Oral evidence: Renewable energy sector in Scotland, HC 745Wednesday 24 February 2016

Oral evidence, 24 February 2016.

Witnesses

Andy Kerr, Executive Director, Edinburgh Centre for Carbon Innovation, Professor Keith Bell, Co-Director, UK Energy Research Centre, and Simon Skillings, Senior Associate, E3G, gave evidence.

Chair

Welcome to the Scottish Affairs Committee. As I think you just heard me say to Mr Stuart, this is our first day of evidence in our inquiry into Government policy on renewables in Scotland. We are very grateful for your attendance. Just for the record—if we could go from my left to right—tell me who you are, who you represent and if you have a brief opening statement. Mr Kerr?

Andy Kerr

I am Andy Kerr. I am Director of the Edinburgh Centre for Carbon Innovation, which is an innovation centre based at the University of Edinburgh. We work with businesses and investors about taking new ideas and turning them into practice. I am also co-director of something called the Centre of Expertise on Climate Change, which provides a lot of advice to the Scottish Government on their policy frameworks.

Professor Bell

I am Keith Bell. I am at the University of Strathclyde where I am the ScottishPower Professor of Smart Grids, but I am also involved and here today representing the UK Energy Research Centre, which is a multi-disciplinary virtual centre really. It involves a large number of academics at different universities across the UK coming to consider evidence, build evidence base to inform energy policy, so it involves economists, social scientists, psychologists, natural scientists in terms of natural capital, for example, and engineers like me.

Simon Skillings

My name is Simon Skillings. I am an independent energy policy expert but I do a lot of work with the environmental think tank E3G.

Chair

Thank you. We have just heard from Mr Stuart—and this is what we want to explore in a bit of detail—about the recent policy announcements from Government and the impact on onshore wind as well as other interests to do with renewables, and we have heard that this could have a significant adverse impact on confidence within the sector. Have you any views about this and what do you believe the impact of Government policy changes will have on the sector? Mr Kerr, we will start with you.

Andy Kerr

Scotland has worked very hard over 15 years or so to essentially optimise or maximise the opportunities that have arisen from the UK and Scottish policy frameworks around renewables and it has been very successful at it, as Neil Stuart flagged earlier. The issue is the seeping away of confidence within the business and investor sector because, while I think everyone accepts that the renewables subsidy regime was not sustainable at that current level as it was a year or so ago, because costs have fallen very quickly, equally every business and investor wants clarity over the medium term. What we had were a series of announcements that came in at very short notice, and certainly the businesses that we are working with have been immensely frustrated with the changes. I am not focusing so much on the near term changes to the renewable obligation because, as you said, that was going to be finishing anyway in 2017. It has been much more about almost all aspects of the policy framework. What were assumed to be secure are being rejigged. That I think has been the major frustration. There is a sense that, instead of being at the leading edge of renewable energy development, the UK is now taking a backward seat and I think, from our perspective, certainly as an innovation centre in the university sector, this is not just about the energy and the clean energy bit. There is also in Scotland a very strong push around using energy as an economic driver, both in terms of export potential but also as a social driver to support social cohesion within communities across the country. Again, I think there is a real sense—

Chair

The social cohesion bit, what are you referring to?

Andy Kerr

What we are saying at the moment in the UK is a strong emergence of frameworks between what the UK Government is planning, which is a nuclear and gas future largely, and what the Scottish Government is planning, which is very much a localised energy future. The localised energy future suggests that what we are trying to do is provide a local matching of supply and demand, and it is trying to look at the whole local energy system so it is not just focused on generation technologies, per se, it is also looking at energy efficiency of buildings. It is looking at the local system: how do you bring in mobility transport into that system? How do you ensure heating is tied to that system? Instead of trying to treat it as being separate technologies for electricity generation, they are saying, “At a local level, within a city level or at a community level, how do we join up those different elements so that we get some local energy system that is clean, affordable and secure?”

Chair

This is interesting to the Committee. Do you have a sense that this is a policy that seems to be being pursued by the Scottish Government, and are you finding that there is a different set of agenda priorities than in the UK Government when it comes to this approach?

Andy Kerr

Yes.

Chair

Thank you. Professor Bell?

Professor Bell

I agree with a lot of what Niall Stuart said earlier. On the reduction in confidence, it has been said many times already, and my perception is that it goes across many sectors. Even if, for example, continued support is promised—although we are yet to see the detail that Niall was talking about—in respect of offshore wind, it affects other sectors: tidal, solar. There is a kind of a supply chain capacity that has been built up and, although it has not made a difference to what has been delivered so far, there is a danger that that supply chain capacity is going to be eroded and, as Andy was just saying, the investment will start to withdraw. We are dealing with an international marketplace now, of course, where a lot of the investment is capital that is coming from all over the world so there is a need to attract that inwards. Andy has mentioned some of the economic benefits that that brings with it, the jobs and so on. Another part of the international dimension is, just as we have talked about Scotland being part of the UK, the UK is part of Europe and there is a European commitment to this classic trilemma of decarbonisation, affordability of energy and the sustainability of it and the security of supply. My understanding from talking to people around Europe is that they see the British Isles—we could extend it further—as representing a major contribution, potentially, to European obligations to decarbonise because of the very rich renewable resources that we have, in particular wind but also the various offshore technologies, wind and tidal in particular; wave technology is a bit further away. I think there is a wider context to it. A lot of the things that we have talked about and have been in the attention of policymakers in recent times are whether cost parity has been met, whether the market can be left to get on with it in terms of low carbon energy or whether some extra support is needed. It has been generally agreed that extra support has been needed. It has made some people a fair bit of money but, on the other hand, it is that support, even if it has not been badged as R&D, that has led to the D, the development and the deployment, and has in turn helped to drive down costs.

Chair

This is something that we would like to explore a bit further. The direct subsidy aside, because there is a bit of political debate and conversation about that, is there anything else that we can do to stimulate the sector through economic development policy? Is there more that could be done, instead of just giving money, or what seems to be giving money, to electrical generators?

Professor Bell

I am maybe not the best person to ask that question of. My background is in engineering although I talk a lot to the economists, but we have a liberalised electricity market. That has been the intention from when the 1989 Electricity Act came in. The idea that there are other sorts of levers that you intervene with has been something that back then, in the early 1990s, was supposed to be a thing of the past. It is slightly ironic that we have seen continual interventions, in particular by Ministers, in little details, as it might have been seen at the beginning, to do with the energy markets, not just electricity, increasingly because the market value of low carbon energy is not yet realised in order to drive the investment on its own. The other side of the equation, what are the penalties, what are the costs of failing to decarbonise, is not realised in the market at present. While the principles still remain to allow the market to get on with it, the market signals do not seem to be there and that is why we get back into these sorts of things. Other sorts of policy interventions? Maybe my colleagues here will have more to offer on that.

Simon Skillings

To my mind, the issue is very simple. What we have seen are some evidently quite significant policy changes and yet they have not been accompanied by any significant changes, or indeed changes at all, in high-level policy objectives. The problem is that there is now a complete lack of understanding as to what has changed, what is the evidence base that is driving the current policies that mean that they are a better way of delivering longer-term policy objectives than the previous package. We talk about support mechanisms and the role of subsidy, but a huge amount of investment is made on the basis of taking a view on the future, taking a punt on the future, based on beliefs about where we are going. Over the last 10, 15 years a very consistent sense of direction has begun to emerge of how much money goes to which particular technology. There is a bit of horse trading here and there, but the general direction has been fairly clear. What we have seen now is something that appears to be a quite a significant change, but there is not the substance behind it that will enable investors to understand where they are going and gain the confidence to move forward with their investments.

John Stevenson

I want to pick up on a comment that Professor Bell made about Government intervention and how you create a degree of certainty. One thing that has always struck me is that if the Government were to change the law and basically said that any new build house—this is residential, domestic housing—had to have solar panels put into it, is that something that you think would stimulate the market in a positive way and create a degree of certainty for the future? Is that the sort of policy interventions you are looking for or is it more towards subsidy and that sort of policy intervention?

Professor Bell

To some extent that is almost an ideological question about what is the role of Government and what Government should be directing and regulating on. A personal opinion would be that the global climate change challenges and the obligations on the already industrialised world are such that we need to make serious commitments. That sort of obligation would not just be solar panels on roofs. It might be to do with thermal ratings of new build properties, whether it is housing, schools, commercial buildings, whatever. I think it would finally make a huge difference. In the short term there would probably be inefficiencies where suddenly a massive market is created and maybe the kind of efficiencies in that market do not yet exist. Over time you would expect that the stronger players would be the ones that survive and the less strong ones would not. Undoubtedly it would drive a market. Whether the short-term costs would be seen with the benefit of hindsight to have been justified is another debate, but personally I think there is a strong role for regulation in terms of standards, let’s say. How you design those standards so that the efficiency of it, the delivery, is maximised is a question that one would also need to go into.

Mr Christopher Chope

What all of you have said seems to smack of special pleading, in a sense. You seem to want to be insulated against market forces. What do you think of your colleagues in Scotland who are suffering in the oil and gas industry as a direct result of market forces? Why do you think you should be privileged while they are not?

Simon Skillings

Personally I find the technology debate—“I like this technology, I don’t like that technology”—a rather sterile and unhelpful debate. What energy policy is trying to do is to deliver certain outcomes in a highly uncertain future and although people talk about the trade-offs—the trilemma was mentioned: environment, security, cost—perhaps the bigger trade-off is between a certain present and an uncertain future. We need to spend money now in order to provide hedges against that uncertain future. That is what everybody does and that is the substance of the premium we are paying now. In terms of insulation against market forces, the thing that is missing from energy policy now—and I don’t criticise the current energy policy because it has been absent for some time—is tackling that core issue, which is thinking through what are the choices we need to make now that manage the risks we want to manage in the future in the most cost-effective way. FiTs and CfDs and so on are delivery mechanisms; that is how you achieve what you want to achieve in the most cost-effective way. That is a second order issue. The primary issue is: how are we managing these future risks in the most cost-effective way? I think there is a very strong argument that renewables have a very major role to play in that. It is the one low carbon technology that has demonstrated that it is capable of being deployed at scale and, therefore, I think it has a very important role to play. But at the moment that argumentation is not explicit anywhere in Government policy that allows people then to start having the, “I don’t like renewables or I don’t like nuclear” or whatever it is and, “We’re paying too much for this, we’re paying too much for that”, because people are not really understanding the logic that sits behind a good energy policy.

Chair

Do we have a good energy policy? Is that how you would characterise the current Government’s approach?

Simon Skillings

I am not privy to the inner workings of Government, but what I would say is that there is no explicit understanding of the energy policy and there is no ability for investors to be able to look at the measures and say, “I see how these measures are sustainable in the short, medium and long term”. That is not just an issue for renewables. That is just as much an issue for every other technology in the energy sector, fossil fuels; every other technology. At the moment there is no basis for saying that I can see a line of sight that takes me credibly from this set of policies to delivering policy objectives out into the medium and longer term.

Chair

I think it was Mr Kerr who mentioned that the changes that we are observing in policy from Government and announced in the last few months are barely having an impact upon objectives, which is to see a reduction in new renewable projects, a contribution to the grid. Is there any evidence that supports that, that the changes that have been announced are having a minimal impact on current policy and the mix we have of energy just now?

Andy Kerr

If you are talking about the near-term renewable electricity, onshore wind in particular, I would refer back to Niall Stuart’s answer from earlier. I think he offered a very fair answer to that. What we are seeing is slightly further ahead, so at the moment a lot of people have stuff in planning, in particular, and they are still waiting to see what is going to happen; it is like the grace period. I think the issue for us is the next step. If I could come back to that point, because I don’t think there is any special pleading. I am certainly not seeing many people arguing that there should be special subsidy rates for particular renewable energy technologies, like wind and solar, when they are seen to be cost competitive with other forms. I think the issue is: can they be on a level playing field? That is a different thing altogether. One of the challenges we have here is that we are often comparing apples with pears. If you are comparing a renewable energy technology, it is capital intensive, so it costs a lot upfront and then has zero or very low running costs, whereas a gas-fired or a coal-fired power station costs a fair bit to fire up, but then the issue is: how much is it going to cost for the next 25, 30 years of its life? That is an unknown. We do not know what that cost is going to be so it is incredibly difficult to judge between the two. Coming back to Simon’s point, the issue for the Government is: in the face of extreme uncertainty, how do we get from where we are now to where we want to go? Everyone in this House and the Scottish Government wants a clean, affordable energy system.

Mr Christopher Chope

But surely contracts for difference are a way of insulating renewables against changes in the marketplace that are having an adverse effect on the oil and gas industry. The oil and gas industry, because of the reduction in the price of its products, has to cut its cloth accordingly, but what you are saying is that you should not have to cut your cloth accordingly because you should be insulated against those changes in energy prices by contracts for difference.

Andy Kerr

But that is not renewables. That is electricity. That includes gas-fired generators and nuclear generators. That is not a renewable issue. That is an electricity issue, because electricity is seen to be at the heart of wellbeing of people whereas oil, being transport, is not, so Governments do not see that as the same key issue. I think it is because we are focusing on electricity. It is not just renewables. It is electricity, per se, in the same way that we need support to provide nuclear. In practice, we are not going to build much in the way of new gas unless there is additional support coming in, so the Government have to physically change the system in order to ensure they get what they want, which will be nuclear plus gas as well as some renewables.

Simon Skillings

That is a very interesting point that brings out the issue I am trying to make about CfDs. I don’t think it is the CfDs that are causing the problem for the fossil fuel industry. It is the trajectory of decarbonisation that is causing the problem. The role of CfDs was intended to be a mechanism to achieve that transition as cost effectively as possible. I think it would be interesting for members to look at data on the cost of renewables in Germany compared with in the UK and Scotland. In Scotland, the resource is better, generally speaking, than it is in Germany—not solar but wind is certainly better—and yet the costs are generally higher. One of the big issues that drives that is the cost of capital. There is complete certainty among the investment community about the direction of travel the German Government have over promotion of renewables. There is not the same certainty in the UK. CfDs were an attempt, and I would argue a flawed attempt, to correct that and provide some increased certainty to reduce cost of capital. Unfortunately, the background politics created an increase in political risk that, generally speaking, outweighed the reduction in market risk.

Chair

Just on that before we lose it, what are the flaws in CfDs in your view?

Simon Skillings

The flaw is not necessarily in the design of the CfD. The CfD reduces market risk. The flaw is that what came out of the CfD was a political risk that tended to offset the reduction of risk that had been achieved by insulating the low carbon generation from the market, because investors were worried about the tenability of those contracts into the medium and longer term. If you look at the nuclear CfD as an example, how anyone cannot be worried that a contract that is meant to be there still in 60 years’ time, and is going to be hugely either out of the market or in the market, is not going to be renegotiated is extraordinary.

Chris Law

There are legally binding targets for reducing carbon emissions. However, there has been criticism that the UK Government do not have any long-term strategy for reducing these carbon emissions. What are the views of each of you on what a strategy should look like?

Andy Kerr

I think they do have a strategy for long-term carbon targets. The Secretary of State has repeatedly said that she assumes they are going to meet them and she is aiming to meet those long-term targets. The frustration that I would offer is that if you choose to go down a route where your electricity is powered by nuclear and gas and your heating is gas and your vehicles largely are oil, you are not going to hit those medium-term targets unless you do something else. One option is using carbon capture and storage; there are other options. I think the frustration is that some of the policy announcements over the last few months appear to have ruled out a series of things, which to many of us, are required if the UK is going to meet those medium-term targets.

Professor Bell

I am not sure I totally agree with Andy. While there is supposedly a goal to decarbonise, I am not sure there is a strategy for how to do it. It is not clear to me that in the medium to long term there is a clear vision on how that is going to be achieved. The short-term policy changes that we have seen, or continued absence of policy I guess you might say, suggest that there is not much of a long-term vision there either. To be fair, the challenge is a very difficult one. Andy has alluded to it in a previous answer. We start from the premise that we have to decarbonise use of energy. As Niall was saying earlier, we want to do so at least cost and continue to have a reliable supply of energy that our economy depends on. Electricity looks like still one of the best bets for decarbonising, not just existing electricity use but heat and transport; decarbonise electricity and electrify these other sectors, to some extent. There is a big emphasis, of course, on the electricity sector. The challenge, as Andy has just said, is we are moving from a type of generation capacity, a type of technology that has moderate capital cost and significant operating costs in terms of the fuel towards types of generation technology that have very high capital costs and very low operating costs. With low operating costs, if the market works in the way that the economists say it should work, the short-run costs bid into the market will be very low, which makes it very difficult for anyone who has significant operating costs to know whether they can recover them. That is the big challenge of how you can start to engender a change of the generation mix, which is less carbon intensive and the reason why you then start fiddling around with all sorts of mechanisms to try to bring it about. When you are talking about nuclear power stations or potentially carbon capture and storage, at least the second generation of them, having long lives, 40, 50, 60 years, you need that long-term certainty to make the necessary investment. On the cost of capital, Simon is absolutely right. DECC’s own research said exactly that: this is one of the key factors when comparing the cost of onshore wind in different parts of the world. That issue about the changing nature of the CAPEX versus OPEX is a really difficult challenge. You end up coming up with all sorts of mechanisms to do that, but in the short term—again, repeating what was said earlier—there is this absence of clear commitment. Why do we need a commitment now? That is probably another relevant question. Why don’t we just wait, as some commentators seem to think we should do, for R&D to deliver the next great technology or to suddenly halve the cost of something and then we will just go for it? First, that shows a great deal of faith in the technologies coming along that quickly. The bigger technologies have had a lot of investment over a long period of time, so it is hard to see that this magic bullet is going to emerge very quickly. Secondly, where a lot of the technologies’ costs have come down is through creating a market. You cannot just leave it in the lab; you need to get it out of the lab and deploy it. That is one of the major things that has driven down the cost of solar PV globally. We need to get on and do something, even if at the beginning it is more expensive than you want it to be. While we are still not getting on with it, we are still impacting on the climate. Global warming is still continuing and the later we leave it the bigger the action we have to take and at some point we may be too late. To build up a supply chain to deliver that very quickly is difficult. For all those reasons I think long-term vision is absolutely necessary but there has to be also a short-term mechanism that moves on the way towards it.

Simon Skillings

It is not easy. I wouldn’t like to pretend it was. If it was easy it would have been done. Essentially, what a strategy needs to involve is a series of technology pathways that manage the key risks that we have looking out, the key uncertainties over our energy costs and technology costs. Creating those pathways involves market creation that allows those technologies that exist to be deployed and drive down their costs and also involves leaving space in the market for innovation and development. That is particularly relevant on the demand side and the distributed energies. There is a second really hard aspect to a coherent energy strategy and that issue is opened up when we start thinking about heating and cooling—heating is probably more relevant to Scotland, I guess—and that is that we can no longer decarbonise the system remotely from individuals or businesses. We need them to do things. We need them either to invest themselves or have some change made to the substance of their buildings. That is an extraordinarily significant consumer engagement challenge that we have not come close to addressing. We talk about technology pathways, and that is very important, but in many ways that is living in the world of electricity, which is the easy bit. The hard bit is still to do, which is how do you engage people to do things differently.

Chair

Thankfully, that is not part of the remit of this Committee. I am sure it is an interesting aspect.

Chris Law

You brought up the fact that there has been a lack of energy policy for some time, or at least a comprehensive one that matches all the areas of energy production. I asked a question earlier of Niall about: what do you think the motives are for some of the recent policy changes, some of which came as a complete shock? Have you any ideas?

Simon Skillings

In fairness, I came to the view before the last election that there was one overwhelming challenge that would affect whichever Government or combination of parties came into power, and that was that delivering security in decarbonisation was costing too much. We had to find ways of reducing those costs and that was going to be the key imperative facing whichever Government came into power. I think there are sensible ways of doing that and there are less sensible ways of doing that, but at that level I can understand the motivation, the need to reduce costs, absolutely. I happen to think there are many better ways of going about it but I can have some sympathy with the motivation.

Professor Bell

I would just be speculating in the same way as everyone else. Clearly some of the public statements were about cost. Whether the costs were very excessive I am not quite sure. Another way of turning around the question about consumer behaviour—as a colleague of mine at University of Newcastle has put it—is that many households spend more on fizzy drinks and crisps in a week than they do on energy. We need to keep the cost of energy down. There is a serious issue about fuel poverty and affordability but, ironically, if the cost of energy was higher, there would be a stronger incentive on being more effective with your use of energy in terms of its timing and the volumes that you are using, provided we give the people the means to be more effective. Some of that requires capital investment in housing stock and facilities and whatever. Unfortunately, in the longer term, I can only see the cost of energy going up and the challenge is to make it go up as little as possible while still meeting the reliability targets and the decarbonisation targets.

Andy Kerr

On the political question, my sense is again that in this House, or particularly with the Conservatives, the renewable side has been seen as something for the environment. What has been interesting over 15 years of multiple Governments in Scotland is that they have treated energy as being an economy opportunity and they have seen that if you support the R&D, the deployment, the innovation you are going to bring in large amounts of investment, you are going to support jobs. There is an economic driver that has been at the heart of it since the early Lib-Lab coalitions and then boosted when the SNP came into power. I think that has been different from the UK Government’s approach to energy that is seen as just trying to balance those three, clean, affordable and secure, and that is a distinct difference we have seen.

Chair

Would you suggest that the UK Government should be sitting down urgently and learning from energy decisions being made in Scotland?

Andy Kerr

I think that the emphasis on innovation if it is done properly, which is not just, “We’ll just chuck everything into R&D” but actually look at the deployment, look at using some of the opportunities that are what we might call living labs or test sites and so on that we have seen being hugely successful in Scotland, could be broadened out across the UK and treated as an opportunity to take those abroad. We are seeing globally a massive energy transformation in 195 countries that signed up to the Paris agreement and we are seeing massive amounts of money being spent. The knowhow in the UK, in Scotland, on power systems, renewables, intermittent, smart grids, local energy systems is phenomenal. The UK can certainly learn from Scotland, in the sense of seeing how Scotland has benefited from drawing in a disproportionate amount of R&D spending as well as deployment spending to support that knowhow and it is now being exported as knowhow. So I think you could certainly say that.

Chair

It is very interesting what you say about how energy policies have been departmentalised. We have the Department of Energy and Climate Change, the Treasury who have an interest in this as well as energy departments. It does seem to cross a number of different Departments in Whitehall. One thing that Niall Stuart said—and I am interested whether any of you have a particular view on it—is seeing energy as a community asset where there is an involvement of the local community and micro projects. I represent a huge rural constituency and I have seen the issue where there were contentious windfarms, for example, going through planning but they have the windfarm funds now. There is an intimate involvement of the community and the provider of electricity locally. I am interested in this idea, whether it is something that we need to address and maybe look at a little bit more deeply.

Andy Kerr

We are aware that funds that are available to the Scottish Government as seed corn funds are being used very heavily to help develop some of these projects, something like the Local Energy Challenge Fund, like the previous Climate Challenge Fund, to try to help communities develop these ideas. Obviously, as was mentioned before, because there is a big off-grid community and there is also a series of island communities that do not have good connections to the mainland, there have been some natural developments around how do you combine a fantastic renewable resource with the fact that what they are doing is importing fuel oil and so on to run generators, which is incredibly expensive? It is then how do you use the renewable resource to secure that and reduce the cost of energy as well as delivering a secure supply? I think those learnings and those activities are very much taking place in Scotland at the moment. The other thing is that they have increasingly found, as you have just described with your windfarm, that initially in the early days, big windfarm developers would come in and they would try to buy off the community with a few thousand quid a megawatt hour. Increasingly, they found that if you properly engage the community—and we have done some work for the Government on this—the ease of getting it through planning is dramatically higher, so even though they may give an equity stake to the communities, the community owns a proportion of the turbines, so they take quite a substantial stake in a windfarm, it is still beneficial for the developer, because they get it through planning much more effectively. The other thing that we see—coming back to the economic and social benefits—is that what it means is that you are then recycling money locally, so if you are an E.ON or an RWE and you are dropping a windfarm into Scotland, the benefit of each turbine is essentially the cost of that turbine: you build it, there is some local value to Scotland, but everything else then gets taken back to the headquarters. If you have community ownership, what you get is the community then gets the money locally, recycles it by spending money locally and so you end up getting economic benefit in areas that traditionally have been challenged economically, particularly through the Highlands. So there have been multiple social and economic benefits and I think the Scottish Government has seen that in a way that I do not think it has been as well aware in Westminster of those opportunities.

John Stevenson

I represent a seat in Cumbria, so what you are saying, I agree with you, and I think there is a greater awareness than you think in the industry down here. For example, in the nuclear industry, there is a lot of community-based activity, trying to get the supply chain. Indeed, the Government’s policy is that 60% of the production or the supply chain should be British for the nuclear build and that is very much something in Cumbria. Also, interestingly enough, we have quite a bit of renewable. I am curious about that, as to how much of the supply chain work is going to Scottish or British businesses in connection with renewables and where is the construction of, say, the wind turbines? Is that in Britain or is that imported?

Andy Kerr

The turbines are certainly imported. I would be struggling—

Professor Bell

We need Niall back in here or maybe Simon has more up-to-date figures, but certainly a few plants have been opened, manufacturing facilities in Britain. Investors had one in the Isle of Wight a couple of years ago; there was a plant in Campbeltown.

John Stevenson

Didn’t they close down, though, the Isle of Wight one?

Professor Bell

Exactly, and that was part of the point. In a way, you can look back and see that as an illustration of some of the policy uncertainties, about whether the market was going to be there to justify investing in a plant and keeping it open. I think in terms of the turbine manufacture, the large turbines, there is very little, if any, of it that I am aware of in Britain. There is still one or two of the smaller companies: Gaia-Wind is based in Glasgow, for example.

Andy Kerr

But what we do see is you get the construction jobs, they are certainly local, and the other thing is you get a lot of professional jobs around that, so the professional services around that, because it is not just about sticking up a turbine, you need the planners, the accountants, the legals, the investment advisory services and so on, so there is now a very strong base of those communities.

John Stevenson

But the R&D and the engineering work is not going to be British or Scottish.

Andy Kerr

The big 7 MW onshore wind turbine was in Methil in Fife, for example, so that was Samsung putting their R&D facilities into Scotland and they have now given it to Scotland, but it was there specifically because they saw the R&D expertise lying in Scotland and they wanted to make the most of it. I think I would be a bit careful about focusing only on wind.

John Stevenson

I was just using that as an example.

Andy Kerr

I think there are particular clusters of expertise where we have great strength, not just in Scotland but across the UK. But it is not just on the engineering, it is that whole suite of services and knowhow about how you deliver stuff. We are certainly seeing companies that we work with operating in South America; we are working with them operating in India; we have a centre out in Hong Kong to take companies from Scotland to develop into the Chinese market. Again, all of those types of operation are because they see the knowhow that exists in the UK and I think that is the real value in terms of R&D.

Professor Bell

I would just reinforce that. Also, not to underestimate the construction, the amount of work and jobs and value that is brought in that, especially for the large windfarms, the solar PV sector, a lot of jobs. A lot of them have gone now, but there had been a lot of jobs in terms of installation in support of that.

John Stevenson

They can be transient jobs though. You have to be careful.

Professor Bell

Yes, but once you have built up a capability—

John Stevenson

We have great experience of this in Cumbria, you get a burst and then it disappears.

Professor Bell

Yes, that is true, but the solar PV sector, there were specialist companies being built up and they had enough of a chain of projects to deliver, where those jobs were going to be around for a number of years. As Andy has said, in terms of the professional services, which does include engineering, Siemens Wind have a major centre in Glasgow. This is a German company investing in knowhow in Scotland, there are major engineering consultancies based again in Glasgow, one or two in Edinburgh, some in Manchester and other places in the south, as Andy says, selling expertise worldwide.

Chair

Before you came in, Mr Skillings, we just heard from Niall Stuart it was 0.7% of GDP, 21,000 jobs in Scotland, and this is a huge sector that obviously needs to be nourished and protected and invested in. There is a sense that what we have seen, in terms of recent announcements, will have a real impact on these types of skilled jobs that we are seeing in Scotland. Do you have a view on that?

Simon Skillings

The point that I was going to make was manufacturing is always vulnerable to offshoring. Where the massive local jobs dividend comes is in the adaptation of the energy system, particularly around the development of the demand side of the market, the efficiency of premises and creating more smartness of premises. Those are jobs that have to be local and have to be sustained. They cannot be transient because there are such a number of properties to get through over time. So, even though that is not directly renewables, it is part of the future energy system.

Maggie Throup

I want to follow on from that, two aspects: first of all, the amount of expertise that there is in Scotland for renewables. Is every opportunity being taken to benefit the Scottish economy by looking at more and more exports? You have touched on a few different centres, but surely more could be done.

Andy Kerr

I am sure more could be done. We certainly work very closely with the enterprise agencies and there has been a rejigging of the enterprise agencies, Scottish Enterprise and Highlands and Islands Enterprise, with Scottish Development International to focus much more on the export markets. That works very closely with UKTI as well, so I think there is a sense that there is genuine nourishing. I was in India last week talking to the STI person in the UKTI and they said, “Our focus is food and drink, energy, education”, so they do see it as being at the heart of what they are trying to sell in terms of the companies that have knowhow in Scotland and how we can take it abroad. I think there has been a fundamental shift over the last two or three years away from, “How much money can we get into Scotland?” to, “How can we make sure that knowhow that we have in Scotland gives us economic benefit through export potential?” What we do not want is to lose the talent that is here, because globally the biggest opportunities are in China and India at the moment. Do we want to lose the companies that we have to headquarter them over there? We do not. That is why I think we are concerned about making sure that there is still a supportive framework, notwithstanding the issues around the deficit and the need to cut costs, nor for special pleading, but to make sure that that type of political vision that says, “This is a key sector for Scotland” and whether it is in the renewable energy, whether it is about reskilling some of the oil and gas workers that is going on, this is a huge opportunity because Scotland is good at energy and therefore we need to make the most of it.

Professor Bell

I think Simon made the point very well about the possibility of manufacturing always going offshore. That looks like it has the best opportunity for bringing value into an economy: build the stuff here, then you have the intellectual property for it, you can sell it elsewhere. We mentioned solar PV earlier. Germany set up a very generous Feed-in Tariff. They created a market and they created a manufacturing base. It is being undercut from China right now, so that is really suffering. But I can only reinforce the point that has already been made about the expertise. Maybe there is another point—and Simon made the good point about what has to be delivered—and there is a local level of expertise that has to come through finally. Whether the supply chain of technicians and engineers is strong enough to meet what many of us think has to be done in the medium to long term I think is an open question. I am involved in a UK-wide scheme to encourage people into professional engineering as electrical engineers and there are eight universities involved in it. The University of Strathclyde is the biggest one, which obviously I am very proud of and it is fantastic. You could turn it around and say, “How come there are not as many at Manchester and Imperial College and Bath and Cardiff?” It is a real struggle, so it seems, to encourage talented young people to come into that sector and many of the universities are depending on—guess what—young people coming from China to come and learn about engineering. Okay, many of them are adding to the UK economy. Well, they would have done but of course the rules have changed over the last few years. They are very keen to stay here and add to the UK economy, but a lot of them are going back and taking their skills and expertise back with them, so we have a short-term benefit there and in a sense we are training up our competitors.

Simon Skillings

I mentioned a little while ago that I thought there were some good ways of reducing energy costs and some less good ways. One of the best ways is through a shared approach, delivering an energy policy objective with European neighbours. All the studies that I have seen that have been done show that these are huge cost savings. They are not little bits around the edges. They are tens and tens of billions of euros. Huge amounts of money can be saved by neighbouring countries working together to deliver energy policy objectives. Scotland is extremely well-placed to benefit from such co-operation because, if you were looking to deliver renewables around the North Sea area, then you would want to put the renewable projects where they were most efficient and that is in Scotland. There also happens to be some great opportunities in Ireland as well, exporting into the UK. You would not build them in Germany, which is where a lot of them are being built. There is some very, very powerful economic logic for working together and delivering energy policy objectives through an integrated European market, but it does require the Governments in a neighbourhood region, particularly around the North Sea, to come together and look to deliver their energy policy objectives.

Chair

We always self-congratulate ourselves about having this huge resource in Scotland, whether it is tidal wave, wind and so on. Is it true or is it just something to make us feel better about ourselves? Is it factual, the fact that we have the biggest resource in Europe and so on when it comes to tidal and wind?

Professor Bell

I think it is true, but especially for the offshore resources there is still an engineering development to take place, not just in offshore wind, which is getting there, but especially in tidal energy and especially in wave energy. There are huge engineering challenges to meet there but, in respect of onshore resources, there is a fourth leg to the slightly over-familiar trilemma: we are talking about a quadrilemma, where the fourth leg is about social acceptability where, although we are very conscious of people objecting in the shires of England to onshore wind, there are significant objections in Scotland as well.

Chair

Tell me about it. I get that in my constituency.

Professor Bell

The point you made about community benefits and the planning was a really good one. Yes, sorry, go on.

Maggie Throup

Moving on from where we were before to looking at Scotland’s role as a hub for research, Scottish Renewables said that Scotland is at the leading edge of research, development and expertise, which is what we have been talking about when it comes to renewables. Just from what you were talking about before, we seem to be talking about policies coming from DECC. I wonder is that the right place that policy framework should be coming from or should it be BIS? How important is a supportive policy framework to driving this innovation? We have established technology, but we need to look at the future and make sure we have new and cheaper technology. Do we have the right focus on policy?

Professor Bell

I am not sure how much of the reduction in the costs of the next round of offshore wind development we could attribute to intervention by BIS. I think a lot of it we could put down to the fact that there is a market; that the renewables obligation was there; there was money to be made; there is competition—

Maggie Throup

No, I think if policy is coming from DECC, shouldn’t it come from BIS if we are talking about innovation and skills?

Professor Bell

In other words, I think it needs to be from both. BIS obviously has a key role in terms of innovation and getting new ideas through that sort of Valley of Death, out of the lab, into the field and starting to be used. That is a critical part of it. It cannot be left to that but it seems in some ways, in respect of energy, it is being left to that at the moment. The announcement by the Secretary of State, mentioned earlier, of money for investment in R&D is enormously welcome. But I don’t think we should be depending on that and seeing that as being the only thing that exists. Creating a market for the technologies that are nearer to maturity I think is also important.

Simon Skillings

The observation I would make is that you increasingly hear people talking now around the world about being on the cusp of an energy revolution. That is beginning to materialise in certain places around the world and a renewable, efficient, smart, local energy system has the potential to have a massive impact on the economy as a whole. It seems to me one of the main reasons why Paris went so well compared to previous climate change negotiations was the industrial community is coming together and saying, “Look, hang on, we know where it is going. We cannot hold it back any more, that is where it is going and we need to get behind and make it happen”. It seems to me critical that it is a core part of our economic development strategy.

Andy Kerr

Yes, it goes back to BIS, but I would also say it is very difficult to situate R&D as if it is in one place. We draw heavily on the UK networks. We draw heavily on the EU networks. We draw heavily on global networks, so there is certainly real expertise, and I would not say just in renewables. Again, I tend to treat that with a very broad thing, so if you are talking about smart cities or mini-grids, local grids and so on, you are talking about local energy systems, it is not just renewable, it is how you put all of those together with energy efficiency, energy demand management, energy analytics. That is where Scotland has something good to offer, but it is embedded in a broader UK and EU set of talent that we draw on.

Chair

Thank you for that.

Maggie Throup

Finally, you mentioned last year the Government announced it was doubling its spend on energy and innovation. How important is this funding compared to revenue support for renewable energy when it comes to driving cost reduction in renewable technology?

Andy Kerr

My view is that—and I think it was a question you had about your solar panels on the roof as well—the practice is better at driving cost reduction than pure R&D, because it is the deployment where you discover what the real prize is. I think something that drives the deployment is the thing that really matters going forward in terms of delivery.

Professor Bell

I think a large part of the solar PV project was in the manufacturing, the processes for dealing with the silicon materials and so on, so there was a market there, there was money to be won from the market, and those who could innovate in terms of the manufacturing techniques and reducing the cost of it were going to benefit from it.

Simon Skillings

Yes. My experience of working with appliance development is the critical step is the move to mass market production. If you can get scale production, you can take massive percentages off costs of prototypes that are developed at a small scale. So you do need a level of market certainty; that is absolutely critical to drive costs down.

Andy Kerr

You can argue that is why Tesla—both with his cars and his batteries—has only just turned a profit this year, for the first year after many years, so yes.

Margaret Ferrier

I would like to come in in the area of division of responsibility again between the UK and the Scottish Government. On the one hand we have electricity, including developing incentives for the generation of renewable electricity, a reserved matter. However, the control and regulation of carbon emissions is the Scottish Government. With this split, how does this division of responsibility affect the ability of the two Governments to take action to support decarbonisation of electricity generation? That is to the entire panel.

Simon Skillings

I was going to say that we are at a challenging time in terms of decarbonisation and the governance of the transition is absolutely critical. There are some forces working in opposite directions: there is a force towards internationalism, which is you get better answers by working together, not just at the UK level, but at a higher level, a multinational level. There is also a more local agenda, so the decisions that you might take in Glasgow will be very different than you might take in Ireland because of the very different energy solutions that would apply. How you develop the new governance of the industry to cope with this more complicated situation—I do not claim to know the answer now—it does seem to me to be an absolutely critical question. Perhaps what I would say is I do not think the answer is about a shuffling between UK level and Scottish level Government. I think we need to think a little bit more imaginatively at taking it away from maybe both of them.

Professor Bell

To a European level, Simon?

Simon Skillings

To a more local level, yes.

Margaret Ferrier

Could I come in then and make the point that, if we are taken out of the European Union, that would be an issue?

Simon Skillings

Yes, one would think.

Andy Kerr

There was general alignment in direction between the UK Government and the Scottish Government, regardless of the political colour of the Governments themselves, which worked fine. The Scottish Government sought to try to maximise whatever the UK Government framework was. But because we are now starting to see this divergence, there is a real need—it will get picked up in the Scotland Bill; I am thinking particularly about clauses 56 and 58. The Scottish Government have ensured that they are consulted on issues around FIT rates in particular, CfDs and so on. Those are the things where, if they are going down as a local energy approach, they need to have some say over how it develops there. In the same way, with energy efficiency measures, there are different issues in Scotland from England, as there are in Wales. There is a need to ensure that, even if it is a national policy, regional differences are properly taken into account. I would argue that that is absolutely critical going forward, because otherwise you are going to see a sort of one-size fits all thing imposed with the vision that does not match what is going on in Scotland, and that would be deeply detrimental.

Professor Bell

I would extend that to other parts of England, for that matter.

Andy Kerr

Yes, absolutely.

Professor Bell

You made the point earlier, Andy, about the geographical situation of being off the gas grid or long, stringy distribution networks, so the drivers are stronger in terms of being able to be more self-sufficient in terms of energy solutions. The opportunity to develop renewables is stronger. You could talk about, I guess, parts of Cumbria or Northumberland or whatever, similar sort of questions. Taking take account the local conditions has to be important in enabling the right solutions. That is what you mean, Simon—the localism has to be factored in.

Margaret Ferrier

The same question was asked of Niall earlier about policy: do you feel it is joined up enough to support the renewables sector, in your experience?

Professor Bell

I think we have all made the point—and Niall earlier—that there is a real gap in respect of heat and transport. These are the massive challenges that are waiting to be addressed and not really being addressed. There is clearly a link with electricity and that is one of the options of how to achieve change in there; there is clearly a link in that with fuel poverty; there is clearly a link with jobs and delivery of solutions and there is a massive link with housing policy. Even as a recent graduate I did some voluntary work with Shelter, and housing policy has been a disaster, in my opinion. The housing stock and nature of how it is replaced and how it is valued is a massive part of this, because so much of our energy is in the domestic sector.

Simon Skillings

Can I just quickly come in here? It relates back to a lot of the earlier discussion. It is very difficult for different administrations to work together effectively if those making policies are not sufficiently confident and brave enough with the decisions they are making to externalise and share the logic. It has to be based on a shared set of beliefs about the risks and the opportunities in the future and that requires Ministers, probably Ministers at both levels, to externalise whatever their internal belief set is over energy policy going forward.

Margaret Ferrier

Just one last question to Andy: given the ECCI support for climate exchange, do you have any insight into challenges that the Scottish Government face in supporting the renewable energy sector in Scotland?

Andy Kerr

I am not sure I have a lot to add to what has already been said. The Scottish Government is clearly very focused on the oil and gas sector at the moment, understandably. The renewable energy sector is a problem and it is not the first problem that they have facing them at the moment, but the real concern is that this uncertainty is going to start to drive away companies and investors. Certainly anecdotally that is the evidence that we are picking up and we are then feeding back to the Scottish Government.

John Stevenson

Andy, just picking up on the point you made earlier about the policy of the Scottish Government, or indeed England or the national Government, going back to my example about solar panels, if you were to make them compulsory, if the Scottish Parliament decided that was a policy they wished to pursue in Scotland, do you see that as a bad or a good thing in terms of trying to create a consistent policy for the United Kingdom? I am just using that by way of example. There are probably other ones we could offer you.

Andy Kerr

If we look at completely different examples from energy—smoking is one, the fact that you have regional differences in building standards is another—they are quite useful almost as test beds to see whether it works. Being confident as a country, as the UK, to say, “Look, let’s see what happens, let’s go for it” and if one region goes down that route and see how it goes, then learning from that I think is a very good thing to do, yes. If you do it at a city level, and again, cities and municipalities are becoming increasingly confident—or certain ones are becoming increasingly confident—at saying, “We want to take a stake in this energy system for our municipality” we are starting to see some interesting things going on. I think that type of diversity within the UK is very good and should be encouraged.

Chair

I was going to ask you about heat and transport, but I think we have covered most of all that. This inquiry is looking obviously at renewables, but do you have any last thoughts that you might have about how this could be much more integrated as an approach? Given that heat and transport make up two-thirds of the whole of the energy emissions and electricity is only 20% of that, is there anything just as a last thought that we could do to get integrated approaches to dealing with this?

Andy Kerr

I suppose with my innovation centre hat on, I would say that we like to think of changes as being nice and smooth, and in reality they are very jagged. What we are seeing is quite disruptive technologies, but also the social use of those technologies, because technology itself is hopeless, it is only when you scale it up that it matters in many different parts of world, not just on the electricity side. We are seeing it around mobility, even thinking about Uber, but also in the movement of people and things within cities or between towns and so on. We have not yet seen it on heat, but I think we should not be surprised if in the next five to 10 years we are starting to see some of these transformations that are already starting to occur in other countries feed into the UK. I think the issue then is: are we joined up enough in policy terms, Scotland and the UK and Europe, to be able to maximise the benefit from those, rather than assuming that we can drive all of those ourselves—that we somehow know exactly how it is going to pan out, because we do not? Whether it is use of smart systems, smart meters, the internet of things, all these different aspects—many of which are tag names that people may or may not understand—we are going to see some big changes around electric vehicles, around these smart appliances and so on. How that plays out in terms of energy policy is difficult to see, so we need to have flexibility, we need to have transparency and the confidence to show the sort of assumptions that are written into energy policy and that type of long-term leadership. I think once you have that, then things will follow.

Simon Skillings

Very briefly from me, buildings need to be treated as an infrastructure in the same way as other energy assets and we need to have the institutions that can coherently optimise the delivery across the infrastructure landscape, and that suggests a much more local infrastructure delivery framework than we have at the moment.

Chair

Just one last question and I asked Mr Stuart this on his way out: we are where we are. We are now at the sharp end of the new environmental policy changes. Is there anything that you would do from here that can significantly improve the renewable sector in Scotland and help us meet our renewable objectives?

Professor Bell

Yes, I would just second what Niall was saying about clarity on the Levy Control Framework and the next round of Contracts for Difference, being the big thing in the short term about renewable electricity specifically.

Chair

On this—Contracts for Difference—is this a real imperative then? Is this where we are at in terms of getting this right?

Professor Bell

That is what is going to unlock the next round of investment, I think, yes. Whether it is a long-term mechanism, as we have talked about, there are some deep issues there, but certainly that is the game in town at the moment.

Andy Kerr

But I would also say that in Scotland, large-scale renewables is one thing. The big push at the moment is on the more local renewables, whether that is the Scottish Government’s push for an energy efficiency programme—to treat it as national infrastructure around buildings—or whether it is the whole notion of local energy systems. Rather than thinking in terms of very large-scale windfarms, it is thinking much more about how you can deliver benefit locally from matching supply and demand, and that is matching and bringing in electric vehicles and so on. I think those are the big changes that we are seeing, but I would echo that point about the CfDs.

Simon Skillings

I would re-emphasise the point that I think it would be a mistake to make it a debate, arguing about who grabs what bit of subsidy. It needs to be a much more fundamental think about how we are going to deliver the objectives that we need to deliver.

Chair

Great, thank you all. This is a first look into this today and I think you have given us a really good background and a flavour of the issues that we need to pick up and look at, so we are very grateful for you coming along this afternoon. If there is anything further you want to add or contribute to the work of this Committee and this inquiry, please submit it to ourselves, but that is all for this afternoon. [1] Witness correction: DECC’s impact assessment suggests this would save 30p a year to consumers.