Submission to the Scotland Office, the Scottish Government and the Economy, Energy and Tourism Committee of the Scottish Parliament
24 Feb 2012
SSE has considered the practical implications for its businesses of the consultations issued in January 2012 by the UK Government and the Scottish Government and they are set out below. In doing so, SSE is mindful of the fact constitutional arrangements are matters for voters.
SSE employs people, serves customers, owns and operates assets and has plans to invest in England, Wales, Scotland, Northern Ireland and the Republic of Ireland. It expects to continue to be a significant business in England, Wales, Scotland, Northern Ireland and the Republic of Ireland in the short, medium and long term and has a legitimate expectation that its investments in existing assets will continue to be adequately remunerated. SSE has no plans to move its Registered Office from Perth.
SSE believes that the interconnection and integration of the electricity and gas systems and markets in Scotland and in England and Wales should continue regardless of the outcome of the referendum on Scotland’s future. This means that there should continue to be a single energy market for the islands of Great Britain, just as there is a single electricity market for the island of Ireland. Indeed, SSE supports further harmonisation of energy systems and markets to strengthen security of supply and achieve efficient use of energy resources for the benefit of customers.
SSE has long acknowledged, most recently in its Annual Report 2011, that regulatory change and legislative change, of which the current proposals to reform the electricity market in Great Britain are an example, are among the principal risks it has to manage, and it has extensive experience of doing so.
The forthcoming referendum, however, increases the risk of regulatory change and legislative change with regard to the electricity and gas industry in Scotland because it means there is additional uncertainty about the future. This additional risk will apply up to the date of the referendum and, should the result be a vote in favour of a change in Scotland’s status, will continue until there is a binding agreement on all of the issues that could affect the electricity and gas industry in Scotland.
This is because under the existing arrangements investment in new long-term electricity and gas assets in Scotland and England and Wales is effectively remunerated through the bills paid by electricity and gas customers throughout Great Britain. These arrangements were established by the United Kingdom Parliament, and Ofgem regulates electricity and gas markets in Great Britain.
New arrangements would have to be established in the event of Scotland deciding it would no longer be part of the United Kingdom and becoming independent. Determining those arrangements would be just one aspect of the extensive negotiations between the Scottish and UK governments which would follow. In these negotiations no issue, including the electricity and gas industry, would or could be looked at in isolation from all of the others.
Moreover, there does not appear to be a consensus on how Scotland’s position with regard to the European Union, which has a major influence over electricity and gas systems and markets in Member States, would be determined in the event of a referendum result in favour of Scotland ceasing to be part of the United Kingdom.
To be sustainable, all investments have to be adequately remunerated and additional uncertainty about key issues such as regulation and legislation makes decision-making in long-term businesses more difficult. This means SSE has a responsibility to consider the risks to adequate remuneration when making investment decisions concerning any operations and assets, including those in Scotland. Its policy, most recently described in its six-month financial results statement published in November 2011, is to apply where appropriate a risk premium to the level of remuneration expected from individual projects.
The practical application of this policy means that when making final decisions with regard to possible new investments in Scotland, which will have to be adequately remunerated if they are to be made, SSE will have to decide whether the additional risk of regulatory and legislative change with regard to Scotland means it should apply a risk premium to the investment proposal. If it concludes that a risk premium should be applied, it will have to determine what that premium should be; and, if a risk premium is applied, it will have to assess the impact of that premium on whether or not to proceed with the investment proposal.
Making investment decisions is about striking the right balance between risk and reward. The additional risk of regulatory and legislative change does not mean that SSE will not invest in projects in Scotland while its future is being determined. The development of SSE’s existing projects in Scotland will continue as planned. It does mean, however, that the additional uncertainty represents increased risk, of which SSE will have no alternative but to take account in making final investment decisions on those projects while that additional uncertainty remains.
It does not mean that anyone should seek to attribute to SSE a view on whether or not Scotland should remain part of the United Kingdom: SSE does not believe it is appropriate for it to have a view on that question, which can only be answered by voters.
SSE is involved in electricity generation, transmission, distribution and supply and in gas production, distribution and supply in Scotland. It employs 5,300 people and has operational sites throughout Scotland. Its total capital expenditure in Scotland for the year to 31 March 2012 is forecast to be almost £900m.
SSE has no wish to become involved in a constitutional or political debate. This submission should be considered in its entirety, and SSE will not be adding to it with on- or off-the-record comment to the media.