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Pelamis Wave Power
Workers assembling components at Pelamis Wave Power. The Scottish-built wave generator could help make Scotland a leader in renewable energy; there are hopes that the country could be self-sufficient in electricity by 2020. Photograph: Murdo MacLeod for the Observer
Workers assembling components at Pelamis Wave Power. The Scottish-built wave generator could help make Scotland a leader in renewable energy; there are hopes that the country could be self-sufficient in electricity by 2020. Photograph: Murdo MacLeod for the Observer

SNP hopes a new wave can carry Scotland to independence

This article is more than 12 years old
Buoyed by his landslide win in the Scottish parliamentary elections, Alex Salmond believes renewable energy exports could underpin self-rule. But do the economics stack up?

Firmly moored against a shabby dockside in Leith, the port in Edinburgh that once played a pivotal role in Scotland's economy, is a symbol of the country's next industrial revolution. Weighing 1,300 tonnes and stretching for 180 metres along the dock, the long red-and-yellow tubular structure is a wave machine.

The conical nose of the Pelamis, a name borrowed from the yellow-bellied sea snake, looks menacingly like a missile on land. But semi-submerged in the water, it is transformed. With five separate sections linked by hinged joints, it converts the motion of the waves into enough electricity to power 500 homes.

The Pelamis machine is at the forefront of an energy revolution that, claims Scotland's first minister, Alex Salmond, will eventually allow Scotland to become the "Saudi Arabia of renewable energy". More than any other country in Europe, Scotland's coastline is blessed with abundant, if unharnessed, marine energy.

Within a few weeks, this 750kW machine will be towed north from the Firth of Forth to be moored at a testing ground off Orkney. The plan is to place hundreds off Shetland, the Western Isles and Orkney within the next five years, with 180MW of installed capacity licensed or in planning.

Its successors should become more powerful, more efficient and cheaper, says Max Carcas, the firm's business development director, perhaps allowing this Scottish firm to dominate a global market. It is eyeing up Denmark's extraordinary dominance of wind turbine manufacturing, worth some £6bn a year in exports.

"The objective is to be cost-comparable with offshore wind initially," he said. "That is the game changer, because there is huge potential to export this technology on a global scale."

Salmond's Saudi Arabia metaphor is carefully chosen: he predicts that renewables – particularly offshore wind, wave and tidal power – will soon allow Scotland to become a net exporter of electricity. By 2020, he claims, Scotland could produce all its domestic electricity needs from renewables.

The surplus would be sold to England and Ireland, or across the North Sea on the new super-interconnectors planned by the European Union. As a lucrative export, it would rank alongside whisky, worth £3.4bn in exports last year, and financial services, still worth £11bn despite the recession and the bailouts for Royal Bank of Scotland and HBOS.

The metaphor also speaks to Salmond's core strategy in emphasising the Scottish nationalist notion of a country with unrealised wealth and potential. It refers to the North Sea oil industry, which has underpinned the UK's economy for more than three decades and is based in Aberdeen, deep in the SNP's heartland. It also suggests that a country on the geographical edge of Europe can play a central role in its economic and industrial future.

Since Salmond's landslide victory in the Scottish parliament elections on 5 May, this vision has become doubly significant. This industry, he hopes, could help power Scotland to independence. He has a date for that in mind: 2018. And he plans to stage a referendum in independence by about 2015. The question is: can Scotland's economy credibly support independence while keeping its generous social policies?

Salmond has immediately begun to prepare for that constitutional confrontation by identifying new fiscal powers that Holyrood does not yet have: echoing similar demands from the Northern Irish Executive, he wants to cut corporation tax to make Scotland more competitive. He wants control over the Crown Estate's lucrative land and marine territories so crucial to the marine energy sector, greater powers to borrow capital, and the freedom to set separate duties on tobacco and alcohol.

He wants to add these powers to already significant new fiscal measures: David Cameron's coalition government is pushing a bill through Westminster that will allow Scotland to vary the UK income tax rates, cutting by up to 10p in the pound or raising it to any level – an instrument that affects £3.8bn in revenue – and quickly introduce borrowing powers for Holyrood of at least £2bn.

Despite Salmond's socially liberal policies, he is a tax cutter. His government has already abolished bridge tolls and NHS prescription charges; it has swept away business rates for small firms and is about to freeze council tax for another five years, driving down public-sector wages in the process. University education remains free for Scots, as does free personal care for the elderly.

Professor Hervey Gibson, a nationalist economist who in 1997 edited the first major attempt to assess Scotland's "national accounts", the Caledonian Blue Book, says the key question Salmond has yet to address is what services would be cut to pay for his new tax regime. Free personal care? Free prescriptions? Free universities? The council tax freeze?

"It mainly hinges on further growth rates and given that the future growth rate for the UK economy is pretty grim at the moment, then there are important questions about what the structure of the Scottish economy could evolve towards," he says.

And, say other economists, this problem lies at the heart of Salmond's core dream of independence. To win over Scotland's dubious electorate, Salmond says independence would not be a cataclysmic separation but a velvet divorce with England and Wales, where some services might yet be shared. It has been labelled "independence lite", built on the assumption that Scotland would get a full geographic share of North Sea oil and gas revenues, but again it remains unclear what he means.

Total public sector spending in Scotland was £56bn in 2009. The Scottish government's official figures, in a document called Government Expenditure Revenue Scotland (known as "Gers") show that including a full share of North Sea revenues would have given Scotland a modest £1.3bn surplus last year, thanks to the record global oil price, but a £10.5bn deficit without it. That small surplus is just 0.9% of Scotland's GDP.

Professor David Bell, of Stirling University, believes there is no significant economic obstacle to independence but that it needs to be "very carefully" evaluated.

"We need some kind of vision as to what kind of country Scotland would be, and that means: is it some kind of Nordic country with higher tax rates and a high level of public services? [If] you want to have a low-tax economy, presumably this is built upon the assumption that it's [tied to] a desire to reduce the size of the public sector.

"That kind of transformation … can't be done overnight, and therefore we won't have the revenues to fund the public sector in the short run. Therefore there has to be some kind of acceptance that you're going to cut back on some aspects of the current spending profile."

There are other significant issues. Salmond is proposing control over corporation tax and excise duty chiefly because he wants to slowly build towards his second, fallback option: a system of fiscal autonomy within the UK short of independence. It would be the fullest extension of devolution; in political shorthand, it is known as "devo max".

That option could well be a second choice in the referendum: it would allow Scotland to control nearly all its own government expenditure, including welfare benefits and pensions, leaving only the costs of pooled services such as defence and foreign affairs to be shared. As Gers states, UK government spending in Scotland is worth an additional £26bn.

But Professor Brian Ashcroft, director of the Fraser of Allander Institute for economic research, says there is "fantastic uncertainty" about how this would work: which services and taxes would Salmond seek to control, and which would be shared with London?

Figures from the Scotland Office, the government department in London that oversees UK policies in Scotland, suggest that Scotland has a substantial "black hole" in its balance sheet: excluding oil and gas tax revenues, adding Scottish government spending to the UK government's welfare spending in Scotland has equalled between 121% and 133% of Scottish tax receipts since 2002.

With both "devo max" and "independence lite" comes another question: what share of the UK's national debt in 2018 would Scotland absorb? Would it be worked out based on Scotland's GDP or its population? Would the UK be allowed by the EU to split up its debt with Scotland? What interest rate would international lenders fix for Scotland's debt?

Ashcroft says: "I think most economists would recognise that Scotland is of a size and sophistication that it could compete and perform in the world economy reasonably credibly. The issue, of course, is whether Scotland would do better as an independent state economically or whether it would do better remaining in the union.

"It significantly depends upon the type of independence and the nature of the negotiations and the deal which is struck between the rest of the UK and Scotland. It's whistling in the dark a little bit."

So it comes back to Salmond's metaphor: becoming the "Saudi Arabia of renewables". Gibson believes the UK's increasing reliance on energy imports will give Scotland's renewables sector even greater value in future; rather than bankrolling independence, North Sea oil should be seen as a nest egg.

"And it's not a huge nest egg," he warns. "The sadness is that it wasn't treated as a nest egg 20 years ago. It would ease the transition to independence but it's not going to fund an extremely long-term future because there simply isn't enough oil, whatever happens to it."

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