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ScotWind: Privatising Scotland’s Future Again

Overview —

A response to the initial auction of options for ScotWind – the largest offshore wind project yet developed in Scotland’s waters.

Instead of mass-privatisation along the same lines as was done during the development of Scotland’s oil, Common Weal offers a nationalisation plan that could have been deployed using policies currently endorsed by the parties of the Scottish Government.

Credits—

Craig Dalzell

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Scotwind is the first auction of Scotland’s offshore territory for the purpose of generating renewable wind energy in a decade and is the largest such auction of its kind so far in Scotland.

But the way it has been done has effectively privatised Scotland’s next generation of energy assets before they’ve even been built, has done so for an unbelievably small fraction of the potential profits to be extracted from the resources and has not done nearly enough to secure the local ownership and supply chain benefits that should come to Scotland as a result of this project.

This report estimates that ScotWind will result in around £50-£90 million per year coming to Scotland in rents from the energy generation in addition to the £700 million already raised from the initial auction. However, analysis of the return of investment and profits from extant offshore wind operations suggest that the energy production from ScotWind could result in £3.5 to £5.5 billion in profits shared collectively between the companies involved in the project.

The report presents a plan that could have retained ownership and operations of this project in Scottish public hands using policies already endorsed by the SNP, Scottish Greens or both.

KEY POINTS

― The Crown Estate’s ScotWind auction initially estimated that it would be able to lease out 8,600km2 worth of Scottish sea area for the development of 10GW of wind energy.

― A ceiling of £10,000 per km2 was placed on the auction price but this was raised to £100,000 per km2 after a similar auction in England proved that the market could pay more.

― The final auction results suggest that this raised cap was also too low – all but one of the bids priced at exactly the cap, with the remainder winning a bid at the lower cap of £10,000.

― Only 7,343 out of the 8,600km2 were successfully auctioned off but winning bids submitted proposals to build a total capacity of 24.8GW of wind energy. This means that on a per GW basis, the ScotWind auction raised only a third of the amount initially estimated – Just under £700 million.

― Once generators are operational, the Crown Estate will receive a rent of £1.07 per MWh generated.

― Once fully developed, this could translate to an annual fee of between £50 and £90 million depending on the “capacity factor” of the wind turbines – a measure of how much energy they actually generate depending on wind conditions and demand compared to their maximum potential output.

― It is not yet known how much the UK National Grid will charge in TNUoS connection fees as this will depend on where in Scotland the electricity from the turbines comes ashore and the capacity in the system. Based on current typical rates for the North of Scotland, the entire ScotWind project, if not directly exported, could expect to pay around £727 million per year in connection charges to the National Grid – around ten times more than the projected rent to Crown Estate Scotland and more than the initial option fees raised.

― However, the National Grid and the current TNUoS system almost certainly cannot absorb the level of additional generation expected from ScotWind without serious reform so this number must be regarded as, at best, illustrative of the failure of this system to appropriately price renewable energy connections to the National Grid.

― Analysis of the annual accounts of extant offshore wind companies such as Vattenfall and Ørsted suggest that the profits to be gained by the companies who won the auction will be many times higher than this annual rent.

― If the ScotWind project achieves a profit margin similar to these companies then it may generate a pre-tax profit of between £3.5 and £5.5 billion annually. The upper range of this represents more than 10% of the current Scottish budget.

― The companies who won the auctions are a mix of fossil-fuel supermajors, private energy companies, state-owned energy companies. BP and Shell have won more than 20% of the total energy capacity between them.

― Many of the private energy firms are themselves owned by a complex web of financial holdings, hedge funds and investment banks. One holding company has been identified as owning shares in multiple auction winners equivalent to them owning up to 20MW of total energy capacity.

― Benefits within the “Scottish supply chain” have been overpromised. Current bids have been won with the explicit exclusion of supply-chain commitments (though binding commitments will be part of future negotiations). However, lack of manufacturing capacity in Scotland means that promises may not be forthcoming if companies deem it cheaper to import materiel than to invest in the capacity to build it in Scotland.

― If Scotland had launched a series of agencies as called for by Common Weal and as accepted by SNP and Scottish Green party policy, the ScotWind project could have remained entirely owned and operated from within Scotland.

― Had Scotland launched a National Energy Company capable of owning ScotWind, it would have been well placed to deliver billions in profits to Scotland every year that will now instead be shipped overseas to private shareholders or invested in the public services of those countries who have deployed their own nationalised companies in Scotland.

― Scotland must build up that capacity now so that it is ready to capture the results of the next energy auction and can position itself to nationalise ScotWind assets when their leases are poised for renewal.

― Combining Common Weal’s policies in this area would result in multiple agencies taking on different aspects of a project like ScotWind:

― A National Investment Bank would provide stable finance and anchor investment.

― A Scottish Energy Development Agency would strategically plan where the next tranche of assets should be deployed and identify where support infrastructure (such as the National Grid) should be reinforced or supply chain gaps filled.

― A National Infrastructure Company would co-ordinate the construction contracts, commission training from extant energy companies and ensure that workers are Justly Transitioned into the new sector.

― The National Energy Company would own and maintain the energy assets, deliver energy to customers and return profits for the public purse.

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