Unraveling the ScotWind scandal

An interview with Dr Craig Dalzell

Last weekend, the Herald on Sunday published a major story examining the ongoing scandal around ScotWind based on a new Common Weal report. ScotWind: One year on revealed Scotland is set to lose tens of billions of pounds in wind energy revenues. This follows a policy paper produced by the think tank detailing the disastrous consequences of Scottish wind privatisation.

In this week’s newsletter, we speak to Dr Craig Dalzell, who has been at the centre of the research. You can also listen to Craig’s latest podcast here, dedicated to this topic.

It is a huge story, and Independence Captured plans to keep it alive in the coming months and years, building support for an independent public inquiry along the way.

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Jonathon Shafi (JS): Craig, thank you for talking to the newsletter. To start us off, could you provide a bit of an overview of ScotWind and the nature of the auction.

Craig Dalzell (CD): ScotWind is the largest auction of Scotland's offshore wind resources to date. It covers an area just under 8000 square kilometres and has around 28 gigawatts of energy capacity. It covers 20 regions around the north of Scotland. The auction itself wasn't selling off the actual seabed. These were options for a lease agreement. So the winner would then have the option to develop the best areas of seabed.

They would have 10 years to produce a plan showing how many turbines they would put in and how they would manufacture, instal and run them. Then negotiations for the contracts involving the pricing of the energy come from there. The next phase of that is ongoing now.

Last year, when the results were published, I produced a paper critiquing the way the auction was conducted. Specifically, the auction had a maximum price cap and the seabeds had a price ceiling, rather than a price floor. The auction said you cannot bid more than a certain amount. That amount was initially set at £10,000 per square kilometre. Several organisations looking at the price of offshore wind around the rest of the UK, and the world, were saying that this price cap was far, far too low. So Crown Estate Scotland, who ran the auction, raised it to £100,000 pounds per square kilometre.

One of the victorious bids managed to win their bed based on that lower £10,000 limit. The other 19 won their beds based on putting in a bid of £100,000 pounds per square kilometre. So all of the beds won at the ceiling. Not less, not more. To me, that suggests that the market could have borne a much higher price. If there had been no cap, then it would have been a competitive auction.

Precisely how much higher? I guess we'll never know. But my recent paper tried to answer that question by looking at similar examples of other offshore wind auctions around the world in the time since ScotWind came out. So I looked at two auctions in the US. One in California and one in New York. Then I looked at one offshore auction in England.

The Scotland auction raised £755 million. If you break that down to a per megawatt value, and then compare it to the other examples I just mentioned, had Scotland raised the same amount per megawatt in California, it would have raised about £3.5Bn. If it had raised as much as the New York bed, it would have raised around £16.5Bn

In short, what was showcased as a great success, has in fact massively undersold these national assets.

JS: Incredible. Let’s get into how some of the decisions around this were made. What is “Crown Estate Scotland,” who ran the auction? How much control did the Scottish Government have? Could you help us explore these dynamics?

CD: It's true that large parts of energy are reserved. Things like the regulation of turbines and the structure of the grid itself, for example. And while planning permission for onshore wind is devolved to the Scottish Government, these are offshore wind farms. The planning there is controlled by the Crown Estate Scotland.

The Crown Estate is a corporation that manages the assets and estates owned by the Crown. Crown Estate Scotland is a separate company, which was split off and devolved in 2017. So Crown Estate Scotland essentially functions like a publicly owned corporation under the control of the Scottish Government. The officers who run Crown Estate Scotland are appointed by the Scottish Government and ultimately answer to the Scottish Government.

So on that basis, whether the Scottish Government had a direct hand in writing the regulation for these auctions, or simply stood by and allowed it to happen, they are ultimately responsible.

JS: Now, I wanted to ask about supply chain jobs. Not only have the seabeds been auctioned off at rock-bottom places, but there has also been an absence of guarantees around Scottish-based manufacturing. What does this mean in practice?

CD: As part of the bidding for these options, each of the companies to had to submit a plan called a “supply chain development statement.” This would outline what they were willing to invest to make their bed happen and where their specific focus was. Essentially, how much were they willing to invest in Scotland to develop, manufacture, instal and operate these wind turbines?

Each of the 20 winning bids submitted these statements. I trolled through them and collected all the data. The Scottish Government was very quick to speak in glowing terms about the minimum commitment that was made, amounting to £28.8Bn worth of investment in Scotland. But in each phase of development - the manufacturing of turbines, installation and operations - what they never said was how much investment was happening outside of Scotland. With that included, the total committed investment is more like £76Bb. So Scotland is only getting just a little more than a third of the total investment that is committed to these projects.

There are also substantial structural weaknesses in the way those commitments have been managed. As it stands, if a development plan falls below what they've committed, they can be fined. So if, for example, a company has promised to invest a billion pounds in Scottish-based manufacturing, but in reality they only deploy half a billion pounds worth of investment, they can be penalised.

However, Crown Estate Scotland has said that the maximum fine they can receive is about £250,000. So it's almost incentivising companies who have promised to invest billions not to do so in Scotland. If it is cheaper for them to import wind turbines from elsewhere, then they'll happily pay the fine. Overall, they will make more profit. And there is no safeguard in place to prevent this from happing since the fine can be fully absorbed as simply an additional cost.

JS: Corporate interests above public interest right enough. Can you give us an idea of what sorts of companies are involved in this?

CD: We've seen in the last week or so the likes of Shell and BP raking in record profits, mainly driven by the energy crisis of the last year, and largely driven by fossil fuel portfolios. Many of those same companies are also involved in Scotland. Shell and BP actually own between them about 20% of the ScotWind auction. So you're seeing the same oil corporations who have made an unimaginable amount of money from the fossil fuel industry double down on their investments.

But they also have renewable wings. They do see the energy transition coming. And they're wanting to get in on that as well. So they represent one major section in relation to Scottish wind energy. Another important element involved in ScotWind are publicly owned energy companies. But none are Scottish. A lot of these foreign public energy companies will profit from Scottish wind resources, and those profits will flow back to their home countries where they will be subsidising public services. Scotland can’t do that, because we don’t have a public energy company in the first place.

JS: Let’s talk a bit about the Scottish National Energy Company (SNEC), because you were involved in some of the policy work around the proposal initially, and I think you will have some important insights on this matter. It was passed the SNP conference, twice, but never came to anything. Can you give us a brief outline of the difference having that kind of infrastructure in place might have made?

CD: It is clearly of great regret that Scotland didn't have a public energy company that could bid for Scottish seabeds. Ideally, such a company could have taken all of all Scottish energy resources into public ownership, so the profits could be recycled to benefit Scotland rather than going overseas or into the pockets of fossil fuel shareholders.

The response from the Scottish Government on this is to say there is just no way we could have had a public energy company under the devolved settlement. I, and those working on the SNEC policy, understand the constraints. But it is perfectly possible to have set one up that could have taken even a small bed with the aim of eventually taking on a larger share, buying back assets from the private companies, maybe over a decade or so. There, lies a route to bringing everything into public ownership.

The Scottish Government did start plans to produce a public energy company back in 2016/17. They stalled, and then eventually cancelled the plans completely last year. They simply said it wasn't going to happen, and dropped the idea entirely. Wales, however, has committed to launching a public energy company. This will be focusing on onshore renewable energy because, unlike Scotland, the Crown Estate in Wales is not devolved, and they don't have the same power to look at offshore resources that Scotland does.

When it was put to the Scottish Government that perhaps Scotland could look at a smaller-scale energy company along the lines of the Welsh model, the response was dismissive. This would be far too small to take on the challenges of Scotland's renewable ambitions, they said. So we're not going to do that either. One is too big, and the other too small. So what exactly do we need to do to get a public energy company in Scotland?

The whole concept is blocked time and again, despite repeated votes in favour of the initiative by SNP members at their party conference, and headline announcements declaring Scotland will have a public energy company.

JS: What does all this mean looking ahead to Scotland's economic future? Are these resources now completely captured? Is there any way back?

CD: Even if we created a national energy company now, the auction for ScotWind has passed, and those resources will now be developed by private interests, big oil corporations and foreign public energy companies.

There is a path to bringing Scottish wind into public ownership, but it involves very tight negotiations right now as the contracts are being drawn up so that the lease length for the turbines is kept as short as possible. Offshore wind licences in Scotland, very recently, have come in with lease terms of around 50 years. It's not unknown for energy companies to ask for 99-year, or even perpetual, leases.

They obviously want the leases to be as long as possible, and there is not a hint of resistance from the Scottish Government. Quite the opposite. These wind turbines pay back remarkably quickly, within a few years at most, and then it is pure profit after that. We should also want to see very firm break clauses, so that if a company does renege on its promises, and does start moving its operations overseas when it had actually promised to keep them in Scotland, the assets can be taken into public hands and given to a public energy company. Which, of course, would need to be set up.

What is absolutely critical, in addition, is that we never, ever, do this again. Scotland has lost perhaps tens of billions of pounds in auction fees on top of missed opportunities to develop infrastructure and manufacturing capability in Scotland. We need a full public inquiry into why the auction was structured the way it was. We need to set up a public energy company now, in preparation for the next round of auctions. The overall strategy should be for the complete public ownership of Scottish energy assets, working to the benefit of the Scottish people.

JS: We're talking about the extraction of tens of billions of pounds from the country. About an absence of a supply line manufacturing jobs guarantees. About minuscule fines being applied to these huge companies, should they break investment pledges. And about a systematic underselling of Scottish assets. Given given all of that, surely this must be one of the greatest scandals under devolution. How do you sum up just how disastrous this has been?

CD: Put it this way, if I was trying to design an auction with the express purpose of returning the worst possible deal for Scotland, ScotWind provides a guide. I honestly cannot imagine running an auction with a price cap. I can't imagine running a development framework that has fines and sanctions for breaches of promises that are so low as to almost incentivise those breaches. I can't imagine a country so willingly turning itself over to the private sector, and giving away its resources without having any involvement of the public sector. And on top of all that, it is the public who will ultimately be paying for this entire project through our energy bills.

If I could change anything about the ScotWind auction, it would be everything.