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Chamber and committees

Meeting date: Tuesday, October 23, 2018

Economy, Energy and Fair Work Committee 23 October 2018

Agenda: Decision on Taking Business in Private, Publicly Owned Energy Company, Damages (Investment Returns and Periodical Payments) (Scotland) Bill: Stage 1


Contents


Publicly Owned Energy Company

The Convener

We now continue our consideration of the possibility of a publicly owned energy company. I welcome our four witnesses: Peter Speirs, public affairs manager, Scottish Renewables; Alister Steele, chair, Our Power Energy Supply; Gail Scholes, chief executive officer, Robin Hood Energy; and Nicholas Gubbins, chief executive, Community Energy Scotland. Thank you for coming to the committee today.


Andy Wightman (Lothian) (Green)

On one level, the whole concept of a publicly owned energy company seems to have been plucked out of thin air, with no one really knowing what the point of it is or why we would do it. Is there anything intrinsic in having an energy company that is owned by the public that would provide benefits for Scotland and its energy supply, generation and use?


The Convener

Witnesses can wave their hand to indicate that they wish to answer a question. The microphones are operated by the sound desk, so there is no need to press any buttons. Who would like to start?


Nicholas Gubbins (Community Energy Scotland)

Community Energy Scotland finds it striking how undemocratic the energy system in the United Kingdom is. Given the way in which things are changing, for example through the roll-out of smart technologies, there is a huge opportunity for the system to become much more democratised. That would be a good thing because there would be a much higher level of engagement and so on. It is difficult to see that happening through the existing set-up of very large, privately controlled companies with limited or low levels of democratic accountability. That is our perspective from the point of view of the democratisation of the energy system.


Peter Speirs (Scottish Renewables)

From our perspective, we would view the publicly owned energy company less as a company and more as an agency—or certainly as having the potential to act as an agency, rather than being a company in a narrow sense. For us, it presents an opportunity for us to behave a bit more like countries such as Denmark or Sweden and to have embedded within the Government an organisation that is committed to ensuring maximum renewable generation and supply. We would view it more as an agency, rather than just as a company.


Gail Scholes (Robin Hood Energy)

Robin Hood Energy is a publicly owned organisation that has now been trading for three years. We were set up publicly owned and not for profit. We are completely transparent and accountable for being an energy supplier.

We have been able to join up on lots of other strategies, in particular the climate change strategy and the fuel poverty strategy. With 183,000 households in extreme fuel poverty in Scotland, the publicly owned organisation provides a real way into connecting with communities and with other publicly owned or governed agencies, such as Citizens Advice. There are lots of agencies that it is possible to connect up with.

We now have more than 200,000 meter supply points. For the sticky customers and the customers who have never switched and who are on the most expensive tariffs, this model provides a really good way into that customer group and a good way to operate at community level.


Alister Steele (Our Power Energy Supply)

Our Power was set up by Scottish housing providers, so our model is that of a community benefit society. We are owned and controlled by our member organisations. From the supply side and from the perspective of the company entering the supply market, the publicly owned energy company has to be clear about what it is trying to achieve. If the market is not working and you are looking to intervene in the market, is having a company enter into that market the right thing to do, or are there other ways in which you could intervene to address the problems that you have identified?

From the point of view of an energy supply company such as Our Power, the marketplace is dynamic and competitive just now, and there are a lot of risks for a company entering that marketplace. I question whether having a new publicly owned energy company is the right thing for Government to be doing just now.

On the broader system, including the areas of generation, the networks, distribution and the supply side, the issue is how the supply chain works and whether anybody in that supply chain is being disadvantaged. Parts of the country certainly are, as the transmission and distribution charges for electricity are higher in the north of Scotland than they are in the south of Scotland. People in an area that is off the gas supply are paying more for their electricity than people in other areas, and that is a major contributor to fuel poverty. On such issues, which concern the wider system, whether the body is an agency or a company is a moot point. I think that if it is more of an agency—rather than being a company that is set up to enter into the market directly—it could begin to address those issues.


Andy Wightman

That is very useful. It seems that we are starting with what we have been given, which is the proposition that there shall be a publicly owned energy company. We are not starting by asking how we tackle fuel poverty, support community energy and so on.

I agree with Nicholas Gubbins that the energy industry is very undemocratic. One way to democratise the energy sector would be to have many more municipal energy companies and social enterprises. Could you comment on that?

Peter Speirs represents some publicly owned energy companies. For example, Vattenfall, which is a member of Scottish Renewables, is a publicly owned energy company. Essentially, you are saying that you do not see the Scottish publicly owned energy company as a Scottish Vattenfall; you see it as being like the Danish energy agency. Could you clarify your position on that?

Is Robin Hood a social enterprise, or is it a company with no share capital? Could you talk about some of the governance issues around Robin Hood?


Peter Speirs

We see the company as something that could act as both. If the Scottish Government wants to proceed with the company acting as a supplier and behaving much like Vattenfall, it could do that. For us, however, the greatest opportunity lies with it acting in a more agency-like manner. It could be both, but the agenda that we are trying to push is for the company, if it does behave as a supplier, also to act within government in a broader sense.


Gail Scholes

Nottingham City Council owns Robin Hood Energy, and it is the only shareholder; the company is 100 per cent owned by the city council. We also have nine white-label organisations, which we set up in their own right. They include the Liverpool Energy Community Company—LECCY—RAM Energy, Your Energy Sussex and Ebico. Ebico has a charitable trust set-up as part of its arrangements. Robin Hood Energy is 100 per cent owned by Nottingham City Council.


Andy Wightman

So it is a municipal energy company, conventionally speaking.


Gail Scholes

Yes.


Nicholas Gubbins

The question from Andy Wightman was about the democratic nature of municipal energy companies, the potential for many more social enterprises and so on. It is almost as if we need to move to a position where the consumer is highly informed and, ideally, engaged. Mechanisms that engage the consumer much more in the sources and use of the power that they are receiving are very important to us. The question then is: what is the best way of doing that? In our view, the more local things are and the more of an ownership stake the consumers have—we prefer the term “citizens”—the better the whole system will be.

We see tremendous scope to increase that engagement, whether through a hierarchy of organisations—a bit like how Gail Scholes has described—or through larger-scale municipal set-ups. We are entirely open on what form it might take, as long as there are much greater opportunities for engaging citizens in how the system is run, which is critical for us.

It is clear that economies of scale are central to the financially viable operation of any energy supply company. That has to be a massive factor in how a supply company would operate.


The Convener

We are slightly constrained for time this morning. I would like to move on to Colin Beattie now.

10:00  


Colin Beattie (Midlothian North and Musselburgh) (SNP)

Could I ask you a simple question on a matter that you have been bouncing around? Should the proposed company be involved directly in the supply of energy, or should it be taking a much more strategic role?


Peter Speirs

From our perspective, the opportunity that lies with this whole endeavour is less to do with direct supply, where the margins are quite small and where the market is relatively crowded; it lies more in ensuring that the Scottish Government and the UK Government can achieve their ambitious renewables and climate change targets.

One proposal is for the company to aggregate public sector demand and ensure that energy is purchased directly from renewable sources. That could be done either through Government-owned generation or through direct power purchase agreements—PPAs—with existing companies. The existing companies have a pretty good track record of achieving scale and reliability.

We have 69 per cent of Scotland’s electricity being generated through renewable sources already. If the Scottish Government could aggregate that demand and enter into PPAs, particularly with onshore wind, which is currently locked out of the contract for difference mechanism by the UK Government, that could at least provide a bridge to a future CFD decision or to high-level bespoke additional capacity over and above what would be provided by CFD.

There is an opportunity for the company to directly involve itself or to directly support generation at both large and small scale. The changes to the feed-in tariff that have been proposed by the UK Government provide an opportunity to support community-level generation, which could in some way replicate the success of the feed-in tariff in Scotland.


Colin Beattie

It seems to me that you are proposing something that is fairly limited in scope for the proposed company. You are talking about the consolidation of public sector purchasing capability, so that simply by bringing it all together, you can negotiate a better price. Is that really the role that the company should have?


Peter Speirs

That is a role that the company definitely could have. If it was directly involved in supply, you could add the demand for its supply to public sector demand and end up with a substantial amount of demand for both electricity and heat.


Colin Beattie

That might give slightly cheaper power to the public sector, but it would not alleviate fuel poverty or anything like that. It would not have a significant impact on that, yet that is part of the purpose of the company.


Peter Speirs

Onshore wind is the cheapest form of new electricity generation. Offshore wind and photovoltaic solar power are also very low cost. There is a direct relationship between the cost of generation and the end bill. There would certainly be a downward effect on bills for consumers, both for the Government and for individual consumers.


Alister Steele

We said in our submission that we did not think that the publicly owned energy company should be directly involved in supply. In considering what such a company could add to the market, we can see that there is now an active switching market for consumers who are engaged, who pay by direct debit and who manage their energy online. If the company is being set up specifically to deal with people who are disadvantaged within the energy market, particularly those in fuel poverty, we know about that from our experience.

Our Power was set up specifically with that aim in mind. We entered the market with one tariff for all customers no matter whether they were paying by prepayment, by direct debit or on receipt of a bill, and we embraced the warm home discount from day 1. Although we took on all those things, it is difficult to get people who are not engaged in the energy sector to switch. I do not see evidence from the work that has been done to date for the idea that a new company could come into the market and begin to make a big impact on fuel poverty, because accessing that body of consumers who are disengaged is very difficult.

In the next few years, the energy market will go through huge change. It will move away from suppliers charging people in kilowatt hours to a much more holistic energy services model in which people in a home are generating power because they have solar panels on the roof and there is storage in the home. How the energy market works and how companies deal with consumers will be different in 10 years’ time. The people who are disadvantaged in the current market will be even more disadvantaged in the future market, so the challenge will be to ensure that nobody is left behind in that energy transition.

If an agency or company is to be set up, it should look at the change that will happen in the energy sector and how we ensure that Scotland benefits from that change and that nobody is left behind. Part of that will be about what local authorities do, because they will have a role to play in that regard.

To answer your question, I do not think that a publicly owned energy company should be involved directly in the supply side.


The Convener

Gail Scholes wants to comment. We will then move to questions from Gordon MacDonald.


Gail Scholes

I agree that the company should not be involved directly in supply, but it is right to say that everything needs to be joined up. If we do not join up everything, we will be missing a trick, given the amount of new homes, electric charging points and battery storage that have to be built and the need to link all that up to renewable tariffs. The market will definitely change, and thought and vision are needed to bring that all together. I strongly believe that that should be the role of a publicly owned body.

Local authorities generally work at city and region level. They bring together all the climate change objectives, the fuel poverty goals and the roll-out of renewables. They are also the planning authority, and they are generally linked to new housing developments. Their role can be significant, if you get the model right. You could do both aspects by entering into something like a white-label arrangement initially, while still having those really close ties to local authorities that are connected into that model.


Gordon MacDonald (Edinburgh Pentlands) (SNP)

On supporting the growth of community and local energy generation, is there scope for a publicly owned energy company to support small community-owned generators through power purchase agreements?


Nicholas Gubbins

The big issue right now is that the wave of community-owned generation projects has passed. The financials largely just do not make them viable. That relates to the point that many community-owned generation projects involve a great deal of voluntary effort, so they have to be very worth while to justify the huge amount of effort that goes into making them happen.

Could an energy supply company, even a publicly owned energy supply company, make a difference through how it offers PPAs, in order to facilitate and make new generation happen? We have thought through several possible models. The key is to have the combination of capital up front and a revenue stream that enables a project to be financed.

To be absolutely honest, we cannot, for various legal reasons, see how a public energy supply company could make much difference. Such a company would not be able to offer much better PPAs than the market can currently offer. It could offer a different way to structure finances, but any other energy supply company could offer that, too. For example, there could be scope for up-front investment in community energy projects and then having discounted supply—in other words, the community project would discount its supply to the supplier through a PPA, for example, over a period of years. That would give the supplier long-term security of supply, which is critical with current wholesale-market variations, and it would give the community generator a potentially viable financial framework to make it all worth while.

However, I repeat that suppliers that are interested in that model could do it now. I am not sure how much difference a publicly owned body would make, other than—


Gordon MacDonald

You mentioned that the financials have changed. What has changed? Is it the UK Government’s announcement that feed-in tariffs are changing, or is it something else?


Nicholas Gubbins

The feed-in tariff has been going down significantly, and no longer exists for significant onshore wind projects. Removal of the export tariff, which is highly likely to happen from the end of March next year, pretty much signals the end of support for relatively small projects.

There has been a great deal of talk about subsidy-free renewables, which might be feasible at a very large scale, but that will not work for small projects that do not have the advantage of economies of scale. The only way through that problem that we can see is for there to be much more collective large-scale development, which could be linked to municipal development or could happen through large-scale engagement among lots of community groups throughout Scotland that wish to take forward projects. Economies of scale are needed to make the financials in any way viable.


Peter Speirs

The points that Nicholas Gubbins makes are accurate, but the difference that a publicly owned energy company could make would be through the political will to establish it. The Scottish Government’s energy strategy notes the benefits of community decentralised generation that come from the energy being generated closer to where it is required and from ensuring that the system is more flexible. The direction of travel of the Scottish energy system is towards that increasingly decentralised model.

The financials might be difficult from a private sector perspective, but the Scottish Government recognises the advantages and sees them as being increasingly important, so the political will could exist to provide the support that is required for community-level generation.


Gordon MacDonald

Grid connections are obviously needed for community generation; it has been suggested that a new company should focus on areas where there are grid constraints. What difference could such a company make in relation to those grid constraints?

10:15  

 

 


Nicholas Gubbins

The key to overcoming grid constraints that mean that a new project could not connect to the system is maximisation of use of the various innovative measures that are starting to appear and with which CES has been closely involved. Areas in which there is high-level constraint create real opportunities for using power in different ways. For example, rather than simply connecting new power to the grid, it could be used as a substitute for heating oil, or for fossil-fuel use in transport. The key is to have the will to explore, pilot and test the ways in which power can be linked directly, with the existing infrastructure, to local use.

For example, when a new generator plant comes on it must be known with certainty that the power that it pumps out is saleable and will be used. Currently, in constrained areas new plants cannot know that: they might at best get what is called a non-firm connection or, at worst, get no connection. A body of demand is needed locally—new demand that can be switched on to take the power when it is generated.

That has been proved to be technically feasible; it is a question of will to invest in local energy systems to make it happen and to create financially viable models that will elicit new generation schemes that are targeted specifically at new local demands. At the moment, that is happening only in a very small way, but there is tremendous scope to increase it, particularly in the constrained areas, which would unlock the still potentially very significant renewable energy generation in such areas.


Alister Steele

Our Power has a number of PPAs with community generators, and the market is very active. People tend to go out to the market annually, depending on how long the agreement is for, and almost retender. There is a PPA market that is working, so care needs to be taken when intervening in it. If the Scottish Government comes in with a different offer on PPAs, how will that impact on the current market? There is a danger that that could push up costs.


Jackie Baillie (Dumbarton) (Lab)

Gail Scholes touched on the plethora of initiatives that are designed to tackle problems in the energy market. We could reel off a list; I understand that there are at least 36 schemes. I am curious to know whether the rest of the panel thinks that a publicly owned energy company would simplify things or add more complexity to the process. I will start with Peter Speirs.


Peter Speirs

Thank you, Jackie, that is kind of you. [Laughter.]

The proposals are still at an embryonic stage; what will happen entirely depends on what the Government wants and how active the company would be. Would such a company have the opportunity to take on the schemes that you mentioned, and to consolidate and improve on them?

An obvious example is heat policy. The local heat and energy efficiency strategy—LHEES—scheme has been proposed. We are concerned that the Scottish Government’s proposals on renewable heat have been a bit watered down. The biggest issue is the lack of a pipeline of activity for companies and the industry to engage in, in the long term. There is the opportunity for a publicly owned energy company to assist local authorities in their LHEES work and to build on that work. That approach could consolidate and improve on an intervention that currently exists. If it were simply to result in a 37th intervention, that would not necessarily simplify things, but a system-wide approach could be taken to consolidate and improve on what exists. The opportunity is there; what happens depends on the precise proposal.


Alister Steele

A publicly owned company would have to be able to simplify the system or there would be no point in having it. If it just went into the market and added another layer of complexity, it would fail in what it was trying to do.

Given how the market is structured just now, it will be difficult to simplify it. There is quite a complex supply chain, within which a number of profit centres work. There is a UK-wide regulatory regime and, as we heard, distribution and transmission costs need to be tackled. Those costs were developed for another era, when there was centralised power generation. They do not reflect how energy is generated now.

Big things like that need to be challenged, but they are more at UK level than at Scotland level. The issue is the ability of a Scottish public energy company to intervene to make the changes that are needed.


Jackie Baillie

We heard Gail Scholes’s view in response to an earlier question. Does Nicholas Gubbins have a view?


Nicholas Gubbins

I struggle to see how a publicly owned supply company would add value. Because of how the market operates at the moment, it is almost a contradiction to say that we could have a publicly owned supply company. It is a question of what other useful things could be done: there are other things out there. At the moment, they are dealt with by different bits of the Scottish Government, its ancillary bodies and agencies, and although the system generally works, it could work a lot better if all the bits and pieces were brought together and co-ordinated. There would be merit in that.


Jackie Baillie

Whatever form that publicly owned energy company takes, should it be independent of Government? Is there a way of doing it such that it could act as a policy adviser, or would it, by merit of its being publicly owned, have to sit within the Government?


Nicholas Gubbins

If the company was doing everything other than supply, there would be a real advantage in its being publicly owned and governmental, so that it would have the weight and policy influence of a Government body or agency. I do not think that that would apply if it was a supply company; it would have to be independent.


Jackie Baillie

I see Alister Steele nodding.


Alister Steele

Yes. Gail Scholes’s example shows that you can have publicly owned energy companies that sit more at local authority level, where there may be reference to a local energy market. However, companies have to operate outwith local authority areas in order to become financially viable, which is one of the contradictions in that model. It is a real issue for the sector.

In many ways, what Nicholas Gubbins has said about a national energy agency is absolutely right, in terms of how the economy is going to develop with smart meters, storage systems and so on. There are Scottish companies that are at the leading edge in developing some of those technologies. It is worth considering how to invest in those companies, so that when the transition happens, it will create jobs in Scotland and become a real driver. There will be opportunities: an energy agency might be able to link investment to employment. On the supply side, however, such companies need to be more local.


John Mason (Glasgow Shettleston) (SNP)

Gordon MacDonald touched on community generation. Maybe the new company could amalgamate or be a guaranteed purchaser, but what about the new company actually doing generation itself? Is that feasible? I am not sure whether Our Power Energy Supply or Robin Hood Energy do generation or whether they just buy. If they do not, why not? Is doing that a possibility?


Alister Steele

Our Power buys rather than generates. It was in our initial vision that we would generate our own electricity, but the complexities of running a supply business and the capital that is needed to enter the generation side have precluded our doing that. We would like to have, in the longer term, much more control over the supply chain, but, up to this stage in our development, it has been too difficult a task for us to achieve in the two years for which we have been operating.

A publicly owned energy company entering the generation market would be faced with challenges of other generators in getting a financial model that works, given that there are no feed-in tariffs. The capital investment and the revenue from that investment have to balance, so the question is how to fund that and whether there would be state-aid issues if other companies are generating. We could look at ways of supporting the generation industry, rather than entering it directly.


John Mason

Our Power’s submission says that we should perhaps nationalise some existing assets. Were you thinking about the buying of hydro schemes?


Alister Steele

I was thinking more about infrastructure in relation to the grid—investment in interconnectors from the islands and grid constraints on the mainland. If the infrastructure in those areas worked better and had more capacity, that would release a lot of potential elsewhere, including in renewables.


John Mason

Does Gail Scholes want to come in on that?


Gail Scholes

I suppose that nationalisation would be done where it would be financially viable. Robin Hood Energy has turned a profit only this year, and it is a small amount, so we have invested in the warm home discount scheme. We would look to invest in our own generation as soon as we were making greater profit. We would naturally go towards things such as private wire and investing in community energy projects.


John Mason

Is district heating something that you would look at?


Gail Scholes

Yes.


John Mason

I do not know about Nottingham, but in Glasgow district heating is very patchy—there are little bits of provision. Would you think about moving into district heating in a city?


Gail Scholes

Where it would work, yes we would. Nottingham has a fairly large-scale district heating scheme that is run quite successfully and is publicly owned. That is interesting, in itself: the schemes that tend not to work so well are those that are commercially owned, where there are financial constraints around further investment in pipe networks and private wire. Those networks will extend only to where they are financially viable and where there is a sale of the heat network at the end—and that sale is needed almost straight away.

Our approach in Nottingham has been to ensure that the city is well connected. When the tram network was put in, for example, we ensured that there was pipework underneath so that parts of the city could be connected in the future. That is where the model has worked. In answer to the question, I say yes—I think that we would invest in the future if it would be financially viable for us to do so.


John Mason

Perhaps the other two witnesses want to come in at this point. Is there enough generation already, such that there is no space for a company to create new generation?


Peter Speirs

The large-scale work on onshore wind that is already in the planning process could double the capacity of existing onshore wind. With regard to small-scale generation, the industry exists; it just needs support and clarity.

District heat is one area in which the Government could certainly be a first mover. For quite a lot of district heat schemes—in particular where a scheme is the first in its area—the borrowing costs are prohibitive in terms of private sector involvement. An instigator of a district heat network has to do the hard work of getting consumers to want to participate in a district heat system. To have the reasonably low borrowing costs that are associated with Government could make viable the projects that are currently either unviable or on the precipice of being so.

That could certainly be the beginning in a place like Glasgow where provision is piecemeal, because it could enable the industry to establish a pretty significant foothold. The public sector could continue to expand the scheme, or could simply be the first mover and then allow the industry to build on the scheme. There is an opportunity.


John Mason

That was helpful. Thank you.


Nicholas Gubbins

I will make a quick comment. I am sure that both Alister Steele and Gail Scholes—although I do not want to speak for them—would be delighted if there was an incentive that enabled them to invest in acquisition of generation assets, or at least in long-term PPA arrangements with local or Scottish generation assets. Stabilisation of the supply to an energy supplier is vital in avoiding the fluctuations in the wholesale market. That will be a key requirement if we are to see more democratic energy companies surviving.


John Mason

That is great. Thank you very much.

10:30  


Angela Constance (Almond Valley) (SNP)

I have a general question for the panel and a specific question for Ms Scholes.

I am conscious that a publicly owned energy company in Scotland would not operate in isolation, given that energy regulation and the market operate at a UK level and beyond. Therefore, I am interested in the panel’s views on the impact on the energy market here in Scotland, and the potential impact on a publicly owned energy company, of any UK Government decisions about support for renewables and access to the grid.


Alister Steele

We were formed by Scottish housing providers, but we have now moved into the Great Britain market, because we needed such width to enable us to become financially viable. The regulator has recently intervened on price caps, standard variable tariffs and price caps on prepayment meters, which has had a significant impact on suppliers’ marketing behaviour, and that was a policy-led initiative by the UK Government. The smart meter timetable, which is a UK regulatory matter, impacts on consumers here, and we have spoken about the removal of feed-in tariffs, which is also a UK-wide issue.

It is unavoidable that a Scottish publicly owned energy company would be influenced by what happens at a UK level, because that is where the energy sector is regulated and it is where a lot of the policy drivers come from.


Gail Scholes

The problem is that the energy industry is quite broken in places. Before we even start with anything new, we need to do a whole load of fixing to ensure that the industry is set up for the next generation. The industry code was designed around six big energy companies, but the market is very different, so there is an awful lot of work to do. A feature of being publicly owned is that we get to do an awful lot of lobbying, of the regulator and of Government, to ensure that some of that is addressed. The Office of Gas and Electricity Markets is not hearing any lobbying from the big six or from some of the other suppliers in the market, because only the very small energy suppliers who are entering the market are really struggling with the industry code, which is blocking progress.

However, a lot is changing. Since we entered the market, we have managed to influence the price cap on prepayment tariffs, which was a change for the greater good.


Nicholas Gubbins

This is a bit of an unusual point, but I got a letter yesterday from Claire Perry, the UK Minister of State for Energy and Clean Growth, which responded to a letter that we sent jointly to the Prime Minister on the state of the UK Government’s policy on small-scale community energy development. The minister’s letter of response was very nice, but everything that she documented in it about the community energy sector related only to England.

There is an issue about how little visibility Scotland has in the UK Government’s energy policy mechanism, and yet Scotland is entirely subject to the UK energy market—Ofgem, the regulator, and so on. There is a disconnect, which needs to be addressed far better than is currently the case.

That illustrates the need for a much more significant measure that would have an impact at a UK level, for as long as we have a UK energy market.


Peter Speirs

The points that have been made are pretty spot on. There will always be limitations, which derive from the powers that we have here in Scotland. The UK Government views Scotland as doing a very good job on renewables—as does most of the world—and I think that its view is that it can take a more hands-off approach. We are trying to change that, but there are just inherent limitations on the work that the company can do.


Angela Constance

My final question is for Ms Scholes. The Scottish Government has announced that its approach to a publicly owned energy company will involve local authorities, either individually or collectively, will be phased and will have a white-label arrangement. Do you endorse that approach? Given your great experience in Nottingham, what is your advice for the Scottish Government as it proceeds, working in partnership with local authorities?


Gail Scholes

I endorse the approach because of the risk in entering the marketplace, as Alister Steele mentioned. Three years ago, the market that we entered was very different. There were 42 small energy companies and now there are more than 70; and commodity prices have risen 60 per cent this year. We have learned that the expertise and industry knowledge required to set up a publicly owned company are not to be underestimated. There is the financial risk of entering the market; some smaller energy suppliers have quickly departed it because of commodity prices.

The starting point is good, as is the transition. Scotland could enter the market more quickly than 2021, as is envisaged at the moment, because if it waits until 2021, it will probably miss smart meter roll-out programmes, and the market will change in the next two years. Entering into a white-label arrangement will take Scotland to the market more quickly and with less risk, but it could still take a longer-term view on what the transition will look like and how the initiative will develop. Starting with a white label and then engaging other parts of Scotland and other partners could work really well for Scotland.


Jamie Halcro Johnston (Highlands and Islands) (Con)

I am conscious of time so have a few brief questions. We have talked a lot about reducing prices but supporting community energy and other small-scale energy approaches. Is there a conflict in those two objectives? Without putting considerable subsidy, as well as time and focus, into community energy—which I support—how can we reduce costs?


Peter Speirs

There are clear advantages from community-owned energy but there are cost implications, some of which increase the price and some of which decrease the price. Generation closer to consumers decreases the price of transmitting energy to them, for example, but the picture is reasonably complex. However, the overall advantages of community-owned energy are pretty significant—I know that you are aware of that, so the conflict is perhaps more complicated than your binary description.


Alister Steele

Wholesale energy costs are about 40 per cent of the cost of running such a business, so a rise in those will have a direct impact on prices because they account for such a significant part of what you are doing. If there is a relationship between the two, it is about using community energy to try to bring down some of the other costs in order to avoid price increases, and Peter Speirs’s point about transmission and distribution and linking generation to local consumption can make that viable if it can be managed.


Jamie Halcro Johnston

That would rely on a lot more generation happening closer to sites of main usage, such as cities. Is that feasible?


Gail Scholes

Yes.


Nicholas Gubbins

Yes.


Alister Steele

Yes. If there is a publicly owned energy company that tries to join everything up, it may very well be possible. It is important to look at the matter holistically and ensure that local authorities and others invest in renewables both in cities and in remote areas, where there is a lot of generation that bypasses consumers in those areas. A different approach is required in urban areas than we would want to take in rural areas, but I think it is achievable. The challenge is to make it happen.


Nicholas Gubbins

We typically have a differential of about 10p per kilowatt hour between the wholesale value to a community generator of selling its power to the grid and the retail cost that someone—who may live nearby—will pay for that energy, because it goes off to the grid and comes back again. The hidden issue in that regard is the use of system charges both in the distribution network and in transmission, where a chunk of the cost is. There is a big debate about those charges and what a fair charging rate would be, but we believe that within that there is scope to control some of the cost elements and therefore incentivise local generation and local use. We are not there yet, but that issue is significant in working out the financials that have been alluded to.


Jamie Halcro Johnston

Would an increase in such generation require Scottish Government support? Would there be up-front costs to get it in place?


Nicholas Gubbins

It would benefit from such support in a number of ways, not just in relation to market compliance and investment measures, but in relation to support for innovation, the network and changes in the way the network is operated locally in order to enable it to happen. I think it is going to happen; it could just use a bit of a push.


The Convener

Gail Scholes can have the last word.


Gail Scholes

Where there have been financial incentives, such as with the feed-in tariff, it has accelerated solar programmes. Putting an incentive in place works really well in getting scale back into communities.

As a priority area, off-grid locations could work really well in terms of cost. In general, consumers in those places pay the most for heat from oil, diesel or whatever they have to buy. The cost is huge and, generally, those off-grid areas are where fuel poverty is found. There are some obvious places where initial investment would work really well.


The Convener

I thank our panel of witnesses very much for coming in today.

10:43 Meeting suspended.  10:46 On resuming—