Net Zero, Energy and Transport Committee [Draft]

Meeting date: Tuesday, February 27, 2024

Official Report 773KB pdf

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Subordinate Legislation

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Renewables Obligation (Scotland) Amendment Order 2024 [Draft]

Our next item of business is consideration of a draft Scottish statutory instrument. I am pleased to welcome Gillian Martin, the Minister for Energy, Just Transition and Fair Work. She is joined by Karen Dickson, the Scottish Government official who is responsible for energy and markets policy, and Aedan MacRae, energy markets policy officer. Thank you for joining us today.

The instrument is laid under the affirmative procedure, which means that it cannot ?come ?into force unless the Parliament approves it. Following the evidence session, the committee will be invited, under the next agenda item, to consider a motion that the committee recommend to the Parliament that the instrument be approved. I remind everyone that the officials can speak under this agenda item but not in the debate that follows.

Minister, I think that you want to make a brief opening statement.

Yes. I would like to briefly outline what has been done to date.

The order under consideration is a minor amendment to the Renewables Obligation (Scotland) Order 2009. The renewables obligation scheme provides revenue to generators of renewable energy through the trading of renewables obligation certificates, or ROCs. Suppliers purchase ROCs, either directly or through traders, from generators. The generators are awarded ROCs by the Office of Gas and Electricity Markets in proportion to their electricity output. The cost of the scheme is recouped by suppliers through energy bills. The number of ROCs that suppliers must provide to Ofgem for the electricity that they supply is referred to as the obligation level. That level must be published by the Scottish ministers before 1 October each year, giving at least six months’ notice to suppliers before the obligation year begins.

The amendment to the 2009 order is necessary to allow the 2024-25 obligation level to be altered to reflect changes in United Kingdom Government legislation that introduce a new 100 per cent energy intensive industries exemption. It ensures that the ROS obligation level aligns with the UK legislation and the new 100 per cent energy intensive industries level. It also ensures alignment with the scheme in England and Wales, with a parallel amendment being made by the UK Government.

I believe that the amendment order is necessary and proportionate. I will, of course, be happy to take any questions that members have.

Thank you, minister. There are a few questions. Deputy convener Ben Macpherson will ask the first one.

Good morning, minister, and welcome to your officials. The committee noted that there were only two responses to the Scottish Government consultation, but I am aware of how much proactive engagement the Scottish Government—including you, of course—generally does with stakeholders. Could you reassure us that the Government is confident that all necessary and appropriate steps have been taken to hear the views of stakeholders and that you have obtained the feedback that you would want to get this right?

Yes. The most important thing is that we provide certainty. As I outlined in my opening remarks, we want to work in tandem with the UK Government to provide that certainty and also to do joint consultation.

There is concern that, if we do not make the exemption for energy intensive industries, particularly in the high fuel price situation that we have at the moment, they could find that they are not profitable any more and they may have to consider things such as job losses—that is everything that we want to avoid. The large manufacturing sector is particularly affected—it obviously consumes a great deal of energy—so the policy protects them to a certain extent and protects those jobs. [Gillian Martin has corrected this contribution. See end of report.]

Thank you. Sarah Boyack, I think that you have some questions.

What will be the impact of us recommending approval of the order? How will it affect the actual price of electricity for the plants that will be affected? How much do you calculate that it will save energy intensive industries in Scotland?

I have some figures here.

I will mention domestic fuel bills, because obviously the exemption is recouped. The measure will have very little impact on domestic fuel bills.

I will have a look for the figures.

Sorry, my question was not about domestic fuel bills. I was asking about the plants.

The 100 per cent exemption will reduce eligible energy intensive industries’ electricity costs by between £5 per megawatt hour and £7 per megawatt hour. That will amount to quite a substantial sum if you think about the huge amount of fuel that is used by those particular industries. [Gillian Martin has corrected this contribution. See end of report.]

How many industries—individual plants—are we talking about?

There are about 43 in Scotland.

Okay, thanks. What proportion of our total Scottish consumption will the measure impact on?

I will need to check my notes on that, Ms Boyack. I do not think that I have that information to hand. Obviously, you are making a decision today. If we can find that information we will provide it to the committee.

I just want to get a sense of how it all fits in.

The industries that are involved have already been set and the amendment will not allow any others to come into the scheme. They are already agreed and set. The exemption was 85 per cent and it will now be 100 per cent. We have seen in the last couple of years that particular energy intensive industries have found it quite difficult to keep employing people and to keep operations from losing money.

My questions are partly about digging in and just trying to get some backdrop as we make the decision, so that is useful. Thank you.

I hope that the information will not be critical to your making a decision on the next item. Minister, it would be helpful just to have those details clarified afterwards so that we have a record of them.

I am trying to get my head around how this will incentivise industry to electrify—hopefully—and move away from oil-powered systems. Does the exemption act as an incentive or is it more about reducing the costs to industries that already have high electricity costs rather than about fuel switching or decarbonisation plans and that kind of thing?

09:30  

Obviously, everything around the decarbonisation of energy is devolved to Scotland and our economic department is looking particularly at high-energy sectors such as manufacturing.

I am not sure that this particular instrument is about incentivising anything. I think it is about protecting jobs. We have large manufacturing, such as food production and feed-stock production. The original point behind the renewables obligation was to get a subsidy for renewables, but this particular exemption is about large manufacturers that are particularly affected by inflation and high fuel costs. There are thousands of jobs associated with those manufacturers and this is about protecting them in the face of a number of pressures. [Gillian Martin has corrected this contribution. See end of report.]

Yes, I get that. I am trying to work out how the exemption helps industry to make the investments that it needs to make to reduce energy costs or to switch to low carbon sources. The original UK policy was called the “British industry supercharger”. How does all this help to supercharge industry in the transition to reduce energy costs and move into a low carbon space? At the moment it seems to be saying, “This is all quite expensive. Let us not put more costs on,” but what is the solution to that? Surely, it is reducing energy and investing in the future.

The solutions to that lie in other schemes and all the work that we are doing with various sectors. There are obviously incentives for decarbonisation in the business support and procurement landscape in Scotland. We are working on a green industrial strategy and there will also be incentives in that. There is incentivisation across the piece of what the Scottish Government puts forward, particularly with our enterprise agencies.

This particular instrument, to my mind and my interpretation, is about keeping the manufacturing and energy intensive industries going and taking away one of the pressures on them, particularly given the global landscape of fluctuating energy prices that at the moment are outwith our control. As we look to the future and have more renewable electricity, in particular, in Scotland, those pressures will decrease.

Does this exemption not add costs to domestic and other electricity users?

It adds a very small amount. It is important to mention, Mr Lumsden, that this will be across the UK. Households typically account for about 40 per cent of renewables obligation costs recovered by suppliers. The average cost is currently about £77.50 per year on an electricity bill. The exemption is likely to cost just an extra pound or two.

We do not want a situation where household bills are affected by things like that, but I think the reason behind this is that there is an awful lot more at stake if we do not have an exemption. The particular sectors that are affected by this employ a large number of people, not just in Scotland but throughout the UK, particularly in manufacturing.

The UK Government has decided to increase the exemption to 100 per cent. It has historically been the case that the Scottish Government has not gone on a different path and we too want to stay on the path and have agreed to act alongside the UK Government.

Also, we do not want carbon leakage. If we have a landscape in the UK or Scotland where it is increasingly unprofitable for those industries to exist, the chances are that they will go elsewhere. It will be not just carbon leakage but economic leakage. This is a way in which we can protect those industries from their overheads being so onerous that they might have to think about taking their operations elsewhere.

Do you have sympathy for bill payers who have to pay the renewable obligation, whereas large consumers of electric are exempt?

The UK Government analysis suggests that the amount that would go on to a domestic bill would be 80p or £1.10 per year for the average household. You balance that—80p or £1.10 added on to a bill in a year—versus the potential for people to lose their jobs. I think that that seems to be a pretty fair balance.

I am always concerned about the effects on household bills. The UK Government’s review of electricity market arrangements and the reform of the energy markets in general are far more critical in relation to the worries that Mr Lumsden describes. Decoupling the price of gas and electricity would have more of an effect on household bills than anything that this particular instrument does.

I am trying to highlight the fairness of it. Consumers are having to pay the obligation but large consumers—and I am not just talking about going from an 85 to 100 per cent exemption—are paying nothing at all. Domestic consumers are shouldering this burden.

We are following UK legislation. If we did not follow it, what might be the effect of that on Scottish energy intensive industries? I imagine—and Mr Lumsden would be the first to be critical of this—that they might look at a situation where there is a 100 per cent exemption in the rest of the UK but only an 85 per cent exemption in Scotland, and they might decide to relocate their operations. I imagine that Mr Lumsden would join me in being concerned about that. That is why we are agreeing to the UK legislation.

Minister, my question was whether you think that it is fair that householders are shouldering the burden.

I never think that it is particularly fair when householders have to shoulder any kind of burden. I suggest that the review of the energy markets is far more critical in that regard. I look forward to Douglas Lumsden joining with me in asking for protections for consumers, particularly things such as a social tariff, which would mean that vulnerable consumers would be protected from any price increases. In my view, that would be far more effective and far fairer than 80p or £1.10 being added to a bill to save highly skilled manufacturing jobs in Scotland.

It sounds like the more shoulders you spread it over the smaller the cost is.

On that note, as committee members do not want to say anything else, we will move on to agenda item 3, which ?is to debate the motion calling for the committee to recommend approval of the draft Renewables Obligation (Scotland) Amendment Order 2024. Minister, you have spoken to the amendment order, but I will give you another chance to speak to it if you would like to.

No, I will not take that chance. I think that I have said everything that I need to say. Thank you.

[Interruption.] I want to know whether there are any other members—

I am sorry; the clerk is entirely right. You need to move the motion, minister.

Motion moved,

That the Net Zero, Energy and Transport Committee recommends that the Renewables Obligation (Scotland) Amendment Order 2024 [draft] be approved.—[Gillian Martin]

Does any member want to make any comments post those that they made earlier? No one does. Good. Minister, I will give you the opportunity to sum up if you feel that you would like to.

No, I am happy to leave it as it is.

Motion agreed to.

The committee will report on the outcome of the instrument in due course. I ask the committee to delegate authority to the deputy convener to finalise the report for publication. Is the committee happy to do that?

Members indicated agreement.

That is good. Thank you, minister, and thank you to your officials for attending.

09:40 Meeting suspended.  

09:45 On resuming—