Independence and the market for electricity in Scotland

Allan, Grant and McGregor, Peter and Swales, John (2013) Independence and the market for electricity in Scotland. In: ESRC Conversations 3: Energy Sector in the Context of Constitutional Change in Scotland, 2013-05-07 - 2013-11-07. (Unpublished)

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    Abstract

    In liberalised electricity markets the impact of further constitutional change depends on the reaction of all the relevant transactors involved in the supply and demand for electricity. This includes the manner in which supplies and demands are balanced and the way in which the market is structured and regulated. A comprehensive analysis would thus require a detailed study of the impact on the “supply side” of the market (generation, transmission, distribution and supply), as well as on the “demand side” (households, firms, government). Furthermore, the fact that electricity cannot easily be stored raises balancing issues, and the Government, both directly and indirectly (through its influence on the market structure and the regulatory framework), influences behaviour at all levels. In this paper we do not aspire to a comprehensive analysis, given the difficulties of delivering that at this stage. A full analysis, for example, would require further information concerning electricity market reform and greater evidence of the impact of constitutional change in these circumstances. Rather, we seek to focus on a number of key areas that we believe will govern the eventual impact of independence. Under the status quo, many of the elements of the electricity market are outwith the control of the Scottish Government and are reserved to Westminster. The promotion of renewables, the resistance to new nuclear and the adoption of legally binding climate change targets are examples where successive Scottish administrations have used devolved powers to, in essence, pursue a distinctive Scottish energy policy (Allan et al, 2008). However, many of the key aspects of electricity market policy (including market regulation, taxation, etc.) are, under current constitutional arrangements, beyond the control (though not necessarily the influence) of the Scottish Government. Significant constitutional change may alter some aspects of market structure and transactor behaviour (for better or worse). But change under independence may not be dramatic if, for example, a unified GB electricity market is maintained and there is little substantive difference in regulation in practice, despite the establishment of a separate Scottish regulator, as the current Government again intends (e.g. Ewing, 2013; Scottish Government, 2013). We organise our discussion around the likely impact of further constitutional change on the ability of the Scottish Government to achieve its energy policy goals, though we focus primarily on effects that are linked to possible developments in the electricity market.1 In liberalised markets, energy policy involves the use of policy instruments to induce private transactors to behave in a way that achieves targets as well as the ultimate policy objectives, subject to constraints. In the Scottish and UK context the major policy objectives include: security of supply; environment protection (limiting carbon emissions to inhibit climate change); economic development (in a sustainable manner) and energy affordability. Additionally economic development potential has received rather greater emphasis in Scotland (where energy is one of the Government’s key growth sectors) than in the UK as a whole