Economy, Energy and Tourism Committee

Meeting date: Wednesday, February 27, 2013

Official Report 656KB pdf

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“Low Carbon Scotland: Meeting our Emissions Reduction Targets 2013-2027”

Agenda item 2 is continuation of our evidence taking on the Scottish Government’s report “Low Carbon Scotland: Meeting our Emissions Reduction Targets 2013-2027—The Draft Second Report on Proposals and Policies”.

I welcome our panel of witnesses. Starting from my left, we have: Dr Mark Williams, who is environmental, regulation and climate change manager at Scottish Water; Rupert Steele, who is director of regulation at Scottish Power; Andy McDonald, who is director of renewable energy and low-carbon technology at Scottish Enterprise; Rob McDonald, who is managing director of regulation and strategy at SSE; and Calum Davidson, who is director of energy and low carbon at Highlands and Islands Enterprise. Welcome to you all and thank you for coming along.

Before we get into questions, would anyone like to say anything by way of a brief introduction?

We are happy just to go into questions.

Let me start by asking about fuel poverty. As you know, the Scottish Government has a target of eliminating fuel poverty from Scotland in so far as is possible by 2016. Various proposals in RPP2 relate to how we might reduce carbon emissions while improving on fuel poverty.

In light of this morning’s announcement by Centrica of large profits from its gas supply, can the representatives from Scottish Power and SSE say how it helps the Government to meet its fuel poverty targets when energy companies are posting very high profits, which are paid for by their customers?

Thank you for that starting question, but I do not think that it is for me to go into the detail of Centrica’s results. Clearly, no one from Scottish Gas is here. It is difficult for me to answer for Scottish Gas.

I am not asking you to answer for Scottish Gas. I have not seen Scottish Power’s forthcoming results, but I imagine that it will be posting healthy profits.

10:30

The thought that I was going to try to elaborate was that profits exist primarily to remunerate investment and risk. Where companies are investing a lot of money, the accounting term for the return on that investment is “profit”. That is what accountants call return on investment.

It is feasible for companies to make huge investments in energy infrastructure only if there are commensurate profits that reflect the appropriate return on those investments. In the case of Scottish Power, roughly 42 per cent of Iberdrola’s global investment is now scheduled to come to the United Kingdom. In fact, we generate significantly less than 42 per cent of Iberdrola’s profits, so that reflects the importance of the United Kingdom as a location for investment. I do not think that we can do without profit, given the need to invest in energy infrastructure.

If we look at the path of gas and electricity prices at industry level over the past few years, it is undeniable that we have seen substantial increases. However, around two thirds of the increase in electricity prices has been driven by wholesale international gas prices. For me—to bring the debate back to RPP2, the climate targets and all those issues—that underlines the importance of investing in low-carbon technologies so that we get off the treadmill of being reliant on volatile international gas prices. From my perspective, that is the key point.

I entirely understand that, but high energy costs are a major driver of fuel poverty, and an element of those high energy costs is the level of profit that energy companies make. Therefore, that must be a factor for consideration when we look at RPP2 and the outcomes.

We have heard that one important point in the RPP2 is about the money that must be found for energy efficiency measures to assist with the alleviation of fuel poverty as well as to achieve our carbon targets. Is Scotland in a good position to receive an adequate share of the current UK-wide funding streams through things such as the green deal and the energy company obligation?

More specifically, the Scottish Power submission states that we are in a good position, because we have the national retrofit programme whereas similar funding has been withdrawn in England. I would be grateful if Scottish Power would elaborate on that.

I will answer the first part of the question, so that Rupert Steele can have some thinking time and then step in to answer the second part.

You asked how Scotland is placed.

Can we be confident of taking a proportionate share?

I forget the exact wording, but the RPP2 clearly sets out an ambition to make Scotland the most attractive place in Britain for investment in energy efficiency. That is an excellent and laudable aim, and there is no reason why we cannot achieve it. However, I urge the committee to reflect on the fact that, in the context of the planning system, Scotland lags behind England and Wales in a couple of areas.

One issue is that, in Scotland, solid wall insulation is not counted as permitted development. Similarly, air-source heat pumps have to go through a much tougher planning regime in Scotland than they do in England and Wales. The contrast is really quite stark. We have had customers in Scotland who have given up on installing air-source heat pumps because of the need to go through the planning system, whereas the process is much easier in England and Wales.

I urge the committee to reflect on those points. However, we are supportive of the overall ambition. There is no reason why Scotland cannot attract a proportionate and commensurate share of the overall spend.

The remark in our submission to which Mr Biagi refers is simply a reflection of the fact that the Government-funded warm front project in England and Wales has come to the end of its funding, whereas I believe the Scottish Government still has a budget for such work. The remark was nothing more than a reflection of the differing budgetary decisions at Westminster and here.

Do you consider that Scotland will be able to count on a sufficient proportion of the UK-wide schemes to be able to deliver on the energy efficiency targets?

There is no doubt that the ECO energy efficiency scheme is a testing one to deliver. We do not yet know what the demand for solid wall insulation will be, and the scheme is quite complicated. We—and, I think, all energy suppliers—will be looking for every opportunity to deliver on those requirements wherever they can be found.

It is clear that Scotland has a lot of solid-wall properties and will therefore be an attractive place to look. To be honest, however, we will be trying to deliver wherever we can. We would love to deliver a substantial proportion in Scotland, but that will depend on demand and what is available.

Is it not the case that we would already be much further on in reducing climate change emissions if there had been sufficient investment in our grid infrastructure so far? I am thinking about grid constraints and the provision of cables to our islands such as the Western Isles, Orkney and Shetland. The necessary investment should surely have been made well before now.

I will start on that question, given that you have referred to the Western Isles and Orkney, which are in our patch. One issue with grid investment is a slight chicken-and-egg problem. We have had an issue with transmission charges in Scotland for many years, so I will focus on that first.

The Office of Gas and Electricity Markets conducted an extensive consultation on transmission charges—called project transmit—which led to a set of proposals that would have been beneficial for Scotland and resulted in a much fairer set of transmission charges, although I will not bombard you with too many numbers—

But not beneficial for Scotland’s islands.

I agree that there are still issues with the islands. First, we need to sort out the transmission charges in Scotland generally, because it is unforgivable for Ofgem and National Grid to have identified a problem two years ago that has still not been fixed. That is a necessary condition, but still not a sufficiently acceptable condition.

I will come back to Mike MacKenzie’s point about the islands. One issue for us—which does not make us very popular, but we have to grapple with it—is that we get slightly conflicting messages. On the one hand, we hear messages from the island groups saying that they need the grid to be built now, very quickly, because there are schemes waiting. On the other hand, there are stakeholders lobbying the Department of Energy and Climate Change and the Government to get a greater subsidy for the island groups on the basis that the schemes are uneconomic.

That situation presents us with a real dilemma, and it is important for two reasons. The first reason relates to the planning regime. If we go to planning for those things, we must be crystal clear that there is a need, and—as I am sure you will appreciate and support—we have to make a needs case. We cannot apply for planning approval, for wayleaves and those sorts of things, on the basis of speculative development that might not have anything on the back of it.

You can imagine, for example, a situation in which we had come to the committee and the Scottish Government with the Beauly to Denny proposals without the certainty that there were renewables developers behind the scheme. When a DECC committee is considering the whole question of the affordability of renewables on the islands, there is a question mark about the economics of those projects. We cannot get away from that issue.

The second reason relates to cost. We are talking about big numbers—the big bets that we are making, if you like. The Western Isles link, for example, would cost £700 million. If there are renewables developers on the end of the project, that is all well and good, and it will be funded through the wind farms and the revenues from them. However, if we place that bet and build the cable link, and there is nothing on the end of it, we expose the generality of customers to a £700 million bill.

Let me put that figure in context: that is roughly equivalent to £150 for every household in Scotland. What we have here is a difficult balancing act. We are keen to get developments away as quickly as possible, but we have to have a definite signal from the developers that they are coming. In the Western Isles, that has proved difficult.

Is it not basic common sense that where renewables opportunities exist, as they do to a significant extent on Scotland’s islands, we should get the cables and the infrastructure in to facilitate development? If the Gordian knot that you described has been tied by the UK Government, will you urge the UK Government to untie it as quickly as possible, so that we can get on with realising the opportunities on Scotland’s islands, for the benefit of consumers not just in Scotland but throughout the UK?

I agree that the Gordian knot—as you eloquently put it—lies at policy level, with Westminster and, if I may say so, with Holyrood, because both institutions have some of the powers. Somewhere between the Scottish Government and the UK Government, we have to get policy clarity on renewables obligation certificates, on other support for renewables and on transmission charges, which will allow developers to give a clear signal. Once they do that, we will—make no mistake about it—crack on with the cable as fast as is humanly possible. We must have policy clarity then the signal from developers in that order; we cannot speculate. I know that that is not the answer that one or two members want me to give, but I hope that you understand that we are in a dilemma.

We are in a vicious circle when it comes to transmission charging and issues to do with islands connections. People will not commit because of uncertainty, especially over transmission charging costs and electricity market reform; because they cannot commit, colleagues on the transmission side cannot build. We are reaching a critical stage and decisions need to be made in the next few months, particularly on the Western Isles connection. Part of HIE’s role has been very much about trying to reduce uncertainty, by ensuring that folk work together and focus on addressing common problems.

At strategic level, and in the context of the overall carbon reduction targets, we have a huge opportunity in the Scottish islands, which have a better wind regime. In effect, the islands are like offshore platforms, onshore, so development costs are significantly lower than they are for offshore wind. We have about a gigawatt sitting there ready to go, but we are constrained by some relatively minor—in the greater scheme of things—policy issues and some not insignificant funding issues. If we address those issues, we will open up a new generation of significantly low-carbon, very high-yield wind for Scotland.

We have been talking primarily about the bigger schemes and the chicken-and-egg situation in relation to triggering the strengthening of the grid that such schemes require. I am also concerned, as I think other committee members are, about all the lower-level schemes—the smaller schemes that would qualify for feed-in tariffs.

Do you agree that because of degression—that word was not in my lexicon until recently; it seems to be a DECC word, which means that feed-in tariffs will be reduced year on year—there will be grid constraints, not just in the islands but virtually throughout the Highlands and Islands? Potential schemes are being delayed all over the network because of grid constraints. Is there a particularly harsh impact on the smaller projects and community projects that could do a lot to mitigate fuel poverty and contribute to our overall targets and which are significant, in aggregate? To what extent are general grid constraints preventing us from meeting our targets?

10:45

There is a particular problem in Orkney, where there is, effectively, a moratorium on connecting anything more than about 3kW, which is like a couple of bars on an electric fire. That is a problem because over the past few years Orkney has been a real success story in smart grids—you see small turbines wherever you go in Orkney.

On the earlier point about fuel poverty, much of HIE’s focus has been on building up resilient communities, with well-paid jobs in those communities and with strong community energy projects that promote energy efficiency, as a way of mitigating fuel poverty. I am thinking of a project on Gigha, where a community-led wind initiative has ensured that significant resources are reinvested in the community in things such as high-quality housing and energy efficiency schemes.

In the light of the problems that we face, the Scottish Government has put together resources for community projects through the renewable energy infrastructure fund, the community and renewable energy scheme—CARES—and through a particular debt and equities scheme. However, we are still constrained by the grid. I agree with Mr MacKenzie that we will face problems in community projects until we can solve the major problems that affect us across the Highlands and Islands.

Convener, I have one more question, which I assure you will be my final question. First, I was a bit intrigued when Rob McDonald mentioned permitted development rights for solid wall insulation. That really puzzles me, because I am unsure what he referred to. As part B of my final question—it is important that there is a part B, I think—I want to ask about air-source heat pumps, which Rob McDonald also mentioned. When the committee heard from Professor Sean Smith last week, he cast doubt over whether heat pumps are a technological solution for fuel poverty or mitigating carbon production. My question is on two things, but Rob McDonald mentioned both together as demand-reduction methods. Can you elaborate a wee bit on that? I am quite puzzled about both of them.

I am sorry if I was not clear.

On permitted development rights for solid wall insulation, the point is very simply that in England and Wales solid wall insulation is classed as a development right, so putting in such insulation does not require one to go through the normal planning paraphernalia. My understanding is that in Scotland—

I got that bit, but I am still mystified. Are we talking about external cladding?

Ostensibly, yes we are. The requirement to go through the more formal planning route means that such schemes need to jump over a significant number of hurdles in Scotland compared with what must happen in England and Wales.

We are talking about external insulation envelopes.

Yes. Such insulation is particularly important for older harder-to-treat properties, of which we have a lot in Scotland. As was pointed out earlier, that inequity does not help us to achieve our fair share of the spend.

I do not want to overplay the importance of air-source heat pumps. They have a role to play, but they are not a magic bullet for tackling fuel poverty and energy efficiency. My point about them was similar to my point on planning: in England and Wales, provided that the air-source heat pump technology hits certain pre-specified noise-level requirements—which are actually quite tough—there is no need to go through the planning process. In Scotland, that is not the case, and the process can take between one and three months. That discontinuity between the two planning regimes makes it more difficult to invest in Scotland on a like-for-like basis. I hope that I have clarified the issue.

Thanks. That was the clarification that I was looking for.

Good morning, gentlemen. My first question is for Dr Williams. The publicly owned Scottish Water is the single largest consumer of electricity in Scotland and captures the entire Scottish customer base. I have asked the question of several people, although Scottish Power and SSE may not like it. Given that Scottish Water has Business Stream as a commercial subsidiary, why does it not consider entering the energy retail market?

I want to lay to rest the matter of Scottish Water’s being the largest energy consumer. We are, as a single entity, one of the largest bill payers in Scotland, and in that context all the national health service boards, for example, have as big an energy and electricity demand as Scottish Water.

Entry to the energy retail market is not something that Scottish Water has considered. We see ourselves primarily as a water and waste water service provider. That is the core function of Scottish Water. It would be a bit of a leap to enter the energy retail market.

Perhaps you might think about it. If I had such a customer base with a company that was publicly owned and was already providing stakeholders with a service, it is something I would consider. As I said, SSE and Scottish Power might not like that.

We would be delighted to compete with them.

I bet you would.

I want to ask Rob McDonald about another area of interest. You are now supporting a new district heating system as part of a £27 million regeneration of homes in Maryhill, providing heating and hot water to more than 1,500 tenants and more than 360 home owners. Do you see geothermal energy as a potential area of major development?

I have been talking to the British Geological Survey and East Ayrshire Council—because there are many disused coal mines in that area—to see what can be done to provide cheap heating to communities. How do you see that developing?

We categorise geothermal as an emerging technology. It is an interesting technology that is quite far away from mass-market deployment. We have an interest in that and a number of similar emerging technologies and are keen to see how they develop. I categorise it as being one to watch.

I will move on to the other Mr McDonald.

In your submission you talk about measures for assessing energy performance in commercial properties and businesses. What discussion has taken place with local authorities and the Scottish Government about assessing and generating more energy efficiency from public buildings? That would, I hope, reduce both local and national Government expenditure. Has there been a conversation about our wanting to do that? Just two weeks ago, I was privy to the viewing of an information and communications technology system that can measure the energy efficiency of buildings. The sequitur to that is how we take that into the domestic marketplace.

I am afraid that I cannot answer the question directly because I have not been involved in that kind of discussion.

I have been involved in considering the development of some of the technologies to improve energy efficiency, and particularly in working with companies to improve the efficiency of their facilities. That has taken place as part of the general improvement of businesses—not just in cost saving, but in making them better and more profitable generally.

We have actively sought to improve the building standards of the estate that we are responsible for in SE’s construction and buildings.

Would it make sense to move the focus from the Scottish manufacturing advisory service, which is very good in terms of lean and Six Sigma processes, to helping companies to drive down their energy bills?

That is a key part of what they do. One of the things that companies focus on is energy reduction and one of their targets is carbon reduction and their contribution to energy efficiency.

I have one more question. The Energy Bill is before the Westminster Parliament. Will you share with us your opinions on the pricing mechanism in that bill and on the bill generally?

I am sorry. What do you mean by the pricing mechanism?

I mean the contracts for difference.

That is a little bit off topic, so just give a brief response.

We think that the Energy Bill is good legislation—which is not to say that there are not details that need to be improved, although we think that it provides a good framework to take forward expansion of low-carbon energy in a cost-effective way, and to maintain security of supply. The only thing that I would urge the Westminster Government to do as it takes the bill forward to implementation is to try to keep things reasonably simple. There seems to be a lot of complexity building up, which may eventually slow things down. I therefore encourage the Westminster Government to keep it simple, keep to the timetable and get it done.

We have a slightly less benign view of the bill than Scottish Power, because we are concerned about the bill’s direction of travel and the safety mechanism. There is huge uncertainty in that regard, which if we are not careful will create—arguably, it has done so already—an investment hiatus, certainly for thermal plant. I think that we will progressively, over the next six to 12 months, see it impacting on renewables development, unless the renewables obligation is extended beyond 2017.

To save time, convener, I will quickly list some of our concerns. The bill is very prescriptive, and the track record of Governments not just in this country but around the European Union shows that being prescriptive about plant mix is not good. There will be bidding for a fixed-price contract, but in this country we have evidence and experience of that, whereby people get the winner’s curse if they are not careful; people bid and the lowest price wins and it does not get built out, so sometimes there is less build. Sometimes people put a premium in when they are bidding for a fixed price contract. We do not know whether the proposed package is consistent with EU state aid. We do not know the strike prices or, indeed, whether there will be one strike price or several, or whether it will vary. We do not know who the counterparty is for the risk, which is quite important. When an energy bill was first mooted, it was going to be the state that would be on the other side of the contract, but now your guess is as good as mine as to who will be on the end of the contract.

Those are all fundamental questions, but we are not much further forward in answering them from where we were 12 months ago when the bill was first mooted. For those reasons, we are much more worried about the bill than colleagues at Scottish Power.

From the enterprise agencies’ viewpoint, we are very concerned that there will be a wall at 2020. For encouraging investment, particularly large-scale investment in Scotland, the bill is giving only a four-year window for offshore wind. We therefore think that it is critical for the UK Government to follow the Scottish Government’s example and publish 2030 targets.

What are the witnesses’ impressions of RPP2? We have had evidence that all the proposals and policies will need to be met before we can meet our targets. Do you believe that that is the case? Do you believe that something is missing from RPP2 that could help in meeting the targets?

From my perspective, RPP2 is pretty much all-encompassing and provides a great range of opportunities. It is obviously directionally correct on the range of proposals and policies, and the levers that need to be pulled. The only thing that I would like to see more of is the incremental steps or indicators that sit beneath some of the higher-level policy objectives that will allow us to understand how the direction will pan out in reality. I think that RPP2 covers all the right areas, but the issue now is delivery. Over the next few years, what metrics will we need for progression of measures that will be driven by the policies, such as insulation, to allow us to understand how effective they will be by 2020? Such things need to be mapped as we go along.

We believe that RPP2 is an important document that sets out the clear intent and political support for low-carbon technologies, which is very welcome and positive, and will create a pro-investment climate to which the market will respond. Where the targets are ambitious, it is right that they should be; we should not shy away from setting ambitious targets. As colleagues have said, the devil is in the detail now in terms of the underpinning policy framework.

I am probably qualified to talk only about the energy component. It seems to me that the target is reliant on two policy levers: one is the EMR reforms, which we have just covered, and the second is the 30 per cent emissions reduction target at EU level. We are quite worried that the EU will not set a 30 per cent target; therefore, the targets overall look challenging. However, they are still an appropriate ambition.

11:00

Carbon capture and storage is also important to the targets. Later, we will consider a legislative consent motion on emissions. The Scottish Government is ceding the power to set emissions for generators to the UK Government. We have had evidence that suggests that, if that happens and the emissions levels are as we have discussed, there will be no drive towards carbon capture and storage because it will be possible to create new gas-fired stations within those emissions levels. If the Scottish Government gives those powers to the UK Government and the targets are set as suggested, what could it do to encourage carbon capture and storage in Scotland?

I am sorry, but I am not familiar with the debate about the different powers and emissions levels, so I cannot comment on that. However, I will talk generically about carbon capture and storage.

We have a project at Peterhead that is in the UK Government competition. My take on CCS is that we need to demonstrate the technology; we need to build a couple of plants and prove that they work. We can worry later about how they are set up and regulated and all the rest of it, but we need to prove that the technology works. Therefore, the Government needs to make a decision as quickly as possible on the schemes. Let us get them built and worry about the detail later.

I will come at it from a slightly different point of view, which concerns the emissions performance standard.

In the Great Britain market as a whole, we will face a problem with security of supply in the latter half of the decade. Ofgem has made it clear that that needs addressed. To be realistic, that will require combined cycle gas turbine power stations to be built. It is unlikely that they will be built if investors believe that there is a risk that, relatively early in the lifetime of those stations, they will be required to fit CCS—which is as yet untested and, potentially, quite expensive—at their own expense.

The Westminster Government was right to give a guarantee that those who build CCGTs now will not need to fit CCS until 2045, because that will drive the investment that is necessary to keep the lights on. If Scotland sets a different policy, the likely result will be that CCGTs will be built in England instead. That is the reality when we face a security of supply problem.

Are you saying that the problem with security of supply will mean that we will miss our carbon emissions targets? Do we need CCS if we are to meet those targets?

I am not saying that CCS cannot be developed. If a framework is developed that makes it worth investors’ while to fit CCS, they will do it. To tell investors that they cannot build a power station unless they fit CCS is quite risky with the current state of the technology. We would not be happy to recommend that.

Longannet will have to close by 2020. Our existing nuclear plants will eventually be decommissioned and the current Scottish Government has no plans to replace them. We will need a lot of new gas capacity. Are you saying that neither Scottish Power nor SSE has any plans right now to build new gas plants?

I cannot speak for SSE. As far as Scottish Power is concerned, we have not set a closure date for Longannet. As of today, we have not taken a decision about whether Longannet will opt out of the industrial emissions directive. I do not want anyone to think that there is a fixed end date for Longannet; we certainly do not have one. We are investing in the plant and are improving its efficiency and performance.

We have consent for a CCGT on the Cockenzie site. That development needs to be looked at in comparison with other sites that we have in the GB electricity market. We have a site in Kent, where—under the current transmission charging regime—it is more attractive for us to develop. That may change. The Cockenzie site has strong advantages, and we are looking at it, as well.

We have projects. What people say about the future of CCS will affect the attractiveness of those projects, unless there is funding available for CCS to be fitted.

I will ask Rob McDonald that question, but first I would like you to clarify whether there is a conflict between having a target to decarbonise the electricity supply and security of supply.

There is not necessarily a conflict, but energy policy involves decarbonising, security of supply and affordable cost, and achievement of all three of those at the same time is very hard. Most people would say that trade-offs will have to be made between the rates of achievement of the various objectives. My guess is that people will be extremely anxious to maintain security of supply under all circumstances.

I would like to make a couple of points. As far as our gas station at Peterhead is concerned, I mentioned the bid for CCS. How that bid plays out will determine the situation there.

On future new-build CCGTs, I absolutely agree with Rupert Steele that relative to the rest of the UK Scotland is an unattractive place to invest, just because of the economics of the transmission charging regime. That reinforces the need to get that fixed. It is unforgivable that it has been left unresolved for two years.

On wider security of supply, I do not think that we should necessarily jump to the answer that CCGT or any other particular type of plant is what is needed. What Scotland will need in the 2020s, as we approach 2030, is flexible generation that will, in a 100 per cent renewables world, be able to cope with the ebbs and flows of demand and supply. That could be a CCGT. Whether a CCGT with CCS would be able to fulfil that function is a moot point, because CCS—at the moment, at least—is quite an inflexible technology, but there are alternatives, such as storage. We have an interest in a couple of pumped-storage schemes—one at Coire Glas and one other. That might be another option. There is also battery technology, although that is a bit further away. There are other alternatives to solve the flexibility conundrum as we reach the 2020s.

From what you say, it sounds as if there is a huge degree of uncertainty.

There is uncertainty not just for Scotland but, with the UK Energy Bill, for the wider UK. We do not know what the market structure will look like as far as capacity payments for thermal plant are concerned. We do not know how the strike prices will work. We do not even know whether pumped storage will qualify for a capacity payment. I agree that there is huge uncertainty—we just do not know.

I am sorry, Rhoda—I rudely interrupted you.

That is fine.

I turn to Scottish Water. Based on—

I am sorry—Marco Biagi wanted to come in on CCS.

The energy mix that RPP2 projects for 2020 is quite specific. It sets out that there will be 500MW of CCS gas capacity. From what you have said, I am unclear about whether you think that that is a credible and achievable target. Could you clarify whether you think that it is?

The target is perfectly reasonable, but the first priority must be to deliver a demonstration project and prove that the technology works, because there is uncertainty about its effectiveness. We think that it will work but, when you are doing things on a scale for which there are not many precedents around the world, you must try them first. All that I was saying was that there is uncertainty around the technology, which is not to say that the target, per se, is wrong.

I agree with SSE’s comments. Obviously, we are not involved with CCS as things stand, although a lot of our earlier work has been helpful to other people who are in the UK Government’s competition. There is a question about whether 500MW of CCS will be available by 2020. If it is not, within a single Great Britain energy market Scotland has other options for importing power from England and Wales and exporting renewable energy when the wind is blowing. There are lots of degrees of freedom.

I want to stretch things out slightly, given that we are discussing security of supply. Rob McDonald mentioned the pumped storage projects, which is a topic that I wanted to bring up. The headline figure is 600MW. If that is the figure for each project, we are talking about potentially 1.2GW in total, which is almost 20 per cent of Scottish demand, so those seem to be a pair of substantial projects. Do they have any implications for the energy mix projections? If the projects are successful, will that make anything else redundant?

Those are good questions. There are many uncertainties because the projects are at an early stage of development—they are in what we call gate zero or gate 1. There will have to be a lot of water under the bridge, if you will pardon the awful pun, before we come close to making investment decisions. It is early days with the projects but, equally, it is early days with CCS, and Rupert Steele has talked about the uncertainties around the existing coal stations. I categorise the targets as exactly that—they are targets that are broad aspirations. There might be changes around the edges, but I hope that the targets will hit the overall carbon constraint cap. I suppose that I am saying that we will get there, but by a different route.

What is your expected timescale for the pumped storage projects?

I would have to get back to you on that, but it will be the back end of the decade. As I said, the developments are at an early stage and we still have to fix the transmission charge issues and all the other issues that I talked about relating to the EMR.

By RPP2 standards, that is practically tomorrow.

Pumped storage is, inevitably, different in character from a CCS power station or, indeed, any other type of power station. Once the water gets to the bottom of the hill, the game is over until fresh electricity is available to pump it back up again. Pumped storage will deal with a peak, but net generation will not be possible.

A problem will be created if there is no wind for an extended period.

Pumped storage is not a solution when there is no wind for an extended period—that problem would be better solved with a gas-fired power station or a similar type of development, of which there are a number.

Of course, the opposite is also true. If demand is low on a windy day, the electricity generated can be used to fill the reservoir. That is the point.

I would imagine that it is wrong to count pumped storage as generation because it is really the storage of generation. When the wind is blowing, we will store the excess energy that is generated. Storing it is like having a battery so, rather than counting that as part of the contribution towards generation, we need to look at it differently. Am I correct? Are we not double counting if we count what pumped storage can put out at peak times?

I take your point. It is a contribution more to capacity than to net energy, but it is still an important contribution in an energy mix with 100 per cent renewables, for example.

Indeed; it is about security of supply and storage, but you cannot add on that generation and say that using pumped storage is part of the equation that leads to a full complement of power. That would be double counting.

11:15

It is still part of the mix, but I take your point. You would have to take into account the energy for the pumping part of the operation.

Earlier, I asked whether something was missing from RPP2 that could help us in trying to meet our emissions reduction targets. Chic Brodie alluded to the fact that Scottish Water has huge water resources as well as land resources. Are we missing a trick if Scottish Water is not using those resources for generation?

Not necessarily. It is true that Scottish Water has a great deal of potential out there. In our submission we highlight the scale of the ambition, which could be as high as offsetting our entire electricity demand and enabling more generation. We are actively seeking to pursue that ambition, partly through the regulated business. When it is in the best interests of customers for us to invest in hydro schemes, we are taking the opportunity to do so. About 25 gigawatt hours’ worth of hydro is involved in the current programme.

However, it is important that as we move beyond the core asset base, we engage with experts—other delivery partners—to deliver energy opportunities. We highlight in our submission the extent to which wind, for example, can provide us with an opportunity in the catchments that we operate in—from large-scale projects down to small-scale wind power at individual treatment works. A couple of sites up in Stornoway and Stronsay are well on with delivery for use on site.

Scottish Water is trying to understand our best opportunities to deliver long-term benefits to customers and to contribute towards Scotland’s wider renewables opportunities. We are primarily focused on partnerships where there is that real need for commercial investment and for a commercial interface with other partners to deliver the opportunity.

A number of members still want to ask questions. We need to finish this evidence session by 11.45, so I ask members to keep their questions short and to the point. So far, our witnesses have been very good at giving short and to-the-point answers—I thank them for that.

The Scottish Government’s energy efficiency action plan established a Scotland-wide target to reduce energy consumption by at least 12 per cent. Local authorities and energy companies have led the way in the provision of energy efficiency measures up until now. What has been the role of the enterprise agencies to date, and what has been the impact?

To pick up on the point that was made earlier, Scottish Enterprise has been looking at the efficiency of the companies that we work with as part of our development of growing new businesses. We have been looking at the technologies that bring in new and efficient forms of energy and supporting those with development and innovation support. Quite a lot of our work to date has been on developing new technologies with small and larger companies.

Earlier, we touched on the fact that we have been looking at the efficiency element as part of our programme of providing business support to individual companies in order to improve their efficiency. This not just about those companies saving money, because a more efficient business that makes better use of its energy will improve its overall standing and its ability to grow. We have also been looking at how some of the technologies can be transferred into international market opportunities.

You quite often say that you are looking at different ways of improving energy efficiency. Can you give us some examples?

We are looking at how to support specific companies. For example, we work with some companies on the development of technology and with others on building controls and building sensors. As noted in previous evidence—from Sean Smith last week, for example—we will be funding a lot of development work in companies that are developing new technology through Edinburgh Napier University programmes and through the Building Research Establishment in order to prove that technology and bring those products to market.

You mentioned Professor Sean Smith, who said in evidence that consumers could be expected to pay an average £80 a year to run smart meters while

“the best and most efficient one, which is manufactured by a Scottish-based company, costs £4 a year”.—[Official Report, Economy, Energy and Tourism Committee, 20 February 2013; c 2504.]

What are energy companies doing to ensure that the costs of using smart meters do not outweigh the benefits to consumers?

You can fight over who is going to answer that question.

Given that the UK Government’s programme requiring the installation of smart meters has been assigned to retail businesses, we all have an incentive—and indeed are under tremendous pressure—to implement smart metering as cost effectively as possible. After all, we will be put at a competitive disadvantage if our competitors can install their smart meters more cheaply than we can.

How the costs and benefits balance out depends on how customers use smart meters. Clearly, they enable us as energy suppliers to provide much better customer service: we will not be able to send out so many estimated bills, and we will not need to bear the costs of dealing with those estimated bills. Under the pressure of competition, those savings will flow through to consumers. In other words, people should be getting a better service and lower operating costs.

Of course the programme itself has its own cost. However, the Government’s impact assessment suggests that that cost is well justified, and we will do our best to implement the programme as cost effectively as we can.

I have nothing to add to that, convener.

Is the draft RPP2 sufficiently clear on where its financial costs will be incurred and who will incur them?

We have no strong view on that question.

On the things that fall to us to deliver, one of the very first questions that we ask as a business—indeed, any business would ask this—-is where the money is going to come from. Our main responsibility is the delivery of renewable power, which happens principally through large onshore arrays. We have about 1,000MW currently in operation, of which half is in Scotland, and 500MW more either consented to or under construction. That is the cheapest large-scale renewable option available to consumers. We understand that consumers will pay for it through the renewables obligation and, in due course, through EMR. Our aim is to maximise the delivery of that low-cost option to minimise the amount that we have to bill consumers.

But is RPP2 clear enough about the financial costs and who will pay what? It does not, for example, quantify the distribution of the expected costs. Do you think that it should?

When people are considering policies, it is always helpful to consider their costs and who will pay them. That is good discipline in any policy making and I encourage that approach to be considered in RPP2.

Are there any other costs aside from the financial costs that should be incorporated into RPP2? What about environmental costs, for example?

I can speak only from an energy perspective, but given that most of the focus is on reducing the carbon intensity, nothing springs to mind. I think that RPP2 is clear about where the costs lie. There is a generic debate to be had about how we can better engage as an industry with the public and consumers, as Rupert Steele said, on the costs of delivering new investments, the security of supply and decarbonising the sector. I thought that the document was reasonably clear on those issues, to be honest.

My question is for Rob McDonald. You spoke earlier about serious concerns around the UK Energy Bill. Can you give us an idea of the number of jobs in Scotland that will be threatened if your concerns are not addressed?

I have no numbers on jobs that are threatened in Scotland or the rest of the UK. My key concern is that, unless the fog of policy uncertainty is cleared pretty soon, there will be an investment hiatus, not just in Scotland but in the rest of the UK. We are extremely worried about that.

An investment hiatus would have a significant effect on jobs.

It would be a serious matter. It would affect the number of jobs across the UK that could be created through the building of new stations and, as Alistair Buchanan from Ofgem said the other week, it would put at risk security of supply for the UK. I do not want to get too melodramatic about that at this stage, but we are very worried.

We talked earlier about the grid upgrade and the difficulties caused by uncertainty over transmission charging. I represent the south of Scotland. Is it the case that the transmission issues affecting the northern and more remote parts of Scotland are putting more emphasis on renewables development in the south of Scotland?

I would not put it in quite that way. We look for the best sites to develop wind projects, which are those where we can develop substantial schemes with a broad degree of local support, wherever that is possible. That was achieved with the 539MW Whitelee development and a number of other ones. Most recently, permission was granted for a 288MW development at Kilgallioch in the south of Scotland.

Obviously, transmission issues are one of the inputs considered when we are developing a site. We are investing a huge amount of money in building out the grid to accommodate those developments. I think that Iberdrola is going to invest £3.8 billion in the UK over the 2012 to 2014 period, the majority of which will concern grid enhancements, to enable, among other things, the development of wind power.

We consider all those factors, and we are looking at sites in the north of Scotland. We just look for the right sites for the developments that will make the vision of low-carbon Scotland a reality.

Do you have a timetable for the grid upgrade in the south of Scotland?

Yes. We were fast-tracked by Ofgem in our first transmission price control review under the RIIO model—revenue = incentives + innovation + outputs—as, indeed, was SSE. That involved getting Ofgem’s approval for a fairly detailed business plan that set out the major investments that would be made. We are cracking on with that plan.

As Chic Brodie highlighted, Scottish Water is the largest single power user in Scotland. Its written evidence suggests that it has the potential to generate two or three times the electricity that it consumes. In areas where power generation outstrips Scottish Water’s local need, have you considered adopting a community renewables model? About 49 per cent of the energy potential on the national forest estate is up for grabs by local communities. Is Scottish Water doing any research on adopting a similar model?

11:30

We are looking across the estate and trying to find those opportunities where, primarily because of grid connection issues, it is in our best interest if we can use the power ourselves. Those are the projects that are most economic for our customers for us to invest in, because of things such as paybacks. However, we have bigger opportunities than those. Although we have not specifically considered community partnerships, an examination of the outlets for power and how we can export it will be part of the consideration of whether it is proper for us to invest in certain areas.

Such opportunities tend to come through our commercial arm, Scottish Water Horizons, because they are not fundamentally part of the core regulated business. We are very much working in partnership with developers and others, first of all to seek those great opportunities. Much of our estate is in remote areas, so it is not easy for us to find an immediate outlet for power. We are looking at some opportunities in the central belt, which might or might not provide those connections. However, as a large consumer of power, in the first instance we are focused on using that power on our estate, and then on exporting what we cannot use. Because our catchments are located away from the population centres, we come up against the overall grid connection issue, rather than a community engagement issue.

But if community groups were to approach you, you would engage with them.

Speaking on behalf of our commercial arm, Scottish Water Horizons, I can say that it certainly would be interested in speaking to anybody out there who has an opportunity. At present, the portfolio of opportunities is extensive. We are considering the feasibility of those opportunities and which of them look economic at any point in time. I imagine that we would certainly be open to speaking to local partnerships.

I will move on to the topic of renewable heat. Highlands and Islands Enterprise’s desk-based study shows that 45 per cent of the Highlands and Islands population is off the gas grid. Its submission states:

“despite the Renewable Heat Incentive ... and loan schemes, high switching costs remain an issue.”

Mr Davidson, what are your thoughts on how RPP2 assists off-grid households to switch to renewable heat? What more could be done to help? Scottish Enterprise’s submission refers to evidence that suggests that there are cost savings from renewable heat. I am aware that Scottish Enterprise has considered a successful scheme in Denmark. I would like to hear views on how effective RPP2 is in addressing the challenges that we face surrounding renewable heat. Are there any other proposals that might help us to meet our targets?

Renewable heat is a particular issue in the Highlands because, as you say, almost half the population is off the gas grid. We have been addressing that primarily by trying to encourage a supply chain of alternative types of heat provision for domestic and commercial users. That is important for decarbonisation because, in the past, businesses such as distilleries have used very polluting heavy oil, so moving them towards biomass or wood pellet fuel sources is a significant step.

As an enterprise agency, our focus is on helping businesses to solve their problems and, crucially, on working with the wider supply chain to ensure a coherent and affordable source of alternative technologies and to help individual companies and small businesses to move on to those.

On RPP2, one interesting thing about the energy market for electricity and heat is that setting policy defines the market opportunity. Therefore, setting a policy that focuses on decarbonisation in the domestic market helps to create that opportunity. It is then the job of the enterprise agencies to support businesses that want to move into that market. Crucially, the agencies work at the interface between academia, further education and the skills agenda to try to ensure that the supply chain goes forward.

For example, our written submission highlights the Inverness College sustainable energy and micro-renewables centre, which we have supported for a number of years. It has demonstrated different types of activity and, crucially, it is involving further education and the wider supply chain. There are also larger investments, such as that in the Balcas plant in Invergordon, which is one of Scotland’s major producers of wood pellets as well as of low-carbon electricity.

I will not repeat what Calum Davidson said, but our approach is similar. We have been looking at the supply chain. As Alison Johnstone rightly pointed out, we have been looking internationally to see what lessons we can learn from other countries. As Calum Davidson said, developing the supply chain is only one part of the issue. Another part is about ensuring that the demand exists, and another is about ensuring that the physical infrastructure can cope or can be amended, particularly to allow district heating programmes. We have also been considering the renewable energy investment fund and some of the investment support that is available to encourage district heating programmes, either at community level or a larger level. In that way, some of the challenges of bringing forward new technology and allowing the supply chain to develop might be recognised and addressed.

We are working with a number of projects to try to balance the potential demand for small-scale heat programmes with the potential to supply the material or power base. Particularly on wood and renewables, we are working on projects with the Forestry Commission and others on small-scale rural programmes to try to develop a feedstock that then allows other programmes to develop.

I have one more question, which is on district heating. We recently had a presentation in Parliament about the island of Samsø. The presentation highlighted that 85 per cent of renewables in Denmark are community owned and that any profits that are generated from the 11 turbines on that small island go back into the local community. There is also a district heating scheme on the island. Scottish Enterprise led a visit to a district heating scheme in Denmark. Did you learn any lessons that could be applied in Scotland to provide a faster roll-out of the technology?

One main lesson that we learned was that we cannot look at just the companies, the supplier or the user in isolation; we need to look at the whole process and the whole system around the opportunity. Samsø is a good example of that. The whole system there was taken into account, including the local industry, the local community, the scale of the community, who would own the scheme, who would invest in it and who would run it.

One of the lessons was about the need to bring together the potential technology and utility and very definitely the users and the community. The community had to see a benefit, and perhaps behavioural change was needed so that the community could own and manage the system and take full benefit from it. Behind that, the support and investment structure to allow those things to happen at community level also had to be in place. There was an opportunity to learn from that. Further discussions and visits are planned to take some more of that learning and consider examples in Scotland where we could potentially apply it.

It would be good to hear more about those.

In view of the time, we had better call a halt. We have had a good and thorough discussion on a broad range of subjects. I am grateful to the witnesses for coming to help us with our scrutiny of RPP2.

We will have a brief suspension to allow a changeover of witnesses.

11:39 Meeting suspended.

11:44 On resuming—