Analysts at Citigroup have advised utilities and other investors that they should "exercise extreme caution in committing further capital to Scotland". In a report published last month, Citigroup Global Markets warns that the Scottish government's plans to hold a referendum on secession from the UK in 2013 or 2014 will not only "create huge uncertainty" at a time when major investment decisions in areas such as offshore wind are due, but also create the risk of stranded assets should Scotland vote for independence.
The report argues that while transmission links would continue to exist between Scotland and the rest of the UK, it is highly likely the country would be cut off from the subsidy streams in England and Wales.
The Scottish government has a target to generate all its electricity — roughly 50TWh — from renewable sources by 2020. The majority would be wind-generated, which entails 16-18GW of installed wind capacity, compared with just 4.3GW currently installed across all renewables in 2011.
Heavy consumer burden
The additional investment would amount to £46 billion (€53.8 billion) and, based on current pricing of renewable obligation certificates (ROCs) at just over £50/MWh, renewables would need an annual subsidy of £4 billion. The Scottish consumer base cannot support this on its own, the report warns.
Scotland has 2.3 million households and 300,000 businesses, according to the report. If the cost was split evenly between both, the cost per household would be £875, compared with electricity bills of around £650 a year now. Businesses would face a £2 billion annual bill. The report points out that the total revenue raised in Scotland in 2009/10 from business rates was £1.8 billion.
"Therefore it is inconceivable in our view that Scottish consumers could shoulder this level of subsidy alone," it states.
These calculations only take into account subsidy costs, be they ROCs or the feed-in tariff (FIT) that will eventually replace them, but not other substantial costs that would need to be borne by Scottish consumers, such as transmission and distribution re-enforcement costs and a potential capacity payment for fossil fuel stations.
The report concludes that the Scottish government would have no choice but to slash subsidy levels in a similar manner to the way mainland European countries such as Spain and Italy have cut theirsolar FITs.
Scotland's first minister, Alex Salmond, dismissed the report, saying the Citigroup analysts had misunderstood the nature of Scotland's renewable-energy programme and the fact that large amounts of the electricity generated would be exported to England.
A Scottish government spokesman added: "We are putting the key building blocks in place to export energy from Scotland to national electricity grids in the UK and Europe, with a strategically planned onshore and offshore transmission network."
But the Citigroup report does in fact acknowledge that Scotland will need to increase its electricity exports from the current 10TWh to 32TWh. However, it points out that an independent Scotland would be a foreign country to the rest of the UK and could only export power at the wholesale price; it would no longer be entitled to the UK subsidy it now receives.
The bulk of Scotland's renewable generation would come from offshore wind, up to 10GW installed capacity. Offshore wind is eligible for two ROCs plus the power price (around £155/MWh). "We would have to assume that gas prices reached an oil equivalent of $300 per barrel to make offshore wind competitive," the report states.
"We think it is therefore reasonable to assume that there will be an ongoing need for a sizeable subsidy stream for renewable assets," it says