, during this transitional period, not to jeopardise or hamper the reaching of the final agreement. Such arrangements shall be without prejudice to the final delimitation”. As a practical matter therefore, the continuing UK and Scotland may reach interim arrangements such as a joint development zone. Co-operation between regulatory bodies should help ensure consistency in the regulatory environment and that licensed activity is recognised in both jurisdictions.
For more information on international law issues arising in the case of Scottish independence please see our briefing on Scottish independence: the international law implications briefing.
Supply security issues
Scotland is a net exporter of electricity to other parts of the UK. During 2019, Scotland exported a record 32% of its generation in net transfers to England and Northern Ireland (with Northern Ireland in turn net exporting to Ireland via the Moyle Interconnector). This is a substantial increase on the net export volumes in 2014.
Assessing the extent to which the UK might rely on Scotland for generation will not be as simple as reviewing the headline net export figures. First, while net exports from Scotland are a substantial proportion of its generation, it is a smaller share of demand in the rest of the UK. In 2019 Scotland produced 15% of the UK’s electricity, but only used 10% of it, while England used 82% having produced 73%.
More importantly, net exports from Scotland are largely a function of its high proportion of wind power capacity so that when these are generating electricity Scotland exports. At such times the main impact on the rest of the GB market is for gas fuelled power stations and other flexible capacity to reduce generation. Without the more diverse continuing GB electricity market to draw on, Scotland’s reliance on intermittent wind generation might become more challenging. In this regard, we note that the Scottish Government (as indeed does the UK Government) proposes to make substantial use of carbon capture and storage which could be a low carbon route to maintaining flexible fossil fuel generation and also making use of North Sea related assets.
It would appear to be in the interests of both an independent Scotland and the continuing UK to continue cross border trade in electricity for the sake of security of supply and lower costs for consumers. For electricity, this might look closer to the situation prior to the 2005 BETTA reforms in terms of Scotland/ GB trade.
Impact if Scotland (re-)joined the EU
Had Scotland voted for independence in 2014 and secured exit from the UK prior to the UK leaving the EU, then the newly independent Scotland would not have been a member of the EU after it left the UK. This is because an independent Scotland would be a new State in international law and the EU is an inter-governmental organisation with entry criteria. To that extent, the UK leaving the EU has not changed the fact that a newly independent Scotland, initially at least, will not be a member of the EU.
However, it has fundamentally changed the position for if and when, as proposed by the Scottish Government, an independent Scotland joins the EU (see our briefing Scottish independence and EU membership: process and implications for more background). An independent Scotland would be joining an EU to which the continuing UK is no longer a member. This inevitably would add additional drivers, to those discussed above, to divergence between the continuing GB and Scotland in relation to the GB energy markets and would make sustaining the deeper levels of ongoing integration harder.
By joining the EU, Scotland will seek to take advantage of existing and further integration across EU markets. However, due to the history, existing infrastructure and geography, an independent Scotland will inevitably be more substantively connected to the continuing GB system than the EU system even as the level of integration between Scotland and GB declines over time.
Other issues for business
Independence would have a variety of cross-sectoral implications for business. Other briefings are available on our Scottish Independence hub including contractual implications, employment and pensions, to relevant impacts on trade rules.
What supersedes the GB energy system in case of Scottish independence is likely to be a complex component of any future exit and future relationship agreement between the Scottish and UK Governments. Cross border trade in electricity and gas can be expected to continue under whatever arrangements are agreed. The question is to what extent will the mutual benefits to efficiency, cost and security of supply of the current level of integration be maintained.