Economy, Energy and Tourism Committee

Meeting date: Wednesday, February 1, 2012

Official Report 455KB pdf

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Energy Policy (United Kingdom Government)

Good morning, ladies and gentlemen. I welcome members and guests to the fourth meeting in 2012 of the Economy, Energy and Tourism Committee. I remind everyone to turn off their mobile phones and other electronic devices. We have no apologies.

We will take evidence on the United Kingdom Government’s energy policy from Charles Hendry, who is Minister of State in the Department of Energy and Climate Change. Welcome, Mr Hendry. It is good to have you here. Would you like to say something by way of introduction before we move to questions?

I am delighted to have the opportunity to give evidence to the committee. I regard engagement with Scottish policy makers as an important part of my brief, so this is a valuable opportunity. We have constructive engagement with the Scottish Government, generally. There are differences on some issues, but across the spectrum we have sought to find as much common ground as we can do, because that is the best way of giving as much long-term clarity to investors as possible about opportunities in Scotland and throughout the UK.

We are conscious that you need to be away by 11 o’clock, so we will rattle through our questions as best we can. Members have a range of questions on different issues. Perhaps we can start with the feed-in tariff, which is of interest to many members, in the context of different technologies.

Good morning, Mr Hendry. You will be aware that there are proposals for at least four large-scale, 100MW biomass plants on the east coast of Scotland—not too far from Edinburgh, as it happens. You will also be aware that the Scottish Government is conducting a consultation on the renewables obligation. It is reported that renewables obligation certificates are to be phased out from 2017.

There is a large body of opinion against large-scale biomass plant, on the basis that the process is environmentally unsound, not least because of the vast distances over which the raw material must be transported. For the Scottish plants, material would be imported from north and south America and Russia. The plants are inefficient; electricity-only plants operate at efficiency levels of only 30 per cent, compared with 70 per cent for combined heat and power plants. It is also argued that large-scale plants will severely distort the UK wood market and lead to a large number of traditional industries going out of business. Last but not least, the approach encourages the burning of wood before it has reached the end of its useful life and undermines recycling.

Given that there are so many factors against the approach, will the UK Government review its position on support for large-scale biomass plants? We hear that DECC is increasing support for wood-burning power stations.

Thank you for your question. A short while ago I was pleased to attend a meeting that was co-chaired by Fergus Ewing, to talk in particular to the wood industry about its concerns. Like Scotland, we have been consulting on the renewables obligation that applies south of the border and in Northern Ireland, which is a separate jurisdiction.

We have broadly recommended that there should be continuing support for biomass. We have drawn a distinction between new, large-scale, purpose-built biomass plants and conversion and co-firing, because we think that there is a significant early gain in relation to carbon emissions when coal plants convert, as we have seen at Tilbury on the river Thames, and when there is co-firing, which Drax is interested in exploring.

We recognise that most large-scale biomass facilities would overwhelmingly require imported fuels—the sector reckons that 90 per cent or more of the fuel that it used would be imported. We are putting together a bio-energy strategy, which will include much greater sustainability criteria, because central to the long-term success of the biomass industry is that it should operate in a sustainable way. Much activity can be supported by imported biomass, but we must be clear about the sector’s overall sustainability.

The sector has an important role to play as part of a low-carbon economy and as a mechanism for meeting our renewable energy requirements, whereby perhaps 30 per cent of electricity will come from renewable sources by 2020. Biomass electricity has the advantage of being dispatchable—it is generated not just when the wind blows or the sun shines, and more electricity can be generated as demand increases.

Biomass has a role to play, but it must operate within sustainability criteria. I talked to Mr Ewing again this morning about how we might try to ensure that we reach as close agreement on the area as possible.

That is all well and good, but in your reply you did not talk about the impact on traditional industries, such as the wood panel industry. A number of plants in Scotland would be severely affected, because they would not be able to source material. Has that been taken into account?

We have had good written engagement with and offered meetings to Anne McGuire MP, who chairs the all-party parliamentary group for the wood panel industry. We are keen to ensure that we fully understand the industry’s perspective.

Our view is that for smaller-scale biomass plants, fuel would be sourced predominantly from domestic production, with demand from each unit being modest, whereas for large units fuel would be overwhelmingly imported. We have asked the industry to put together a code of practice, to ensure that people are comfortable about the extent to which they will be looking for imported biomass. The industry is looking for secure supply contracts of seven years or longer, so it will be clear where the fuel is coming from.

We think that there is inadequate wood husbandry in this country at the moment and that with good, sensible management of our resources there can be much greater production of indigenous biomass. Much of the biomass that would be used in the plants would not be trees. There would be some branches, bark and off-cuts from the wood panel industry, but much of the biomass would come from other biofuel stocks, such as miscanthus, or elephant grass, and purpose-grown willow. We think that we can address the issue that you raised as part of the sustainability criteria.

We have a problem with the housing stock in some of our rural areas, in that the cost of insulating a house can be more than the house’s value. The feed-in tariff and carbon emissions reduction target schemes do not work in a way that protects the people who live in such homes. For instance, there is no eligibility for the feed-in tariff for solar panels if a house’s energy efficiency rating is below C. Many people argue that using renewables to heat homes rather than using insulation to keep heat in would be an answer.

The CERT scheme also discriminates against rural areas, in relation to the requirement for a proportion of the people in the area to be on low incomes or fuel poor. Rural communities are too interwoven for that to be the case. Housing tends to be privately owned, rather than part of a housing association estate or council estate.

Has the UK Government considered the issue? I accept that the CERT and FIT schemes are about carbon reduction, but will the new schemes take into account the issues that I raised, with a view to alleviating fuel poverty?

There were several points to respond to in that. We recognise that the issues of hard-to-heat homes and insulation are often more challenging in Scotland, and not just in rural communities—John Robertson MP has raised the issue of the nature of the housing stock in Glasgow and how difficult it will be to insulate. We recognise that there are particular insulation issues. As we implement the green deal, we are considering how it can be used most effectively to provide insulation for hard-to-heat homes. We recognise that people who live in such homes will often have more limited means and that therefore their ability to contribute towards insulation will be more constrained.

The principle of the green deal is that, through new sources of finance that are not related to the individual’s ability to borrow money but which relate to energy use, people will, on day 1 after the insulation programme, receive the benefit of a warm home and then, gradually, over 20 or 25 years, the cost of the work will be repaid. A proportion of the saving will then be used to offset the costs that have been incurred. We believe that, with that approach, nobody will miss out on the green deal because of their income situation. The final details on that are still to be resolved, but it is an important part of the approach.

Secondly, we have introduced the energy company obligation—ECO—which is an increasing obligation on the energy companies to deal with their most vulnerable customers. During this winter, the companies will write to 2 million of their customers and DECC is writing to 4 million consumers, particularly vulnerable ones, to draw their attention to how they can get a better energy rate. We are encouraged by the fact that some energy companies now offer the dual fuel benefits to homes that are off the gas grid. Whereas, historically, people in such homes could not take advantage of those tariff benefits, they should now be able to do so.

We are also considering off-grid issues more generally to see how we can get help to those homes at an earlier stage. For example, the renewable heat premium payment, which is the forerunner to the renewable heat incentive and which gives a grant for renewable heat measures, is particularly targeted at homes in rural areas that are off the gas grid. The scheme provides a grant to people to assist them in going down the renewable heat route.

We are considering linking the feed-in tariffs to the degree of energy efficiency because it seems only right that, if we give people a subsidy for generating electricity or heat, they should not waste that energy in a poorly insulated home. We are considering that. We have consulted on the required level of efficiency to ensure that we do not end up unfairly penalising those who cannot achieve a C rating.

Many of the homes that I am talking about will be G rated, simply because of the costs of insulation. To not allow the people in those homes to get the feed-in tariffs and to invest in renewables will almost leave them in that position from now on. Feed-in tariffs might help the owners with the costs of insulation. The houses probably have a market value of £15,000 to £20,000, but it would cost about £60,000 to bring them up to a standard at which the owners could benefit from feed-in tariffs. That approach almost condemns people to live in fuel poverty for a long period.

The solution to that is to find better ways of paying for insulation. The obligation on the companies and the work through the green deal are part of that. At the end of the day, we want those people to be warm in their homes. We do not want them to install electricity or heat generation systems that are much larger than they need for a house of that size. The best approach to help consumers achieve a permanent reduction in their bill is through finding ways of delivering energy efficiency. My colleague Greg Barker, who has the ministerial lead on that, is alive to the issues in some of the more remote parts of Scotland and in other parts of the United Kingdom because of the nature of the housing stock. The households that need the support most should absolutely be the ones that get it at the earliest stage.

10:15

In early December, I spoke to a small businessman who had decided to reprofile his business to go into the solar panel installation part of the energy sector. As a result, he brought someone into his company through an apprenticeship. Then the UK Government decided to reduce the feed-in tariffs for solar panels. We know about the court case and last week’s appeal decision on that.

That is the background; my question has two parts to it. First, what can you say to give people who are in business—particularly the small business sector—confidence that they can plan ahead to bring people into employment and diversify their businesses? Secondly, what can you say to reassure householders who want to install solar panels on their properties to lower their bills and address climate change but who are unsure of what measures the UK Government might introduce further down the line—measures that may be considered unlawful, similar to the recent situation?

We were faced with a situation in which the number of installations was going through the roof. Between July and October, the number of small installations in Scotland rose from 2,000 to 5,000 and between October and December it rose from 5,000 to 12,000. That was the total number of feed-in tariff installations in Scotland, and 11,000 of those 12,000 installations were photovoltaic panels. That massive growth rate was threatening to take up the entire budget for a four-year period in one year, and we needed to act because it was being paid for through a charge on people’s bills. The changes that we have made will save £100 million a year on people’s bills. We are aware of the fact that bills are often higher in Scotland because people need to heat their homes for a greater part of the year; therefore, Scottish consumers will gain more pro rata than people in other parts of the United Kingdom.

We needed to act. We also felt that the rate at which the installations could proceed was such that we had to change the tariff quickly, rather than give people three or four months in which to proceed with their installations before the rate was degressed. We saw more installations in the final six-week period than in the whole previous history of installations. Even after the change had been announced, companies were still advertising that, if they received an order by next Tuesday, they would install before the December deadline. It would have created a fire sale, with people going round saying, “Here’s a piece of paper. The Government’s reducing the tariff dramatically in April.” It would have been completely unsustainable. Difficult as it was, we felt that we had no choice but to change the tariff, and we are now looking to take our case to the Supreme Court for a final decision, which we hope can happen quickly.

I understand that, in all parts of the country, we had seen a significant ramping up of the sector because of the opportunities that existed. In terms of confidence, we did not make retrospective changes—we looked at the evidence from other European countries that did that and killed off the market overnight. We sought to make changes to get the return back to the level that it had been at, which was a tax-free 5 per cent rate of return guaranteed for 25 years. That is still a pretty good rate of return compared to anything that people can get elsewhere. Our aim was to put it back where we had intended it to be, as it had moved to a tax-free rate of return of 10 or 12 per cent guaranteed for 25 years, which was unsustainable.

We want it to be a long-term industry and we want to reflect the fact that the costs have been coming down dramatically, so we are moving to a system with much more regular changes, which will be more accurately tied to the falling cost of the technology. Rather than the cliff edges that we have seen so far, we want much smaller degressions that are more manageable for industry. The scheme as set up did not have the right levels of degression built into it and did not give us the scope to support community schemes, which many people have been keen to see supported for reasons that we understand. Therefore, we need to rebuild the scheme in a way that gives it greater long-term sustainability.

I have spoken to a number of people since my initial call to that small business owner. Not one person has said to me that the 43.3p per kilowatt hour rate was sustainable; they all agree that it was unsustainable, was too high in the short term and should have come down. However, they raised with me what they perceive to be a short-term approach from the UK Government. It was as if it had not done its sums correctly when the scheme was put together in the first instance. The people to whom I spoke feel that small businesses and householders are being punished as a result of that.

The assessments for those figures were clearly wrong. However, in defence of the previous Government and of Ed Miliband, who was in charge when it was put right, I point out that nobody anticipated the rate at which the cost of the technology would come down. The assumption was that it would reduce over time, but we have seen a 30 or 40 per cent—some people say 50 per cent plus—reduction in the cost of the schemes.

When we made the decision, the number of installations was running at three times above the rate that was anticipated in the initial assessments. Ultimately, it ran at four times above that rate.

The figures were significantly wrong, which is partly reflected in the way in which costs have come down much more quickly than anybody anticipated. Any business that discovered that its costs were rising three times more quickly than it expected would not decide to take action in six months’ time; it would need to address the question urgently or else it would not have the budget to do anything that it wanted to do in future.

I understand what you say, but let us look at the overall implications. The construction sector was negative about how quickly the change was made, as my colleague Stuart McMillan indicated. What other costs to the Government were considered, such as unemployment in the sector and the macro costs to the Exchequer?

We considered those but, at the end of the day, a fixed sum of money had been allocated to the programme and, when people are worried about fuel prices, they want the Government to make sensible choices about how money is used. Under the old regime, the cost of solar was 10 times as much as the subsidy given to onshore wind and, even with the changes, it is still five times the subsidy to onshore wind.

When consumers are extremely worried about how they will afford to pay their bills throughout the winter and charges are increasing on top of that, it is the Government’s responsibility to try to ensure that money is used in the most reasonable and sensible way. At the end of the day, the people who were able to install solar panels tended to be those who had access to a significant amount of capital. There is something rather regressive about people on low incomes paying higher electricity bills so that wealthier investors can get the benefits over 25 years.

We are keen to see the contribution that photovoltaics can make in the longer term. They are part of the mix but, as the costs are tumbling, it does not make sense for us to go too rapidly into the sector when we know that, if we wait for a few years, the costs will continue to tumble.

Bringing the decision forward from 23 December to 12 December has resulted in a need for the Government to go to the Supreme Court after the High Court threw out its position. Why was the decision brought forward?

Because if it had been an extra three or four months—

We are talking about two weeks.

No, the original degression date was expected to be in April—the spring—and we brought it forward to December. We had a consultation that ended around Christmas and the closure date for installations was going to be early December. If we had allowed the scheme to run to the original planned degression date, it would have blown the budget and would simply have meant that we would have had to make even more dramatic cuts to the scheme thereafter than those that we have had to make now.

Who controls energy policy, you or the Treasury? There were some severe comments in the Financial Times last week, and Mr Whitehead, who is a senior partner and energy lawyer with SGH Martineau, said:

“this whole saga has put at risk investor confidence in the UK renewables sector”.

How do you react to that?

I disagree. We are simply trying to put the scheme on a sustainable basis for the longer term. Even if it goes back to where it was intended to be—in other words, to a 5 per cent rate of return guaranteed tax free for 25 years—that is, by any standards, still generous. However, when a scheme goes many times over where it was expected to be, a responsible Government must act to get it back on track and that is what we have sought to do.

Individual policy drivers for reserved energy policy lie with DECC, but the Treasury, too, has an overview with regard to the overall cost to consumers. Whereas levies used to be exempt from Treasury consideration, they are now considered within the overall framework of consumer charges and in successive changes, including the removal from people’s bills of the carbon capture and storage levy and the renewable heat incentive levy, we have taken the best part of £100 a year off bills. We are trying to get the right long-term sustainable policies in place, but recognise that we have to do so at the lowest cost to consumers.

Time is pressing, but Patrick Harvie and Mike MacKenzie have brief supplementary questions.

I will be very brief. If you lose the appeal, minister, how will you change the policy?

As you will understand, we intend to fight the appeal and at this stage we are looking at what will be necessary in that respect. However, we have laid before Parliament a date in March as a fallback period to cover such circumstances. We believe that our case is strong and, even though it has not found favour with the court so far, we will continue to argue it.

Is it correct that, in such circumstances, we would revert to the 43p until March?

Anything installed in that short period up to the original degression date will get the higher rate until degression takes effect; after a certain date, the rate will drop. The mechanism is slightly complex in that part of it is enshrined in legislation and part of it is set out in statutory instruments.

I am sure that you are aware that, before last September, the proportion of PV installations in Scotland was 1 per cent whereas, given the population, one would have expected the figure to be about 10 per cent. You might not realise that that is partly because in Scotland the installed cost—in other words, the cost on the roof—has not decreased to anything like the English level. Indeed, as my colleague Rhoda Grant has pointed out, in some Highlands and Islands areas that suffer most from fuel poverty, particularly Tiree, the outer islands and the northern isles, the installed cost of the technology is particularly high. Ironically, Tiree is the sunniest place in Britain and the northern isles enjoy longer hours of sunshine in the summertime. In those terms, it makes very good sense to use these technologies as part of the solution. Do you accept that, although you might have made a convincing case for reducing the feed-in tariff in the south of England, the case might not be so convincing for parts of Scotland that could well be doing with this technology?

Given that the feed-in tariff is directly related to the amount of electricity that is being generated, those who live in Tiree—which, as you say, is the sunniest part of the United Kingdom—will generate more through the tariff than those who live in less sunny parts. The rate of return to consumers is greater in areas with longer daylight hours and greater sun intensity than in other areas that are not so blessed.

10:30

From that perspective, the picture varies across the UK. Understandably, some of the fastest growth has been in Cornwall, but there have been strong rates of growth in other areas, too. However, the system must not be broken down into small units that cover local authority areas, because that would be unworkable. There must be a general approach, but a recognition that if there are specialist issues—I would be interested to know more about the construction cost issues to which Mr MacKenzie referred—their possible impact must be understood.

We have tried to make the system as relevant as we can across the country as a whole. However, as has been said, people in areas of the country that have more sunshine—such as Tiree in the Western Isles—will benefit even more from the feed-in tariff regime than those in other parts of the country.

I think that the science suggests that that is a healthy and positive but marginal effect, whereas the costs of installation in such island places are disproportionately high.

It is primarily small businesses that have been affected. As Mr McMillan said, there has been a detrimental effect on them. In addition, the finalising of the implementation of the renewable heat incentive, which is a scheme that offers a lot for some peripheral areas, seems to have been delayed. Can you give us an assurance that that will be implemented soon?

Yes. I share your frustration that there have been delays. We recognised that, on the domestic side of the renewable heat incentive, particular challenges still needed to be addressed. We had not been able to get an accurate idea of the efficiency of air-source or ground-source heat pumps. Their technology is central to the RHI moving forward, so we needed greater clarity on that. However, we did not want to use that as a reason for holding up the larger-scale commercial and industrial schemes, so we decided to introduce the incentive in two stages. We have gone ahead with the commercial projects and we will bring forward as soon as we can the details on the residential ones. We are not far off being able to do that.

We need to move on, but before we leave the issue of feed-in tariffs, I have a more general question about subsidy. As we have heard, the feed-in tariff for solar power has been successful in stimulating demand and driving forward improvements in technology, but perhaps it has been too successful, given the extent of the interest that there has been. Now that the precedent has been set that when demand reaches a certain level the subsidy is stepped down, might you consider other technologies in that regard? I am thinking, for example, of onshore wind and the fact that there is currently huge demand across Scotland for onshore wind development.

As I am sure is the case for other committee members, I am contacted almost daily by developers who seek permission for particular sites. Equally, we are contacted by many residents who object to developments on particular sites. It seems that something of a gold rush is going on to develop onshore wind in different parts of Scotland. It has been suggested that that focus is to the detriment of other technologies, such as those offshore, that might be more beneficial in the long term. At what point would the Government say that we had done enough on onshore wind and that we do not need to subsidise it to the same generous level, because that subsidy would be better invested in supporting other, more marginal technologies?

We are driven not so much by the demand as by what we see as the costs to the industry. With the feed-in tariff, the changes were driven by our assessment of how costs had come down. Similarly, in our banding review of the renewables obligation, we have been looking at reducing the level of support for onshore wind. Alongside our review, the Scottish Government has undertaken its review in Scotland, which is broadly in line with us in most areas on the rate of support that should be given.

I have been keen to reflect the falling costs of the technology. Onshore wind is an increasingly mature technology, so we do not expect its costs to fall a great deal more. Moreover, by reflecting falling costs, we want to ensure that turbines go to where the resource is most efficient and strongest. I was concerned about finding that, in areas where the wind is not that strong, ever-larger turbines were being erected to a higher level to catch the winds that are higher up.

I believe that adapting the policy will encourage or drive investors to go for areas where the resource is best. South of the border, we have changed the planning approach to give much more say to local communities. However, in doing that, we have looked carefully at what happens in Scotland, where there are good examples of community engagement, with benefits to communities in community ownership.

We can learn a great deal in England from some practices in Scotland. Those practices have meant that a significant number of wind farm developments in Scotland have happened with greater local public support than there has often been in England. I want us to learn from that. I realise that wind farm developments are still very contentious in many parts of Scotland—my Scottish colleagues at Westminster regularly tell me their concerns in that respect—but we see them as important technology for delivering low-carbon electricity in the most affordable way and the cheapest of the renewable resources. However, we need to carry communities with us.

We need to move on to carbon capture and storage.

Good morning, Mr Hendry. In your opening remarks, you mentioned that there are sometimes issues on which you do not completely agree with the Scottish Government, and vice versa. Obviously, one such issue is CCS and the UK Government’s decision on supporting the trial at Longannet in Fife. What dialogue did you have with the Scottish Government prior to and following that decision? Obviously, the Scottish Government has a clear position on supporting the proposal, but it is impossible for the trial to go ahead without support at the UK level. What dialogue have you had on that? Are you continuing to speak to the Scottish Government about the matter, and particularly about any future support for the type of projects that we are looking to have in Scotland?

I think that we were all saddened that we could not reach an agreement with Longannet. An immense amount of work was done over years to try to get us to that stage. At the end of the day, we allocated £1 billion of public spending for the first project, but it is clear that we could not get the output that we needed. We were looking for 300MW of plant to be installed with CCS technology, but that could not be delivered for £1 billion. The Scottish Government was kept informed of the discussions, which were led by the UK Government. There was no offer of funding from the Scottish Government, although there was no request to it for funding either. Realistically, I think that, if it had wished to contribute, that would not have made a difference to the project’s viability.

There were particular issues with the project that were going to push up the costs. As an old plant, it would have needed hundreds of millions of pounds to be spent on it just to give it flue gas desulphurisation technology and a long-term future in the light of directives that are coming through. Those were additional costs that were not related to CCS, but they would have needed to be paid in any case.

We have learned a great deal from the proposal. There is still tremendous interest in CCS plants in Scotland, and we are determined to move forward rather more quickly to identify future projects and get a sustainable industry in the sector that will meet the Scottish Government’s and our aspirations.

Obviously, we have responsibility for the development of skills and human capital in particular in considering such projects in Scotland. When such decisions are being taken, does your UK Government department look at that matter, or do you leave it to the Scottish Government to try to identify what the impact would be of your decision, at the UK level, for the people who work in the industry and their future needs? The Longannet decision places that plant’s future under significant pressure, and the question is whether it will be able to retain the people who work there—not necessarily only those who work on the site, but those who are available to the industry.

I understand that that is a huge concern to you as the local MSP. I also understand the personal disappointment that you would have felt and acknowledge the commitment that you have shown to the matter.

We looked at work on where the most viable case was for the first pilot plant in the United Kingdom for CCS. If we were going to develop an industry, we had to look at the right project to take that forward and from which we could learn most. We had to consider what would do most to help us to build up a global industry. We do not see there being only a few pilot projects; rather, we want an industry in which Scottish and British companies can develop skills and take them around the world. That was our driving force.

Any skills issue would inevitably be discussed with the Scottish Government. Had we been able to take forward the Longannet project as we had hoped, the discussions would have been about the requisite new skills for people coming in. Clearly, Mr Park is talking about a loss of jobs that could happen, depending on the future of the plant. As he will appreciate, those decisions are a matter for the company that is involved. However, a difference can be made on some issues. For example, transmission costs, which are critical in Scotland, are being actively considered because of the possible long-term implications for major Scottish plants.

The whole saga of CCS has been a stop-start process. If we are going to find out whether the technology has anything to offer for the long term, there must be clarity. We should use existing plants because, as well as developing the technology, that would reduce existing emissions. It is inappropriate for the UK Government to endorse the proposed Hunterston plant at any level, such as through the new entrants reserve process. That proposal is for a new plant with mostly unabated emissions, so it would create new emissions and not just an opportunity to develop the technology. The proposal is wildly unpopular and would be environmentally destructive to wildlife habitat. The planning decisions are for Fergus Ewing but, as far as I understand it, the UK Government has backed that project through the NER funding process and sees it as a potential CCS site. Will DECC drop its backing for that project?

As part of the NER300 process, applications were made to DECC and we had to decide whether we should pass them through. We passed through most of the applications that came to us, because that process was fundamentally about whether there was a technological barrier to development. Clearly, with a new plant, there was no technological barrier, although we understand that there are planning concerns and issues, which as you rightly say are matters for the Scottish Government. At this point, our job is to assess the technology.

We believe that there is a significant gain from using a new plant, because of the issues that I explained to Mr Park about the extra costs of applying the technology to an old plant. Most of our current plant is very old—the most recent coal plant was consented nearly 50 years ago. We have old plant compared with the plant in other parts of Europe. If we want a new industry, we have to consider supercritical power plants and those that use the technology of the future rather than technology that is being phased out throughout the world.

We have been more open. We have said that we want to consider gas as well as coal. As members will be aware, a positive proposal has been submitted for Peterhead. As a result of the soundings that we have taken for the next competition, additional interest has been shown elsewhere in Scotland. However, at present we are considering technology issues, not planning ones.

Surely the imperative of CCS is to keep fossil carbon out of the atmosphere. If the technology is used as a pretext to develop a new coal-fired power station—the emissions from which will be mostly unabated, even with the proposed CCS element—we will put more fossil carbon into the atmosphere, not less. How does that add anything to Scotland or the UK in meeting climate change commitments?

The carbon intensity of a new coal plant is massively lower than that of one that was built 50 or 60 years ago, although it is still much higher than that of other technologies.

It is still additional carbon.

Yes, but we have said that, to gain consent in England, any new plant would need to have carbon capture and storage on at least 300MW of its output, with the expectation that it will be fully retrofitted subsequently. We can deal with the matter through planning constraints. The national policy statements, which apply to England rather than Scotland, will determine how the planning inspectors—the Infrastructure Planning Commission—should consider applications for new coal plants. I do not believe that a new coal plant will be built that does not have CCS attached to it.

It will be partially attached.

Yes, but with the expectation that that will be extended in due course. If we want to develop those technologies, we should recognise that the pressure around the world is for new coal plants. China is building two new coal plants a week. We need to work to develop the technology, which has great export potential. That will create great opportunities for businesses that specialise in the sector, such as Doosan Babcock in Renfrew, and ensure that they can take advantage of the technology. At this point we are looking at the technology but, as you rightly say, there is a range of different planning issues that will be entirely within the remit of the Scottish Government.

10:45

The export—

I am sorry, Patrick, but you have had a fair go and other members are waiting to get in.

The message that I have heard this morning is that in implementing CCS technology, older plants will be at a disadvantage because of additional cost, and newer plants will have a bit more of an opportunity. Is that an accurate assessment of what you have said this morning?

It is not wholly accurate. There are additional costs with the retrofitting and necessary upgrading of some of the older plants, but some of them have already invested in the necessary infrastructure to ensure that they meet the industrial emissions directive when it comes in at the end of the decade. Some plants have planned to do that, so they will not need to make further investment in order to comply and additional costs will not apply.

Part of the process that we need to go through now will bring up different costs according to whether the CCS technology is pre-combustion, post-combustion or oxy-fuel combustion, or whether it is on gas or coal. We have a lot to do but we are much better informed as a result of the front-end engineering and design—FEED—study that was done at Longannet and in Kent as part of the early stages of the previous competition.

As no one else has any pressing questions on CCS, we move on to the two other areas that we want to cover very briefly. Mike MacKenzie has a question on electricity market reform.

We all broadly welcome the suggestions by the Office of the Gas and Electricity Markets for the reform of transmission charges, which should go some way towards levelling the playing field for generators in the north of Scotland. However, I am concerned about the situation of islands. I am led to believe that the playing field for islands will by no means be level because of the suggestion that transmission charges might be as much as six times higher than they will be on the adjacent mainland. Given the generating capacity that is available as a result of the raw resource of wind in the inner and outer Hebrides and the northern isles, are you comfortable with going ahead on the basis of Ofgem’s suggestions or can you do something for those islands?

Before we move on from CCS, I have one further comment that is relevant to Scotland. One of the best academic bases in the world for CCS is here in the Scottish universities, particularly in Edinburgh with the work of Professor Gibbins and Professor Haszeldine, which is world class. We want to see that used as part of this way of going forward. Regardless of the number of projects that are coming forward in Scotland, Scottish academic institutions and businesses can make a strong contribution to the process.

On the transmission charges, Ofgem is at the start of the consultation process. The old regime is not appropriate for the future and as we look for new sources of generation that will be more remote from where the electricity is needed, we need a different infrastructure. In the past, our old plants were near the coal heads and the industrial centres grew up around them. CCS plants will be predominantly coastal, as are the nuclear plants in the UK, and as will be much of the wind resource and, of course, the offshore and marine resource. That will mean a different structure from our generation network, so we will need a different system for incentivising that power to be brought to market.

Ofgem has done some useful work on project transmit as part of the process, but that is not the end of the process. It is a consultation process, so the concerns of the Scottish Government and the communities in the Highlands and Islands about the cost of the infrastructure to the islands must also be borne in mind. We have had good discussions with the Western Isles Council, for example, about some of its ambitions for wind and renewables development, but those ambitions will not be realised as we hope they will if we cannot get the power to market.

That is one of the most important issues to be addressed. Ofgem has the lead on it, but it will consult the UK and Scottish Governments to ensure that we end up with a system that works for consumers and encourages investment in new generating capacity.

You spoke earlier about how communities are involved in developing community renewables. More communities are involved in that on the islands because of community land ownership and the like. They have been told that costs for any increased capacity in the grid will fall on developers as well, which will cover transmission charges and the cost of grid development. However, such costs prevent small-scale renewables projects from getting off the ground. Will you factor in that issue?

Ofgem is doing a separate review of connection charges, which it does periodically in any case. Currently, anyone who requires a new grid connection is responsible for the cost of providing it and anyone who later joins the connection must pay towards the costs that the first applicant incurred; that is one of the ways in which they can get back some of the initial costs.

However, there is an issue for the islands in that regard. When an initial grid infrastructure is put in place, we do not know how much capacity may ultimately be required. If one wants to see a significant roll-out of renewables generating capacity in the islands, a larger infrastructure would have to be put in place initially rather than a small one that might ultimately prove to be insufficient. Squaring that circle is one of the most challenging areas of policy. We are involved with the National Grid and Ofgem to find the right funding formula to support developers’ aspirations without imposing on them excessive costs that would make a development unaffordable.

Before we move to our final topic, I welcome to the public gallery visitors from my old school, Inverness royal academy, who have come to listen to questions on the issue of fracking. They are extremely welcome.

Patrick Harvie has a question on the issue, but I have a question for the minister first. Has DECC put any value on the potential for shale gas in the UK?

We have not, but there have been assessments of how much shale gas there may be. The assessments have been done independently, particularly on behalf of Cuadrilla Resources, which is the company that has done most work in the area. It has come up with a vast figure, but there is a very real difference between gas in place and recoverable gas. Typically, we would expect recoverable gas to be about 10 per cent of gas in place.

The British Geographical Society has also undertaken some work in the area, but DECC has not done so.

The report from the Tyndall Centre for Climate Change Research, which was commissioned by the Co-operative, acknowledges that if—I stress the word “if”—shale gas replaced other, more polluting forms of fossil fuels, there could be a reduction in emissions. However, the report states that the likelihood is that fossil fuels that are getting taken out of the ground will get burned somewhere, which means that shale gas would be a substantial additional source or stock of fossil fuel. According to the report, if a relatively conservative rate of extraction of shale gas were achieved—about 20 per cent of the available resource under Lancashire—it could represent more than a quarter of the UK’s entire carbon budget up to 2050. What is your response to that particular argument and to the Tyndall report in general?

The Tyndall report is one of a number of assessments of lifetime carbon emissions from different forms of gas. Clearly, it must assess the drilling technologies and the amount of methane, which is a much more damaging greenhouse gas. However, the expectation is that the methane would be captured because of its commercial value. Such an assessment must also consider combustion emissions.

We are looking at the importance of carbon capture and storage in gas plants, because we recognise that there is a much more important role for gas as we go forward than the previous Administration believed. That reflects the greater global availability of gas and the fact that global gas demand has now been estimated at 200 to 250 years.

We should recognise gas as part of the mix as we move forward, but we must consider how we can reduce or eliminate its carbon emissions over time. We know that we can mitigate the emissions that are associated with gas through carbon capture, but that technology still needs to be brought to fruition and to market.

We believe that shale gas can make a contribution, but we are still looking at the evidence. It has clearly been a game changer in the United States, which has moved from being a major importer of gas to a potential significant exporter. The gas price in the United States is now a third of that in Europe and a fifth of that in Asia, so it is clear that there is a very significant economic benefit from shale gas.

We need to look at that technology, but there are very real complications around the pace of its development in the United Kingdom in comparison with other countries, particularly in relation to land ownership rights. In the States, people own the mineral rights to what happens beneath their home. In the UK, the Crown owns the rights, and somebody else buys a licence and has to get permission from the people who own the land above to develop it. That is a much more complicated and slower process, and people would expect to be remunerated for any activity that happened in that way.

So far, shale gas extraction has been happening mostly in fairly unpopulated parts of the world, whereas we live in one of the most densely populated parts, which will inhibit the pace. There are environmental issues and drilling issues that must be addressed, and very high environmental standards that need to be reasserted, but we would certainly not rule out that technology or the contribution that it can make.

Much like the Scottish minister, you talk about CCS in relation to shale gas as something that we know that we can do. I gently point out that it is something that we hope that we may be able to do one day, not something that we know that we can do.

The Scottish Government’s planning policy addresses the derivation of gas from shale reserves and identifies environmental and other factors, among which is the potential pollution of land, air and water. I will put questions to Fergus Ewing about whether that includes CO2 emissions and whether those environmental factors include the climate impact of CO2. Does the UK Government recognise the CO2 emissions as one of the environmental factors that should determine licensing for shale gas extraction?

The licensing approach is separate, and it is right that it should be. A range of different processes must be undertaken, and the Environment Agency in England and the Scottish Environment Protection Agency in Scotland must be satisfied about environmental protection to ensure that nothing can seep through into the earth or any water around that area.

But does that environmental protection include the climate impact of CO2 emissions from combustion of shale gas?

That is not part of the consideration by those agencies. There are very strict environmental measures in place: the regulations for shale gas are the same as those that would apply to drilling for oil and gas offshore. The activity is very heavily regulated; we would certainly say that we have some of the tightest regulations in place anywhere in the world.

But they do not cover climate change.

The CO2 emissions would be a more general matter for Government policy. We must be satisfied that CO2 emissions can be mitigated. If gas was to replace coal, for example, there would in any case be a CO2 gain as a result of that change. That should not be part of the consenting process, but it would clearly be a part of the policy process.

Thank you. There is one final—and I hope very brief—question from Chic Brodie.

Mr Hendry, you mentioned the environmental consequences of shale gas extraction. You recently answered a question in Parliament by saying that neither you nor DECC ministers had met representatives of the Environment Agency. Given that it was revealed last month that the US Environmental Protection Agency had established the first clear link between fracking and water poisoning, when do you plan to meet such representatives?

In fact, the question asked whether there had been a meeting. I visited the Cuadrilla site in Lancashire and Environment Agency representatives were there too, so although I did not quantify that as a meeting, I was able to ask their advice on the processes.

There is very close engagement between the agency and my officials, who liaise with it on a continuing basis about any concerns that it has. The agency has an absolute power: it has the right to say, “This should not go forward; we are not satisfied with it”, and it can stop any development in its tracks. Any development must have local planning consent and a licence from us, but it must also satisfy the Environment Agency or SEPA that it is in keeping with their objectives.

The answer that we gave very strictly answered the question, but it was not a full answer with regard to the extent of the contact that has already taken place.

I thank you very much for coming along, Mr Hendry, and for your very thorough answers.

Thank you very much indeed.

We have covered a lot of ground this morning, and the session has been very helpful to the committee. If you have learned one thing this morning, Mr Hendry, it is that Tiree is the place to book your summer holiday.

11:00 Meeting suspended.

11:04 On resuming—