Seòmar agus comataidhean

Thank you, convener, and good morning.

The draft order under consideration is a minor amendment to the Renewables Obligation (Scotland) Order 2009. Before I move on to the amendment, it might be helpful to provide some background information on the scheme.

The renewables obligation scheme was introduced in 2002 to support renewable electricity generation projects. Equivalent schemes are in place in England and Wales and Northern Ireland, and are managed under separate legislation. All three United Kingdom schemes are administered by the Office of Gas and Electricity Markets. Throughout its existence, the Scottish obligations scheme has remained largely aligned with the England and Wales scheme.

The scheme closed to new generation capacity across the UK in 2017, but it will remain operational until 2037. Some 565 existing generators are accredited under it. That accounts for 8.8GW of renewables capacity in Scotland.

The obligation requires electricity suppliers to source a percentage of the electricity that they supply from renewable sources. Accredited renewable generators are awarded certificates according to their output per megawatt hour. They are then sold to suppliers. That incentivises renewable generation by providing projects with revenue in addition to the wholesale energy price.

Electricity suppliers fulfil their obligation by providing the required number of certificates to Ofgem in proportion to the amount of electricity that they have sold. Alternatively, they can make a fixed payment into a buy-out fund at a higher price than procuring certificates typically requires. That fund is then recycled back to suppliers that provided certificates to Ofgem. However, when some suppliers fail to meet their obligations, a shortfall in the fund is created, which reduces the value of any recycled payments. A mutualisation mechanism exists within the scheme to prevent excessive shortfalls. If the shortfall exceeds a certain threshold, existing suppliers are required to pay the unmet obligations of suppliers that did not meet their obligations. In each of the past five years, mutualisation has been triggered due to an increasing number of suppliers defaulting on their obligations.

The amendment order under consideration will alter how the mutualisation threshold is determined under article 48 of the Renewables Obligation (Scotland) Order 2009. The mutualisation threshold has failed to keep pace with the growth in the scheme and proportionality. It is now considerably smaller than it was when it was first introduced.

The aim of the amendment is to better protect customers by restoring the balance of risk between generators and suppliers. As the cost of the scheme to suppliers is passed on to consumers in their energy bills, any increased costs associated with mutualisation are also passed on.

The amendment will alter the mutualisation threshold for Scotland from a fixed value of £1.54 million to 0.1 per cent of the forecast costs of the scheme across the UK. It will also restore alignment with the scheme in England and Wales regarding mutualisation as the UK Government made a parallel amendment in 2021 to move to a variable level of scheme costs. Critically, the amendment will ensure that suppliers and, in turn, their customers are not more likely to face the costs of mutualisation in Scotland than they are in England and Wales.

Finally, a further provision is included in the proposed Scottish statutory instrument, allowing Ofgem to publish the mutualisation threshold for the 2023-24 obligation period as soon as reasonably practicable after 1 April. Ordinarily, Ofgem must publish the threshold before the new obligation period starts but, given that the SSI will not come into force until 31 March, it is allowed to publish the threshold later than that.

For the reasons that I have set out, I believe that the proposed amendment is necessary and proportionate, and I am more than happy to answer any questions before we move on to the debate.

The scheme was designed on that basis. However, the much more deep-rooted issue—the committee has covered it previously—is the way in which companies, particularly suppliers, have been able to enter into the market without the necessary financial protections in place, and how that led to all the problems that we have had with higher costs and energy prices during the past 18 months in particular.

Ofgem is working on how it can put further protections in place to reduce the risk of companies falling out of the market so quickly and on greater financial protections for them because, in the end, the consumer ends up picking up all the associated costs. The threshold will help to make sure that the mutualisation process operates more fairly, which means that those who meet their obligations are not unfairly penalised because of other operators who do not meet their obligations.

That makes a change.

It depends. If a local authority is looking to develop an ownership-model municipal bus service, there are all the capital costs that are associated with that, such as purchasing buses, running garages for maintenance and so on. That is why a number of local authorities are looking at the franchising model, where the authority would enter into a franchise agreement with a bus operator to provide the services in its area and the authority would specify the services that it wants—their frequency and timetable. That is similar to the way in which the system has operated in relation to rail.

It is £30 million that is coming from the public sector budget.

What timeline is it over? Do you know, Kerry?

In the past, we have been able to reallocate an underspend and re-utilise that budget, so it is not lost in that sense. However, through greater public awareness and understanding, we can promote the schemes and the programmes to encourage more people to take up the options that are available to them, whether they are for domestic or business premises.

I have flagged up to a number of businesses in my constituency that are experiencing significant energy challenges as a result of the big price increases that there might be loans available to them through the Business Energy Scotland programme, to enable them to invest. One company—I will not mention it by name—is at an advanced stage in that process. It is looking at putting in solar panel systems, which is part of the programme, to reduce its energy costs as it is an energy-intensive business.

Continuing to improve the awareness of the public and business is important. I think that it would be fair to say that the situation during the past year has meant that people now focus on their energy costs in a way that they did not previously—their focus is much greater. There is an opportunity to ensure that we are driving forward energy efficiency as part of reducing future energy demand.

It is important to understand that it is not as though nothing is happening. Although it is in-house at present, a considerable amount of work is being done by officials, working with local authorities, housing associations and other organisations on how we can look at collectively working together to deliver not only some of these energy efficiency programmes but alternative heating systems.

We have created the heat networks unit within the directorate, which is playing an important part in helping to bring together expertise around local authorities and housing associations, which are looking at heat networks as well. The national agency will be able to take that up on to a much more national scale through dedicated resources, staff and expertise, to support local authorities and housing associations in taking forward these policy areas.

We are trying to avoid getting into situations where local authorities have to reinvent the wheel each time they try to design a heat network or where housing associations have to reinvent the wheel to get heating efficiencies. We want to bring together the expertise and skills base that can support them to bring that work forward.

Can we do that quicker? We have ambitious targets on heating buildings. The Climate Change Committee’s report from the end of last year showed the need for us to ramp up our action in that area. If there are areas where we can speed up that process, we will not be slow in making sure that we do that.

I hope that that reassures you that a considerable amount of work is going on; we are not waiting for the standalone agency to be created before we drive that work forward.

That area has changed dramatically over the past year. If we were having this discussion last year, I would be saying that blue hydrogen would probably play a big part in the early development of the hydrogen economy. What has significantly changed over the past year is that, because of gas prices and so on, there has been a big switch in the sector to being much more focused on green hydrogen, because its potential production costs have dropped significantly. Companies that previously focused on blue hydrogen are now looking at going straight to green hydrogen, because the cost base has dropped sufficiently.

Blue hydrogen will continue to play a role in the energy transition in some of our big energy intensive sectors—for example, grey hydrogen is used in Grangemouth, but Ineos has plans to move towards blue hydrogen, which is aligned with the Acorn Scottish cluster project. For some companies, blue hydrogen will be a bridging technology before they move to green hydrogen.

The focus over the coming years will be much more on green hydrogen, not only because that is what is happening here but because that is what is happening on a Europe-wide basis. For example, the REPowerEU programme has a big focus on low carbon and on green hydrogen being the future priority; blue hydrogen is seen as being a bridging technology in some energy intensive sectors.

That is the pattern of travel, which is why you can see in the hydrogen action plan that our focus is much more on green hydrogen, particularly because of its export potential. There is significant potential for us to be a major exporter of green hydrogen and hydrogen derivatives such as ammonia and methanol and to develop liquid organic hydrogen carriers. We are involved in work on that with partners in Rotterdam and the Net Zero Technology Centre. I see green hydrogen becoming more of a focus and playing a bigger part than I would have said this time last year.

You mentioned three areas: skills, companies at a domestic level, and planning. Planning is not so much of an issue, because planning elements will rest largely with us. Quite a number of the big offshore developments that are planned over the course of the next 10 years have potential hydrogen projects associated with them. I am very conscious of the need to make sure that we have the right support in place for that. Some changes are taking place within my directorate to facilitate that, including recruiting additional staff and bringing in a strategic lead at director level to drive that forward. That is happening just now and the budget provides an additional £5 million to support the development of that element. Those are the planning aspects that sit within my portfolio.

There is a challenge around skills, not just here in Scotland but globally. During the past year to 18 months, in countries across the globe, particularly in Europe, the scaling up of offshore and onshore wind has been quite marked. It became more of a priority during the energy security issues of last year.

There will be a number of challenges here. There will be a skills challenge because of the restrictions on access to labour. There will also be a materials challenge in that access to some of the raw materials that are needed for the manufacturing of these products will become constrained because of the level of global demand. There will be a capacity constraint in relation to industry manufacturing some of the components, given the level of demand that might be experienced. That is why, in my view, having a clear and effective consenting process is extremely important to give the industry confidence that the process that we have here in Scotland for rolling out these projects is a priority area, which means that they can be taken forward in a timely fashion.

I do not want to speak for Ivan McKee on this, but it would be fair to say that I am also doing a lot of trade work because, during the past year to 18 months, the area of energy has just increased dramatically. We are receiving demands from ministers of overseas Governments to meet us, and the number of businesses in Scotland that are looking to invest overseas has increased dramatically. When I was in Japan in November last year, a lot of the talk was about accommodation of inward investment from Japanese companies here, but also Scottish companies investing in south-east Asia and renewable energy as well. That has scaled up significantly. I know that Mr McKee has found that challenging because of the demands that it is placing on him, which is why I am doing some of that work, and other ministers have also been involved in picking up some of that demand.

On the budget provision, at this stage I am comfortable that we have sufficient budget provision to meet demand. We need to refocus some of the staff who are involved in some of the broader energy work on the areas that we need to prioritise rather than looking for any extra resource. The work that we are doing just now to bring together the trade, investment and energy aspects is all about trying to knit them together much more effectively to be more focused and more efficient in the use of resources.

I think so—I think that those two things come together, although they might not be entirely aligned time-wise, in a way that will be helpful in providing that level of scrutiny.

I very much hope that, when the draft climate change plan update is published later this year, we will be in a position, if we have strand 2 and strand 3 in place for the next year’s budget, to be able to see exactly how the budget delivers on the climate change plan, which will have to be much more detailed, for different portfolio areas. That will mean that, whether on transport or agriculture, we will be able to set out very clearly the actions and the policy impact. The question will be whether strand 2 and strand 3 allow us to provide the level of transparency on the budget process that aligns with that. The committees will then be in a position in which they can see clearly whether what is said in the climate change plan fits with what is set out in the budget. I think that, ultimately, that is where committees and the Parliament want to get to; it is certainly where I want to get to, so that there is transparency right across Government.