A LEVY ON EXPORTED ELECTRICITY?

A rather incredible suggestion. But more importantly: is it even possible? Three leading energy experts have given their assessments. They are scathing:

“an extraordinarily unrealistic assertion”

“singularly lacking in empirical underpinnings”

“The claimed saving seems impossible to validate as well as being such a significant reduction on bills as to be highly questionable.”

A levy on exported electricity: what do experts think?

One of the most eye-catching pledges being made at this election is the SNP’s promise that independence would cut electricity bills for Scottish households by more than a third.

The SNP has not explained where this figure comes from, and has repeatedly refused to disclose any calculations that might justify the pledge.

The only attempt to explain how it could be delivered can be found in the paper “It’s Scotland’s Energy”, published by the SNP last December. This is a key passage:

“An SNP Scottish Government would also use revenue from seabed leases and exports (whether from interconnector congestion income or a levy on exported electricity to reduce or remove the existing network, policy and environmental costs on household bills.”

Network, policy and environmental costs represent around half of a household electricity bill. So the mechanisms suggested for reducing, or even removing, these costs must be doing the heavy lifting to deliver the headline pledge.

We know from the ScotWind auction that revenue from seabed leases in Scotland is relatively modest.

Interconnector congestion income refers to revenue generated from price differences between interconnected electricity markets.

The wholesale market price of electricity in an independent Scotland, set by short-run marginal costs, would often be close to zero. So there would certainly be ample opportunity to generate such income, since the equivalent price in England and Wales would usually be higher.

However, it should be obvious that interconnector congestion income for Scottish network assets would come at the expense of income for Scottish generation assets.

And it’s also important to note that Scottish generation assets would still need to recover long-run marginal costs. Which is why CfD prices really matter - households must pay those guaranteed, inflation-linked prices. Not simply the near-zero short-run marginal costs.

At a whole system level for Scotland, it should be clear that interconnector congestion income would be a zero-sum game, at best. Anything gained by network owners must have been lost by generators, and households would be on the hook for the recovery of those lost generator revenues.

In reality, it would be much worse than a zero-sum game, because interconnector congestion income would actually be shared with the co-owners of the interconnectors, the National Grid in England and Wales.

So, if revenue from seabed leases and interconnector congestion income are not going to deliver the pledge, the remaining mechanism is the proposed levy on exported electricity.

But the SNP envisages an independent Scotland joining the EU. Which raises a massively important question: doesn’t this idea fall at the very first hurdle? Such a levy would be impossible under the terms of the EU-UK Trade and Cooperation Agreement (TCA), and the evolving “reset” of that agreement, wouldn’t it?

Could the SNP really be relying on a mechanism so obviously and fatally flawed? To be sure I wasn’t missing something, I asked a number of relevant experts. Here are the responses:

Professor Derek Bunn
Professor of Decision Sciences, Management Science and Operations at the London Business School

Yes you are correct Sam. It's an extraordinarily unrealistic assertion. You are correct in terms of the TCA and also the intent of the proposed re-set to effectively re-align GB with EU electricity trading.
Also, apart from the treaties, it would not be possible to impose because of the meshed electricity networks across the North Sea and with Ireland. A lot of power could flow from Scotland into England via European links. Northern Ireland would complicate matters further. Northern Ireland is actually part of the All-Ireland Single Electricity Market (SEM), so effectively harmonised into the EU system, especially with the new link in the south from the Republic to France.

Professor David Newbury
Director of The Energy Policy Research Group (EPRG) at the University of Cambridge

It would depend on trading arrangements but normally Scotland would have its own price of electricity and England would likely have a different price. Some agreement would be needed on who gets the difference in price. Note that Scotland cannot currently use all its windpower, which is curtailed and compensated by GB customers - ie mostly England. An independent Scotland would struggle with its surplus wind power, and would be a very unattractive location for any further investment in renewables, especially offshore in deeper waters than the North Sea. As an argument it is singularly lacking in empirical underpinnings.

Robert Armour
Chair of the Scottish Government’s Expert Commission on Energy Regulation prior to the 2014 independence referendum

No one knows what the state of UK EU trade relations will be in the future as much depends on the Governments in place at that time. The potential timescales for independence, rejoining the EU, etc if ever, all seem to me hypothetical and , at soonest, into the 2030s. And any predictions on bills 10 years hence seems destined to be wrong.

A levy on our main export partner also seems to me fraught with problems. Aside from our mutual dependence for energy security… Scotland may well have surpluses to export from intermittent renewables but its anti-fossil and anti-nuclear policies mean it will rely on imports from thermal generators south of the border at times of low wind/solar/hydro… the erection of trade barriers if the UK has previously moved closer to the single market raise obvious competition rules concerns as these would not be allowed between member states. But the idea that Scotland could impose a penal levy without a response from England in other areas of dependence… energy and non energy… seems fanciful. The claimed saving seems impossible to validate as well as being such a significant reduction on bills as to be highly questionable.