Chamber and committees

The warm home discount scheme is a UK-based scheme. We proposed that it should be devolved, and it was agreed that it would be devolved. We proposed combining the energy company obligation and warm home discount schemes to create a more flexible and better scheme that would also increase the pot of money available to support low-income households. Despite spending probably about a year plus in trying to get the UK Government to agree to that, in February this year it finally said that it was not going to agree. We wanted to expand and invest more money in the warm home discount scheme if it was devolved to us. Our plan was to do that, but we were denied the opportunity by the UK Government.

As I mentioned, during this session of Parliament, we are putting record investment of £1.8 billion into energy efficiency and heat programmes. We have also increased the eligibility for and scope of our area-based programmes to support local authorities and low-income households. We are putting in a significant level of investment, but we remain frustrated that the UK Government did not take up the offer and opportunity to do something even better with the warm home discount scheme here in Scotland that would have benefited more households to a better level.

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.

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.

However, the biggest constraint on that will be grid capacity. If you want to build an offshore wind farm, you require a date to be set by National Grid for when you will be able to connect to the grid to supply it with electricity. The biggest risk for ScotWind is National Grid not having put in place the right plans—although I welcome the fact that it is doing its holistic network review at the moment—which could stop a project that could be delivered by 2030 from being delivered until 2035 because it cannot get the grid connection until, say, 2034.

For the delivery of such projects, grid capacity needs to be in place. National Grid is taking forward that bit of work. Our view is that that should be delivered by 2030, and National Grid is planning how to deliver that.

Energy efficiency has an important role to play in the short, medium and long term, but it would be unrealistic to expect energy efficiency programmes to be rolled out on the scale that would be needed to deal with the potential crisis that we face in 2022 and into 2023 as a result of how the energy markets are. I will give an example of why there are challenges.

The sector has challenges in accessing labour to do energy efficiency work. I met a company that is involved in our area-based programme for local authorities, which targets properties where people could be fuel poor by providing greater energy efficiency and in some cases district heating systems. The company’s managing director told me that, even if we doubled the money that we offer for such projects, his company could not deliver them because it does not have access to labour. He said that his company used to have a lot of eastern European labour but no longer has access to that because we are no longer part of the European Union. I did not throw that up just for a Brexit-related reason, but that company was pointed about the fact that it does not have the same access to labour as it had pre-Brexit, which has constrained its capacity and ability to ramp up programmes that we would like it to deliver.

That issue does not apply to every company, but it happened to be the case for the company that I met. One constraint is access to labour and skills to deliver programmes, so programmes need to be taken forward in a way that ensures that the sector can deliver and which will expand the skills that are necessary to develop such programmes in future years. There are constraints and limitations.

Energy efficiency will play an important part in the short, medium and long term, and it is clearly an important part of meeting our climate change target of reducing energy consumption. However, it is wrong to think that the sector could easily double the number of homes that we insulate under the energy efficiency programme tomorrow, because the sector faces constraints.

If the grid capacity is there, it could be by 2030.

You ask me whether I recognise the situation. We actually recognised it back in January, which is why we suggested a four-nations approach to tackling the issue as well as a four nations joint ministerial group in much the same way that we worked on a four-nations basis on issues around the pandemic. However, the UK Government has not taken up that offer.

Will we work with the UK Government? Of course we will. We will work with it where we can and highlight the actions that we think should be taken. However, we can work with parties only if they are prepared to work with us. We have not yet had a positive response to the suggestion of all four nations working on a joint ministerial basis, which I think, given the nature of the crisis, would be the right thing to do.

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.

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.