The future of energy in Scotland: consultation analysis

4. Delivering Smart, Local Energy Systems

4.1. The consultation paper noted that the Scottish Government is committed to supporting the development of local energy economies as part of a varied and proportionate response to Scotland's energy system. Chapter 5 of the draft Energy Strategy outlined the 2050 vision, and included two priorities and four actions to meet this vision. The priorities were:

• Priority 1: Directly supporting the demonstration and growth of new innovative projects.
• Priority 2: Develop future energy systems in partnership between communities, the private and public sectors.

4.2. This Chapter also sought views on the role of a Government-owned energy company and Renewable Energy Bond in Scotland.

Priorities for developing smart, local energy systems

Q11: What are your views on the priorities presented in Chapter 5 for developing smart, local energy systems over the coming decades? In answering, please consider whether the priorities are the right ones for delivering our vision.

Summary of main themes:

• Many respondents supported smart, local energy systems as being more robust and quicker to decarbonise than current energy sources, and local projects offer the potential to develop into clusters and regional initiatives.
• Respondents referred to the need for a whole systems approach which is collaborative in nature, with initiatives that enable local and community projects to be developed, and with regular monitoring and evaluation.
• There was support for the use of Energy Masterplanning as a strategic approach to bring forward energy projects. There was also reference to the need for a more supportive regulatory environment.

4.3. Comments on this question came from 142 respondents across all respondent groups.

4.4. Many of these (63), across all respondent groups, noted their support for the priorities, with some also referring to their support for the vision and actions within this chapter. There were some qualifying statements, however, primarily from respondents within the Energy sub-groups, relating to concerns that the current regulatory landscape does not allow for the development of a decentralised and flexible energy system.

4.5. The benefits of smart, local energy systems: Several respondents outlined a number of benefits of local energy systems including their potential to be more robust and quicker to decarbonise than current energy sources, or that local energy projects will have the potential to develop into clusters and regional initiatives. One respondent in the Local Government sub-group commented:

"We welcome the investigation into alternative funding solutions for community led projects. Local energy systems will help tackle issues of security of supply, reducing energy usage, less expensive and stimulates regeneration."

4.6. Several respondents provided examples of smart, local energy systems that are already in place in different communities across Scotland and further afield.

4.7. Several respondents commented on the need for the Scottish Government to provide support in a number of ways. These included:

• Communication with the general public to demonstrate the benefits of local ownership / shared ownership / co-operative business models.
• Providing support for research on smart, local energy systems and innovative projects, for example, in enabling early markets for such as hydrogen and district heating to develop.
• Continuing to provide funding and support streams and investment mechanisms.
• Providing technical support.
• Acting in an advisory capacity.
• Support mechanisms in place to help enable communities to play a role in development of smart, local energy systems.
• Supporting local supply chains.
• The Scottish Government needs to work with the UK government to consider a broad view of how to optimise smart local energy systems.

4.8. The following paragraphs report comments made by respondents on each specific priority.

Priority 1: Directly supporting the demonstration and growth of new innovative projects

4.9. Several respondents, primarily in the Academia / Research / Training and Energy sub-groups noted the need to take a whole system approach.

4.10. A similar number, primarily within Energy, Local Government and the Third Sector / NGO sub-groups noted their support for initiatives that enable local and community projects to be developed, with the Community and Renewable Energy Scheme ( CARES) and the Low Carbon Infrastructure Transition Programme ( LCITP) being the most frequently mentioned.

4.11. There were some comments of the need to monitor and evaluate funding on a regular basis; and several respondents noted the importance of a strategic approach that can ensure innovative projects can become commercial businesses. As noted by an organisation in the Third Sector / NGO sub-group:

"We think that it is important the first priority recognises the need to ensure that where demonstration projects are successful there are clear mechanisms in place to ensure wider deployment where appropriate."

4.12. There were a small number of comments on the need for energy companies to work together collaboratively rather than operating as silos, so as to allow for the integration of energy networks.

Priority 2: Developing a strategic approach to future energy systems in partnership between communities, the private and public sectors

4.13. Several respondents, mostly in the Third Sector / NGO, Public Sector / Delivery Agency / Regulator and Non-Energy sub-groups, were supportive of the use of Energy Masterplanning as a strategic approach to bring forward energy projects.

4.14. There were also some comments on the need to link this into local authority strategies and development plans as well as the National Planning Framework ( NPF) and Scottish Planning Policy ( SPP). Aligned to this, there were several comments, primarily from organisations within the Energy sub-groups and Third Sector / NGO sub-groups, relating to concerns that the current regulatory landscape does not allow for a decentralised and flexible energy system. Furthermore, a small number of respondents noted their support for a national framework that supports smart, local energy systems.

4.15. While there were a number of comments that local authorities will play a key role in development of this strategic approach, some respondents, mostly in the Local Government sub-group, noted they will need resources in terms of funding, the development of relevant skills and expertise, and access to advice to help deliver the priorities.

4.16. Several respondents also commented on the use of Scotland's Heat Map to help deliver the Strategy's vision.

4.17. There was support for a Government-owned energy company ( GOEC) and for a Scottish Renewable Energy Bond. These are covered in greater detail later in this chapter.

4.18. There were a small number of comments, primarily from those in the Academia / Research / Training sub-group that the approach to shared ownership outlined in the draft Energy Strategy focuses too much on financial incentives and that there is a need to also consider the broad range of economic, social and environmental benefits that smart local energy systems can bring.

Actions regarding smart, local energy systems

Q12: What are your views on the actions for Scottish Government set out in this chapter regarding smart, local energy systems? In answering, please consider whether the actions are both necessary and sufficient for delivering our vision.

Summary of main themes:

• There was overall support for the actions, across all groups of respondents.
• Only a small number of respondents disagreed with these actions.
• There were calls for available funding sources to be simplified and streamlined.
• There were suggestions of a need to accelerate a transition from Distribution Network Operators ( DNOs) to Distribution System Operators ( DSOs) to provide the right control of infrastructure investment and grid services to support local systems.

4.19. Comments on this question came from 125 respondents across all respondent groups.

4.20. There were a total of 4 actions set out under these 2 priorities, and a full listing of these is in Appendix 4. The number of actions under each priority was as follows:

• Priority 1: Supporting demonstration and innovative projects - 2 actions
• Priority 2: Partnership working - 2 actions

4.21. Around half of respondents to this question (62) noted their support for one or more of the actions outlined in Chapter 5 regarding smart, local energy systems. Support for these actions came from respondents across all sub-groups. Only a small number of respondents disagreed with any of these actions. Some respondents provided cross-cutting comments relating to all four actions, while others commented on specific actions.

4.22. A need for local solutions to supplement larger scale generation: While some respondents focused on local issues, a small number commented that local solutions should supplement larger scale generation, because larger scale generation and national policy may provide better economies of scale and better security of supply to ensure affordability.

4.23. Need more ambition: A small number of respondents, primarily Individuals, felt these actions needed to be more ambitious, for example, that there is a need for a stronger vision for the role of communities in the delivery of energy transition, particularly in low carbon heat and transport.

4.24. A need to simplify funding sources: Several respondents called for available funding sources to be simplified and streamlined, with a perception from some respondents that the range of funding streams currently available can be confusing to those who want to apply for funds. There were also a small number of suggestions for the development of a single point of contact for the range of finance and assistance available.

4.25. Distribution Network Operators: There were a small number of references, primarily from the Renewables sub-group, to Distribution Network Operators ( DNOs) and the need to accelerate a transition from DNOs to Distribution System Operators ( DSO) to provide the right control of infrastructure investment and grid services to support local systems and allow local projects to provide network, generation and demand side management services.

4.26. A need to review regulations: There was also a suggestion on the need to review the regulations so that DNOs have the authority and ability to invest in smartgrid technology and skills to be able to operate a more complex network as local energy companies emerge. A small number noted the need to consider options for local communities to take over ownership and operation of existing local distribution grid networks from DNOs if this could assist in delivery of a specific project.

4.27. Other issues raised by small numbers of respondents included:

• Connection constraints can be an impediment to local energy project development.
• The need for co-location of energy storage with energy generation to bring flexibility to the grid.
• Innovation in energy tariffs required.
• Charging regime set by Ofgem and National Grid should be adapted to allow local variation.
• The requirement for simplification of network charging principles that are cost-reflective and represent fair recovery of costs.

4.28. Some suggestions are relevant to the actions overall and have been included in the cross-cutting themes chapter. Other suggestions included:

• A need for flexibility across all elements of smart, local energy systems. This included flexibility in funding so that viable projects can be taken forward, flexibility in guidance so that changes can be introduced in the light of demonstration projects and flexibility in the energy system so that local energy objectives to be met in a cost effective way, while still allowing for new models and technologies to emerge. Also, that there will need to be a degree of consistency across local energy plans to allow for comparability.
• Support from the Scottish Government, including support for the provision of network data to help with project scoping and development and improvements to data in the Scotland Heat Map; and the sharing of data across stakeholders.

4.29. A brief summary of key points made in relation to each of the specific actions is provided in Appendix 4.

A Government-owned energy company

Q13: What are your views on the idea of a Government-owned energy company to support the development of local energy? In answering, please consider how a Government-owned energy company could address specific market failure or add value.

Summary of main themes:

• Many respondents identified a need for some form of public agency to support an energy transition. A number of these supported a Government-owned energy company ( GOEC) for the development of local energy, although some others queried the need for a GOEC or suggested alternatives to a GOEC.
• A small number of respondents queried the need for a GOEC and several suggested that a GOEC would detract from the existing range of initiatives and activities undertaken by other organisations.
• A number of roles were identified for a GOEC; these included, the provision of finance to support community-ownership, shared ownership or the development of energy systems projects; as a supplier of last resort; or information provider.
• The added value that a GOEC would bring includes the facilitation of community energy development on a long term basis, and with the use of Power Purchase Agreements ( PPAs) to ensure long term planning as well as being of use in more remote locations.
• It was suggested that a GOEC would operate efficiently, on a not-for-profit basis and allow for innovative energy systems. This would help to overcome some market barriers.
• Some suggestions were made for alternative mechanisms; these included Energy Service Companies ( ESCos), Government and Community-Owned Energy Companies ( GCOECs) and Municipal Energy Companies ( MECs).
• There were some suggestions for a centralised energy agency along the lines of the Danish Energy Agency.

4.30. Comments on this question came from 137 respondents across all respondent groups.

4.31. Many of these respondents - again, across all respondent groups - noted their support for a Government-owned energy company ( GOEC) to support the development of local energy. Some of these respondents reiterated that a GOEC must add value to existing organisations and schemes, and address specific market failures.

4.32. Potential roles for a GOEC: Many respondents cited a number of roles that could be undertaken by a GOEC. A key role was the provision of finance to support community-ownership, shared ownership or the development of energy systems projects. This could also provide significant benefits in levering investment, and in providing grants or low interest loans, which is of particular importance in areas where there may be little by way of economic incentives for the commercial development of projects or in generating capacity. Additionally, some respondents noted that a GOEC could provide guarantees or joint funding for shared ownership projects. In turn, this would help to create security of supply and overcome poor access to the grid.

4.33. Supplier of last resort: Several respondents also noted that a GOEC could be a supplier of last resort in instances where district housing scheme operators have gone into administration or in taking forward a project that a developer or an Energy Service Company ( ESCo) does not wish to take on. One organisation noted that a GOEC would not need to be involved in every scheme but should only act where a development is unable to match with an existing heat network provider. These comments came primarily from Third Sector / NGOs and Local Government respondents.

4.34. Providing advice, information and support: Several respondents also suggested that a GOEC could provide information, advice and support on tariffs and energy use to help address the current lack of switching and engagement on the part of the general public.

4.35. Adding value: Respondents noted a number of ways in which a GOEC could add value. Key was that a GOEC could facilitate community energy development on a long term basis; the long term nature of energy supply was a key theme emerging at this question. Several respondents suggested that Power Purchase Agreements ( PPAs) are a good way to ensure long term planning; this comment came primarily from Third Sector / NGOs and a small number of respondents within the Local Government, Public Sector/ Delivery Agency/ Regulator, Energy (Renewable) and Energy (Utility) sub-groups.

4.36. Potential in remote geographic locations: Several respondents - mainly from a range of different Energy sub-groups - felt that a GOEC could be useful in more remote geographic locations which have a high level of resources but poor grid access and where there is likely to be market failure. There was also a suggestion from a respondent in the Energy (Other) sub-group that a GOEC also offers potential to bring together off-the-grid gas customers to encourage group buying of oil to bring down prices or even in selling their resources to others.

4.37. Other benefits of a GOEC: A small number of respondents felt that a GOEC would operate efficiently, keep energy prices down, and help to alleviate fuel poverty and help to increase consumer confidence. Another benefit was that the GOEC would operate on a not-for-profit basis and offer support at a social level, which is preferable to privately owned companies that exist primarily to make profits for external shareholders. Some respondents also commented that this business model would mean that trust is built between communities and the Scottish Government, and where the focus can be on social and ecological benefits. It was also felt that a GOEC would allow for innovative energy systems and projects, and act as a catalyst for new developments and accelerate the development of renewable heat technologies. It was suggested that a GOEC could support renewable energy by sourcing power from local energy providers.

4.38. There were also a small number of comments that a GOEC would be able to acquire and share data as well as provide technical support.

4.39. Barriers to be overcome: A small number of respondents also noted there are a number of market barriers that a GOEC would overcome; this included current economic disincentives to the commercial development of generating capacity in Scotland or transaction costs; that barriers are less likely to impact on a Government-owned organisation because of the focus on social benefits and the long term nature of their planning. In turn, this will encourage local energy production. As noted by an organisation in the Public Service / Delivery Agency / Regulator sub-group:

"Establishing an arm's length GOEC with roles in supporting existing and new energy schemes and initiatives, and delivering energy infrastructure including district heating, could remove some of the barriers from establishing district heating that have been identified by the development industry. These barriers include the financial burden and long term involvement associated with installing, managing, maintaining and operating a district heating network."

4.40. Working within the planning process: Throughout responses to this consultation, respondents have referred to the planning system, and there were a small number of comments that a GOEC would help to get developments through the planning process or that the Masterplanning process could benefit from the impetus and discipline that a government body could bring.

4.41. Other ways in which small numbers of respondents felt a GOEC could add value included:

• The regulation of district heating and providing advice on the development of LHEES.
• Delivery of SEEP at a national level through branding and associated marketing campaigns.
• Scotland would benefit greatly from community ownership of energy generation and supply at local and national level.
• Would encourage developers to connect to networks.
• Will help reduce the gap left by reduced subsidies for renewable energy.

4.42. A small number of respondents noted a preference for government in the energy market being used to support a GOEC rather than providing subsidies for large scale energy projects such as Hinckley Point nuclear power station and / or Swansea Bay tidal barrage, both of which are perceived to be expensive, supporting the wrong type of energy development and offering little or no social benefit.

4.43. Questioning the need for a GOEC: While many respondents were supportive of the concept of a GOEC to support the development of local energy, a small number queried the need for a GOEC. Two organisations in the Engineering / Network sub-group felt that central expertise is needed but that this could be provided directly by government or by a Scottish Green Investment Bank.

4.44. Some respondents requested further clarity on what is intended by a GOEC before offering a view on the benefits of a GOEC to support the development of local energy. For example, what form a GOEC would take, what role(s) it would adopt, how it would operate, what benefits it would bring, and so on.

4.45. Opposition to a GOEC: There was opposition from several respondents, primarily Individuals and those within various Energy sub-groups. A key reason for this was that the creation of a GOEC would detract from the existing range of initiatives and activities undertaken by other organisations, with some of these noting their support for initiatives already in place such as CARES, LCITP or the Innovation Fund. As such, there was some commentary that a GOEC should meet gaps in the market rather than replicate existing resources.

4.46. A small number of respondents within the Utility, Engineering / Network and Renewable sub-groups also felt the private sector has a record of success and should be the primary vehicle for the delivery of the Energy Strategy. Comments included that a GOEC would have a conflict of interest between its role within policy and its role as a business owner, and that public ownership of energy generation is not appropriate at a larger scale as it risks distorting the market and deterring private investment.

4.47. Possible alternatives: Several respondents made suggestions for alternative models that could be used instead of a GOEC, although most noted support for a GOEC to retain some sort of regulatory role which would not conflict with a role as a supplier or developer of energy.

4.48. A small number of respondents felt that it would be better for the Scottish Government to support the growth of community not-for-profit energy supply companies and thus the growth of developments in the district heating or CHP markets.

4.49. Potential for an ESCo: The most frequently cited alternative model - often by respondents in the Local Government sub-group - was ESCos (Energy Service Companies). The advantage of an ESCo is that it might be easier to roll out locally and will have an understanding of local community needs. Also, an ESCo can help to provide energy and tariffs to customers at a lower cost while at the same time providing a source of income for local authorities, which in turn may reduce the burden on the Scottish Government financing of local authorities. An ESCo could also seek to address the issue of the current energy market that penalises individuals living in more remote areas. Finally, an ESCo would allow for the procurement of energy infrastructure on a national scale to achieve economies of scale. A number of respondents also cited examples of successful ESCos that are already being run by local authorities.

4.50. Support for Government and Community-Owned Energy Companies: There was also some limited support for community-owned schemes or for Government and Community-Owned Energy Companies ( GCOECs). As with an ESCo, there was a perception that it would be possible to get better buy-in to a community-owned scheme. As with the GOEC, key benefits were lower prices and social benefits such as reductions in fuel poverty.

4.51. Other alternatives to a GOEC: There were a small number of mentions of Municipal Energy Companies ( MECs), with comments that these would allow for the Scottish Government to remain in a regulatory role and support intervention in areas of failure. There was also support - primarily from Community or Third Sector / NGO respondents for a Scottish Energy Company ( SEC), with some suggestions that SEPA could be a stepping stone towards creation of a SEC. A key benefit to this model is that local initiatives would benefit from collective knowledge, skills exchange and access to capital through some sort of consortium.

4.52. The potential for an Energy Agency: Several respondents suggested a need for a centralised Energy Agency; often citing the example of the Danish Energy Agency. It was suggested that an Agency like this could focus on delivery, measurement and verification of projects and offer the services of a 'one-stop-shop', acting as a centralised planning authority, offering procurement services, expertise and managing relationships with other national bodies. There were also some comments of the range of funds and initiatives that are available within this sector and the need for an organisation to simplify and offer advice on what support is available and how this can be accessed.

4.53. It was also suggested that this Agency could have responsibility for the delivery of SEEP and that LHEES could learn lessons from the Danish model. There were also a small number of mentions of other countries operating central agencies along similar lines and these included the Sustainable Energy Authority of Ireland and Sweden.

Additional comments

4.54. A number of other comments were made by small numbers of respondents and these included:

• Requests to simplify the number of agencies that exist within the sector and to reduce the complexity of the range of support and funds that is available and how to access these.
• There is a role for a Scottish Renewable Environment Bond (this issue is covered in the following question).
• The Scottish Government should have responsibility for running the National Grid in Scotland.

A Scottish Renewable Energy Bond

Q14: What are your views on the idea of a Scottish Renewable Energy Bond to allow savers to invest in and support Scotland's renewable energy sector? In answering, please consider the possible roles of both the public and private sectors in such an arrangement.

Summary of main themes:

• Many respondents, across all respondent groups, noted support for a Scottish Government Renewable Energy Bond, although some noted that the Bond should focus on a wider range of energy sectors and not just renewables. Very few respondents were opposed to this concept.
• Key advantages were that it could be an important delivery mechanism in instances where finance from other sources is a challenge, and that it would allow savers and investors to have a stake in the sector and open up ownership to a broader range of audiences. Respondents cited little by way of disadvantages.
• Some respondents felt this is not a new concept and cited examples of successful projects elsewhere.
• There were some suggestions for alternative options for raising capital including crowdfunding and Individual Savings Accounts ( ISAs).
• There were some cautionary comments on issues that will need to be considered given that delivering a new project to market would represent a sizeable challenge.

4.55. Comments on this question came from 123 respondents across all respondent groups.

4.56. Over half (73) across all respondent groups noted their support for a Scottish Government Renewable Energy Bond to allow savers to invest in and support Scotland's renewable energy sector.

Advantages of a Scottish Renewable Energy Bond

4.57. Respondents cited a number of advantages to this Bond. Several respondents noted that finance is likely to be a key challenge for complex local energy schemes and a Bond could be an important mechanism to deliver such schemes. Several others noted that it will allow savers and investors to have a stake in the renewable energy sector and open up ownership to a broader range of audiences. As noted by an organisation in the Energy Renewables sub-group:

"This will allow savers to generate a rate of return on investment from the growth of the industry and bring in capital to finance future development at an attractive rate to developers."

4.58. Other advantages cited by small numbers of respondents were that a Scottish Government Renewable Bond could:

• Allow savers and local communities to support and profit from the development of the energy sector.
• Be financially secure, environmentally desirable and socially acceptable.
• Be attractive to a range of different audiences including pensions investors and pension funds, local authorities, savers and local communities.
• Help to educate and engage people about energy issues or raise awareness of energy issues, with a small number of comments that this needs to offer accessibility for all individuals, including low income households.
• Allow investment in new technologies that are not yet mature enough to attract funding, or that the Bond would need to be willing to lend to riskier projects.
• Open up ownership of renewable energy projects to a wider range of communities or other groups.
• Offer a good rate of return, although two organisations in the Energy - Engineering Network noted that it the Bond focuses on specific emerging technology projects, it might not offer the levels of return demanded by corporate bonds.
• Be done at a local community level so that local people reap the benefits and obtain an income (cited primarily by Engineering / Network and Other Energy sub-groups).
• Overcome the issues of limited funding and high borrowing costs that often act as barriers to the development of community-scale generation.
• Provide a good way for the Scottish Government to forge a stronger relationship with businesses.
• Raising funds through a nationwide mechanism has the advantage of achieving scale and enabling investment in large projects.
• This can be used to provide guarantees to investors.

4.59. A number of respondents noted this is not a new concept and that there have been a number of community share issues to date to raise capital for local energy projects. Some organisations, mainly in the Energy - Renewables sub-group, commented specifically on green bonds that have become a growing source of finance for local community projects in recent years.

4.60. While a small number of respondents agreed that this Bond should focus on renewable energy investments, several others across other sub-groups including Energy - Other and Non-Energy groups, felt this should include all low carbon technologies.

4.61. Examples provided of successful projects, cited mainly by respondents in the Third Sector / NGO or Community sub-groups, included:

• The Edinburgh Community Solar Co-operative.
• The Property Assessed Clean Energy ( PACE) project in California.
• Climate Bonds.
• Qualified Energy Conservation Bonds from the US Department of Energy.
• Energy Efficiency Green Bonds in Mexico.

Alternative options

4.62. Alternative suggestions on ways to raise capital and included:

• Crowdfunding.
• Promoting mechanisms which support local energy bonds.
• Individual Savings Accounts ( ISAs).
• Aligning with the Scottish Local Government Pension Scheme.
• Investing through The Renewables Infrastructure Group ( TRIG) which is listed on the Stock Exchange.
• Creation of an energy fund as outlined in a Scottish Renewables discussion paper (suggestion came mainly from organisations in the Energy - Renewable sub-group)
• Project Bond Credit Enhancement ( PBCE) which has been adopted elsewhere to assist in the development of a bond market where market appetite was low.

Concerns

4.63. Respondents cited very little by way of disadvantages to the setting up of a Scottish Renewable Energy Bond, although a small number of respondents noted concern that this could be to the detriment of local projects, with a risk that communities could find themselves competing with the Scottish Government for investors' money.

4.64. Only a small number of respondents noted any opposition to the establishment of this Bond and these were mostly Individuals, with some scepticism over likely rates of return or a dislike of government bonds.

4.65. Several respondents, while being supportive of a Bond, noted some caution or highlighted issues that will need to be considered if it is decided to go ahead with a Bond. For example, a small number of respondents commented that delivering a new financial project to market would represent a sizeable challenge needing significant legal and commercial expertise; or that consideration would need to be given to risk management, governance, liquidity, tax treatment or structuring.

4.66. There were also a small number of concerns that bonds might be taken up by investors out with the local community because of their attractive returns and that the bond sales need to be structured in such a way as to ensure that local communities benefit, regardless of who owns the Bonds.

4.67. Several respondents, while generally supportive of the concept, noted that further exploration and detail is required.

Possible roles of the public and private sectors

4.68. Respondents provided little commentary on the role of the public and private sectors. There was a degree of support for the private sector to be involved but with a preference that they are regulated regarding their rates of return and they would need to consider the social and environmental objectives of any project. Another respondent commented that while there may be a role for the private sector, the public sector should take the lead.