Scottish Government

1 Energy: where the solution begins

1.1 Energy Sector must take the lead

The energy sector is the main driver of Scotland's transition to a low carbon economy. It is a major contributor to emissions, and therefore the transition of our energy system must lie at the foundation of the transition to a low carbon economy.

The Scottish Government's Climate Change Delivery Plan (June 2009) ² identified two transformational outcomes for the energy sector:

• a largely decarbonised electricity generation sector by 2030;
• a largely de-carbonised heat sector by 2050 with significant progress by 2030.

For electricity, this outcome can be achieved by transforming the current electricity generation mix, within which conventional fossil fuelled power stations account for around 45% of installed capacity (as shown in Figure 1).

A key mechanism for decarbonising the electricity generation sector is the EU Emissions Trading System ( EUETS), which puts a declining cap on carbon emissions from power generation and other large industrial sectors. In enabling firms to trade across the EU for the right to emit, the ETS creates a carbon price and allows emission reductions to be to be made where they are most cost effective. As the carbon price produced by the ETS increases in line with the declining cap on emissions, companies will have greater incentive to reduce emissions and move towards low carbon generation technologies. In addition, the Renewables Obligation provides a financial incentive to invest in all forms of renewables and will continue to play a key role in accelerating the deployment of renewable technologies in Scotland.

Figure 1. The Electricity Generation Mix in Scotland, 2010

Source: Wood Mackenzie, Scotland's Generation Advantage, 2009.

With support primarily from the EU- ETS and the Renewables Obligation, Figure 2 illustrates how the electricity generation mix in Scotland may evolve by 2020 and subsequently over the decade to 2030. Such a mix comprises significantly larger shares of renewable technologies with additional baseload capacity provided by fossil fuel plants fitted with carbon capture technology. In making this transition, we will require a far larger and smarter electricity grid, capable of managing fluctuations in supply and demand. International interconnectors will also need to be developed, to facilitate exports to counties with lower potential sustainable energy deployment.

Scotland has important generation advantages for renewable sources that will support these de-carbonisation goals. Alongside this, the oil and gas sector is currently at the heart of Scotland's energy economy and is a key source of strength as we make the transition to a low carbon economy.

Figure 2. Evolution of the Electricity Generation Mix in Scotland by 2020 onwards

Source: Scottish Government
Scenario based on known renewable resources and planned baseload plant retirement and potential replacement ³

1.2 Objectives of current activity

The key economic objectives that underpin our work to strengthen Scotland's areas of international comparative advantage in the energy sector, and to contribute to the commitment to reduce emissions by 80 per cent by 2050, are as follows:

• to capitalise on current opportunities to strengthen the Scottish supply chain for energy investments, especially in respect of oil and gas, renewable and low carbon energy and distributed energy systems;
• to strengthen the productivity and competitiveness of the Scottish industry providing energy efficiency and distributed energy services to communities and businesses both at home and outwith Scotland;
• to ensure Scotland captures benefits from current technology developments and capitalises on them by building strong world leading energy businesses of the future;
• to ensure that Scotland becomes Europe's leader in carbon capture and storage, by continuing to work with the UK Government, EU, business, research and academics to ensure we fully capitalise on Scotland's potential;
• for all these tasks, building the skills base that can deliver the exponential change in output from the energy sector as a whole that will be required to place energy at the centre of Scotland's future prosperity;
• the delivery of cost savings for consumers and business through energy efficiency improvements which will free up resources and increase demand for goods and services.

The 10 Energy Pledges ⁴, which were announced in early 2009 as part of a Greener Deal for Scotland, form a coherent approach to energy issues in Scotland. The actions range across key areas of energy generation and transmission, energy efficiency and transport, focussing on addressing both short and longer-term opportunities for Scotland to benefit from competitive advantage. They are aimed at creating new jobs, reducing emissions and saving households and businesses money, thereby contributing to economic recovery and growth and to addressing climate change. The pledges have been incorporated into the Scottish Government's Economic Recovery Programme ⁵,published in January 2009 and updated in March and November 2009 ⁶ Details of each pledge and progress on them is set out in the Annex to this paper (page 27).

1.3 The Economic Contribution of the Energy Sector

Energy powers the Scottish economy, and this is reflected in its status as a key sector and cornerstone of the Government's economic strategy. An energy rich nation, the discovery of oil in the North Sea laid the bedrock for Scotland's continued role in world energy markets. Since then, around 40 billion barrels of oil equivalent of oil and gas have been extracted from the North Sea. Estimates suggest that up to 40% of the North Sea's oil and gas reserves remain to be produced, albeit in often more challenging environments and smaller fields.

Today, Scotland's climate and marine environment provide vast natural resources and enormous potential for the deployment of renewable energy. The sector represents one of Scotland's most powerful areas of comparative advantage. With around 7.4 GW of renewable energy generating capacity either installed, consented or under construction, Scotland is firmly on track to meet the baseline target of 50% of domestic electricity consumption from renewables by 2020. The economic benefits are tangible, with the sector already generating significant economic value, creating jobs across the sector, and associated supply chains. Opportunities are not limited to the domestic market. The expertise and experience gained by Scottish businesses in serving the expansion of the sector in Scotland will open up new markets in Europe and beyond where renewable energy capacity is growing rapidly. There is a real opportunity for Scotland to exploit this source of comparative advantage to ensure that renewable energy and related environmental and clean technologies play a central role in economic recovery.

In May 2009, the Scottish Government published the first version of the energy key sector paper, which set out a range of policies, programmes, actions and projects across 10 key areas for driving the future of the energy sector in Scotland. The focus on those 10 key areas, and the Scottish Government's pledges for action in each, forms the basis of our efforts to support the sector to grow and to deliver a low carbon economy in Scotland. The paper, and the picture it set out of the sector, was intended to generate debate on the shape and future growth of the sector. The ensuing debate has been encouraging and has helped revise our understanding of the shape and size of the sector in Scotland. As a result, we have been able to refine the picture of the sector and its place at the heart of Scotland's economy.

Table 1 reports official statistics on employment and gross value added ( GVA) across the various industries that comprise the energy sector in Scotland. The figures reported in the table relate only to direct employment within each energy sector and consequently do not capture the economic value and employment that the sectors support in other areas of the Scottish economy. In addition, there are two notable issues with respect to the official statistics on the energy sector which are discussed further below.

Table 1. Scottish Energy Sector Statistics

Notes:
1. Employment data are sourced from the Annual Business Inquiry ( ABI/1).
2. GVA data are sourced from the Scottish Annual Business Statistics (derived from ABI/2).
3. Under national statistical practices, GVA from offshore oil and gas activities is not apportioned to Scotland but is attributed to the UK extra-regio territory. For further discussion of alternative methodologies for apportioning Scotland's share of 'extra regio' North Sea oil and gas GDP & GVA please refer to the Oil and Gas Focus Section.

The first issue is that the renewable energy industry is not assigned a Standard Industrial Classification ( SIC) code and therefore is not identified as a separate sector of the economy for statistical reporting purposes. While some portion of renewable energy related output and employment will be captured in other energy sectors, for example large electricity generators based in Scotland will have a renewable energy division, other activities focussed on servicing the sector will be categorised under the core function of the business, for example, manufacturing or business services.

Second, as a result of UK national statistical practices, Gross Domestic Product / Gross Value Added from the offshore oil and gas sector ( SIC 11.1) operating in the UK Continental Shelf ( UKCS) is not allocated to specific geographic regions within the UK mainland. Instead, in the ONS Regional Accounts, the convention is for the UKCS to be included as a (notional) separate region of the UK (the extra-regio territory). As a result, while the table above reports employment in both onshore and offshore oil and gas activities to Scotland, GVA data is only available for the onshore oil and gas services element ( SIC 11.2).

To address these issues the focus sections below on renewable electricity, renewable heat and the North Sea oil and gas sector explore each of these sectors in more detail.

1.4 Engagement with Industry

The Scottish Energy Advisory Board

The Scottish Government established in 2009 The Scottish Energy Advisory Board for effective, high-level, open and informed engagement between Ministers, the energy industry and other relevant bodies, on the key issues facing the energy sector in Scotland. It will work to understand and articulate the Scottish industry view on these issues - including potential synergies between the oil and gas and the renewables sectors, delivering a low carbon economy and ensuring the security of Scotland's energy supply.

Energy Theme Groups

As parts of the energy sector have very different characteristics, technology and issues, the First Minister has created three Ministerial led energy theme groups focusing on Oil and Gas; Thermal Generation and Carbon Capture and Storage; and Renewables. Chaired by the Minister for Enterprise, Energy and Tourism, the groups also advise Ministers and enterprise agencies on key Scottish energy issues, analyse trends, inform policy development and challenges and identify and address opportunities in each part of the sector.

Scottish Grid Group

The Scottish Grid group brings together key individuals with an interest in the development of the Scottish Electricity Grid for informal discussions and information sharing on issues which effect the transmission and distribution of Scotland's energy supplies. The Group is chaired by officials from the Scottish Government's Energy Markets Division.