The Wind, The Waves and the Black, Green Oil

Craig Dalzell

In my time as a policy campaigner I have counted a few times now where my work has had a tangible impact on the poltics and fabric of Scotland. One of those has undoubtedly been the digging I’ve done into the ScotWind project – a plan to create 28GW of offshore wind energy in Scotland, first lauded by the Scottish Government as a success but now known to have cost Scotland billions that will be extracted from the scheme in private profits and may cost billions more if its supply chain promises prove as weak as they appear.

During the recent SNP leadership campaign, all three candidates identified where they would have liked to go further with ScotWind with the eventual winner Humza Yousaf – now First Minister – outright pledging his desire to buy an equity stake in a future “ScotWind II” (though not the current scheme), to look again at the capped price mechanism and to reconsider a national energy company built using the blueprint adopted by Wales.

Our main concern with ScotWind was that the options auction that completed last year was designed around a price-capped auction where the various bidders could only pay up to a maximum price – initially £10,000 per km2 and then increased to £100,000 per km2 after experts sounded warnings that it was too low. We contended in our analysis that the fact that every single winning bid came in at exactly the price ceiling was a sign that they would have happily paid more in an open auction.

In my second paper on ScotWind I examined international examples of comparable offshore wind auctions and found that the prices achieved in their uncapped bids were many times higher than that of ScotWind. Had ScotWind achieved those prices then instead of a mere £755 million gained for the public purse, Scotland could have brought in more than £16 billion.

Of course it’s difficult to test these hypothetical situations and the obvious criticism of this approach to ask if prices higher than the capped one actually could have been achieved in Scotland. The now deputy FM Shona Robison is of the opinion that they couldn’t be (despite admitting that she was not involved in the negotiations). I strongly disagree simply on the basis of asking what anyone thinks the price raised by the ScotWind auction would have been in the absence of a cap. If it would have been lower than the cap then there’s obviously something very broken in economics as companies have bid more than they needed to. If an open auction would have raised exactly the same as the capped auction then I think we would all be calling for an investigation into the obvious case of collusion and cartelism between the Crown Estate Scotland and the energy companies. The only reasonable scenario is that the price cap cost Scotland money.

The question therefore is “how much?” and that is the more difficult question to answer. Detractors of our paper point to factors such as Scotland’s remoteness, the difficulty of building in our rough seas and the limited customer base for our energy exports all as reasons for the low, low price. Scotland’s energy, they say, just isn’t worth enough for us to bother about (especially if we want to entertain notions such as independence and nationalised energy – allowing others to extract those resources for themselves is perfectly fine though).

Enter the perfect test case for this hypothesis. Last week, Crown Estate Scotland announced a new offshore wind auction as part of the INTOG programme.

This programme consists of two parts. IN refers to “Innovative technologies”. It’s a testbed for research and pre-commercial offshore wind programmes. These bids are quite small and were limited to 100MW each. Given that the world’s largest offshore wind turbines currently in the planning pipeline are designed to generate up to 18MW each and the 20MW threshold looks likely to be breached any time now, it’s likely that these fields will consist of just a handful of turbines – probably no more than ten, even if the scheme is designed to test things like floating foundations rather than to push the envelope of sheer size.

The TOG pathway is likely to be more controversial. This is a plan to “decarbonise” offshore oil and gas operations by powering the drilling rigs with renewable energy. Of course a “green” rig will only actually be “Net Zero” if it somehow manages to magic away the environmental impact of the oil it extracts. I’m not sure even Martin Compston could manage that one. It’s the same greenwashing trick that other polluting industries like airports have done by “decarbonising” their buildings but asking us to just ignore all of the fume-belching planes flying in and out.

Nevertheless, companies were bidding enthusiastically on both the IN and the TOG schemes and many of the winning bids ended up achieving prices substantially higher than the ScotWind auction. All but two of the INTOG bids “beat the average” of ScotWind on a price/MW basis and across the whole auction, the round raised £48,336/MW of capacity – around 75% more than ScotWind’s average of £27,626/MW. The highest winning INTOG bid came in at £99,000/MW for one of the IN fields. All in, INTOG has raised £262 million for the Scottish public purse by auctioning 5.5GW of capacity. However, had ScotWind achieved the same average price as INTOG, instead of raising £755 million across its 27.6GW of capacity, it would have raised something closer to £1.3 billion.

But, the sharp-eyed observe, this is still a far cry from the manic bidding seen in places like New York last year. So why does INTOG give me the confidence to say that ScotWind could and should have achieved more?

The answer is that we can apply the same criticisms of INTOG as have been applied to our analysis of ScotWind. The IN round is fairly straightforward. As stated earlier, these are research and pre-commercial platforms so not necessarily designed to be part of a fully commercial environment even those their successors might be. Their small size also limits the economies of scale that would come with the multi-GW fields of ScotWind. These fields are also particularly remote even compared to other INTOG schemes which themselves are almost all further out to sea than the ScotWind fields – An overlay of the maps of the two schemes shows just how much further out INTOG fields (recoloured red here for clarity) are compared to ScotWind (green).

The TOG schemes suffer from almost the same degree of relative remoteness as the IN schemes but come with an additional challenge to their commercial pricing which is their limited customer base. They are specifically designed to serve a nearby oil rig or cluster of rigs and thus may have limited or even no connection to the mainland Grid. Just as only having one seller of a product or service (a monopoly) pushes up the price of that product, so only having one buyer of a product (a monopsony) pushes that price down. Indeed, given that some of the companies involved will either outright own the rig their “green” energy will be serving or at the very least may have a complexly interwoven cross-ownership of subsidiaries and shareholders between them, it’s likely that there will be some degree of vertical integration between the wind energy and the oil rigs. Does the electricity even come with a cost at all if all you’re doing is paying yourself to provide a service to yourself?

Despite all of this, INTOG has done better for the Scottish public purse than ScotWind before it and the new Scottish Government should be challenged on why this happened and what steps will be taken to ensure it doesn’t happen again. I would still like to understand why the Scottish Government didn’t have a proper handle on what was happening with ScotWind at the time.

I suspect that the answer lies in why the three leadership candidates – as they were at the time – didn’t mention INTOG when they are asked about ScotWind at the SNP TUG hustings and why their answers betrayed than none of them appeared to know all that much about the projects beyond their written talking points. I suspect that when Crown Estate Scotland was devolved in 2017, the Scottish Government either didn’t really know what to do with it or didn’t care to find out what they could do with it. I suspect that Crown Estate Scotland was simply left to run itself without sufficient oversight from the Ministers who were supposed to be guiding it. I hope that this will change with the changing of the guard in Bute House and Holyrood. Time will tell, but the new Cabinet Secretary Neil Gray and whoever becomes responsible for Crown Estate Scotland should expect an invitation shortly to meet with Common Weal’s energy team. We remain committed to ensuring Scotland gets the most out of our offshore resources, we have the plan to make it happen. We only hope that the Scottish Government will finally, finally agree that the best way to do that does not involve privatising our future, again, at the lowest possible price.

3 thoughts on “The Wind, The Waves and the Black, Green Oil”

  1. David Simpson

    This article contains some excellent material, and the point about the capped auction where all successful bids were set at the cap while a later uncapped auction achieved much more per km² clearly demonstrates that the sea bed resource was well undersold to Scotland’s significant dis-benefit, and there is a very good case indeed for an enquiry.

    Unfortunately, this paper as written cannot be quoted as a reference since, after all the good work on the economics, the paper contains the following statement “Given that the world’s largest offshore wind turbines now generate up to 18GW each and the 20GW threshold looks likely to be breached any time now”. Sadly this contains the fundamental error of substituting GW for MW – a 1000 fold exaggeration. As far as I can establish the Chinese claim to have commenced construction of an 18MW turbine. If true, and if it is successfully commissioned, it will be the world’s largest, significantly exceeding the 14MW largest currently operating wind turbine.

    I am sure the GW/MW error is inadvertent, and if the paper could be re-issued correcting this and the incorrect “world’s largest” claim then it would be an extremely useful source.

    1. Hi David. That was indeed a daft typo on my part and should be sorted now. It should indeed have been 18MW.

      A multi-GW wind turbine would be quite the sight to behold (and we’d probably only need one of them to power all of Scotland!) but the tech isn’t /quite/ there yet. Maybe that’s one for INTOG II…

  2. Hi Craig
    Thank goodness Commonweal is covering this. I feel like what someone working in the OIl sector of the 70s must have felt like watching the energy being sqandered and sent south. The Green Hydrogen made at Kintore in Aberdeenshire is to be transported to fire Stateras gas fired power plants in England, and probably the Teeside Hydrogen Hub beloved by Shaps…..I guess thats what the ‘Project Union’ GH pipeline is all about.

    Disappointingly Scotland only had about three GH schemes awarded despite having 80% of the contrained renewables (politics over practicality in the UK)……

    Never mind the two HVDC subsea (2 GW) interconnectors going in to move energy from Peterhead and Torness to the north of England…enough to power 4 million homes (in England)or Green Hydrogen production??……loads of pooling and sharing going on there….sigh…..I’ve been building wind farms/interconnectors in Scotland since 2005 and as an Independence supporter its enough to make me want to cry

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