Scoping Note on a Scottish Publicly Owned Energy Company

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Low, Ragne (2018) Scoping Note on a Scottish Publicly Owned Energy Company. Scottish Parliament, Edinburgh.

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Abstract

This scoping note provides the Economy, Jobs and Fair Work Committee of the Scottish Parliament with evidence to consider in its review of proposals for establishing a Scottish Publicly Owned Energy Company (POEC). Conducted over a short period, the scoping note is based upon a rapid review of the literature on public and not-forprofit energy companies, the Scottish Government’s Strategic Outline Case document, discussion with a number of interested stakeholders and the evidence and views presented to the EJFW Committee during its inquiry on the draft Scottish Energy Strategy in 2017. In its consultation on the draft Scottish Energy Strategy (January-May 2017), the Scottish Government sought views on the potential role and remit of a publicly owned energy company to help the growth of local and community projects. In October 2017, the First Minister made a commitment to establish a not-for-profit, publicly owned energy company to supply energy to consumers at as close to cost price as possible. A Strategic Outline Case was published by the Scottish Government in March 2018 setting out a series of operating models for delivering on the core objective of providing competitively priced energy and helping to alleviate fuel poverty. The options set out in Strategic Outline Case centre around the establishment of an energy supply company (a retailer of gas and electricity to customers). This scoping note reviews the evidence on establishing a Scottish publicly owned energy supply company as well as wider evidence on what the purpose and model of a POEC could be. A number of key points emerge. GB electricity (and to a lesser extent gas) supply is a low margin market, a point recognised in the Strategic Outline Case and reinforced by many sector stakeholders. The number of smaller suppliers in that market has grown rapidly in the past five years, and an increasing number of these are offering fixed rate or very low margin tariffs. The latest data suggest that the pre-tax margin on the average dual fuel consumer bill is just under 5%. Importantly, this is almost all delivered by the gas component of bills. Average electricity pre-tax margins were below zero for 2016. In the current market, successful suppliers are those that can procure energy at lowest prices, have the most efficient billing and customer relations systems, and are best at hedging risk. This is the market into which a Scottish Government-owned supply company would be entering. Taking a wider view of the purpose a POEC might ultimately fulfil, the review conducted here suggests four overarching objectives a Scottish POEC could have: * Creating new energy infrastructure platforms; * Accelerating wider energy system transformation; * Increasing engagement and participation in the energy system; * Reducing costs to consumers. This review concludes that a Scottish publicly owned energy company can deliver on a number of these objectives. It also suggests that it is possible to integrate these wider objectives into planning for the POEC, even if the focus for the POEC is initially as an energy supply company. Further, it suggests that it is essential to consider these wider objectives in the context of how the POEC will interact with existing energy policy initiatives. The EJFW Committee may wish to support further public debate on both the purpose of the POEC and how it will work alongside existing policy, by considering the following questions: How might a Scottish energy supply company work best to support fuel poverty reduction? How can the POEC be best designed to maximise alignment with wider Scottish energy policy objectives, and to remove all potential tensions with other policy objectives? Should a new Scottish POEC be more than solely a licensed energy supply company? How might the POEC be designed to make space for objectives and functions beyond the retail of gas and electricity? What benefits might this have?

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