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An Independent Scotland? Another Risk For Green Investors

An independent Scotland would likely take control over energy market and network regulation, displacing Ofgem. Utilities and other investors should exercise extreme caution in committing further capital to Scotland.

  • Another Political Risk Looms – we have written several reports in recent times highlighting the negative impact that political risk has had on the European utility sector. In the UK a new risk has arisen. In May the Scottish National Party won an overall majority in the Scottish legislature. Since the election the SNP’s popularity seems to have increased further, gaining 45% approval ratings in recent opinion polls.
  • Two main policies – the SNP has two flagship policies; first to hold a referendum on Scotland seceding from the UK; and second for Scotland to aggressively develop renewable energy to drive an industrial renaissance and deliver 130,000 jobs.
  • Policy 1 – Referendum – the Scottish Government plans to hold a referendum in 2013 or 2014. If a yes vote is the outcome then this would mandate the Scottish Government to negotiate terms for Scotland to secede from the UK. Secession could take place as early as 2016/17, although the timetable is naturally unclear given the lack of precedents.
  • Policy 2 – Renewable energy – the Scottish Government is targeting a massive increase in renewable power generation from the current 10TWh to around 50TWh by 2020. To achieve this, generation capacity in Scotland needs to double from 13GW to circa 26GW with the increase being achieved through building on-shore and off-shore wind. This would cost approx. £46bn.
  • But are these policies compatible? – we think not. First the referendum process will naturally create huge uncertainty at precisely the time when major investment decisions are due to be made. More importantly that amount of renewable power would require annual subsidy of around £4bn. Scotland’s consumer base is far too small to support this level of subsidy, in our view.
  • Stranded Asset Risk – therefore continued subsidy from consumers in England and Wales would be required. But Scotland seceding from the UK would clearly place this subsidy stream at grave risk. Renewable investors risk seeing their assets stranded in a newly independent Scotland.
  • Other Risks – an independent Scotland would likely take control over energy market and network regulation, displacing Ofgem. The impact of this is impossible to assess at this time. But a new substantive regulatory risk would clearly be created which could lead to investors applying a discount on networks assets in Scotland.
  • Conclusion – in our view utilities and other investors should exercise extreme caution in committing further capital to Scotland. This particularly applies to SSE and ScottishPower (Iberdrola) who may already be over exposed to these risks.

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