Green Industrial Strategy

Part One: A Green Industrial Strategy For Scotland

A Scottish Industrial Approach

The Green Industrial Strategy has a single goal: to help Scotland realise economic growth opportunities from the global transition to net zero.

Scotland has pledged to deliver a just transition to net zero by 2045. This mission requires an economic transformation. It also presents huge economic opportunities that go beyond Scotland’s long held status as an energy powerhouse. Offshore oil and gas have for several decades been an integral part of Scotland’s economy. However, North Sea production is by every estimate set to decline due to the geological maturity of the basin. Seizing the opportunity for Scotland to play a leading role in the emerging global net zero energy economy offers a route to creating highly-skilled, well-paid jobs with economic and social value. This will offer opportunities, amongst others, to those in the oil and gas industry and over time, has the potential to provide even more jobs than North Sea oil and gas has today^[1].

Scotland is not, and does not need to be a market leader in every aspect of the transition to net zero. We cannot do everything, as a country or a government. In identifying priority opportunity areas for economic growth, we are making a strategic choice to focus our efforts and resources in specific areas, based on an assessment of Scotland’s strengths and likely sources of comparative advantage. We recognise that we are operating in an international commercial and investment environment and our openness to trade, and active participation in global value chains will be essential.

Consistent with our view of what a modern industrial strategy means, these opportunity areas span sectors, sub-sectors, and places. For example, growing our hydrogen sector will create opportunities across the hydrogen supply chain from manufacturing, production, end use, transportation and storage infrastructure, to regulatory innovation, standard setting, and exports. Similarly, the geography of our energy sector presents distinct economic opportunities for different regions of our country, be that as a result of the distribution of our natural resources where our rural and island areas play a pivotal role, our physical proximity to key demand centres in North West Europe, or our existing industrial assets such as our port infrastructure, new Green Freeports and Grangemouth.

Our ability to remain competitive and realise the potential benefits of these opportunity areas requires focused policy action to sustain a wider enabling environment. This requires cross-government effort and partnership working to apply the levers at our disposal to attract investment and secure a growth economy which helps improve the lives of the people of Scotland. Industry, business, communities, public institutions, and government must work together successfully to maximise fair and equitable benefits from energy transition and secure a fair and prosperous economic future.

This strategy sets direction, and makes a clear statement of our focus and intent. We fully expect that new opportunities will emerge as we make progress. Our approach will allow us to respond to those opportunities; adapting and evolving as our economy transitions, and shaped by ongoing engagement with businesses and stakeholders. The strategy is a key part of the broader National Strategy for Economic Transformation and links explicitly to our Energy Strategy and Just Transition Plan which highlights the crucial role and opportunity of renewable energy in Scotland. Indeed, it will sit alongside our broader suite of Just Transition Plans which describe how the transition to net zero in the most emitting sectors will be achieved in a way that delivers economic, social and community benefits, including fair work, environmental preservation and reduced poverty and inequality. There will be parts of our economy which are not a current focus for this strategy, but where ongoing Scottish Government support is vital to achieving other important aims and objectives – including those to do with our net zero targets and a just transition. Alongside the Fairer Scotland Duty Assessment, we anticipate that further equality and other impact assessments will inform specific actions within the strategy.

This Green Industrial Strategy will exist within a wider global context and is cognisant of Scotland’s position in wider green global value chains. The Scottish Government has limited borrowing powers for capital investment and this strategy does not seek to compete with the scale of public investment, spending and subsidies attached to recent industrial strategies in the USA, China or the European Green Deal Industrial Plan. This very acknowledgement is reflected in the distinctive approach the strategy takes – seeking to build on our natural strengths, to draw focus, to work with partners in Scotland, the UK, Europe and beyond, and to adapt and respond to emerging opportunities.

Finally, we recognise that Scotland is a small nation with a particular constitutional and fiscal context. Macroeconomic policy and much of the policy and regulatory environment for energy is reserved to the UK Government .The Scottish Government wants the people of Scotland to see maximum benefits from Scotland’s energy transition. However, while powers remain reserved, we are limited. We will use the powers we do have and explore further opportunities to invest in energy-related projects, technology, and infrastructure. By investing in the transition, the Scottish Government could, by promoting economic development and employment, provide direct economic benefits for the people of Scotland, reduce fuel poverty and support the creation of skilled jobs and fair work within a renewables-based energy system. We will undertake work to explore options for investment, considering the best approach to making this investment in ways that support our ambitions while delivering value for money for the taxpayer. This will include consideration of regional, local and community-based approaches.

Scotland’s Strengths

Scotland’s economy is well positioned to seize the economic opportunities arising from the global transition to net zero. Scotland has an open economy with a population of 5.4 million, a wealth of diverse and natural capital, and GDP of around £200bn, of which around 10% is currently associated with offshore oil and gas extraction.

This strategy is built around Scotland’s existing and emerging strengths and potential sources of comparative advantage. Recent research on the Economic opportunities in Scotland’s net zero and climate adaptation economy^[2] provides a summary of these, which include:

• Diverse natural capital – wind, water, and land with economic value and significance for the overall quality of Scotland’s economic growth.
• Potential first mover advantage in floating offshore wind.
• An established onshore wind industry with potential early mover advantage in some areas such as remanufacturing and decommissioning.
• Expertise in oil and gas; a world class subsea engineering workforce and existing strong offshore supply chains.
• Strategic oil and gas infrastructure that can be repurposed to provide capacity to sequester carbon in the north-sea; or support pipelines for hydrogen.
• A highly skilled energy workforce, elements of which already deliver on international and domestic projects.
• Geographical proximity to mainland Europe, and European markets.
• A supportive policy environment and government ambition.
• A strong culture of R&D, including world-leading universities and institutes.
• • Recognised strengths in services supporting our energy sector and comparative advantage in professional services and an expectation that domestic and international demand for services related to achieving net zero objectives will experience significant and sustained growth.
• An existing comparative advantage in financial services and a strong position in green and sustainable finance.

In line with the approach of A Trading Nation, Scottish Government’s Export Growth Plan^[3], this research suggests that a deliberate focus by the Scottish Government on internationalisation, looking beyond servicing domestic demand markets and targeting international growth markets; and commercialisation, bringing viable goods, services, and research products to market; could help create high-skilled and high-paid jobs and address regional imbalances.

Identifying Opportunity Areas

In identifying the opportunity areas, we looked at evidence around current and potential economic value, jobs and exports. We considered existing government evidence as well as more recent research and analysis into net zero and climate adapted economic potential by independent analysts^[4] as well as our enterprise agencies^[5].

The data around many emerging net zero sectors is still developing and can be inconsistent. It

can be challenging to make accurate projections about which parts of the economy will grow at what rate, as any projections will be affected by uncertainty around future global developments and the actions of other governments and the private sector. Our opportunity areas are not, therefore, the result of a single forecast or model. Instead, we have triangulated across several sources and engaged with academia and business to develop the most credible assessment possible of our current net zero economic strengths and the opportunities with most evidenced potential.

We have prioritised areas:

• Where Scotland has existing strengths. We are more likely to succeed and build globally competitive industries in areas where we have existing, underpinning strengths – such as a skilled workforce, strong business base or natural advantages. Our strategy aims to identify areas where Scotland can win in rapidly developing global markets. Forecasting is inherently uncertain so we must build on strong foundations.
• Where those strengths are most likely to lead to growth prospects, including the capacity to enable or unlock other industries, markets, or opportunities with growth potential. We have prioritised opportunities which have the potential to reach significant scale (both in terms of value and high-quality jobs) or to unlock further growth opportunities in the transition to net zero.
• Where those strengths and opportunities include the potential to grow exports. We have prioritised opportunities where analysis suggests Scotland has potential to succeed in both domestic and international markets. This should ensure sustainable growth opportunities, delivering beyond our domestic net zero transition, and exporting goods and services to the world.

Based on this analysis, we have identified five key areas in which Scotland is well placed to develop internationally competitive clusters in global growth sectors related to the transition to net zero:

1. Maximising Scotland’s wind economy: making the most of our natural resources and established onshore and offshore wind sectors; building on our first-mover advantage in floating offshore wind to generate clean electricity participating in global supply chains as well as expanding our domestic supply chain capacity, and seizing opportunities across the offshore wind supply chain, from infrastructure to manufacturing; positioning Scotland as a leader in material circularity of wind turbines and components.

2. Developing a self-sustaining carbon capture, utilisation and storage sector: building on our geological CO2 storage potential, expertise in subsea engineering and a highly-trained workforce; enabling low carbon products and aiming to capture a portion of the European market for carbon storage, which is both an economic opportunity as well as assisting our European neighbours to decarbonise.

3. Supporting green economy professional and financial services, with global reach: building on our strengths in high-value tradable services sectors and considering how Scottish Government can support future innovation and growth.

4. Growing our hydrogen sector: building on our comparative advantage of renewable electricity generation to become a leading nation in the production and export of reliable, competitive, sustainable hydrogen, hydrogen products, and related skills and services for domestic decarbonisation, and export to European markets and beyond.

5. Establishing Scotland as a competitive centre for the clean Energy Intensive Industries of the future: Supporting the electrification of our existing energy intensive industries where appropriate, and making Scotland internationally attractive as a location for existing and new clean Energy Intensive Industries which will benefit from our growing capacity in renewable electricity production.

The opportunity areas form a sequenced strategy for growing Scotland’s economy as we transition to net zero. The strategy is founded on a clear understanding of our natural resources, existing strengths and strategic assets which support the production of clean electricity from wind and the sequestration of carbon offshore. Those strengths underpin our existing global position in green services and will generate opportunities to grow this part of our economy in coming years. Generating growing amounts of clean electricity will, in time, unlock opportunities in hydrogen for use and export and to power the clean energy intensive industries of the future.

We will take a system-led approach to delivering these opportunities, recognising the complex interactions between these areas and with global markets. Our competitive position in green global value chains is dependent on the scale and nature of global markets – both in relation to exporting and importing as part of our supply chain. The opportunity areas also differ in their current scale and maturity. The role for government in supporting growth across the opportunities will be varied and, consistent with our Innovation Strategy, we will remain agile in identifying further emerging opportunity areas that arise out of our strengths and as a result of technological advances and innovation. For example, while the Scottish Government is already investing actively in the physical infrastructure needed to spur the growth of the offshore wind industry, we are at an earlier stage in building our understanding of the opportunities for Scotland offered by new clean industries and in our financial support for low carbon innovation in our Universities and business community.

Partners and Places: delivering in a green industrial ecosystem

To achieve our ambitions for economic growth, we must cultivate a thriving green industrial ecosystem.

Public bodies, businesses, the workforce, Trade Unions, investors, local government, the third sector and social enterprise, communities, regional partnerships, schools, further and higher education providers and others, all have essential roles and responsibilities in building a green economy which supports innovation, investment, and growth. In return, there are rewards to be won in the form of profitable businesses providing high-value jobs across our communities and a healthier population benefiting from a low-emissions society.

Private sector industry

This strategy aims to offer a clear sense of the direction of travel and a level of certainty for the different elements of the business base.

Developers and large businesses – can expect public policy levers and resources to align behind the key opportunity areas identified in this strategy, providing a positive, transparent landscape in which to make growth decisions.

Small and Medium Enterprises – can expect support from our enterprise agencies, skills system and publicly funded accelerators to help them to access burgeoning new markets, both domestically and internationally. This will include support for rural and island businesses that are well placed geographically to benefit from supply chain opportunities.

Professional and financial services – can expect support for development and expansion through action to fuel the underlying green economy which drives their success, promote them to the world and engage in international standard setting, and help to remove barriers to further growth.

Investors – can expect action across Government and our agencies to reduce barriers to investment and, in some cases, share risk and reward. There will be opportunities for different types of investment, including the development, growth and scale-up of businesses focused on the key opportunity areas; opportunities for inward investment to complement and add value to

Scotland’s existing business base and fill strategic gaps in Scotland’s industrial capability and capacity; and opportunities for capital investment in the large scale projects and infrastructure necessary to realise the opportunities of wind, hydrogen, CCUS and energy intensive industries.

Public sector collaboration and partnerships

Regional Economic Partnerships (REPs) – will forge cross sectoral partnerships that identify specific regional opportunities, seek and attract investment and deliver programmes of action that reflect regional strengths and priorities.

Investment Zones – will see Scottish and UK Government working in partnership to leverage local strengths in research and innovation to boost productivity and grow knowledge-intensive clusters linked to research institutions and existing strengths. The overall funding envelope (encompassing tax reliefs and capital and revenue spending) will increase from £80m to £160m for the investment zones in Glasgow City and the North East, with the latter seeking to harness the opportunity to reposition the region as the net zero Energy Capital of Europe.

Enterprise agencies – will lead the delivery of this strategy, operating at the heart of a Team Scotland approach, and working in partnership with local communities. Specifically,

• Scottish Enterprise will deliver on its core mission of creating an internationally competitive renewable energy industry in Scotland. Its focus will be on delivering strategic inward investment to grow Scotland’s energy transition capabilities, supporting the development of ports and harbours, stimulating and scaling innovation and growing the supply chain in Scotland.
• Highlands and Islands Enterprise (HIE) will deliver its vision of the Highlands and Islands becoming a leading net zero region. Alongside existing strengths and capabilities in pumped storage hydro and marine renewables, HIE will offer strategic and operational support to deliver the regional transformation opportunities of offshore wind and green hydrogen.
• South of Scotland Enterprise (SOSE) will establish the South of Scotland as a net zero region, building on the South’s existing reputation as a ‘renewables heavyweight’, powered by affordable, sustainable energy and seizing opportunities of onshore and offshore wind, and green hydrogen.

Scottish National Investment Bank – operationally independent and capitalised by the Scottish Government, the Bank will play a primary role in making commercial, impact investments and equity stakes in scale-up businesses and the industry and infrastructure critical to the delivery of this Strategy. It provides market insights, builds relationships with 3rd party investors and has a role in stimulating and creating markets to ensure that Scotland realises the economic and wider benefits of the transition to net zero^[6].

Crown Estate Scotland

Crown Estate Scotland is well positioned as manager of the Scottish Crown Estate to support the delivery of the five key areas of focus identified in this report, particularly the wind economy and the development of the carbon capture market. Crown Estate Scotland will continue to have a role working with government and partners to optimise seabed use in a way that balances public interest with commercial opportunity and will continue to support and enable growth of the supply chain and energy ports to help unlock the economic, social and environmental potential of the ‘Blue Economy’.

UK Government

Plans for GB Energy continue to emerge. It offers opportunities to further strengthen investment in infrastructure and technology, helping to realise the national and regional ambitions that this strategy represents. We are therefore committed to fully engaging with the new body to help shape its approach and ensure that it delivers effectively for Scotland’s people and economy.

We also continue to work with the UK Government, Ofgem, and the National Energy System Operator (currently the ESO) to ensure that the interests of Scotland are best represented. In particular, timely grid connections and strengthened grid infrastructure will be key to securing renewables project delivery and investor and supply chain confidence in Scotland. The Scottish Government welcomes the proposal for Mission Control to bring together industry experts with government and regulators to help deliver energy projects and speed up the connection of new power infrastructure to the grid.

Europe

Europe represents our closest and largest international export market and the EU has an increasingly influential role as a regulator. Fostering successful European partnerships is a key enabler of this strategy. We will continue to pursue bilateral and multilateral opportunities to develop a partnership approach, including maximising value from the UK’s association to the EU Horizon programme and seeking to represent Scotland’s position in existing fora such as the North Seas Energy Cooperation.