Constitutional Change and the Electricity Industry: Constraints and Opportunities

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

2. 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

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

4. 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

5. 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))

6. 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

7. 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

8. 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

9. 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 Butcannot 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

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

11. 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

12. 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)

13. 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

14. 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

15. 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

16. 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

17. 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.bcan meet EU renewables target through domestic consumption or ‘flexibility mechanisms’)

18. 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?