Written evidence submitted by OFTEC AND UKIFDA (NRG0016)

OFTEC and UKIFDA submission to Scottish Affairs Committee

Inquiry into GB Energy and the Net Zero Transition

1. What impact will the UK Government’s approach to net zero have on Scotland’s oil and gas industry?

- What state of readiness is the oil and gas sector in for the net zero transition?

- Is the scaling up of the clean energy sector keeping pace with the decline of jobs and investment in the oil and gas sector, or does the UK Government need to do more to close this gap?

Who we are

OFTEC and UKIFDA members represent the entire supply chain of the liquid fuel industry in Scotland, the UK and Ireland, from highly skilled manufacturing and engineering roles to the installers and suppliers delivering vital heating oil to off gas grid residents.

Our members are a major part of the supply chain that relies on Scotland’s oil and gas infrastructure, including the Grangemouth refinery and major oil terminals such as those at Finnart and Clydebank. Our members then go on to supply the 135,000 oil heated homes in Scotland (and 1.7 million homes across the UK) with the vital heating oil, and manufacture, install and maintain oil heating equipment.

Our industry in Scotland consists of 22 fuel distribution companies predominantly headquartered in Scotland, running 89 fuel depots and employing directly 1,500 people, as well as 298 businesses employing c.500 appliance technicians. All our members support the country’s oil industry and its thousands of associated jobs. A significant number are family-owned with deep roots in their local communities, with a particular presence in Highland and Island communities.

The decarbonisation challenge facing Scotland’s oil heated homes

We fundamentally believe that to successfully deliver the decarbonisation of homes and businesses, government policy should allow for the use of different technologies and solutions, depending on the unique characteristics of each individual buildings and the needs of its occupants.

Our industry has a key role to play in the decarbonisation of off gas grid oil heated homes and the associated benefits that this would bring of delivering against the Government’s Net Zero ambitions and Carbon Budget requirements.

Our members understand the unique issues which these households and customers face. Heat pumps and heat networks have a significant role to play, especially in urban settings, but prove more difficult to deploy in a rural environment. If the Government’s Net Zero targets are to be achieved, consumers must be given the right technologies and incentives to decarbonise.

Scotland’s oil and gas industry will play a significant role in helping these households to decarbonise, by contributing to the production of renewable liquid fuels (also referred to as biofuels in this submission). The liquid fuel industry and fuel technicians in Scotland and across the UK are already working with off-grid consumers to help them transition to low carbon fuels to replace their fossil fuel heating oil.  Over the last three years the industry has successful trialled a switch to renewable liquid fuels, most notably Hydrotreated Vegetable Oil (HVO), and is ready to deploy this at pace with the necessary legislative amendments (which we set out in question 3).

As research by the Future Ready Fuel Campaign demonstrated, over 95% of off-grid households want a greater choice of low carbon heating solutions and 88% of respondents said they would prefer to switch to HVO compared to just 6% for a heat pump[i].

• Research undertaken for Department for Energy Security and Net Zero (DESNZ) and the Scottish Government shows that, for rural homes off the gas grid, installing a heat pump, including essential retrofitting costs, will cost an average of over £24,000.
• This would also require significant investment in the electricity grid, many new or re-trained installation technicians, and will cause significant disruption. In parallel, heat networks require a heat source and a reasonably dense population of homes to be viable, both prove difficult in remote rural areas.
• The Scottish Government’s own figures[ii] also indicate that electrified heating will simply not work for much of Scotland’s off gas grid oil heated homes. This is estimated as high as 40% of Scotland’s total housing stock that won’t be able to go down this route, whereas all existing oil heated homes are suitable for renewable liquid fuels
• The Scottish and Southern Electricity Network (SSEN) area, covering the majority of the oil heated homes in Scotland, has estimated the cost of upgrading its low voltage feeders and substations is forecast as being between £0.8bn to £1.2bn, the equivalent of £953 and £1369 per home.

The opportunity

In recognition of these challenges, three years ago the industry launched a demonstration project that replaced kerosene with renewable liquid fuels in 150 homes across the UK, including c20 homes in Scotland. The project showed that decarbonisation targets through to at least 2033 would be met without causing significant disruption to the consumer, minimal upfront cost, no additional electricity capacity requirements and at no cost to the taxpayer.

The renewable fuel was HVO, a refined product manufactured from using waste cooking oil, animal and forestry materials. HVO reduces carbon emissions by up to 88% in pure form and was recently recognised by the Scottish Government as a Net Zero fuel.[iii]

Currently HVO is not produced in commercial quantities in the UK. There is a clear opportunity, as set out in the Scottish Government’s Grangemouth Just Transition Plan, to turn Scotland into a biofuel manufacturing hub through the conversion of its existing refining infrastructure, such as Grangemouth, into biorefinery sites.

2. What UK Government interventions will be necessary to maximise the ability of oil and gas workers to find jobs in clean energy?

UKIFDA and OFTEC members are a critical part of the oil and gas supply chain employing over 20,000 people, all reliant on the successful transition of the industry – we want to ensure there’s a solution that works for everyone.

A positive step forward would be for the Scottish and UK Governments to confirm the future of part of the Grangemouth site as a biofuel refinery, which will be 30%-70% cheaper than building a new plant from scratch and prevent the direct loss of 400 skilled jobs[iv]. We support the Scottish Government’s vision as outlined in the Just Transition consultation for: “The Grangemouth industrial cluster will become a net zero chemicals centre for Scotland and a leading production centre of the UK’s low-carbon energy industry, supporting the developing biofuels and hydrogen sectors, and playing a key role in ensuring Scotland’s energy security and economic prosperity.”

Given that the process for refining biofuels is the same as that for refining fossil fuels and could use the existing refining infrastructure, we would expect a substantial correlation between the oil and gas jobs of today and the green jobs of tomorrow. This is a huge opportunity to bring Scotland’s fossil fuel industry into a clean, green future, and bring with it the thousands of ancillary jobs, including those employed by OFTEC and UKIFDA members.

OFTEC technicians have the skills and community networks already in place to upgrade oil heated homes immediately. Upgrading kerosene boilers to HVO takes just a matter of hours and the replacement of a nozzle – this is in stark contrast to the significant and widely reported skills gap stymying heat pump deployment[v].

Global refineries making the conversion to biofuels have shown how local jobs can be protected; P66’s Rodeo refinery in California transitioned to produce HEFA Sustainable Aviation Fuel in one year at a cost of £1bn, with no job losses. Preem’s Lysekil transition in Sweden is preserving all 400 jobs and creating 50 new ones at a cost of $0.73bn.

3. Are Scotland’s energy industry and associated supply chains well-placed to transition to clean energy generation, or is more support needed?

Scotland’s existing network of heating fuel oil suppliers, manufacturers and installers is already well established and ready to deliver renewable liquid fuels to consumers.

In addition, OFTEC’s members have the requisite skills to deploy this solution immediately. With conversion from a kerosene oil boiler to a HVO boiler requiring just a nozzle change that can be done in the space of an annual boiler service and costing c.£500, this is a readily-deployable solution that can be rolled out using the extensive existing networks across the country – but only with policy alignment between the Scottish and UK governments.

There are two straightforward policy changes needed to make this work. Currently, HVO is more expensive than Kerosene for off gas grid households. The average UK off gas grid consumer pays £1,073 per year for 1,500 litres of heating oil, whereas a 20% HVO blend would cost £1,237 per year, based on a blend price of 82.45 pence per litre[vi].

In order to incentivise use of HVO, two straightforward changes are needed to reduce the cost to the consumer:

• Section 159 of Energy Act 2023 now gives the Government the power to create a Renewable Liquid Heating Fuel Obligation (RLHFO) for home heating which would reduce the cost of these fuels, using the same price mechanism as the Renewable Transport Fuel Obligation (RTFO)[vii]. This received cross-party support during the passage of the Act.
• Counterintuitively renewable liquid fuels for home heating currently attract a fuel duty of 10.18 pence per litre under the Hydrocarbon Oils Duties Act (HODA) 1979, whereas kerosene used as heating oil does not. This provides a significant disincentive for consumers to switch.

With a RLHFO in place and the HODA 1979 duty removed, the cost of HVO to the consumer would fall significantly.

•                     It would deliver an almost zero upfront cost saving when compared to an average upfront capital cost of c.£24,000 by taking a heat pump approach.
•                     A blend of 20% HVO is technically achievable from the onset with a potential increase over time (working in the same way as the current mechanism that is used to decarbonise transport fuel.  This would reduce the additional annual cost to use renewable liquid fuels for each household to just £36 per year, as opposed to a £163 yearly additional cost without an RLHFO and duty changes.

This would not involve any cost to the Treasury and the primary legislation to enact the changes is already in place.[viii]

The RLHFO creates a market mechanism which spreads the costs of the fuel across the fuel market and currently the Treasury takes no revenue from the existing HODA duty provisions as consumers are currently not using HVO for home heating.

By enacting these policy changes, over time a domestic industry for biofuels can be created to replace Grangemouth’s footprint of 360 million litres of fossil fuel consumption and retain and create new green jobs in Scotland.

Other governments have recognised the key role that RLFs can play in the decarbonisation of homes. The Scottish Government has recently acknowledged the role of renewable liquid fuels in the journey to net zero by designating them as a net zero fuel.

As the Scottish Government’s New Build Heat Strategy Regulatory Impact Assessment states, “as a renewable fuel, bioenergy may represent the best option to help decarbonise some rural homes for which clean heating systems may be limited (e.g. due to grid infrastructure capacity[ix]).”

In December, the Northern Ireland Executive published its own consultation on the importance of the use of biofuels to decarbonise off-grid homes, recognising that they can be “secure, affordable and sustainable[x].”

In addition, the Irish Government is also expected to announce its own Renewable Fuel Obligation for home heating, recognising the value of the fuels for its decarbonisation agenda. The Irish and UK Governments are using the same supply data and Ireland has drawn the conclusion that there is more than enough supply.

4. What actions should the UK and Scottish Governments take to ensure the necessary generation and transmission infrastructure to support the development of Scotland’s renewables sector?

It is not pragmatic to base heat decarbonisation policy on an assumption that rural off gas grid homes will in future rely on electric heating, in most cases via an air source heat pump. The National Grid’s own Future Energy Scenario (FES) report, “Leading the Way,” estimated that to achieve clean power by 2030, one million properties in the UK will require a solution other than electrified heating, due to the high cost of local network upgrades.[xi] Many will not be able to switch due to excessive cost or limitations on local electricity supply and infrastructure.

Adding a heat pump to the 1.7 million UK off-grid oil heated homes would require an additional 6.3 billion kWh to the electricity grid - equivalent to one of the two new nuclear reactors at Hinkley Point C.

In calculating additional grid costs in the Scottish and Southern Electricity Network (SSEN) area, which encapsulates the majority of the oil heated homes in Scotland, the estimated cost of upgrading the low voltage feeders and substations is forecast as being between £0.8bn to £1.2bn, the equivalent of £953 and £1369 per home[xii].

By creating a policy environment that encourages the use of renewable liquid fuels, this will:

• Free up grid capacity for more suitable households to achieve the Net Zero 2030 target;
• Not only achieve but exceed Carbon Budgets 4 and 5 allocated to the off gas grid sector;
• Ensure that the energy supply remains secure as the UK transitions towards renewable energy;
• Immediately reduce carbon emissions from oil heated homes and businesses; and
• Maintain consumer support and buy in given the affordability and ease of converting to renewable liquid fuels.

As set out above, these policies require limited legislation, can be delivered at no cost to the taxpayer and can be implemented quickly in both parliaments, with the full support of industry and consumers.

Major considerations in converting an existing refinery into a renewable facility include the availability of feedstock for HVO.

The UK Government recently published[xiii] its revised UK and Global Bioenergy Resource Model (2024), updated by Ricardo in 2024, based on work started in 2011 and updated in 2017, to estimate the potential bioenergy resource that the UK could access from both domestic and international sources in the period up to 2050. Analysis of the data shows that there is more than enough feedstock to meet both UK and Irish demand for HVO as a 100% replacement for kerosene heating oil.

The UK Government’s SAF mandate at 22% by 2040 also provides significant confidence in feedstock availability, given that HVO is a byproduct of the most common method of Sustainable Aviation Fuel production. Therefore, the more SAF that is made, the more HVO will be available.

5. How can GB Energy, and other ways of backing industry (including funding), most effectively support employment, economic growth and the development of clean energy supply chains in Scotland?

The GB Energy Bill should include a directive for GB Energy to review the decarbonisation challenges faced by the 1.7 million off gas grid households in the UK, and to consider the solutions that exist to help them do so practically and affordably. Further analysis about the decarbonisation challenges of off gas grid households needs to be done, and GB Energy can play a significant role in ensuring Scotland’s off gas grid households are not left behind in the decarbonisation transition. 

6. How should GB Energy work with the Scottish Government and other Scottish bodies to identify appropriate funding and other mechanisms?

N/A

7. What does a just transition look like for workers and communities across Scotland’s highland and island communities, and what role might community energy and community benefits play in this?

A successful transition for our industry would be to ensure that the 20,000 roles we have can continue to be productive under a renewable liquid heating fuel scenario. This is a major opportunity for Scotland’s highlands and islands communities to decarbonise in an affordable and pragmatic way, and to maintain and boost the existing local rural economy. In the four Highlands and Islands Scottish Parliament electoral regions, there are approximately 36,500 oil heated homes, the highest proportion in any area of the UK.

To date, the transition to net zero has not featured significantly in political discourse, and households in the Highlands and Islands - as elsewhere in the UK - have not had a significant say in how it should be achieved. Achieving citizen buy-in is critical and this is best achieved by prioritising choice and minimising cost and disruption as much as possible - something our proposals help to achieve.

It is also important that the Government factors in the unique ecosystem and environment of the highlands and islands. Rural areas of Scotland are seeing significant temperature fluctuations, whilst having warmer summers, the Highlands and Islands are continuing to face colder winters, with the country recording its coldest winter in 2021, with temperatures reported to have reached as low as -23°C.[xiv]  This makes the use of Air Source Heat Pumps challenging to operate, if not impossible, without a thermally-efficient building fabric and/or additional back up heating. By enacting the aforementioned two policy tweaks, this would lead to a practical and immediate reduction in carbon emissions for existing homes in what are highly sensitive and vulnerable eco systems.

Local fuel oil businesses such as Highland Fuels are already helping customers in the highlands and islands decarbonise, and are exploring how a variety of future fuel solutions, such as hydrogen, green electricity, and renewable liquid fuels, can all be used to support customers. Last year, they opened the most northerly public HVO pump in the UK at Lerwick, Shetland[xv].

8. Can the UK learn lessons from international examples about how to effectively manage Scotland’s energy sector transition?

The conversion of existing refineries into biofuel operations has already taken place in a number of countries which offer a clear pathway forward for the conversion of Grangemouth. There are a number of international examples where refineries have made the successful transition to biofuel production, which UKIFDA members have been involved in.

For example, at the end of 2022, eight US refineries had been converted into biofuel plants producing HVO and/or SAF, with conventional refinery conversions expected to more than double production capacity by 2025. Investment in SAF also has a countercyclical benefit with home heating oil, with jet fuel dominant in the summer and heating oil in the winter.

This transition is also taking place in Europe. For example, Eni recently confirmed its decision to build Italy's third bio-refinery in Livorno[xvi] and Preem is converting its IsoCracker plant at the refinery in Lysekil, Sweden[xvii]. The investment enables Preem to become the largest producer of renewable aviation fuel in Northern Europe, and one of the largest producers of renewable fuels for road transportation.

About OFTEC and UKIFDA 

OFTEC and UKIFDA (The UK and Ireland Fuel Distributors Association) are the representative trade bodies for businesses that deliver vital heating services to households and businesses, primarily in rural areas. This includes liquid fuel distributors, appliance and tank manufacturers, and heating technicians. Together, we represent companies that employ over 20,000 employees, including many family businesses that have passed their ownership down through generations and live within the countryside communities they serve.