Scotland’s Risky Power Play

Energy was meant to be Scotland’s trump card in its quest for independence. Now, with a could-go-either-way vote on splitting the three-century old United Kingdom a day away, that trump card looks more like a joker.

Oil and gas, of course, have fueled dreams of Scottish independence since the early 1970s, when the discovery of crude in the North Sea turned once sleepy ports such as Aberdeen into major hubs of the global energy business. Scotland is banking on billions in annual revenue from the aging offshore oil fields to fund its expansive vision of an independent state.

But its push is dealing a weak hand to the electricity market, potentially imperilling billions of dollars in investment and raising the specter of higher power prices for Scottish families and businesses.

At the heart of the matter is Scotland’s insistence that, if it prevails in Thursday’s referendum, it can pick and choose the best of both worlds. Scotland hopes to keep the British pound, for instance, though London has frowned on that idea; Scotland wants to scrap nuclear weapons yet still be part of a nuclear-armed NATO; it wants to leave Britain but join the European Union with British privileges.

When it comes to electricity, Scottish nationalists tell voters that even after independence, London will underwrite billions of dollars worth of new renewable-energy projects needed to turn Scotland fully green. They also claim that Scotland will keep selling its excess electricity south of the border to desperate English customers. The Scottish government insists that the U.K. will need to import renewable energy from Scotland to meet legally binding targets.

Yet officials in London have warned that if Scotland secedes, it will be left to its own devices when it comes to the electricity market. "If Scotland becomes an independent state, the current integrated Great British energy system could not continue as it is now," the U.K. Department of Energy and Climate Change told Parliament this spring.

Climate Secretary Ed Davey has said that London will not fund those green-energy projects. British Prime Minister David Cameron, in Scotland Monday for a last-ditch appeal at union, warned that a "yes" vote would yield a "painful divorce" and that "if you leave the U.K. — that will be forever."

The uncertainty surrounding the referendum and its aftermath is now starting to rattle the clean-energy sector, like oil and gas before it. In the last four years, Scotland has announced about $22 billion worth of private-sector, clean-energy investments there, which could create as many as 12,000 jobs. Much of that is out to sea pending the results of Thursday’s vote: Bloomberg New Energy Finance said in a report Monday that uncertainty could derail or delay $12 billion worth of projects.

More worrisome for an independent Scotland are rising power prices. Maintaining the power grid in Scotland’s challenging geography costs more than in the rest of Great Britain. Only a few million Scots would bear the burden post-secession, rather than sharing them across the whole U.K., as is the case currently. That’s especially true for Scotland’s rapid growth in green but pricey renewable-energy projects.

"Effectively, a lot of the high costs in Scotland are paid for by people in England," said Malcolm Keay, an energy analyst with the Oxford Institute of Energy Studies. "The bottom line is that electricity costs more in Scotland, and prices risk being higher in an independent Scotland," he said.

Scotland aims to generate 100 percent of its electricity from renewable sources by 2020. But that will be a tougher slog on its own that as part of Great Britain. The British government estimated that if Scotland alone has to pay for its renewable-energy development, rather than relying on London to the tune of more than $900 million annually, household power prices could jump by more than $300 a year and costs for businesses could rise by about $1 million.

Energy economics could deal Edinburgh even more low cards. Decommissioning existing oil, gas, and nuclear installations will cost at least $50 billion; oil and gas pipelines under the North Sea will need to be dismantled when production winds down, as will old nuclear plants that have been running for decades. What’s less clear is how that burden will be divided between Scotland and the remaining United Kingdom if Edinburgh opts for independence; British officials have said only that "an independent Scottish state would be expected to take a share" in the costs.

To be sure, despite all the acrimony, a harmonious energy custody agreement could still be reached, if only out of necessity. Britain is bound by both domestic and European law to curb its greenhouse-gas emissions and use more renewable energy, even though most U.K. clean-energy installations are in Scotland. Therefore, Britain may continue importing electricity from its ex even after Scotland goes its own way.

At the same time, Scotland must reach alimony agreements with the rest of the United Kingdom over nuclear energy waste from both mothballed and operating plants.

"There’s quite a bit of posturing; a lot of things are being said with a view to influencing the referendum itself," Keay said. "In the event, people will probably do what seems more reasonable and what seems more practical."