Utility Week

12 | 1st - 7th August 2014 | utILItY WEEK Scottish referendum Regulation I ndependence for Scotland would pose a conundrum for energy regulation. It would erect barriers across a power transmission network where barriers had been deliberately removed under the Brit- ish Electricity Trading and Transmission Arrangements. It would split a single regula- tor in two when the European Commission has laboured to bring regulators in member states closer together. And it would add to regulatory complexity when Ofgem is trying to simplify the whole show. But how insur- mountable would these problems be? A recent report by the Expert Commission on Energy Regulation set up by Scotland identified the biggest issues that policymak- ers on either side of the border would face, and came up with proposals on how to address them. The chief changes resulting from Scottish independence would be: • under European law, Scotland would need an independent national regulatory authority (NRA); • the NRA would be a multi-utility regulator in line with current Scottish government plans; • a Scottish system operator would be established; • there would be a single, GB electricity and gas market with unified networks for both. T he UK's energy retail sector is far from in rude health. It has been referred to the Competition and Markets Author- ity because it is believed to be uncompetitive and not working in the best interests of con- sumers. With this as the backdrop, the poten- tial for Scottish independence could shake up the energy retail sector even further. The biggest question in a post-union world would be whether the single market continues between Scotland and the rest of the United Kingdom (rUK). Immediately a‹er independence, the two side of the bor- der would look the same. The Scottish gov- ernment is likely to replicate the regulatory regime from rUK, with the same obligations on suppliers – at least initially. One consultant told Utility Week that the business models of the foreign owned com- panies – EDF Energy (French), Eon, Npower Scottish independence, as dra‹ed, would leave each regulator taking its policy steer from its government while trying to maintain the coherent operation of a single market. Even if both governments wanted to leave a single pan-Britain energy system intact, there would be profound difficulties. No-one is arguing for wholesale gas and electricity markets to be split, and the expert commission agrees that any physical separa- tion would incur "significant cost, but deliver no material benefit". Nevertheless, it says there is every likeli- hood that political ambition will lead to gov- ernment interventions from one country that will not be welcomed by the other. For exam- ple, political clashes would be inevitable over the continuing socialisation of Scottish transmission and distribution network costs across all Britain's consumers. Similarly, hos- tilities must arise over renewables subsidies. The report says policy differences could be resolved by "effective consultation and joint agreement to minimise market distor- tions and other unintended consequences", but it concedes that the continuation of a single British market might prove a tough proposition. "An independent Scotland and the rest of GB would have different policy objectives, making it difficult to agree a com- mon approach, which would be required to maintain a fully integrated system," it says. (both German) and Scottish Power (Span- ish) – already cater for supplying energy via a regional subsidiary. The creation of a new nation would only result in this business model being extended to the newly inde- pendent Scotland. Stephen Hunt, analyst at UBS, says there are unlikely to be any significant changes should Scotland opt to go it alone and the single energy market continues. "I assume we will move to a 3 per cent retail margin across the whole of the UK, so from there, it's not a massive downside if Scotland came out with, for example, a 2 per cent margin," he says. However, with the Scottish government eager for a single pan-utility regulator, dif- ferences could soon emerge. Scotland could end up with a big two, because the Scottish market is historically uncompetitive, with consumers there among the most unlikely The bottom line is that if a common vision could be agreed at ministerial level, and clear lines of communication established, anything is possible. But given the political antagonism between Westminster and the SNP, this can by no means be guaranteed. Examples abound of separate regulatory regimes co-operating in single markets (such as the Irish, Nordic and Iberian markets), but these conglomerations of previously separated markets arose where the two sides recognised the advantages of union. Leading Scottish energy lawyer and chairman of the expert commission, Robert Armour, says the situation for Scotland and the rest of the UK would be different. Spitting up a previously single market breaks new ground. However, he also says that "once you get in the UK to switch supplier. Decc statistics reveal the incumbent sup- pliers – SSE (66 per cent) and Scottish Power (46 per cent) – have maintained a higher pro- portion of their historic customer base than the GB average (37 per cent) (see graph). Coupled with the differences introduced as the two separate markets diverge – such as social responsibilities and the Scottish gov- ernment's focus on renewables, while rUK looks set to press ahead with new nuclear – the costs to serve the respective custom- ers will also change. Decc estimates inde- pendence could add up to £189 to domestic energy bills for Scottish consumers, because the subsidy support for renewables would fall solely on customers in Scotland. Tony Ward, head of power and utilities at EY, says that outside of energy, the currency adopted by Scotland will have the biggest Turbulent times lie ahead for retail sector Untangling energy will be no easy task National markets have joined forces in Ibe- ria and Scandinavia, but no previously unified European market has been "rent asunder". The SNP has said it would establish first a multi-utility regulator, then expand its respon- sibilities to be multisector. "Socialised" transmission costs will have to be split and renegotiated. Scotland would need to set up an inde- pendent system operator or hire National Grid to continue in that role.

• Cover