Renewable energy is often claimed to empower local communities as well as providing economic benefits. Part of the logic is that renewables seem to offer “energy independence”. The truth is less straightforward. In this article, co-authored with Professor Gordon Hughes of Edinburgh University, REF examines the case of the Viking Energy wind farm in the Shetlands and more broadly that of Scotland itself.
For 600 years from the mid-9th century to the mid-15th century, the Shetland Islands were the largest component of the semi-independent Viking Jarldom of Orkney and Shetland and as such affiliated with both Norway and Scotland. They were transferred to Scotland in 1470 in lieu of the dowry payable when Margaret of Norway married James III of Scotland. They became part of the United Kingdom with the Act of Union in 1707, and they have been associated with the United Kingdom for longer than they were part of an independent Kingdom of Scotland. That history is, perhaps, reflected in their somewhat ambivalent relationship with Edinburgh over the last fifty years.
Now, with the willing involvement of the Shetland Islands Council, the Scottish Government and the Ofgem (the UK’s energy regulator), the Shetland Islands are being converted into what will to many seem like a private colony operated by the power company SSE.
The role of the Scottish Government is no surprise: SSE is the largest company based in Scotland and has been consistently supported by the Scottish Government.
It is less clear why the Shetland Islands Council or Ofgem should facilitate this project, the key elements of which are:
(a) the construction of a large onshore wind farm, “Viking Energy”, with a capacity of 447 MW, and
(b) a 260 km largely undersea transmission cable with a capacity of 600 MW from Kergord in Shetland to Noss Head, Caithness in the north of mainland Scotland
Since Scotland is awash with excess wind power, the electricity from Viking will be exported to the North of England – but only when there are no constraints on North-South transmission capacity. That is not a trivial qualification because wind generation capacity in Scotland already exceeds by a substantial amount the capacity of the cross border inter-connectors and the sub-sea Western Link. Thus, the reality is that for many hours in the year Viking Energy will simply add to the amount of wind capacity in Scotland that has to be constrained off the system, being paid (very generously) for that.
The role of Ofgem is particularly controversial. As the regulator it has a statutory duty to protect the interests of electricity and gas customers in the whole of the United Kingdom. More than 90% of the costs of the subsea transmission system and any constraint payments will be borne by electricity customers in England and Wales, who will see absolutely no benefit from them. This is taxation without any form of associated benefit or, indeed, representation in the decision. History suggests that taxation without either representation or offsetting benefits is a hard sell.
Ofgem also has a duty to promote renewable energy, but in a manner that is efficient and consistent with the long run interests of customers, so there can be no excuse for supporting a scheme that is unjustified in geographical and economic terms, and that justification, as we shall see, is doubtful.
The case of the Shetland Islands Council is more delicate still. The publicity material for Viking Energy claims large economic benefits for the Shetland Islands. Tracking down the real payments is more difficult. There is a commitment to pay £2.2 million in community benefit per year. Viking Energy suggests that it will have 35 employees in Shetland, amounting to about £1 million per year in take-home pay. Beyond that almost everything will be imported or arise outside Shetland.
On the most generous estimate the likely economic benefit in Shetland will be less than £5 million per year. That may sound generous, but cool reason suggests otherwise since that sum amounts to only £220/Shetlander per year.
The major beneficiary of the scheme seems likely to be SSE’s transmission business – SSEN Transmission (formerly SHET). Irrespective of the economics of the Viking wind farm itself, SSEN’s regulatory asset base – i.e. the permitted assets for which Ofgem, the regulator, allows the company to charge consumers – will increase by nearly 20% directly as a result of this project. Perhaps even more important, its investments in other transmission assets such as the subsea cable from Caithness to Moray and transmission lines down from the North of Scotland will be underwritten by adding additional power generation for transmission.
Stepping back from the issues of who gains and who pays, and also putting aside the extremely questionable wisdom of inflicting the environmental impacts of major industrial construction on such a unique wild land environment, we are left with the fundamental economics. Does a wind project of this nature make economic sense in Shetland?
Even though the wind turbines are located on land the project is conceptually identical to the development of any offshore wind farm. It is constructed in a remote marine location and the power generated has to be transported a long distance to the major mainland centre of power consumption in the North of England, a straight-line distance of about 720 km.
When operating, the wind power from Viking will displace marginal gas-fired generation. This will lower carbon dioxide emissions by between 0.35 and 0.40 tonnes per MWh. At a carbon price of £30/tonne of CO2 (tCO2) – well above the current level – the value of this saving is £11–£12/MWh. Based on the long run gas price, the saving in the variable operating costs for gas generation will be £25–£30/MWh. There will be no saving in the fixed costs for gas plants as these will be required for backup and to ensure system stability. Thus, the marginal value of wind power delivered to the North of England will be in the range £36–£42/MWh.
On the cost side there are two elements that must be considered. The first element is comprised of the costs of transmitting power from the North of Scotland to the North of England and then using it to meet English power demand. The transmission losses over multiple transmission zones will be at least 5%. On top of that there will be transmission costs of at least £15/MWh (from Caithness to the North of England) and balancing costs of at least £12/MWh (based on the lowest estimate). Hence, the net value of power from the Viking project supplied to the North of England will be no more than £15/MWh at Caithness, i.e. where the power is delivered to the existing UK transmission system. It may, of course, have cost a great deal more than that to generate and transmit.
The second element to consider, therefore, is the cost of building and operating the wind farm itself and the subsea transmission line to Caithness. Published estimates of the cost of the Viking wind farm stand at about £600 million, but this seems likely to be an optimistic understatement of the type familiar from many other large infrastructure projects as various as the Channel Tunnel and the Scottish Parliament.
Based on the analysis of the actual costs of onshore wind generating stations, and allowing for the premium incurred in building a wind farm in Shetland, it seems likely that the actual cost of building the wind farm will be nearer £750 million at 2018 prices. Actual operating costs are likely to start at £85,000 per MW at age 1 year and will increase to £125,000 per MW at age 15, both at 2018 prices. Using a cost of capital of 4% in real terms the actual cost of the wind output from Viking is likely to be about £58/MWh at 2018 prices. The capital cost of the transmission line is reported as about £600 million. With a cost of capital of 3% the cost of transmission from Shetland to Caithness will be about £24/MWh at 2018 prices.
As noted, the Viking project is in effect an offshore wind farm that happens to be located on land. Thus, it should cover transmission costs to the nearest point on the UK mainland on the same basis as other offshore wind projects. On this basis, the net value of power at Caithness is £15/MWh while the cost of producing and delivering power to Caithness is £82/MWh. Even allowing for some error in the cost estimates described above it is highly unlikely that this project is a cost-effective way of meeting power demand in the GB market.
Expressed in terms of the cost of reducing carbon dioxide emissions the calculations imply a minimum cost of over £310/tCO2 if we assume that all power from the Viking project displaces gas generation. However, that is improbable because Viking output will be highly correlated with onshore and offshore wind output in the rest of the UK. In many periods Viking output will simply displace other wind generation – either in Scotland or offshore – for reasons of transmission grid stability. As a consequence, the actual cost of reducing emissions using the Viking project is likely to be more than £550/tCO2. That is extremely high, much greater than even extreme estimates of the Social Cost of Carbon, and wildly in excess of mainstream values such as the $29/tCO2 assumed in the Stern Review. Abatement at the cost likely to be incurred at Viking is not an economically rational climate policy; the cure is worse than the disease. And this, as noted earlier, is without taking into account the local environmental impacts of the scheme.
There is another way of thinking about the Viking Energy project. SSE claims, when bidding for CfD contracts, that it can supply offshore wind to the mainland grid at £45–£48/MWh (2018 prices) from projects such as the Seagreen and Dogger Bank offshore wind farms, with delivery dates in 2023. If these bids are taken at face value, there can be no justification for supporting a project due for completion in 2024 that will have much higher costs when the electricity is delivered to the main demand centres in England. SSE can’t have it both ways. If the Seagreen and Dogger Bank bids are realistic, then Viking is poor value for money. If Viking is good value, then there is something wrong with the Seagreen and Dogger bids.
We can conclude, therefore that, when seen in the larger context, the Viking project is likely to be a very expensive way of reducing emissions or meeting national power demand. But what about meeting Shetland’s power needs? Currently the island relies primarily on an ageing set of diesel generators at Lerwick power station, plus power from gas generation at the Sullom Voe terminal. The Lerwick station is operated by SSE but the units are due to be retired by the mid-2020s. It is not possible to rely solely upon wind generation from the Viking project – and/or other wind farms in Shetland – because the supply is intermittent and requires either storage or backup generation capacity. The Shetland to Caithness transmission cable could import power from the mainland, but that will involve substantial market and operating risks. Hence, in 2013 SSE proposed a scheme involving a 90 MW replacement for the Lerwick power station which was rejected on grounds of cost.
There is a serious conflict of interests with respect to the role of SSE, a conflict that has significant implications for customers in both Shetland and the rest of Great Britain. It is extremely surprising, to say the least, that Ofgem, the Scottish Government and the UK Government have tolerated a situation in which the various parts of SSE – as wind farm developer, transmission operator, power distributor and plant operator – have been allowed to determine the design and assessment of projects whose costs will ultimately be borne by British electricity customers via a variety of what are, in effect, taxes.
Neither is this arrangement good for Shetland because the islands find themselves at the mercy of decisions that are driven by the complex internal finances of SSE’s various subsidiaries. The role of the Shetland Community Trust (SCT), which financed a significant part of the early development of the Viking project, is especially questionable. At the outset it seems to have thought that it could be an equal partner in the project, but both project economics and the accounts for the various limited liability partnerships suggest otherwise. There is a lesson here for all local development trusts. The imbalance of resources and expertise mean that all of the advantages lie with the commercial developer in almost all joint ventures between developers and community organisations. In the Viking case this imbalance was reinforced by SSE’s size and its control of both transmission and distribution in Shetland and the North of Scotland as well as its larger relationships with both regulators and the Scottish Government.
SSE may have sincerely thought that what it was proposing was good for the local economy, but it is of course true that arguments of that kind have frequently been used to defend the behaviour of colonial governments and dominant external investors in the past. We tend now to view such arrangements in a different light, whether in Africa or in Scotland. Certainly, SSE has done little to avoid either the appearance or the reality of conflicts of interests in its dealings with the Shetland community.
The situation in Shetland highlights similar issues in the rest of Scotland in which the multiple roles of Scottish Power and SSE, whether in generation, distribution and transmission, frequently give rise to conflicts of interest and incentives to transfer costs from power companies to English and Welsh electricity consumers. One irony is that the SNP administration in Edinburgh, which rests its case for independence on membership of the European Union, has resolutely failed to act on EU Directives that require the unbundling of generation, transmission and distribution to avoid precisely such conflicts of interest as can be observed in Scotland. Electricity accounts for a significant fraction of Scotland’s exports but the population of Scotland, like the population of the Shetland Islands, gains very little benefit from this activity. Bluntly, the electricity sector in Scotland is highly capital-intensive and generates limited added value for consumers. At present this reality is concealed by a distorted market, and distorted prices. If those distortions are removed, the truth would become painfully evident. If Scotland wishes to avoid becoming a text-book example of a dangerously unbalanced economy it must seek to avoid over-reliance on a very small number of companies in one industry.