Chamber and committees

I have a question so that I am clear about what you mean. Our investment in energy efficiency measures such as area-based programmes is largely modelled on what can be delivered in the sector, what we can take forward and what can be expanded where there are reasonable grounds to do that. You said that that means that we will not be able to meet what we intend by the end of this year—what exactly are you referring to?

There is quite a lot in there and you have covered a wide range of issues. At an international, and particularly a European, level, there is much greater focus on decarbonisation of the energy sectors and there is a clear determination to move towards renewable energy at a much faster pace than anticipated.

We need only look at the comments that the European Commission has made and the approach that it has taken—Commissioner Timmermans has highlighted the importance of renewables, and Europe’s largest economy, Germany, has set out its stall very clearly when it comes to the focus on renewables and hydrogen as its future approach—to see that there is a real step up in pace and in the desire, at European level, to decarbonise energy markets, reduce dependency on imports, particularly from Russia, to meet climate change targets, and to deliver security of supply.

In recent months, it has been interesting to see how countries in other parts of Europe are recognising that they will not be able to meet all their renewable energy challenges themselves, so they are looking at the potential of other countries to provide markets and support. I have had engagements with ministers and representatives from different parts of Europe who are looking at Scotland as a potential exporter of renewable energy, particularly in the context of green hydrogen. Scotland is seen as a potential main source of green hydrogen to support the European economy.

Let me put that in context. Germany has said that it wants a big focus on hydrogen to decarbonise industrial processes. Germany will require to import about 70 per cent—the vast majority—of its hydrogen, so it is looking for import markets in the countries that are in a position to support that activity, including Scotland.

We are talking about faster decarbonisation, a greater focus on renewable energy, and countries that are looking for import markets and export opportunities because of the focus on greater energy security at European level.

On actions that can be taken, countries that have introduced windfall taxes include Germany, Italy and Spain. I hear people making the argument that, if we introduce a windfall tax, we will not see investment in renewables, but Shell was looking to invest in offshore renewables in Scotland, in a partnership with Scottish Power, before it was making record profits. That interest is not going to change. Renewables investment is increasing in Italy, Germany and Spain despite the introduction of windfall taxes. The argument is a red herring: the reality is that investors are still moving into those markets because they want to be there, and they can see that that is how security of supply will be delivered.

The UK Government needs to act quickly. It needs to look at introducing a windfall tax and using the proceeds to support people during the cost of living crisis that millions of households are facing across the UK, and which is only going to get worse.

The Jackdaw oil field is at a different stage. I saw the motion that you lodged in Parliament on the matter; our position on Jackdaw is the same as our position on Cambo, and that position has been reinforced by the Scottish and UK Governments’ independent adviser on climate change, the Climate Change Committee, which said that there should be a compatibility checkpoint not just for new projects but for consented developments that are not yet in production. Our view on Jackdaw is exactly the same as our view on Cambo with regard to the compatibility checkpoints, and it has now been reinforced by the review and recommendation of the Climate Change Committee.

If someone is having insulation installed in their property now, then yes, it will. People who are already getting insulation or are planning to put in insulation or other energy efficiency measures later this year will, of course, get the benefit of that.

You suggested that we will not meet a target for the end of this year. What target are you referring to? I am not clear about what target you mean.

We still do not have clarity about the track 2 process for carbon capture, utilisation and storage. We have had extensive discussions with the UK Government about that, and it is rare that I do not raise the issue when I meet UK energy ministers. Their view is that the Scottish cluster has to be considered in track 2, but we do not have clarity on when that process will take place. However, the UK Government has recently said that it expects that it will require four CCUS projects to be in operation by 2030. The problem is that we do not know what the track 2 process will be for the other two projects that will be taken forward, and I would think that the Scottish cluster would be one of them. We need clarity on that timeline and a clear understanding of the timescale for decision making on track 2 to make sure that those projects can be delivered later this decade.

The response that I got from Kwasi Kwarteng largely said that these matters could be discussed at the four nations net zero joint ministerial group—if I recall correctly. I might be wrong, but I think that that is what was said. We also asked the UK Government to work with us on creating a joint ministerial group back in January this year. It has not taken up that offer, and it has not engaged with us specifically on tackling the cost of living crisis.

The fact that such a large number of companies—largely unhedged companies—has exited the market during the crisis demonstrates the gamble that they have taken in the energy market. They have been gambling with a business model that is based on low wholesale gas prices and it has gone wrong for them. They simply move out of the market and the costs of that are picked up by consumers, because of the way in which the supplier of last resort system operates.

We should not tolerate companies operating in the energy markets that do not have the capital and the capacity to manage volatility in those markets. They gambled when the prices were low and it worked for them. Then, when the price went up, they decided to get out of the market because the business model no longer worked.

I think that the regulator should have addressed the issue at an earlier stage, because there was always the potential for that to happen. It is okay to say, with hindsight, that we should have moved at an earlier stage, but the regulator is there to model potential risks and to protect the customer. In this case, I think that it has failed, that the system has failed for consumers and that, as a result, we will pick up the costs for many years to come, given the billions of pounds that are involved.

There is a need for the regulator to recognise the failure on its part. The UK Government should also be looking at why the situation has been allowed to arise and at how we can make sure, through the introduction of regulatory changes by Ofgem, that it does not happen again in the future.

That brings me to the announcement that Ofgem intends to move to a system that involves a quarterly, rather than a twice yearly, price cap mechanism. I do not think that that will change anything. It will not change people’s household bills, unless the cost of fuel starts to drop significantly. All that it will mean is that people might get a drop in price at an earlier stage, so that, instead of waiting six months for it, they might have to wait only three months. Although that is a positive, I do not think that the proposed change to the system will change anything in the present market, given where we expect energy prices to go over the course of the next year to 18 months, according to the intelligence that I am getting about the sector.

I also think that the proposed change risks putting people in difficulty. With the price cap increase in October last year, which resulted in a significant rise in prices over the winter, when people’s demand for energy consumption was at its peak, people at least knew that they had some respite until April, when the next price cap review would be implemented. If we had had a quarterly system, there would have been another increase in January, right at the peak of demand, when folks’ energy use is at its highest level. That could have resulted in more people being put into financial difficulty. There are potential unintended consequences of moving to a system of four price cap changes a year. It has potential benefits, as I mentioned, but there are also potential downsides.

In addition, I do not think that that change amounts to the fundamental reform that is necessary to make sure that we have an energy market that protects consumers’ interests. The very fact that so many companies exited the market for the reasons that I outlined demonstrates that consumers’ interests were not sufficiently front and centre in the way that the system was being regulated.

As regards Ofgem’s view that people should go to their energy company first if they have concerns, I think that that is, by and large, probably still good advice. Some energy companies have hardship funds and payment plans that they can use to assist people who are having difficulty. It is important that the regulator scrutinises the way in which suppliers provide that advice and information, that the information is appropriate and that they also provide advice on where customers can go for independent advice, over and above what they have been told by their energy supplier.

Transmission charges continue to act as a barrier to the roll-out of renewables in Scotland. We know that they make renewable energy, both onshore and offshore, more expensive in Scotland than in other parts of the UK, because we still have a system that is based on geography. Ofgem brought forward its proposal on locational marginal pricing without consulting the Scottish Government and without us knowing anything about it. That came completely out of the blue, despite the fact that Ofgem had apparently been working on its proposal for more than a year, and despite the fact that I meet Ofgem on an almost quarterly basis. There was no intelligence about it whatsoever.

Our early analysis of locational marginal pricing is that it could still have a negative impact on Scottish projects; indeed, it could potentially have even more of a negative impact that the current arrangements. We are doing further work on that. We have discussed the matter with National Grid to express our frustration and unhappiness at the lack of engagement with the Scottish Government on such an important issue.

We are also feeding into a consultation exercise that the Department for Business, Energy and Industrial Strategy is taking forward as part of its transmission charging arrangements. Locational marginal pricing is one option—it is not necessarily the only option. It will be interesting to see what other options BEIS chooses to bring forward.

The reality is that the transmission charging mechanism that we have has been designed on the basis of closeness to population centres. However, as the vast majority of renewable energy that we will have in future will come from locations away from population centres, we need a transmission charging scheme that recognises that, that is fair to consumers and developers, and which does not become a barrier to the type of investment that is absolutely critical to driving down energy costs—in other words, investment that ramps up renewable energy capacity.

We are due to receive data from the third sector organisations that distribute that fund for us so that we can look at where we at with distribution and whether we need to add resources to it. Those measures are part of what we are considering in the Government’s wider response in trying to support people.

The fund is specific and targeted at those who are experiencing particular distress and who are at risk of self-disconnecting because of energy costs. We expect to get data from third sector organisations in the coming weeks on how the overall amount of the fund is being utilised at the moment, and we will then be able to assess whether we need to do more to help support and sustain the fund in future. We are very open to considering whether we can provide further support through that fund, if necessary.

I do not think that we have disaggregated the data on fuel poverty, and I do not know whether we have disaggregated the broader poverty data, either. I suspect that we have, and I would broadly expect the fuel poverty data to mirror the broader poverty data in its disaggregation. If the disaggregated poverty data were to show that women are experiencing greater levels of poverty, which I believe it does, I would expect that to be mirrored in the fuel poverty element, too. However, I do not think that we have disaggregated data on a gender basis with regard to fuel poverty.

Nuclear will not be reducing energy bills any time soon. For a start, such projects take a long time to be developed. You just have to look at Hinkley Point C, which is behind schedule and about £5 billion over budget. Given the subsidy costs that nuclear requires, it is likely to force up bills—I think that the estimate is an extra £40 on folks’ bills.

Nuclear energy is one of the most expensive forms of energy that can be produced. Just last week, Kwasi Kwarteng, the energy secretary in the UK Government, acknowledged that there is a risk of nuclear pushing up bills, even in the short term. Therefore, I think that it is the wrong approach. In fact, we can see other countries in Europe moving out of nuclear. For example, Germany will be closing its last reactor this year, and it is very clear that its strategy is to focus on renewables.

Our approach to nuclear energy is not ideological. Greg Hands has said that to me before, and it has been pointed out to him that that is wrong. In our energy strategy back in 2017, we set out the principles of why we do not support nuclear energy. In Scotland, we think that the best approach is to focus on renewables and that pump storage, hydro and battery storage capacity are the ways in which we can tackle our future energy needs.

We know that onshore and offshore wind are significantly cheaper and produce significantly lower-cost energy, and we also know that, by and large, hydro produces more lower-cost energy. In Scotland, we have a number of schemes that could be taken forward; however, there are frustrations in that respect. I would highlight as an example the 600MW facility Cruachan 2, which is being planned by Drax and which I visited last year. The problem is that Drax cannot take it to the market, because the UK Government has not provided the market mechanism to get it into the grid. It is an investment of more than £1.5 billion, potentially involving about 900 jobs, and it would also have the on-going benefit of being a renewable energy source, but it does not have a route to market.

The same applies to SSE and some of its plans around hydro. Just a fortnight ago, I visited the scheme at Sloy, which SSE is looking to expand and develop. Again, there are limitations due to the lack of a market mechanism from the UK Government, and the situation is quite frustrating.

If you look at the countries with the lowest energy costs in the world—Norway and Canada—their biggest energy source is hydro and pump storage. More than 90 per cent of Norway’s energy comes from that source, while, in Canada, the figure is 60 per cent. Our view is that the best approach for delivering energy security and lower-cost energy supplies in Scotland in the future is through renewable energy projects, whether they be onshore, offshore, solar, hydro, pump storage or battery storage. We should focus on them for our future energy needs. The UK Government has got it seriously wrong in its energy security strategy, because it focuses too much on nuclear, which could actually maintain energy prices at higher levels than they should be at or could potentially increase them.