Written evidence submitted by Professor John Underhill* and Professor Alex Kemp**

University of Aberdeen (NRG0025)

Response to Questions from the House of Commons Select Committee on Scottish Affairs

Professor John Underhill* and Professor Alex Kemp**

*Director for Energy Transition, Interdisciplinary Institute and **Professor of Petroleum Economics and Director of Aberdeen Centre for Research in Energy Economics and Finance (ACREEF) at the University of Aberdeen

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?

The impact of the UK Government’s approach to net zero is to accelerate the decline of investment and production of oil and gas from the UKCS.  Present policy is distinctly lukewarm regarding both the award of new exploration licences and the provision of field development approvals.  With respect to environmental protection the current position is that all of Scope 1, Scope 2, and Scope 3 emissions are to be considered in the approval process.  Scope 3 emissions relate to the use of final petroleum products are notably petrol and diesel by motorists and others.  In this case the polluter pays principle would highlight the role of motorists rather than the producers of crude oil and natural gas. 

The effects of the Energy Profits Levy with its increases in headline rates, extension of life, and reduction of investment allowances have been to reduce development incentives particularly in small fields and incremental projects in mature fields.  An example in the public domain relates to the cancellation of incremental projects in the Forties field.  The overall consequence has been increased reliance on imports for both oil and gas.  The Climate Change Committee regularly produces projections of UK oil and gas consumption consistent with the achievement of Net Zero by 2050.  Alongside the central projections of UK oil and gas production from the North Sea Transition Authority the combined results reveal a major reliance on imports of both oil and gas throughout the period to 2050.  The net result is lower levels of GDP and tax revenues throughout the period. 

The oil and gas industry is fully aware of the discouraging investment environment in the UKCS.  Some companies have already diverted their investments to other more welcoming destinations.  In the UK consolidation has emerged as a natural reaction to the adverse investment environment.  A notable recent example is the decision of Shell and Equinor to form a joint 50:50 company based in Aberdeen.  This incorporates synergies including financial/tax ones.  Equinor is understood to have underutilised tax losses.  The new company will be able to utilise these at earlier dates. (This would not be possible with the joint venture arrangements (such as between Shell and Esso historically) as the two companies were treated separately for tax purposes).

The renewables sector has already exhibited commendable growth, particularly with respect to offshore wind, albeit largely in generating electricity rather than job creation.  Currently, its growth is not fully compensating for the decline in the oil and gas sector.  Financial incentives and Government subsides are very important to the further growth of the renewables industry.  In recent years, the main incentives mechanism has been the Contracts for Difference scheme whereby generators of electricity from renewable sources receive guaranteed prices to underpin their investments.  But in 2023 when an auction round of licences was promoted there were no bidders reflecting the substantial construction cost inflation.  In turn, this has led to significant increased guaranteed prices being provided under the Contracts for Difference scheme.  The lesson is that continuous review of the operation of the scheme is needed. 

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

              As indicated in the answer to Question 1 continuous review of the details of the Contracts for Difference incentives scheme is needed.  Another policy area relates to the local content of the investments in renewables.  Much of the value added comes from the manufacture of the turbines.  Currently, this activity is undertaken in foreign countries particularly in Denmark and Germany.  Useful policy lessons regarding local content can be obtained from the efforts of the UK Government in the 1970s to enhance the UK content of supplies necessary for the development of oil fields in the UKCS.  Further benefits can be obtained through enhanced provision of education and training relating to the skills required in offshore renewables in particular. 

              There is a need to undertake a capability mapping exercise to identify which oil and gas technologies and skills align with the aspiration to make the UK a clean energy superpower. Once the gaps have been identified, there needs to be a drive to up- and re-skill workers to make them relevant and competitive in the renewable jobs market, be that through apprenticeships or continuous professional development. This needs to involve, demands engagement with and funding of the Further and Higher Education sectors, who are best placed to refine existing programs and tailor new ones to address the need. An example of success is the National Energy Skills Accelerator (NEAS), a collaborative effort between Aberdeen University, Robert Gordon University, NE Scotland College (NESColl), Skills Development Scotland and Energy Transition Zone Limited, which secured £1M funding from the Scottish Government’s Just Transition Fund to build relevant course content and deliver free re- and up-skilling programs to over 700 workers.

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 energy industry, including the supply chain, is well-placed to accelerate the development of renewables and some of the knowledge of the offshore working environment can be utilised by offshore wind operators, but to date, this has not translated into major renewables projects, many of which have been build overseas and shipped into the UK without touching land (e.g. Floatation Energy’s Kincardine Floating Wind Farm).   To date, the existing supply chain has sought to make up for a lack of North Sea activity, be that in oil and gas or in renewables by seeking and securing international oil and gas operations.  Of course, specialised training is also required.  Provision of more training courses would be beneficial.  Fortunately, these have become increasingly available.  It should be noted, however, that the locational advantages relating to oil and gas are not replicated for offshore renewables. 

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?

              The Energy Transition to Net Zero requires an enormous increase in the provision of electricity transmission and distribution facilities.  A very large scaling-up is urgently required.  Government policy should be to facilitate the investment in transmission and distribution facilities.  This includes dealing with planning permission issues relating to onshore transmission lines and sub-stations.  The concept of compensation to those adversely affected by pylons needs to be further considered.  A lot of effort needs to be put into public engagement too as the scale of rewiring of Britain will mean new cables to land, the building of electricity substations and pylons to link to the grid. Many coastal and rural communities need convincing of the need and benefits and a public information drive is required.

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?

It is understood that GB Energy will become a co-investor in renewable energy developments.  This means sharing investment risks and returns.  This is welcome.  GB Energy will also be well-informed about Government policy.  In turn this should be of much value to private sector co-investors.  A very significant part of the electricity transmission network will be from Scotland to England.  GB Energy, based in Aberdeen, will be well aware of the importance of this for the successful development of the whole electricity sector based on renewables.  The physical proximity of the supply chain to the GB Energy office will be helpful.

Given that GB Energy support will reduce the CAPEX outlay for private companies and also lead to funded projects being seen as advantaged because of the investment and consequent perception that the Government have skin in the game, GB Energy will be heavily lobbied. In order to make informed investment decisions between different technologies and different renewable projects in one strand (e,g, offshore wind projects), there will be a need for sound, technically informed, open, transparent and independent due decision-making process. It is not clear that the need for a technical assessment is currently part of the mix, but it should be a key component of GB Energy’s construct.

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

              GB Energy will soon become fully aware of funding requirements to the development of the renewable sector in its capacity as a co-investor.  It will be in an excellent position to provide relevant details to the Scottish Government and other Scottish bodies such as Scottish Enterprise.  Its physical presence in Scotland will make communication easy.  GB Energy’s views on policy will be readily and sympathetically received by Government bodies.

There will be a need to work out where the various regulators such as The Crown Estate, Crown Estate Scotland, the North Sea Transition Authority, and other key bodies and stakeholders (e.g. fishing, MoD, marine and environmental bodies etc.) are engaged and there is a case for the instigation of one single overarching “Net Zero Regulatory Authority”, to evaluate the competing opportunities, assess the trade-offs and make key decisions about the best use of the “offshore real estate” that maximises the chances of meeting the legally binding net zero targets.

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 failure to deliver a path from the existing reliance on oil and gas for our total energy and electricity base load for times when the sun isn’t shining and the wind isn’t blowing, will also lead to stresses that will threaten energy and power supplies, something that became very apparent during the cold, dark and windless days of early January. The wish to avoid power cuts in the time between our current reliance on oil and gas and a clean energy future means that there needs to be a staged transition rather than a cliff edge for existing industries. 

The transition from oil and gas to a renewable future needs to be a managed and orderly one if it is to be Just. Closure of industrial complexes like Grangemouth, Port Talbot and Humber and carbon intensive sectors (e.g. cement, heavy industry and oil and gas) will lower emissions and reduce the UK’s carbon footprint, because of the way a country’s carbon scorecard is calculated (only domestic emissions are counted), doing so will lead to job losses and social challenge in the areas affected as well as see the global carbon footprint rise as products are imported from overseas, thus, having a detrimental impact on global climate. Deployment of robust carbon capture, transportation and storage (source-to-sink) networks linking the emitters with safe and secure geological repositories will make industry more climate compatible and delay closures and job losses.

Residents and workers in Scotland’s Highlands and Islands may feel that their welfare is being adversely affected by major electricity transmission schemes with no obvious benefits in their own electricity bills.  The subject of compensation from pylons and substations should be given more serious attention by policymakers and a campaign of public information and engagement should be undertaken to highlight the benefits of the transition and the part these elements will play in delivering clean energy.

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

              Norway has a track record of more consistent energy policies than those of the UK.  Thus, their taxation policies to North Sea oil have been much less disruptive with far less changes compared to the UK.  Similarly, their depletion policy has been more consistent.  Their policy in setting up a Sovereign Wealth Fund (now termed Pension Fund) has ensured that future generations will benefit from the exploitation of their oil and gas reserves.  Their development of renewables has also been more consistent than in the UK, for example, with respect to development of electric vehicles.  Their development of carbon capture and storage has also been more consistent than has been the case in the UK.

January 2025