RSS0018 - Evidence on Renewable Energy Sector in Scotland

Written evidence submitted by Scottish Renewables

Introduction

Scottish Renewables is the representative body for the renewable energy industry in Scotland, working to deliver a low-carbon, secure energy system, integrating renewable electricity, heat and transport at the lowest possible cost.

This submission sets out Scottish Renewables’ response to the Scottish Affairs Committee’s call for evidence on the renewable energy sector in Scotland, responding to each question in turn.

How important is the renewable energy sector in Scotland to the Scottish economy, to meeting Scotland’s energy needs and to meeting the UK’s renewable and climate change targets?

Economy

Scotland’s renewable energy sector has grown rapidly in recent years, with the UK Government estimating that the industry employs some 21,000 people in Scotland alone.[1]

The sector has delivered in excess of £1bn of capital investment each year over a number of successive years.[2]

Communities across Scotland also benefit from more than £10 million pounds of ‘community benefit’ payments each year,[3] and there are now in excess of 500MW of community and locally-owned renewables projects.[4]

Low-carbon heating and cooling are already bringing significant economic benefit to Scotland as well, with an estimated turnover of £694 million and employing 7,390 people.[5]

Energy needs

Renewables are now the biggest source of power in Scotland, ahead of nuclear, coal or gas, generating the equivalent of almost 50% of our gross electricity consumption in 2014,[6] with more than 7GW of capacity now installed. As Scotland generates more power than it consumes, exporting the surplus (24%), renewables made up 38% of total electricity generation in Scotland in 2014. [7] Figures from DECC show that renewable generation displaced more than 12 million tonnes in 2014.[8]

However, the development of renewable heat has been considerably slower, despite heat accounting for more than half (54%) of Scotland’s energy use. The same is true of transport (25% of energy use)[9] with only 3-4% of our non-electric heat and transport needs currently met by renewable sources.[10]

Meeting targets

Scotland makes a disproportionate contribution to the UK’s renewable electricity output, generating 29.5% of all UK renewable power in 2014.[11] Scottish Renewables’ latest projections are for Scotland to generate in the region of 33,000GWh of renewable power in 2020,[12] which would mean that we contribute around a third of the renewable power required by the UK to achieve its 2020 renewable power target.[13] With further growth in heat and transport we believe that around 28% of Scotland’s overall energy use will come from renewables by 2020,[14] around twice the level likely to be achieved by the UK as a whole.

Looking further ahead, the Committee on Climate Change estimates that the UK needs to more than double installed capacity of renewable generation by 2030 (to around 60 to 90 GW) to meet the Fifth Carbon Budget.[15] With a significant capacity of consented projects onshore and offshore, and substantial further potential, it is clear that Scotland could continue to make a disproportionate contribution to the UK’s low-carbon power needs.

The UK Government’s long-term ambitions for heat and transport are not clear enough for us to assess the contribution that Scotland could make to these. However, it would appear that the growth of renewable heat in Scotland is outstripping the UK with just over 19% of all RHI registrations north of the border.[16]

Innovation

Scotland is also at the leading edge of research, development and expertise in innovative technologies such as wave energy, tidal power, floating wind, deep-water foundations and subsea engineering. The country is host to the world’s first floating offshore wind array, due to start construction in spring 2016, and the Offshore Renewable Energy Catapult’s 7MW Levenmouth Turbine – the most advanced, research-dedicated, open-access offshore wind turbine in the world, as well as the testing facility at Hunterston and the European Offshore Wind Deployment Centre being developed near Aberdeen.

In the wave and tidal sectors alone, around 1,700 people are employed across the UK.[17] Scottish waters are home to an estimated 10% of Europe’s wave energy potential and 25% of its tidal resource. Centres for technology development, such as the world-leading European Marine Energy Centre in Orkney, attract technology developers from all over the world to Scotland and the UK. Our resource, facilities and expertise in marine energy mean the UK is well placed to continue to progress these exciting technologies and continue to lead internationally.

The Committee on Climate Change states that achieving our carbon budgets with a ‘more flexible power system’ has the potential to save consumers £3bn-3.5bn per year.[18] Securing this flexibility will require a range of new technologies such as Active Network Management (ANM) systems, demand side response, storage and increasing interconnection using HVDC technology. While some progress has been made across these areas, additional work is still required to see these innovations delivered at scale. A number of Scottish companies and projects are leading the way in terms of this required network development including Smarter Grid Solutions, Flexitricity, Scottish Power Energy Networks ‘Accelerating Renewables Connections’ (ARC) project and the Power Networks Demonstration Centre at Strathclyde University

Will current UK Government energy policy maintain a stable renewables industry in Scotland and support future growth in the sector?

The reality today is that many companies are scaling back or even freezing investment altogether in projects which cannot make RO deadlines, which don't have a CfD offer, or which have not yet accredited for the Feed in Tariff and locked in a price (known as pre-accreditation). Likewise, there is significant uncertainty over the Renewable Heat Incentive.

Whilst we know that Government intends to hold a CfD allocation round this year, there has been no confirmation of timetable, budget, nor whether administrative strike prices will be revised. Nor has there been confirmation that the ‘Remote Islands’ will be eligible to bid in the upcoming allocation round if State Aid clearance has been granted in time. Despite now being three months on from the Secretary of State’s ‘reset speech’, the renewables industry still does not know the timetable for future CfD rounds, nor the overall budget for these.

Further, despite the massive political focus on onshore wind, it has not even been communicated officially that it is the government’s intention to exclude onshore wind from the upcoming auction round, and, if so, how this would be compatible with State Aid regulations.

All of this means that it is difficult to see further growth in onshore wind and solar projects beyond the developments which have already have a secured ‘route to market’ through the FiT, RO or CfD. In terms of offshore wind, the three projects with consent but without a CfD will all have to compete in future allocation rounds. At the moment it appears that onshore wind may well be the only form of electricity generation in the UK without any form of market support.

Recent changes to the Feed-in Tariff for small scale renewables have also raise many questions about the future for smaller scale projects, with the Chief Executive of a leading hydro developer stating:

“The only sad note is that the recent cuts to hydro tariffs announced at Christmas means we will see next to zero new Highland schemes come forward for construction from 2018 onwards.” [19]

The first allocation of FiT’s under the new system has resulted in deployment caps being reached, limiting the scale of development that can be taken forward at the smaller end of the market.[20]

It is important to highlight that, at present, investors appear unwilling and or/unable to build new capacity in any form of electricity generation (gas, nuclear or renewables) based on the wholesale electricity price alone [21]. While the Renewables Obligation (RO), Feed-in Tariff (FiT), Contracts for Difference (CfD) and Capacity Market (CM) mechanisms may differ in the terms and level of support they offer, they each exist to provide a reliable signal to investors who would otherwise be unable to commit the significant investment required to replace and upgrade the UK’s electricity infrastructure [22].

Electricity

It is, therefore, our view that, in order to attract investment to provide the significant capacity required to meet our longer-term electricity needs and to continue the decarbonisation of the power sector, the UK Government should commit to the following actions:

Deliver on commitments to set out the Levy Control Framework beyond 2020 and provide a 10-year rolling horizon:

Set out timing and budget information for future CfD allocation rounds as a priority:

Provide a market-enabling contract for all forms of low carbon generation that are able to deploy in the absence of ‘subsidy’

Heat

The UK Renewable Heat Incentive (RHI) was due to close in April 2016. However, the Chancellor stated during the Spending Review [23] that the scheme would now continue until 2021, which comes as welcome news for the sector in Scotland. However, a number of uncertainties remain which hinder future investment in renewable and low-carbon heat projects and technologies. We therefore call on the UK Government to make progress in the following areas.

Provide clarity on proposed changes to the Renewable Heat Incentive

Introduce a tariff guarantee to help stimulate investment in large scale projects and provide certainty to projects already in development

Assess the contribution of solar thermal systems and the relevant support required under the domestic RHI

Assess the potential of introducing appropriate support for biomass CHP to attract the desired level of capacity, either through the FiT or an alternative mechanism

Work with the Scottish Government and industry to ensure Scotland can play its part in building heat networks in communities across the country

What is the potential impact of changes to levels of public subsidy on the renewable energy sector in Scotland?

The impact of the various announcements on renewables made by the UK Government since 18 June 2015 reaches beyond the renewables sector alone. The Committee on Climate Change has stated that “the announcements potentially present problems as the cumulative impression has been of a weakening of the policy framework”,[24] and this ‘weakened position’ is already having an impact on decisions as set out by National Grid, EY (formerly Ernst and Young) and other active investors:

National Grid announced that it has reduced the volume of new capacity that it expects will deploy by almost two thirds, citing policy uncertainty as one of the key factors in the reduction [25]
The UK has for the first time fallen out of the EY Renewable Energy Country Attractiveness index top ten. This fall in the UK’s standing has been directly attributed to uncertainty around UK energy policy [26]
Carlton Power, the owners of the UK’s only new gas plant to have secured a contract through the Capacity Market, has indicated [27] significant difficulty with securing investors citing issues with an undervalued wholesale market price and increasing policy uncertainty

The impact of the recent policy statements on the renewable energy sector specifically is particularly acute, including those outlined below.

DECC’s Impact Assessment [28] calculates that the proposed closure of the RO to onshore wind projects one year early will reduce deployment of onshore wind in the UK by up to 2.5GW, with a central estimate of 200MW. It also estimates that this policy change will lead to up to 63 million tonnes of additional CO2 being emitted into the atmosphere, while saving around 30 pence on the average household energy bill, as a central estimate. Finally, it calculates that total lost benefit to communities across the UK would amount to £1 million each year.
The Scottish Government has stated [29] that Scotland will be disproportionately affected by this policy as around 70% of UK onshore wind projects in the planning system are located here.
An EY survey of lenders in the onshore sector found that more than half of those who responded to the questionnaire said they weren’t prepared to lend until the UK Energy Bill had received Royal Assent, largely due to the current political and regulatory risk concerning the RO, and the lack of guidance on the process and timing of the Energy Bill amendment through parliament.[30]
Delays and early closure of UK support mechanisms for renewables underlie Scottish Renewables’ projection that Scotland is now likely to fall short of its 2020 renewable energy targets. There are consented schemes onshore and offshore that could get us to the target, but the delay in the second allocation round means that they are unlikely or unable to proceed before 2020

How effective is the Scotland Office in ensuring that the aspirations of the sector are taken fully into account in the development of UK energy policy?

Our perception is that the Scotland Office has played an important role in ensuring that threats to and opportunities for the growth of renewables in Scotland are understood by the wider UK Government. For example, the potential for onshore wind on the Scottish islands and in ensuring industry input to consultations and decision on Electricity Market Reform.

We are not clear however, what part the Scotland Office has played in recent decisions on things such as the closure of the RO to onshore wind or the decision not to commence a CfD allocation round in 2015.

What progress has been made in implementing the Smith Commission recommendations on renewable energy?

The Smith Commission’s foreword recommended more intergovernmental working between the UK and Scottish Governments:

“I recommend that the Prime Minister of the UK and the First Minister of Scotland meet shortly after 25 January to agree details of how this will be achieved. I would encourage them to find solutions which will carry the confidence of the public and our civic institutions.”

Scottish Renewables’ submission to the Smith Commission called for:

“The UK Government and devolved administrations to build on the consultation mechanisms built into the Energy Act (2013) and to develop a joint energy policy and strategy document that sets out overall UK energy policy and the part that each of the devolved nations can play in delivering that. This would allow each nation to play to its strengths and to maximise the benefits from their own natural resources, whilst ensuring a coordinated approach to UK wide progress against international targets.”

However, we are not aware of any steps taken to achieve this, with the last nine months appearing to bring further divergence in UK and Scottish energy policy rather than closer working.

With the importance of Scotland to future renewable energy targets and therefore UK climate change targets, we continue to call for a more ‘joint energy policy’ that reflects the broader needs of a single GB energy market, while also allowing for the different parts of the UK to play to their strengths in terms of resources.

The Smith Commission also recommended that:

“There will be a formal consultative role for the Scottish Government and the Scottish Parliament in designing renewables incentives and the strategic priorities set out in the Energy Strategy and Policy Statement to which OFGEM must have due regard”

However, the UK Government is of the view that there is no need for any improved mechanism in the current Scotland Bill. Yet, the fact that a pre-Smith consultation mechanism existed was not referred to as a reason not to undertake any improvement of the consultation mechanism in the original UK Government Command Paper, which stated that:

“The UK Government will work with the Scottish Parliament and Scottish Government to devise a proportionate and workable method of consulting the Scottish Parliament on the strategic priorities set out in the Energy Strategy and Policy statement (SPS).”[31]

Our understanding of both the Smith Commission and UK Government statements was that government would look at improving the existing consultation mechanisms, but it appears that existing arrangements are likely to apply.

What other areas of UK Government energy policy impact on the renewables sector in Scotland?

Perhaps the key aspect of this debate is tone. Ministers seem almost at pains to stress the costs of renewables while emphasising the benefits of all other forms of power generation. The reality is that the UK will best achieve its future climate change targets, keep bills down for consumers and promote energy security through a balanced energy mix with an ever-growing percentage of renewables. A clear statement to that effect would go a long way to restoring some of the confidence lost in the sector since June 2015.

Other policy decisions to highlight include the decision to remove the Climate Change Levy Exemption from renewable generators with less than a month’s notice,[32] despite this costing generators around 6% of turnover according to RenewableUK.[33]

One of the key interventions in the electricity market is the Carbon Price Floor (CPF), designed to ensure a more effective tax on carbon emissions than the level determined by the EU ETS. This impacts on the costs of fossil fuel generators and increases the competitiveness of low-carbon alternatives. We believe that the Carbon Price Floor (CPF) should at least be index-linked over coming years, and the Carbon Price Floor projections maintained in order to inform future policy decisions. The UK Government should also continue to press for reform of the EU ETS to ensure a meaningful, credible carbon price is maintained across Europe.

What impact does renewable energy policy in Scotland have on the cost of energy to businesses and households in Scotland compared with the rest of the United Kingdom?

As the mechanism to support investment in renewable power, heat and transport all apply GB-wide or UK-wide, the impact of renewable energy policy in Scotland, to the cost of energy to business and households in Scotland, is the same as for business and households across GB.

The latest estimates we have from DECC show that in 2014 the RO added £36 to the average household electricity bill and FiT added £9, with £5 of this offset by the low marginal costs of renewable power.[34]

February 2016