Draft Energy Strategy and Just Transition Plan

Chapter 5: Creating the conditions for a net zero energy system

Creating the conditions for a net zero energy system - By 2030,Scotland's energy supplies will be secure, reliable and affordable for people and businesses across the country. The total electricity produced in Scotland will contribute to increasing energy security and limit the impacts of global energy shocks.

As we transition to a net zero energy system, renewables and other zero-carbon technologies, including pumped hydro storage, will need to provide all the services required to ensure a secure energy system.

Along with ensuring that investment in our infrastructure is sufficient to allow us to maximise the benefits of increasing renewable electricity and hydrogen supplies we need to integrate the demands of heat, industry and transport to ensure that we take a whole systems approach to our future net zero energy system.

This chapter sets out actions to ensure that we have a resilient, affordable and secure future energy system. Many of the areas covered in this chapter sit across the reserved powers of the UK Government, and we therefore outline how we will work together to achieve the necessary policy, regulation and investment changes require to deliver benefits for net zero and our economy.

We will:

Ensuring energy security and resilience

Energy Security

We will work with key industry stakeholders and partner countries to explore the goal of a fully interconnected North Sea grid, opening up further opportunities for export of Scottish renewable energy to assist others in meeting their decarbonisation goals.

Electricity System Operability and Restoration

We will continue to press UK Government to update technical requirements for black start services.

Pumped Hydro Storage

We call on the UK Government to support the development of pumped hydro storage through an appropriate market mechanism.

Flexibility

We urge the UK Government to make the ancillary service markets more accessible for Battery Energy Storage Systems (BESS) and other low carbon technologies ahead of fossil fuel powered alternatives.

We commit to taking forward research to explore the opportunities available to Scotland through Vehicle to Grid technology as part of our net zero energy system.

We will explore the role of EV battery recycling as a circular economy opportunity for Scotland.

Energy Network Resilience

We will continue to seek to influence UK Government decision-making to ensure Scottish interests and all risks are fully taken account of.

Climate Impacts

We will develop the next statutory Climate Change Adaptation Programme for publication in 2024, in response to the full set of 61 risks and opportunities identified in the 2021 UK Climate Change Risk Assessment.

We will improve our response to climate related events by facilitating the local authority roll out of the Persons At Risk Distribution (PARD) system.

Energy markets and network regulation

Electricity Market Arrangements

We are engaging with the UK Government to ensure that any reform of the wholesale market supports continued deployment of renewable generation and adequate protection to consumers.

We will continue to call on the UK Government to reform the GB wholesale market to enable consumers, communities and businesses in Scotland to share the benefits of low-cost renewable power.

We will continue to call on the UK Government to reform the market to break the link between the price of electricity and the cost of gas.

Network Investment

We are working closely with the network companies to support timely delivery of required electricity network infrastructure.

We are engaging with Ofgem and the network operators to provide clear and transparent information on the impact of SG policies and targets on network infrastructure.

We are influencing policy and regulatory reform at a UK level – for example through the Offshore Transmission Network Review (OTNR).

Grid charging methodologies

We will continue to press for reforms to the transmission charging arrangements through Ofgem's transmission charging task force and National Grid modifications.

Constraint Costs

We will continue to work with National Grid ESO, transmission owners and Ofgem to explore opportunities to accelerate planned network investment to relieve constraints.

We will continue to work with National Grid ESO to explore opportunities to use the value of constraints as a means of incentivising demand, such as heat and hydrogen.

We are engaging with the UK Government to ensure that any reform of the wholesale market supports continued deployment of renewable generation and adequate protection to consumers.

5.1 - Ensuring energy security and resilience

Energy security is a matter reserved to the UK Government (See Annex E). Scottish Ministers have responsibilities in responding to and managing civil contingencies, including large scale loss of electricity supply.

Security of electricity supplies

Excluding intermittent renewable generators such as wind and solar, Scotland had a maximum supply capacity of 10 GW available in 2020/21. This breaks down as 5.6 GW of non-intermittent generation in Scotland and 4.5 GW of import capability. Scotland's peak demand in winter 2020/21 was 5 GW, comfortably within maximum supply capacity of 10.0 GW.^[104]

Scotland's electricity system is part of the broader GB system, providing a form of resilience as the GB system can provide both a source of import and export. While Scotland's electricity has historically been provided by nuclear power stations, large fossil fuel power stations, pumped storage and hydro, National Grid Electricity System Operator (National Grid ESO) has confirmed that Scotland's demand can be met even in the event of earlier than expected closure of existing nuclear facilities. Increasing our levels of renewables capacity (as set out in Chapter 3) will also boost the available energy for our growing net zero energy system.

Cross border transfers of electricity and the use of interconnection with the diversity of technologies on the continent helps to maintain resilience in the wider system against individual shocks and to make the most efficient use of the resources at our disposal. Collaboration through interconnection with other countries will become increasingly important as offshore wind becomes a bigger proportion of our energy generation, and it will be vital to bring these projects forward in an efficient way that helps future-proof our energy system.

Maximising benefits to our economy, businesses and workers

A fully integrated North Sea Grid would open up opportunities for the large-scale export of Scottish renewable energy to the rest of Europe, also realising Scotland as a world-leading destination for the import and storage of CO₂. We will work with key industry stakeholders and partner countries towards the goal of a fully interconnected North Sea grid, opening up further opportunities for export of Scottish renewable energy to assist others in meeting their decarbonisation goals.

Building in flexibility to respond to changing levels of supply and demand in our electricity system

Maintaining energy security includes responding to seasonal variations in supply and demand. Seasonal variations in the demand for electricity are much smaller than they are for gas^[105]. This pattern will change as heat, transport and industry decarbonise and demand larger amounts of electricity than today. Efficiently matching energy supply and demand for power, heat, transport and industry will allow us to make the best use of our flexibility tools, such as energy storage (including pumped hydro storage as well as grid scale batteries) and demand-side response.

There are several technologies that can increase flexibility in our electricity system and provide wider benefits for consumers and society. This includes grid scale battery storage, as well as pumped hydro storage. Scotland has approximately 864 MW of electricity storage capacity^[106], and 2.2 GW of battery storage that has been approved planning permission. We need to significantly increase this capacity.

In its role balancing supply and demand across the electricity system, National Grid ESO must keep the system within defined operating limits. Traditionally, these services were often provided by thermal generators such as gas-fired power stations. As we transition to a net zero energy system and reduce our dependence on fossil fuel generation, renewables and other zero-carbon technologies, including pumped hydro storage, will need to provide all the services needed to ensure a secure electricity system.

System level storage (sometimes knowns as Long Duration Energy Storage – LDES) plays an important role in Scotland's energy system. Several recent studies have highlighted the benefits of deploying long-duration storage technologies such as pumped storage in the UK. For example, Aurora Energy Research recently found that 24 GW of long-duration electricity storage (LDES), equivalent to eight times the current installed capacity, would be needed in Great Britain to meet the government's commitment to decarbonise the power sector by 2035^[107]. Such levels of LDES would not only reduce overall system costs by £1.13 billion per annum. (2.5%) benefiting bill payers, but also drastically cut our reliance on imported gas.

Pumped hydro storage (PHS)

PHS is a flexible technology that can ramp up to respond to periods of low output (for example days with low wind). Depending on the size of the body of water and number of turbines, it can produce relatively small amounts of electricity or provide a substantial amount to the grid. When there is more power on the system than demand, a pump hydro storage will take power from the system to push water back up hill ready to be used again.

In recent years the removal of the UK Government's Feed in Tariff (FiT) and Renewables Obligation (RO) mechanisms has made the installation of new conventional hydro power schemes challenging. However, Scotland remains the UK's hydro capital, with over 88% of the total UK hydro capacity.^[108] PHS also continues to play a pivotal role in Scotland's energy system providing long-term storage and reserve for the electricity networks. PHS accounts for 740 MW of Scotland's 864 MW of energy storage^[109].

There are currently 1.5 GW of pumped hydro storage projects awaiting construction in Scotland that could deliver vital flexibility for the grid and balance out the intermittent nature of renewables. However, the lack of a dedicated support mechanism means these projects do not have sufficient certainty to proceed. We have repeatedly called on the UK Government to support the development of pumped hydro storage. Recent events have fully demonstrated that reliance on gas balancing is no longer tenable from a price or environmental perspective. Given this, it is now imperative that the UK Government provides the right framework for investment to enable pumped hydro storage projects and similar technologies to proceed.

Maximising benefits to our economy, businesses and workers

Pumped hydro storage projects have the potential to create a large number of jobs and benefit the local economy, as well as providing much needed resilience in the system. At up to 1.5 GW of capacity and 30 GWh of storage, SSE Renewables' Coire Glas pumped hydro storage project will more than double the UK's electricity storage capacity. That is equivalent to enough power for 3 million homes for up to 24 hours non-stop. While pumped storage is a well-established and proven technology, it will be the first project to be developed in the UK for over 30 years. Coire Glas represents over £1 billion in investment for SSE Renewables, and another significant investment in the Great Glen, and Highland Region, with further community investment funds in addition to more than 500 jobs during construction.

Batteries

Batteries can be combined to provide energy storage: In a domestic setting supporting the energy efficiency of individual homes; In communities and neighbourhoods, supporting the energy efficiency of the local low energy network; In strategic locations and through aggregating a large number of fixed and vehicle batteries to support regional energy and grid balancing a high energy network.

Utility scale battery storage offers fast responding, dispatchable power when required. As of September 2021, only 124 MW of the total 864 MW^[110] of energy storage was provided by Battery Energy Storage Systems (BESS) capacity installed in Scotland. However, there is a further 2.1 GW that has secured planning permission. Typically, these systems use lithium-ion technology, and only contain energy to dispatch full power continuously for a short number of hours. They also provide a number of ancillary services required to maintain stability within the electricity networks. We urge the UK Government to make these markets more accessible for BESS and other low carbon technologies ahead of fossil fuel powered alternatives. Our Revised Draft NPF4 supports development proposals for all forms of renewable, low-carbon and zero emissions technologies including energy storage, such as battery storage and pumped hydro storage.

Vehicle-to-grid (V2G)

V2G technology allows electricity stored in the battery of an electric vehicle to be supplied back into the network through a two-way V2G enabled charger. It enables electric vehicles to be used to store energy when generation exceeds demand and supply it back to the network during periods of peak demand when vehicles are less likely to be in use. This means there is potential for the transport system to support the grid in integrating high levels of variable renewable energy sources and consequently reduce the need to call on gas-powered stations to meet high energy demand.

It also presents an economic opportunity for electric vehicle owners and operators to sell electricity stored in their vehicles batteries back to the grid when it is most expensive, then charge during cheaper periods. Although there will be economic benefits for individuals who install V2G chargers, the largest benefits would likely be for organisations who own large fleets.

Traditionally these fleets only generate revenue whilst operational, however V2G means they could also provide revenue in their downtime.

Research suggests V2G could be close to mass market rollout. V2G technology was demonstrated in Britain for the first time in August 2022, showing the potential direct role consumers could play in balancing the grid. We will take forward research to explore the opportunities for Scotland in this area.

Maximising benefits to our economy, businesses and workers

Research suggests that over 14,000 tonnes of energy storage and electric vehicle (EV) batteries will be placed on the market in Scotland on an annual basis by 2050. It is estimated that the total capacity of the EV batteries reaching end-of life in 2050 will be between 4.8 and 7.7 GWh.^[111]

End of life waste may create significant circular economy opportunities for businesses in Scotland:

• Repair: Triage battery cells to fix faulty/damage elements.
• Refurbish: The battery is disassembled, and cathode material is restored for a new battery or partially reused for manufacturing of a new battery.
• Remanufacture: The battery is disassembled, and intact parts are reused whilst defective parts are restored to a like-new capability.
• Recycle: Extracting and processing the batteries raw materials through pyro, hydro, or direct recycling processes. These are then put back into the supply chain for reuse or other uses.
• Reduction: Reducing hazardous waste.

A number of businesses have already begun to operate in this market, with 436 registered industrial battery producers in the UK as of May 2022. Of these, 10 were companies registered with facilities in Scotland. Commercial-scale recycling for EV batteries is expected to become sustainable in the next 5-8 years, with further potential opportunities for Scotland in addition to the reuse of batteries for energy storage. There are currently gaps in data on battery composition, use and disposal. ^[112] Improving current policy and regulation is likely to help support the development of a more circular economy for batteries, reducing waste and maximising the value of batteries, and the rare earth elements they contain, for Scotland's economy. We will further explore this opportunity in 2023.

Hydrogen could also play a useful role in delivering large-scale and long-term energy storage in an integrated energy system and has the potential to replace or augment the critical balancing and resilience services that natural gas storage provides to the energy system today. It can help address intermittency of renewables through its production by electrolysis at times of excess green electricity supply. Hydrogen electrolysers co-located with renewables or deployed at scale in strategic locations will enable this.

Electricity System Restoration

The Scottish Government welcomes the Electricity System Restoration Standard proposed by BEIS in April 2021. This requires that at least 60% of demand can be restored in each region of GB (including Scotland) within 24 hours of a GB wide blackout, and that all demand can be restored within 5 days.

During events like this, the electricity system is traditionally restarted using thermal generation. However, there is a growing level of expertise in Scotland in using renewable generation to provide system restoration services. This innovative approach could mean that ultimately renewables could provide a cost-effective restart service for the electricity system.

Although the technology exists, to encourage this approach requires National Grid ESO to develop market mechanisms tailored for renewable generation to participate effectively. National Grid ESO has existing markets for black start services, but the technical requirements are based on those of thermal power plants. The Scottish Government will continue to press the UK Government to update these requirements, taking into account lessons learned from the Scottish Government supported Dersalloch trial.^[113]

As thermal generation looks to retire, National Grid ESO has been working with key stakeholders to establish alternative avenues to restore power in the event of a national power outage. In March 2022 they tested the feasibility of using Drax Power Station and Cruachan pumped hydro power station to restart part of the GB transmission network. This test was a success and demonstrated the ability to reconnect the North of England and Scotland from two existing Restoration Service Providers.

Resilience

A resilient energy system is one which can allow continued generation, transmission and consumption of energy, without having an impact on other parts of the system. Short-term and prolonged outages of parts of the energy system (caused by technical issues, rare or adverse weather) can have a significant impact on people and businesses.

The Scottish Government takes an 'All Risks' approach to Critical Infrastructure Resilience (CIR) through the Scottish Government's Strategic Framework 2020-2023 outlined in Keeping Scotland Running | Ready Scotland.^[114]

Responsibility for the security and resilience of infrastructure lies solely with UK Government. The Scottish Government seeks to influence UK Government decision-making to ensure Scottish interests and all risks are fully taken account of. To this end, Scottish Government sits on energy sector security and resilience forums at a UK level.

Increased use of digital technologies will support this transition. However, we must be aware of the increased cyber security risk. It is paramount that we have the capabilities and capacity to withstand, adapt to and rapidly recover from cyber incidents and attacks, while preserving the continuity of these critical infrastructure operations.

It is vital that the whole energy system is resilient to the impacts of climate change and other local and global phenomena which can impact our energy system. The Climate Change Committee (CCC), set out eight highest priority climate risk areas for urgent action to enhance resilience in June 2021 as part of its advice to governments across the four UK nations. 'Risks to people and the economy from the climate-related failure of the power system' is one such priority risk area, due primarily to projections indicating that both dependence on electricity is likely to increase through the net zero transition, alongside an increase in intensity and variability of extreme weather events.

The locked-in impacts of climate change, such as the increasing frequency of severe storms and flooding, can have major effects on the ability of network and other key infrastructure to remain operational. While storms in recent years have led to severe damage to networks infrastructure, we must be prepared for such weather to become more common and it is vital that the networks look to increase, where possible, practical and efficient, the resilience of the network to minimise the impact of such events on homes and other energy users.

Some climate impacts vary substantially across Scotland. For example, extreme winter rainfall is increasingly affecting the west of the country more heavily, whereas summer droughts typically affect the east. Small low-lying islands are also under particular threat from climate change and predicted sea-level rise. Analysis by the CCC shows that it is often more remote parts of the country that are most vulnerable to these impacts and where it takes longer for power to be restored. Disruption to energy supply also tends to affect those who are already more vulnerable; e.g. Storm Arwen left 80,000 homes in Scotland without power and Ofgem's review into the networks' response recommended that all networks develop robust winter preparedness plans as an important part of ensuring that all customers, including those in vulnerable situations, are effectively supported^[115].

In October 2022, the Scottish Government published the third and final report in the response to Storm Arwen^[116]. It details the coordination of a Winter Preparedness Programme, improved public communications, and welfare checks as part of a wide range of 'care for people' in the event of a power outage caused by a major storm event. We will improve our response to climate related events by facilitating the local authority roll out of the Persons at Risk Distribution (PARD) system across Scotland, which helps local authorities and the NHS to identify vulnerable individuals during an emergency.

The Scottish Government is currently developing the next statutory Climate Change Adaptation Programme for publication in 2024, in response to the full set of 61 risks and opportunities identified in the 2022 UK Climate Change Risk Assessment (which in turn is informed by the CCC's independent evidence base as noted above).

5.2 - Energy markets and network regulation

Electricity market arrangements

The UK Government's Review of Electricity Market Arrangements (REMA) seeks views on a wide range of options to address the combined challenges of responding to higher global energy costs, the need to further boost energy security and move the UK to a cleaner energy system. The Scottish Government responded to the first phase consultation on 10 October 2022.

Changes being consulted on include:

• de-coupling costly global fossil fuel prices from electricity produced by cheaper renewables, a step to help ensure consumers are seeing cheaper prices as a result of lower-cost clean energy sources.
• introducing incentives for consumers to draw energy from the grid at cheaper rates when demand is low or it's particularly sunny and windy, saving households money with cheaper rates.
• reforming the capacity market so that it increases the participation of low carbon flexibility technologies, such as electricity storage, that enable a cleaner, lower cost system.

Benefits to our communities and regions

We continue to call on the UK Government to reform the GB wholesale market to enable consumers, communities and businesses in Scotland to share the benefits of low-cost renewable power. The UK Government must design and implement recently announced changes to the wholesale market for renewable and nuclear generators in a way that maximises the benefit to consumers and does not disadvantage generators who are not making excessive profits.

Longer-term, the Scottish Government is urging the UK Government to reform the market to permanently break the link between the price of electricity and the cost of gas. Scotland is part of the GB system and GB gets around 35% of its electricity demand from gas-fired power stations. The cost of gas therefore has a strong impact on the cost of electricity in the GB market. Gas generation is approximately 9 times more expensive than renewables. Even if we assume the highest cost estimates for grid integration of intermittent renewables (£30/MWh), gas generation is still almost 6 times more expensive than renewables.

Energy networks

Significant infrastructure investment in Scotland's transmission system is needed to ameliorate constraints and enable more renewable power to flow to centres of demand. National Grid ESO has identified the requirement for over £21 billion of investment in GB electricity transmission infrastructure to meet 2030 targets. Over half of this investment will involve Scottish Transmission owners SPEN and SSEN. The most recent Network Options Assessment from the ESO also includes two major subsea links to England from Peterhead.

The Scottish Government is working closely with network companies to support timely delivery of this infrastructure. Our Major Electricity [Networks] Project Group brings together representatives from industry and across Government to monitor progress, identify barriers and mitigations.

Our Energy Networks Vision to 2030^[117], published in 2019, describes our vision for Scotland's networks: placing Scotland's consumers, economy and society at the heart of our energy system as we transition to net zero.

In the years that have followed, significant progress has been made:

• Both transmission and distribution businesses have published ambitious business plans to reflect the scale and pace of delivery required to meet Scottish Government ambitions.
• National Grid ESO has progressed a coordinated approach to network design, supporting delivery of Scotland's offshore wind ambitions.
• Project PACE and the Electricity A9, developed through the Scottish Government's EV Strategic Partnership have clearly demonstrated the value of collaboration between DNO's and Local Authorities, ensuring that the network acts as an enabler for net zero change.
• Our gas networks are continuing to explore and expand on the opportunities that will come through the hydrogen economy by testing and demonstrating blended and 100% hydrogen distribution through the gas network infrastructure.

There is the potential to repurpose and redesign some parts of Scotland's gas networks in order to carry low carbon gases, including biomethane and hydrogen. There is also the potential to repurpose some parts of the gas network to transport CO₂ associated with Carbon Capture and Storage.

While policy and regulation in respect of energy networks is reserved to the UK Government, the Scottish Government has an important role to play. We are engaging with Ofgem and the network operators to provide clear and transparent information on the impact of SG policies and targets on network infrastructure.

We are also influencing policy and regulatory reform at a UK level to ensure that it supports the delivery of Scottish Government policies and targets – for example working with BEIS, Ofgem and National Grid ESO through the Offshore Transmission Network Review (OTNR). Relevant areas of devolved policy and decision making are regularly reviewed to ensure they continue to support timely delivery of network infrastructure.

Maximising benefits to our economy, businesses and workers

New subsea connections will strengthen our ability to export renewable power while new 'first of a kind' coordinated connections will minimise the overall cost of offshore connections sharing infrastructure between offshore developers, Offshore Electricity Transmission (OFTOs) and onshore transmission owners. For example, Ofgem has approved the need for a 1.8 GW transmission link from the Western Isles to the mainland National Grid. This will not only enable onshore wind projects on the Western Isles to export to the grid, but also offshore ScotWind projects, and will provide a more cost effective solution than individual radial connections.^[118]

Constraint costs

When the electricity transmission system is unable to transmit power being generated to the location of demand, due to congestion at one or more parts of the transmission network, constraint management is needed.

As deployment of renewable generation has increased, the volume of generation managed under the current 'connect and manage' regime has grown. This has meant that the cost of constraint management is now expected to reach close to £2 bn/year by late 2020s^[119]. Constraint payments are paid by users of the network, including consumers.

The Scottish Government is clear that this expected increase in cost means that the threshold for significant new infrastructure is met and the UK Government must enable investment to be taken forward at the earliest opportunity to relieve constraints. We continue to work with National Grid ESO, transmission owners and Ofgem to explore opportunities to accelerate planned network investment.

We will also continue to work with National Grid ESO to explore opportunities to use the value of constraints as a means of incentivising demand – such as heat and hydrogen.

The rising cost of constraints has also been cited as a strong indicator for reform of the GB wholesale market under the UK Government's Review of Electricity Market Arrangements. The Scottish Government is engaging with the UK Government to ensure that any future arrangements support continued deployment of renewable generation and adequate protection to consumers.

Grid charging methodologies

Just Transition Commission recommendation

The current transmission charging scheme militates against investment in Scottish solutions and inflates costs for Scottish communities. It needs urgent reform. The Scottish Government should bring the full weight of its influence to bear on this matter, which remains reserved to Westminster.

The Scottish Government has long called for the GB regulator to reform the charging arrangements used to recover the cost of our transmission grid infrastructure.

With more forms of zero carbon generation and demand seeking to make use of a net zero electricity system, it is increasingly important that these arrangements are reformed in the right way, where those who drive costs on the system are paying their share.

Despite our extensive renewable capability, renewable generation in Scotland is subject to higher transmission charges. In a net zero world it is counterproductive to care more about where generation is situated than what type of generation it is, and a new, sustainable long-term approach is needed to support an energy transition that is just and fair for everyone.

We must also consider the potential for charging arrangements to lead to unintended consequences in other parts of the energy system. For example, high transmission costs and volatile pricing forecasts placed on generators in Scotland can increase investor risk and drive-up Contract for Difference (CfD) prices for generators across Great Britain.

Further, the UK Government must take a carefully considered approach to determining how locational signals are used, and take full account of the risks of placing those costs on customers as a barrier to net zero investment.

The Scottish Government will continue to press for similar reforms to the transmission charging arrangements through Ofgem's transmission charging task force. Scotland's Energy Task Force identified transmission charges as one of the key barriers to net zero as part of the Joint Business Plan for Unlocking Investment in Scotland's Energy Sector.⁵

In today's market, TNUoS (Transmission Network Use of System charging) is the only form of locational signal applied to generation. However, for many forms of generation like wind and solar it is not the main factor to inform siting decisions.

Ofgem has acknowledged the potential for network charges to act as an unnecessary barrier to net zero. In its Access SCR decision, Ofgem removed the contribution to reinforcement for demand connections. This recognised that impact on network costs will be outweighed by the broader benefits of supporting the transition to net zero^[120]

This is a welcome intervention that will ensure customers looking to adopt heat pumps or EVs are paying for the network on a level playing field. We would urge similar pragmatism to be applied to assessment of transmission charges.