EC/S2/04/07/A

ENTERPRISE AND CULTURE COMMITTEE

7th Meeting, 2004 (Session 2)

Tuesday, 2 March 2004

The Committee will meet at 2 pm in the Debating Chamber, Assembly Hall, the Mound, Edinburgh

1. Renewable Energy in Scotland: The Committee will take evidence from:

Panel 1

Alistair Buchanan, Chief Executive, Ofgem;

David Halldearn, Director, Scotland and Europe, Ofgem;

Charles Gallacher, Deputy Director, Scotland, Ofgem;

Panel 2

Iain Todd, Director of Renewables Energy Industry Development, Department of Trade and Industry;

Panel 3

Jim Hunter, Chairman, Highlands and Islands Enterprise;

Elaine Hanton, Senior Development Manager Renewables, Highlands and Islands Enterprise;

Panel 4

Dr Richard Yemm, Chairman, Scottish Renewables Forum and Chief Executive of Ocean Power Delivery;

Fergus Tickell, Chief Executive, Ormsary Estates;

Professor Ian Bryden, Associate Dean, Centre for Environmental Engineering and Sustainable Energy, Robert Gordon University;

on its inquiry entitled Renewable Energy in Scotland. Judith Evans Clerk to the Committee (Acting) Room 2.7, Committee Chambers Ext. 0131 348 5214

EC/S2/04/07/A

The following meeting papers are enclosed:

Submission from Ofgem EC/S2/04/07/1

Submission from the Department of Trade and Industry EC/S2/04/07/2

Submission from Highlands and Islands Enterprise EC/S2/04/07/3

Submission from Scottish Renewables Forum EC/S2/04/04/4

EC/S2/04/07/1

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EC/S2/04/07/2

THE SCOTTISH PARLIAMENT, ENTERPRISE AND CULTURE COMMITTEE’S INQUIRY INTO RENEWABLE ENERGY IN SCOTLAND

MEMORANDUM FROM THE DTI

1. The DTI welcomes this inquiry: we are pleased to have the opportunity to give evidence and to submit a memorandum. We recognise the importance of renewable energy to Scotland and appreciate the opportunities it offers, the barriers that must be overcome and the concerns that have to be addressed.

Statutory responsibility

2. The statutory responsibility for energy matters is shared between the UK Government at Westminster and Scottish Ministers. Power is devolved to Scottish Ministers for the promotion of renewables and for consents for new developments under sections 36 (all applications to build new power stations over 50 MegaWatts or over 1 MegaWatt for hydro and offshore renewables) and 37 of the Electricity Act 1989 (overhead power lines). Responsibility for all other matters, including renewables R&D, and electricity trading and transmission issues, remains with the Westminster Parliament.

The Energy White Paper

3. In February 2003 the Government published its Energy White Paper "Our energy future - creating a low carbon economy". It accepts the need to reduce carbon dioxide emissions significantly and provides the long-term framework to deliver our environmental, security of supply, competitiveness and social goals. In reducing carbon dioxide emissions, the priority is to strengthen the contribution of energy efficiency and renewable energy sources.

4. The Energy White Paper set a target of 10% of electricity from renewable sources by 2010, and an aspiration of 20% of electricity from renewable sources by 2020 to ensure that renewables play an appropriate part in achieving the wider carbon emission reduction aspiration (60% reduction by 2050 and real progress by 2020).

Targets Strategy

5. The Government’s strategy for meeting the 10% target by 2010 target has the following main components:

• We have legislated through the Renewables Obligation Order 2002 to incentivise electricity suppliers to produce an increasing proportion of their output from renewable sources. It places an obligation on all licensed electricity suppliers to supply a specified and growing proportion of their

1 EC/S2/04/07/2

sales from electricity generated from a range of eligible renewable sources. Suppliers can meet their share of the Obligation in two ways (by presenting Renewables Obligation Certificates (ROCs) – whether generated or purchased) or by paying a penalty (the buy-out price - set by Government). The proceeds of the buy-out fund are recycled to holders of ROCs as an additional incentive to invest in renewables. We recently announced proposals to raise the level of the Obligation in the period after 2010, so that it reaches 15.4% by 2015-16. This is to boost investor confidence in renewables. A major review of the Obligation will be carried out in 2005/2006. Following a consultation we recently announced a number of technical amendments to the Obligation – extending the eligibility of co- firing under the RO to 2016 and making further provision for very small generators to be eligible for ROCs.

• We assist the development of renewables projects through capital grants schemes which total nearly £350m over the years to 2006. Most of that investment is aimed at the new technologies of offshore wind farms and energy crops. Other technologies are being supported through research and development funding. Lists of the developments in Scotland supported through our capital grants and the marine projects supported by our New & Renewable Energy R&D programme are at Annex A..

• Renewables UK, based in Aberdeen, has been created to help UK industry capture as much of the new renewables market as possible. The recently published Renewables Supply Chain Gap Analysis was co- ordinated by Renewables UK, the Scottish Executive, the Scottish Enterprise and Highlands and Islands Enterprise. It reviews the current status of the renewables industry in the UK and assesses the future potential.

• We have devised a strategic framework to facilitate a major expansion of offshore wind energy. The results of the Round 2 offshore wind competition were announced recently. 12 companies/consortia have been awarded 15 new sites with a potential combined capacity of 5.4 to 7.2GW of offshore wind energy.

• Renewables electricity has been exempted from the Climate Change Levy. The levy applies to gas, coal, electricity and liquefied petroleum gas (LPG) (for heating) used by business and the public sector. Exemptions exist for energy generated without causing environmental harm such as through new renewable energy technology.

• Research and innovation investment will play an important role in ensuring that sustainable technologies and solutions are developed and implemented which enable the targets to be met.

2 EC/S2/04/07/2

6. Research Council investments of £28m for basic and strategic research in support of sustainable energy will help to develop “whole system” solutions to meet 2010 and longer term targets. This includes the establishment of UK Energy Research Centre and National Energy Research Network (to provide a focal point and greater coherence of energy researchers across the UK – including researchers and research centers in Scotland). This investment will build on other Research Council programmes including SuperGen and Carbon Vision. The University of Strathclyde leads the £3.4m SuperGen consortium on “Future Network Technologies”, while Edinburgh University leads the SuperGen Marine consortium (£2.6m) in collaboration with the Universities of Strathclyde, Herriot-Watt, Lancaster and Robert Gordon.

Co-ordination

7. We recognise that to succeed in achieving the White Paper goals there needs to be close working across departments and more widely. Structures have been put in place to make sure this happens:- The White Paper announced the creation of a Sustainable Energy Policy Network (SEPN). This is a network of policy units from across government departments, the devolved administrations, regulators and key delivery organisations jointly responsible for delivering the White Paper. There is a ministerial SEPN chaired by the Secretaries of State for Trade and Industry and for Environment, Food and Rural Affairs and the Scotland Office is a member. There is also an official level SEPN with Scottish Executive representation. The SEPN implementation plan is published on our web site http://www.dti.gov.uk/energy/sepn/index.shtml. This sets out the 10 individual workstreams (one of which covers renewables) and lists some 100 key milestones for implementing the commitments in the Energy White Paper as well as the names and contact details of the officials responsible. The website is updated regularly to show progress on implementing the milestones.

8. We recognise the importance of the Forum for Renewable Energy Development in Scotland (FREDS) and the Director, Energy Industries Business Unit and Oil and Gas Industry Development in the DTI, is a member of the Forum.

9. The Renewables Advisory Board is an independent non-departmental public body sponsored by DTI providing advice to the UK Government on a wide range of renewable energy issues. The Board brings together Government departments, the renewables industry and the unions to develop mutual understanding of the key issues for the industry both short term and over the next twenty years, including for example, technology development, barriers to market penetration and export enhancement. The Board is chaired by the Minister for Energy and Construction at the DTI and Scotland’s Deputy Minister for Enterprise & Lifelong Learning is a member.

3 EC/S2/04/07/2

Regulation and Infrastructure

10. The provision of an adequate electricity infrastructure, both distribution and transmission, is of critical importance to the application on renewable technologies and the achievement of the Government’s renewable targets and aspirations.

11. The 2003 Energy Bill includes legislation to bring in the British Electricity Trading and Transmission Arrangements (BETTA). This is a package of measures that are intended to result in the creation of a single wholesale electricity trading market for Great Britain and a single set of arrangements for access to and use of the transmission system in Britain. BETTA is expected to go live in April 2005, Parliamentary time permitting.

12. BETTA will enable all generators to have access to a GB wide market through a transmission system operator that is independent of generation and supply interests. BETTA will also introduce a single set of rules for access to and charging for the transmission network, and a single set of rules for trading across GB. This is important for renewables in Scotland because the costs of upgrading the Scottish transmission system to accommodate increased renewable generation will be recovered from all GB users of the transmission system.

13. Customers in GB have already gained significantly from increased competition in electricity, especially following the New Electricity Trading Arrangement and other changes. BETTA will provide scope for further benefits. Customers in Scotland should be the major beneficiaries from the increased competition introduced by BETTA that could be worth some £8 million per annum, representing about 0.5% on all consumers bills.1 We do not believe increased competition introduced by BETTA will result in larger savings because the wholesale price in Scotland is already linked to the wholesale price in England and Wales, however Scottish customers will also gain from a re-allocation of transmission charges. An indicative Ofgem estimate believes this could result in about £13 benefit per domestic customer in Scotland. Lower costs will help reduce fuel poverty, this affects 17% of households in Scotland according to the Scottish Executive's 2002 figures. Commercial and industrial customers in Scotland could see some of the most significant cost savings, which is likely to contribute towards Scotland’s general business competitiveness.

14. The other side of this re-allocation of transmission charges is that transmission charges for some Scottish generators will increase, while other Scottish generators will see reductions in total costs. In aggregate, Ofgem estimates that the impact of BETTA on Scottish generators will be broadly neutral. Under BETTA the GB system operator will be tasked with developing a transmission charging methodology that is cost reflective, non-

1 See Paragraph 7.3.3 of the BETTA Regulatory Impact Assessment (RIA). The RIA also notes, in Paragraph 9.2, that if all the benefits and costs of the BETTA project were to be allocated to Scottish consumers, and taking no account of the reallocation of transmission system costs, it is estimated that the average price of electricity in Scotland would be about half a percent lower than otherwise.

4 EC/S2/04/07/2 discriminatory and that promotes competition in generation and supply. This methodology will encourage transmission assets to be built and charged for in the most efficient way, thereby benefiting the customer. National Grid’s initial proposals suggest that the charges will be between £15-22/kW in the north of Scotland and around £11-£12/kW in the south of Scotland. While these numbers are higher than current use of system charges in Scotland, simple comparisons with existing transmission charges are misleading. The increase in transmission charges will provide access to a much larger market (which is critical for growth in renewables) and need to be viewed alongside the introduction of lower connection under a GB charging methodology, and the abolition of interconnector charges.

15. While in general the Government believes that charges should be cost reflective in order to deliver the transmission system needed in the most efficient way the Government appreciates that very high transmission charges can adversely affect the development of renewables generation. Because of this the Government has indicated that it intends to take a power, in the Energy Bill, that would allow some form of dispensation on transmission charges to renewable generators within a specified area where there is high renewable energy potential, but where development of new renewable generation may be adversely affected by high transmission charges.

16. Any final scheme will be subject to consultation and we believe, will retain efficient locational signals for renewable generators, whilst at the same time protecting them from the most severe charges under a GB-wide charging regime, that might deter investment in this new and developing industry in peripheral areas of Scotland.

17. The DTI and Ofgem, together with the transmission companies, have established the Transmission Issues Working Group (TIWG). The Scottish Executive, Scottish Power and Scottish & Southern are members. The role of the TIWG is to identify, well in advance, transmission-related issues required to be resolved in order to meet the needs of the Government’s renewables targets.

18. Investment in the electricity distribution networks is for the companies, but Ofgem is considering this as part of its ongoing work of setting the new distribution network operator price controls, which will apply from 1 April 2005. Currently, distribution networks are designed to distribute energy from the transmission system to customers, and are not designed to facilitate the connection of large amounts of renewable and other small generation. There is an need, therefore, to transform the passively managed radial nature of the existing distribution networks into actively managed networks which can accommodate the bi-directional energy flows and other issues associated with significant amounts of generation.

19. Resolving these technical issues will require considerable innovation by network operators and owners. To encourage this innovation and

5 EC/S2/04/07/2 overcome a number of non-technical issues, we must ensure that distribution network operators have adequate business incentives to connect generation to their networks. A new Centre for Distributed Generation and Sustainable Networks at Strathclyde and UMIST with £1.6m of DTI support over 5 years will bring together and enhance academic expertise in this area. In addition, there is a need to ensure that appropriate connection charging arrangements are developed to remove unnecessary barriers to the connection of generation. Ofgem are currently addressing these issues through the 2005 Distribution Price Control review and their review of connection charging arrangements.

20. Progress in overcoming existing technical, regulatory and commercial barriers to the development of distribution-connected generation is monitored by the joint DTI-Ofgem Distributed Generation Co-ordinating Group. The Scottish Executive is a member of the Group.

21. Analysis for the White Paper shows that the electricity system could cope with an increasing reliance on renewable generation. But the study also highlights that as the proportion of intermittent generation increases, the cost of maintaining stable supplies also increases. We accept that these costs need to be managed and new ways found to minimise them. We are already funding research into this through the DTI's New and Renewable Energy and the Engineering and Physical Sciences Research Council’s Supergen programmes. As part of our current capital grant programme we allocated in 2002 an additional £4m to facilitate the demonstration of new control, storage and metering technologies.

22. In the face of the substantial level of intermittent generation implied by the Government’s renewable targets and aspirations, it will be necessary to ensure that future electricity market and trading arrangements include incentives to bring sufficient plant capacity forward in order for reliability of supply to be maintained.

February 2004

6 EC/S2/04/07/2

ANNEX A

Offshore Wind Capital Grants

Total Committed to Projects awarded Round 1 Licences in UK = £117 million

Of which two projects are in Scottish waters

Project Owner Size Capital Grant

1. Robin Rigg Powergen 30 turbines Yes £9m 2. Robin Rigg Powergen 30 turbines Yes £9m

R&D – New & Renewable Energy Programme

Wave and Tidal Stream Devices

DTI has supported the following Scottish companies:

Ocean Power Delivery’s “Pelamis” wave energy device (Edinburgh). The programme has supported 5 projects with OPD since 1998, with total funding of approx. £2.6 million.

Lunar Energy’s ducted tidal turbine (mainly based in Aberdeen) to which we have committed £913,000 to design a 1MW prototype.

Wavegen (Inverness). DTI has supported two projects. £2.35 million has been committed to the development of the company’s Near Shore Floating Oscillating Water Column device and its Power Take-Off system. DTI has also provided £600,000 to the “Hydra” wave energy device project.

7 EC/S2/04/07/3

ENTERPRISE AND CULTURE COMMITTEE INQUIRY INTO RENEWABLE ENERGY

WRITTEN EVIDENCE

Submitted by Highlands and Islands Enterprise

Summary

This paper contains Highlands and Islands Enterprise’s initial response to the Scottish Parliament’s Enterprise and Culture Committee’s Inquiry into Renewable Energy.

The following summarises the key issues described in that paper: -

• The Highlands and Islands’ natural resources provide outstanding renewable energy potential for Scotland and UK. This presents the HIE area with major opportunities in terms of local business growth and community development.

• Near term opportunities will arise from the wind sector. However, strengthening the local supply chain and securing local benefit is dependant on unblocking the consent process to ensure sufficient projects proceed to meet Government targets.

• Successfully achieving Government targets for renewable energy will require a mix of renewable technologies to be developed and deployed.

• Substantial investment in the transmission and distribution network is essential if this opportunity is to be realised in the Highlands and Islands. Strengthening the grid connection between the Highlands and Islands and the Central Belt is of strategic importance.

• Regulation of the electricity industry is undergoing a period of change and it is essential that these changes do not negatively impact on renewable generators or those located some distance from market and demand. It is also essential that electricity users in the Highlands and Islands do not incur higher prices because of the cost of investment required to deliver renewable electricity to areas where demand is greater.

• Securing community involvement and long term benefit from the renewables market is essential. HIE’s Community Energy Unit is successfully supporting a number of community scale projects and is actively considering mechanisms by which communities can become involved and benefit from commercial scale projects.

• Key to creating an indigenous renewables industry will be the UK’s ability to develop and commercially deploy emerging technologies, such as wave/tidal, biofuel and hydrogen fuel cells, while maximising the UK supply chain in all aspects of the industry.

Highlands and Islands Enterprise 26 January 2004 2

Context

The Highlands and Islands Enterprise (HIE) Network is responsible for economic and community development across a diverse geographical area which covers more than half of Scotland and is home to around 425,000 people. The HIE Network’s strategy ‘A Smart Successful Scotland – the Highlands and Islands Dimension’ sets out four strategic objectives: Strengthening Communities; Developing Skills; Growing Businesses; and Making Global Connections. The HIE core gives strategic direction, undertakes area-wide initiatives and provides support services for the whole Network. Our ten local enterprise companies (LECs) each serve a distinct geographical area and take account of differences in local needs and priorities.

Renewable energy provides opportunities for the Highlands and Islands across all four of the Network’s strategic objectives. These opportunities have the potential to benefit some of the remote areas of the Highlands and Islands which have not as yet fully benefited from the remarkable turnaround in the economic fortunes of the Highlands and Islands in recent years. It is part of our vision to demonstrate careful, sustainable use of the area’s natural assets. Growth must be achieved in tandem with the area’s natural environment and development activity must remain aware of the legacy it leaves for the future people of the area.

Background

The renewable energy resources of the Highlands and Islands constitute the greatest concentration of potentially exploitable renewable energy resources in the UK. The Highlands and Islands area has a long history of exploiting this resource, dating back to the early 20th century when hydro projects were built to support local industry.

To this day the Highlands and Islands continue to produce the majority of the UK’s renewable energy and pumped storage schemes such as those at Cruachan and Foyers offer a means to store energy to meet short term energy surplus and excess demand. At the same time they provide a valuable tourism resource by attracting considerable visitor numbers to remote areas while contributing to a wider understanding of energy issues through interpretation and tours. Opportunities to further develop hydro electricity still exist, but the area’s resources also go much wider. Some of Europe’s strongest sustained wind regimes can be found in the Highlands and Islands (with load factors up to double the UK average), along with some of the world’s best wave and tidal regimes and significant forestry resources with potential for biomass exploitation. A number of communities in the area, including those on Eigg, Muck, Fair Isle and Knoydart which are not connected to the national electricity grid, have already embraced renewable energy relying on wind, hydro and other forms of renewables to meet their energy needs. It is evident that accessing the renewable resource of the area will be important not just in local terms, but also in the wider Scottish and UK context of meeting national and international commitments.

Highlands and Islands Enterprise 26 January 2004 3

The Highlands and Islands also currently house some of Britain’s manufacturing, research and development facilities to exploit these renewable energy forms, including the Vestas, Cambrian and Isleburn Engineering wind turbine tower and monopile manufacturing plants in Argyll, Stornoway and Ross-shire respectively; marine energy business Wavegen in Inverness; and the European Marine Energy Centre being established to test full scale wave (and later tidal) devices on Orkney. Significantly, the area’s long association with the offshore oil and gas industry has ensured an enviable legacy of transferable knowledge, skills and experience in manufacturing and engineering. Recent research by HIE has demonstrated that many businesses in the area have the capacity to diversify into the renewables sector, with many already having done so. HIE has also recently instigated preparation of a Workforce Development Plan to identify and support the skills development needs of businesses involved in the renewables market as part of its strategy to encourage development of a local industry.

Recent analysis of the UK Renewables Supply Chain, funded by the DTI, Scottish Executive, HIE and Scottish Enterprise, considered the economic opportunities associated with growth of the industry. Currently there are up to 8,000 jobs sustained by the industry across the UK, with around 1,300 of these in Scotland and of that over 600 in the Highlands and Islands. The average wage range of those Highlands and Islands jobs is £15k per annum for production to £25k for management which is significantly higher that the average wage rate in this area. Renewable energy therefore helps address productivity deficiencies relative to Scotland and the UK. The HIE Network has already invested almost £30 million in developing the area’s renewables industry signifying its commitment to the creation of a long-term market.

The UK Supply Chain study estimated that by 2020 up to £19 billion of capital expenditure would be required in the UK to meet the Government’s aspirational target of 20% of electricity needs from renewables by 2020. This level of expenditure would lead to between 17,000 and 35,000 jobs being sustained by the industry. This reflects a conservative assumption that total activity across this period will be constant, but in practice the total activity is likely to vary year-to-year and therefore peaks could be significantly above these levels.

Achieving Government Targets

The establishment of Government targets to increase the UK’s use of renewables over the next 2 decades has opened up considerable opportunities to the Highlands and Islands. Scotland’s 18% target by 2010 will require up to 800MW of new generation, and its 40% target by 2020 will require up to 2,500MW. To meet the longer term target will necessitate an average of 120-150MW of new generation to be built every year between now and 2020. Recent research by HIE has identified 3,000MW of planned onshore wind activity in Scotland over the next 3 years, of which 75% is planned for the Highlands and Islands, whose significant resource is therefore clearly a vital factor.

Highlands and Islands Enterprise 26 January 2004 4

However, in meeting longer term targets it is clear that a mix of energy supply is required, and this will require new and emerging renewable technologies to be supported to the point where they can compete commercially in the renewables market. To date, UK Government grants have been made available for offshore wind and biomass, and R&D support available for technologies such as wave and tidal. The key to achieving a diverse source of supply and an indigenous industry based around it will be the ability to support development of emerging technologies to commercial reality.

Equally important will be long term Government commitment to the incentives required to support the fledgling industry. The recent announcement that the UK target would be extended to 15% by 2015 goes some way to improving confidence in the Government’s commitment to the industry, but the ability to extend this further and offer additional incentives for the newer technologies over a longer time frame will also be important.

Achieving Government targets can also be assisted by energy efficiency improvements – this is a major theme in Government policy which aims to ensure householders and businesses receive accessible and effective help to reduce their energy demand.

Key Issues for Renewable Energy Development in the Highlands &Islands

There are a number of strategic issues important to the development of renewables across the Highlands and Islands, including the need to balance local impact with wider imperatives to reduce carbon emissions, unblocking the consent process while alleviating environmental, MOD and Civil Aviation concerns, increasing public awareness and tackling negative perceptions. Some of the most pressing issues are the need to increase the capacity of the electricity grid across the Highlands and Islands, ensuring that regulatory changes to the electricity industry do not hinder renewables development, and capturing community benefits in a way that offers long term recompense to areas hosting developments. These are summarised below:-

• Grid Issues

It is widely acknowledged that the electricity grid across the UK is currently ill- equipped to connect numerous and widespread new generation. In particular, the grid across the Highlands and Islands, which was designed to supply centrally produced electricity to scattered communities, is not sufficiently robust to connect substantial levels of new local generation for export south to the centres of population and demand. Constraints also exist further south with bottlenecks in the capacity of transmission lines between the Scottish and Southern Energy area and south of Scotland, the English interconnector and within the English system.

The major upgrading investment requires the approval of the industry regulator, Ofgem, whose responsibility it is to ensure least cost is passed back to consumers. Its remit does not allow it to encourage positively

Highlands and Islands Enterprise 26 January 2004 5 development of specific types of generation, including renewables in the market. Therefore, investment approval for upgrading the Highlands and Islands system is dependent on grid operator Scottish and Southern Energy (SSE) demonstrating generator demand, take-up and impact of such investment. HIE facilitates the Highlands and Islands Transmission Working Group which is made up of SSE, DTI, Scottish Executive and relevant local planning authorities (Ofgem attends on an observer basis). The purpose of the Group is to ensure sufficient local information exchange to enable SSE make the required case for investment in the islands’ connections and across the H&Is. Ofgem has recently consulted on the preferred mechanism to consider investment proposals which it is hoped will result in a more flexible means for it to do so.

Critical for developing and accessing the Highlands and Islands renewable resource will be the ability to upgrade the transmission system running south from the region. SSE has begun the environmental scoping work for a proposed Beauly to Denny line - this will be of strategic importance in allowing the high resource areas elsewhere in the Highlands and Islands to be accessed for renewables development.

The Highlands and Islands distribution system (lower voltage system and generally wooden poles, as opposed to high voltage transmission lines on pylons) will also need to be up-graded. Many of the best locations for renewable energy are served by a weak distribution network unable to export even the smallest amounts of electricity. To make the best use of the area’s renewable resources, significant distribution investment is therefore needed to avoid a concentration of development along the path of the main transmission lines.

Increased local use of electricity should also not be forgotten, especially given that electricity losses can be as much as 2% in transmission and up to 7% in distribution. Increased local use in the Highlands and Islands could be an effective tool in making the economic justification for infrastructure investment to feed demand in the south.

Significant strengthening of the grid and distribution system across the Highlands and Islands is required to allow the area’s renewable resource to be developed. Strategically important is the connection between the North and Central Belt to enable the resource of the wider Highlands and Islands to be developed, but equally important is the need for infrastructure investment covering the wider Highlands and Islands. This would enable the benefits of development to be spread widely and help mitigate the effects of concentrated clusters of development.

Regulatory Issues

In 2001 Ofgem implemented major changes to the way in which the England and Wales electricity market operated. Although this system does not currently extend to Scotland, it will be rolled out under plans to introduce a GB wide trading market in 2005 (known as BETTA, British Electricity Trading and

Highlands and Islands Enterprise 26 January 2004 6

Transmission Arrangements). The Scottish electricity market has a duopoly (Scottish and Southern Energy and ScottishPower) which is governed by Ofgem. The difference in the rules and market arrangements limits competition between Scotland and England/Wales and discourages new market entrants in Scotland. The introduction of BETTA will help remedy this situation by introducing an open British market for new generators, transparent pricing and fair and transparent access to the high voltage electricity grid.

However, BETTA and associated regulatory changes may also introduce new threats to renewable generators, especially those in the Highlands and Islands. The key issue is ensuring that distance from market does not lead to discrimination against generators. This threat is evident in a number of proposals coming forward. For example, while plans to introduce ‘shallow’ charging for connection to the lower voltage distribution system (e.g. whereby new connectees pay only for local connection and use of system) are supportable in principle, they may lead to higher costs for connectees in the north. There will be a similar effect if proposals to impose zonal charging for losses on the transmission system are resurrected. This could create an onerous regulatory climate in which to develop renewable energy schemes in the north of Scotland compared to elsewhere in the UK. Ofgem has also recently consulted on the impact of regulatory change on renewable generators. This consultation has been long sought by the industry and raises key issues for small renewable generators – it is imperative that following closure of the consultation, appropriate mitigation measures are put in place timeously to ensure small generators are protected.

Electricity users in the Highlands and Islands area are higher than average consumers of electricity and have limited fuel choice due to the lack of a significant gas network (mains gas being one of the cheapest and most effective means of heating). It is important that any new or existing regulation does not penalise electricity customers in the area and that the costs of developing the infrastructure to deliver Government targets are shared by all customers across the UK customer base.

Regulatory changes to the electricity industry will substantially change the operation of the market. The transparency this will bring to the system will be positive, but there are also risk areas for customers and generators, especially those remote from major areas of demand. It is imperative that the impact of changes is fully understood from a generator and user perspective and mitigation planned before changes are implemented.

• Securing Community Involvement in Renewables

Renewable projects are not just at the large industrial level. They also apply at the community and household level and are an effective means of reducing energy consumption and carbon dioxide emissions, especially when combined with energy efficiency measures. HIE’s Community Energy Unit (CEU) is supporting over 100 community-based renewable energy projects across the Highlands and Islands and interest amongst communities continues to grow.

Highlands and Islands Enterprise 26 January 2004 7

The majority of these projects are small scale and linked to community facilities, offering long-term revenue cost savings. Projects supported by the CEU have encompassed wind, solar, wood-fuel, hydro and ground-source heat pump technologies. Funding for the CEU’s work is provided by HIE and The Executive’s Scottish Community and Household Renewable Initiative (SCHRI). The total committed value of these projects to date is £0.85 million.

There has, however, been little progress but a lot of interest and enthusiasm in larger scale community-owned commercial projects. The level of community benefit from commercial wind farm developments has been a prominent issue in recent debate on renewables. A fundamental issue has been whether it is feasible to envisage a significant expansion of larger-scale community-owned commercial renewables projects, bringing with it potentially much greater benefits than relatively small ‘community benefit’ payments from commercial operators.

A conservative estimate of income from a (medium sized) 1MW wind turbine would be £100,000 pa, after subtraction of operation and maintenance costs and before interest and tax. There is obvious scope for such income to underpin the costs of community development initiatives and perhaps the capital costs of implementing local development plans, or sustaining other community activities in the longer term. Alternatively, there might be more strategic developments that such income should be directed to, such as affordable housing in fragile areas.

However, other than on crofted land, there is no consistent accepted mechanism by which local communities claim a share of the profits generated by private schemes. On croft land, crofters are entitled to a share of the development value which therefore may have to be split 3-ways. So far, commercial developments proposed on crofting land have become tangled in the complexities of crofting law. The Executive is currently considering these issues as it works towards its Crofting Reform Act. These issues need to be addressed if renewables are to make a positive impact on fragile communities within the Highlands and Islands.

A number of other obstacles stand in the way of communities who wish to develop their own renewables projects. The main issue is that development costs for wind farms are very front-loaded and entail a high level of risk before any income is generated. For example, an initial deposit of 25% is required for establishing a connection agreement to the grid. This combination of cost and risk generally preclude communities leading development at anything other than very small scale projects.

If this situation is to change, action is needed to establish mechanisms that can marshall finance and manage the risk on behalf of communities interested in developing their own projects. Economies of scale are likely to require action at the strategic level to allow risk to be spread across a range of projects. One potential mechanism, under consideration by HIE would be a Highlands and Islands Community Energy Company. This would be a non- profit distributing company that would offer a range of finance and project

Highlands and Islands Enterprise 26 January 2004 8 management options to communities interested in taking forward their own projects. The Company might also take forward developments at its own hand where communities are interested but unable to develop their own projects, providing opportunities for part-ownership.

It is important for the further development of renewables that communities are engaged with the planning process, and understand the rationale behind their development. Renewables offers a significant opportunity for communities to benefit from their environment for the local and wider good. The SCHRI scheme has demonstrated the ability of communities to grasp this opportunity but further support is required to drive forward community owned commercial projects.

Renewable Energy Technologies & Issues Associated with Development

The development of emerging renewable energy technologies offers Scotland, and the Highlands and Islands, an opportunity to become world class leaders in a sector which could support a new indigenous industry.

Wave/Tidal

HIE has recently led a public sector consortium (which included the Scottish Executive, DTI, Scottish Enterprise, Carbon Trust and Orkney Islands Council) to develop the world’s first grid connected facility for the testing of full scale wave energy devices. The European Marine Energy Centre (EMEC) on Orkney will offer independent verification of device performance which will be crucial in providing investors, insurers and buyers with confidence in device design while prolonged testing in a challenging marine environment will provide assurance on design survivability and robustness. In turn this should help device developers secure the private backing necessary to move to the next stage of commercial development. However, that commercial deployment is unlikely to take place in the UK without the introduction of appropriate incentives to support the higher cost of utilising a new technology. For example, Portugal has pledged to offer a substantial price incentive to the first tranche of wave energy deployment to encourage the development of the industry there. To ensure devices are commercially developed in the UK will require at least a similar level of support to be offered. This is a key consideration for the newly formed FREDS (Forum for Renewable Energy Development for Scotland) and its marine sub group. Assuming appropriate incentives are introduced, efforts shall then be required to support the development of the UK supply chain.

Wave/tidal energy could offer substantial opportunities but these will only be realised if appropriate mechanisms are put in place to support their commercial development.

Biomass

Although an established technology elsewhere in Europe, biomass has yet to achieve significant deployment levels in the UK. Barriers include a lack of

Highlands and Islands Enterprise 26 January 2004 9 knowledge in the market place, the poor image of wood as a fuel, the lack of an established system of fuel supply, an insufficient number of energy services companies and a dearth of skilled personal. While Government efforts to date have been focused on electricity production, biomass heat could also play an important role if appropriate incentives were in place.

Within the Highlands and Islands there is considerable scope to utilise forestry/sawmill residues to generate electricity and heat. The incentive to support such development is the downstream impact such projects will have on the forestry sector in terms of long term demand and employment. To date there are a number of wood fuel projects operating within the Highlands and Islands where wood fuel boilers supply heat to homes via district heating schemes, swimming pools, community halls, hotels and public buildings. More projects such as these using local wood chip are expected to develop as confidence levels and experience increase. The development of a Highlands and Islands wood fuel development programme (led by the Forestry Commission and HIE) has recently won European funding assistance and this will help support such development. This fund will be used to develop local wood fuel clusters with suppliers and users of wood fuel located within a close geographic area. This will maximise local benefits while minimising the transport distance for fuel delivery. Up to six locations are being identified throughout the Highlands and Islands to develop clusters.

Biomass projects have been slow to develop across the UK and there remain issues with fuel supply in particular. Unlike much of the UK, Scotland has a readily available wood fuel resource which could be exploited. Government incentives currently focus on electricity production but biomass heat could also play an important part if supported. This is particularly true in the Highlands and Islands where choice of heating fuel is limited.

Onshore Wind

Achieving Government targets will in the short term require a considerable expansion of onshore wind activity in Scotland. The bulk of that already planned is within the Highlands and Islands. This level of project development offers local businesses opportunities in terms of supplying services and goods into the supply chain, but also to attract established component suppliers into the Highlands and Islands where technology gaps are unlikely to be filled by indigenous business diversification. Ensuring the appropriate range and mix of skills are available to assist this process will be important.

The Highlands and Islands have already secured a number of high profile and important successes including the establishment of wind tower manufacture in Argyll and monopile production in the Western Isles and Ross-shire. In addition, the area boasts one of Scotland’s foremost civil contractors to the wind sector in Scotland, a leading electrical engineering business and a number of smaller, indigenous developers based in Orkney and Shetland. Efforts have also been made to ensure that other local businesses are aware

Highlands and Islands Enterprise 26 January 2004 10 of the opportunity and that the leading developers and their turnkey contractors are aware of local business capability. Similarly the opportunity to attract European manufacturers of wind turbine blades and other components into the area is being investigated with the ultimate aim of establishing a full supply chain for the wind sector within the Highlands and Islands.

Key to securing and maintaining downstream benefits will be project developers’ ability to secure necessary consents. Experience to date suggests that the consent process will take a minimum of one year to achieve – in fact, frequently it will take much longer. The result is that existing manufacturers have to deal with an unsteady and unpredictable workload (and manage lengthy periods between contracts), and other indigenous businesses and potential inward investors are nervous and unwilling to move into the market. Ideally, a steady stream of consents is required for maximum business advantage, but simply unblocking the consent process will ease current difficulties.

The wind sector offers local businesses a diversification opportunity. However, to support that diversification and allow business growth in the market it is imperative that the approval process does not unduly hold up projects.

Other Technologies

The development of new technologies such as fuel cells could also be important given their potential to solve the problems and costs associated with storing and transmitting electricity. Fuel cells are currently being demonstrated as pre-commercial systems, but significant research, development and demonstration activity is required to bring down capital costs, and to tackle materials and durability issues. In particular, demonstrations and field trials are required to provide operating experience and establish reliability and performance. While existing evidence suggests that large scale or commercial opportunities may not be realisable in the near term, there are niche demonstration possibilities which will be considered further in the Highlands and Islands. Indeed, project proposals for hydrogen fuel cell demonstrations on Shetland and Islay are currently being progressed. However, demonstration activity remains uncoordinated. The establishment of Fuel Cells UK aims to bring together the various strands of activity (as does the Scottish Fuel Cell Consortium in Scotland).

The establishment of the Energy Intermediary Technology Institute (ITI) will offer further opportunities to engage in research and commercialisation activity associated with energy technologies. HIE has closely engaged with Scottish Enterprise in implementing the Intermediary Technology Institutes and has Board membership of the holding company.

Fuel cell development at a large scale is likely to be a longer term aspiration, but niche demonstration opportunities exist. Opportunities to become involved in research and development of other new energy technologies will result from the establishment of the Energy ITI.

Highlands and Islands Enterprise 26 January 2004 11

Conclusion

The development of renewables offers Scotland, and the Highlands and Islands, a significant opportunity for both community and business development. Securing that success will hinge on a number of key issues such as resolving grid issues, engaging the community, tackling regulatory change, supporting businesses in development and commercialisation and maximising research and demonstration of leading edge renewables technologies. Crucial to achieving these will be the ability to support projects through the consent process in order to create a sustainable industry in which new business ventures will flourish and the ability to create a mechanism to capture real and long term benefits flowing from it for communities.

Highlands and Islands Enterprise 26 January 2004 SCOTTISH Briefing renewables

SOLAR HEAT A Programme for Scotland

Solar Heat – A Forgotten Opportunity? Solar Heat has the potential to contribute significantly towards the Government’s targets for greenhouse gas emission reductions and renewable energy, whilst also creating economic benefits, employment and tackling social issues such as fuel poverty. But Solar Heat has been largely ignored by Government’s in the UK and as a result the uptake is far behind that of other European countries. The Scottish Renewables Forum is therefore proposing Solar Heat: A Programme for Scotland. This briefing paper sets out the basis for the programme and presents some background information.

Programme Summary

· A typical system with panels of about 4 square metres will provide about ½ of annual domestic hot water of a house in Scotland. · The installed cost of a Solar Water Heating system is normally from £1500- £3000 and an Air Heating System is from £500 - £700. · A domestic Solar Water or Air Heating system in Scotland can

provide CO2 savings of over 2000kg per year.

The Programme for Scotland proposes support based on:

· A tapering grant support package for new installations, over a ten year period. · Initial grants of 40% would taper down to 10% after 5 years. · A target rate of 4000 new installations per year after 5 years. · This would deliver a total of over 30,000 new systems after 10 years. · A total programme cost of £10m, over 10 years.

· The cost per kg CO2 saved would be less than 1p and is competitive with other renewable technologies now supported by the government.

The Programme for Scotland would deliver additional benefits of:

· Job creation of over 200 in installation, plus an additional 150-200 in manufacturing and support services. · A sustainable solar industry, generating gross revenues in excess of £10m per annum for the domestic market alone. · Creation of export opportunities in technology, skills and services to a global market · Creating social inclusion, enabling individuals to contribute to the government targets in a realistic way. · Tackling fuel poverty and improving Scotland’s housing and health.

for further information contact: Scottish Renewables Forum, The e-Centre, Cooperage Way, Alloa FK10 3LP Tel 01259 272 117 Fax 01259 272 118 Email [email protected] or visit our web site at: www.scottishrenewables.com SCOTTISH Briefing renewables

Background There are two main ways of collecting solar energy – solar heat and solar electricity (utilizing photovoltaics or PV). Solar Heat is highly relevant to Scotland as it is efficient, we have a cold climate, the systems are manufactured locally, are technically proven and are close to economic viability. Solar Heat can be collected by heating either AIR or WATER.

Solar Water Heating Solar Air Heating q Solar Water Heating is mainly used to heat q Solar Air Heating is mainly used to heat domestic hot water. incoming fresh air for ventilating a house. q A typical system with panels of about 4 square q The simplest Solar Air heating system needs metres will provide about ½ of annual no special panels because it uses the slates or domestic hot water in Scotland. tiles on a roof as a solar collector. q The installed cost of a Solar Water Heating q Such a Solar Air Heater will warm a house, system is normally in the range £1500- reduce dampness and improve air quality £3000.These prices are based on low volumes (and, often, health). of manufacturing, an undeveloped installation q The installed price of a Solar Air Heating and maintenance network and no support system is normally in the range £400- £700. mechanisms.

CO2 Savings q Both Solar water and Solar Air heating systems can reduce CO2 emissions, by reducing the need for conventional heating fuels. q Depending on the fuel which has been displaced, a domestic Solar Water or Air Heating system in

Scotland can provide CO2 savings of over 2000kg per year.

Current Practice q Compared with other Northern European countries Scotland has a very low level of Solar Heating installations. q For example, it has been estimated that Scotland has only a few hundred installations a year and a cumulative total of about 2,500 installations while a country such as Netherlands has over 50,000 installations and is installing at the rate of about 10,000 per year.

Does Solar Work in Scotland? q Published research has shown that, surprisingly, Scotland has one of the best climates in Europe for Solar Heating. This is because we need to heat our houses for more months per year. This allows us to enjoy a better utilisation of available solar energy, more then compensating for our slightly lower levels of solar radiation.

Benefits q The result would be a substantial reduction in Scotland’s CO2 emissions and a substantial increase in Solar Heating employment. It would also make a major contribution to reducing fuel poverty and making Scotland’s housing warmer and healthier.

Additional Information q Further information on Solar Heat: A Programme for Scotland is available upon request. q A technology briefing on solar heating in Scotland is also available from the SRF.

for further information contact: Scottish Renewables Forum, The e-Centre, Cooperage Way, Alloa FK10 3LP Tel 01259 272 117 Fax 01259 272 118 Email [email protected] or visit our web site at: www.scottishrenewables.com EC/S2/04/07/4

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