The future of energy in Scotland: Scottish energy strategy

Chapter 3. Scotland's Route To 2050: Targets, Priorities And Actions

This chapter looks at our 2030 targets, and their component parts, in more detail. It also identifies the near-term actions which will help realise our Strategic Priorities.

This is a long-term Strategy, designed to guide our decision making between now and the middle of the century – over 30 years in the future. We can't be entirely certain what our energy system will look like by 2050; however, our ambition and policies over the coming years, and our pursuit of low or no regrets options, will set us on the right path to the low carbon future that we want for Scotland.

2030 Targets

This Strategy sets two new targets for the Scottish energy system by 2030:

• The equivalent of 50% of the energy for Scotland's heat, transport and electricity consumption to be supplied from renewable sources
• An increase by 30% in the productivity of energy use across the Scottish economy

The equivalent of 50% of the energy for Scotland's heat, transport and electricity consumption to be supplied from renewable sources.

An increase by 30% in the productivity of energy use across the Scottish economy

Renewable Energy

Scotland's long term climate change targets will require the near complete decarbonisation of our energy system by 2050, with renewable energy meeting a significant share of our needs.

In 2009 the Scottish Government established a suite of renewable energy targets for 2020 – with a headline target of the equivalent of 30% of Scotland's heat, transport and electricity consumption to be supplied from renewable sources. We have made good progress to date, with the equivalent of 17.8% being met by renewable sources in 2015.

Reaching 50% in 13 years will be challenging, particularly in more uncertain market conditions compared to those in the preceding decade, and due to the fact that not all the relevant policy levers are devolved to the Scottish Government. But the target demonstrates the Scottish Government's commitment to a low carbon energy system and to the continued growth of the renewable energy sector in Scotland. It also underlines our belief in the sector's ability to build on its huge achievements and progress thus far.

Energy Productivity

The Scottish Government's previous energy efficiency target was to reduce final demand for energy by 12% by 2020 (from a 2005-07 baseline). This target was achieved 6 years early, and final demand in 2015 was 15.4% lower than the baseline. However, reducing demand is only one part of our energy efficiency ambition.

Our new target is a measure of the combination of energy consumption and the output of the economy.

Diagram 10 - 2030 Renewable Energy Target

Scottish Government analysis underpinning this target shows that renewable electricity – which has already outperformed our interim 2015 target of 50% – could rise to over 140% of Scottish electricity consumption, ensuring its contribution to the wider renewable energy target for 2030.

This assumes a considerably higher market penetration of renewable electricity than today – requiring in the region of 17 GW of installed capacity in 2030 (compared to 9.5 GW in June 2017) – with greater interconnection with parts of continental Europe providing an expanded market for our electricity.

It also anticipates the switch from fossil fuels in transport to ultra-low emission vehicles, including plug in hybrids, battery powered electric vehicles, hydrogen fuel cells, and biofuels. We assume the non-electrical proportion of transport demand met by renewables to be around 5%.

Renewable heat grows to around 20% of non-electrical heat demand, with a big rise in heat pumps and continued growth in biomass. Renewable heat is also likely to increase due to growth in district heating – if powered by renewable fuels.

The heat and transport figures do not include the impact of electrifying heat and transport demand to 2030. These impacts are captured within the electricity sector, as metered demand for electricity rises and our gross consumption increases.

Higher energy productivity means squeezing more out of every unit of energy consumed across the economy – more economic activity for each unit of energy being used. Energy productivity in Scotland increased by approximately 31% between 2005 and 2015.

Enhanced energy efficiency and improved productivity will help curb energy consumption without limiting growth – enabling the continued reduction in emissions whilst still growing the Scottish economy. It can make businesses more competitive by improving their productivity in respect of each unit of energy consumed, with investment in industrial energy efficiency reducing operating costs and protecting against some or all of any rise in energy prices.

Scotland's Economic Strategy makes clear that improving productivity is about making better use of all our resources – whether they are people, infrastructure or natural assets. It is the principal long-term driver of economic growth. More productive economies can produce greater quantities of goods and services for a given set of resources, typically leading to higher incomes, living standards and wealth.

We are already seeing the results, with improved productivity in transport, industry and home appliances in the last decade driven by improved efficiency standards, with new techniques and informatics technologies leading to enhanced productivity.

This is consistent with the overall EU ambition to implement an EU-wide energy efficiency improvement by 2030 ^[11] , and with our Climate Change Plan analysis. The change in productivity between 2005-07 and 2030 could be in excess of 60%.

Strategic Priorities

Achieving our aims will involve energy and non-energy policy levers, and a combination of reserved and devolved powers.

Certain aspects, such as energy efficiency and fuel poverty initiatives, and our positions with respect to granting consent and planning permission for nuclear power and unconventional oil and gas, are matters for the Scottish Government and Parliament, while others – such as market support for different forms of power generation, and regulation of the gas and electricity grids – are reserved to the UK Government.

The following pages set out the detail of the balance between Scottish Government actions and action required by the UK Government or other national or international actors.

We will need to collaborate across public, community and private sectors – building upon our existing partnership approach with local government and other organisations, trade bodies and community groups. This will help to manage any tensions and trade-offs, and maximise the beneficial outcomes for Scotland.

The Strategy's six priorities summarise our approach. They are flexible, able to respond to changes in individual technologies and wider market developments. Our focus is on the near term, rather than the full transition – on the next five years particularly, as we prepare to make the major medium and long-term decisions in the next decade.

Even within that period, considerable change is likely. For example, the nature of the UK's exit from the EU, policies to deliver the Clean Growth Strategy and Industrial Strategy, international efforts to deliver the Paris Climate Agreement – all of these and more could have a powerful bearing on our progress. We will keep that progress, and our approach, under close review (see Chapter 5).

Consumer Engagement and Protection

We will work hard to protect consumers from excessive or avoidable costs, and promote the benefits of smarter domestic energy applications and systems.

Consumers remain at the heart of our future plans for the energy system. Our policies and actions will continue to reflect their varied needs, and the new ways in which they can interact with and affect the energy system.

The days of people passively consuming energy are beginning to change. There is still a distance to travel before these changes extend to everyone, however, the growing number of options, and our choices, behaviour and actions as consumers, will have a huge influence on the shape of future energy systems, and on the pace of our low carbon transition. The Scottish Government will play its part in ensuring that consumers are informed, engaged and empowered as the energy system evolves.

Fuel Poverty and Consumer Engagement

New energy companies have eroded the market dominance of the "Big Six" in recent years – from a 98% market share in 2013, to around 80% in 2017. The increase in competition, and in choice for consumers, is something that the Scottish Government has warmly welcomed.

But not all households are able or willing to take advantage of such opportunities. And switching rates in Scotland are lower than the rest of Great Britain. So while recent moves by the UK Government to cap tariffs for certain consumers may help to reduce bills, these must form part of wider efforts to ensure a fairer market for all.

The current energy market is failing many Scottish households. In 2016, 26.5% of Scottish households were fuel poor. Many of those fuel poor households are part of a significant group who do not switch suppliers – and are therefore on some of the most expensive energy tariffs.

Consumers who take advantage of competition and choices are typically higher-income earners; they have access to a mains gas supply, use the internet to compare and find the best deals, and choose to pay by Direct Debit. However, this creates a situation where those who are less able to pay effectively subsidise the better-off, engaged consumers. This worsens the existing inequalities, and penalises households living in fuel poverty. This unique set of circumstances reinforces the case for further action.

We are currently consulting on a new long term fuel poverty strategy ^[12] and will introduce a Warm Homes Bill in 2018, as part of our ambition to eradicate fuel poverty. This will put in place a new cross-portfolio fuel poverty strategy, setting a new statutory target and adopting a revised definition of fuel poverty that will place a greater emphasis on households with lower incomes and high housing and fuel costs.

Our work to promote consumer engagement in Scotland is one way of tackling this inequality. The Scottish Government has supported a partnership between its Home Energy Scotland service and the social enterprise Citrus Energy to promote impartial tariff-switching. In 2018, we will begin a pilot project to examine how to extend the benefits of competition to vulnerable and disengaged consumers – with face to face advice and support for them to switch energy supplier or tariff. This project will operate through Home Energy Scotland, in partnership with a range of trusted organisations, and in an area chosen to include consumers who are more likely to be disengaged.

We have also announced plans to introduce financial health checks to address the poverty premium ^[13] , including through helping people switch to the lowest energy tariff.

In October 2017, we announced an ambition to establish a new energy company. Our aim is that this company will support economic development, contribute to tackling fuel poverty, will be publicly-owned and run on a not-for-profit basis.

Central to our concerns is improving the level of trust that consumers in Scotland should have in the energy market through tackling inequality and promoting inclusive growth.

Establishing a publicly-owned Scottish energy company is a unique challenge, requiring deep expertise. Analysis is now underway to consider the best route to achieve our principal aims.

The aim is to have the new company set up by the end of the current Parliament (2021).

The company may also have a role to play in helping delivery broader Government energy ambitions – including the promotion of renewable generation and maximising benefits for local communities.

Smart Meters and Home Automation

Smart systems and technology can also help increase consumer engagement. For example, customer data from smart meters could be used to provide tailored energy efficiency solutions and advice.

Smart meters and appliances give consumers the ability to manage their energy use more carefully and economically – for instance, appliances may switch on and off based on local network demand and prices. This ability is likely to become much more widespread as the next generation of smart meters is installed – and underlines once more the need to ensure that less engaged and more vulnerable customers are not left further behind.

The power to regulate the market rests with the UK Government and Ofgem. We welcome Ofgem's development of principle-based regulations, including vulnerability principles which shift the focus of suppliers from simply meeting the letter of the regulations to identifying and supporting those that are vulnerable. This pro-active approach will become even more important as the energy system develops.

These regulations complement Ofgem's moves to make switching easier and energy costs more transparent, while introducing protections around the installation of pre-payment meters. We share common ground with Ofgem here, and will continue to work in partnership to tackle the issues facing energy consumers.

But the Scottish Government has its own role to play too, through our newly devolved powers on consumer advocacy and advice – powers which can help us make sure that the views of Scottish consumers are heard properly, and that any threats or failures are swiftly addressed.

We will be consulting over the coming months on our plans to deliver a powerful, effective consumer advice and advocacy service. We appreciate the role that organisations such as the Citizens Advice service, the Extra Help Unit, Energy Action Scotland and Home Energy Scotland play in providing support and advice direct to consumers, championing consumers at local and national levels and highlighting the difficult issues faced by consumers.

We will continue to work closely with consumer bodies and to make sure that industry listens to consumers, identifying and responding to specific issues.

We will also develop an energy consumer Action Plan to take a more detailed look into consumer issues across the energy sector.

Energy Efficiency

We will continue to take direct and supporting actions to improve the use and management of energy in Scotland's homes, buildings, industrial processes and manufacturing.

Buildings

The Scottish Government has designated energy efficiency as a National Infrastructure Priority. The cornerstone of our approach is Scotland's Energy Efficiency Programme ( SEEP). In May 2018 we will launch a full Route map for SEEP and introduce the SEEP Transition Programme.

SEEP is fully in line with our draft Climate Change Plan, and our ambitions for sustainable growth. It is a 15-20 year programme; its aim is to make Scotland's buildings near zero carbon wherever feasible by 2050, and in a way that is socially and economically sustainable.

By 2050, SEEP will have transformed the energy efficiency and heating of Scotland's buildings. This will make our homes, shops, offices, schools and hospitals warmer and easier to heat.

Reducing energy demand will help tackle fuel poverty, help businesses become more competitive, and release savings in the public sector for front line services.

SEEP can help create multiple benefits, including:

• a substantial Scottish market and supply chain for energy efficiency services and technologies, with an estimated 4,000 jobs per annum across Scotland;
• health and early years improvements through people living in warmer homes; and
• regeneration of communities through upgraded building stock.

SEEP aims to radically improve the energy efficiency of Scotland's homes, and buildings in the commercial, public and industrial sectors. It will build upon a transition programme which offers local authorities incrementally greater opportunities to deliver integrated energy efficiency projects.

SEEP will build on existing successful programmes such as the Energy Efficiency Standard for Social Housing ( EESSH), Home Energy Efficiency Programmes Area Based Schemes ( HEEPS:ABS) and the Public Sector Non Domestic Energy Efficiency Framework and Project Development Unit.

SEEP will focus to the mid-2020s on reducing energy demand in all buildings across Scotland – establishing solutions for switching heating supplies from high to lower carbon or renewable sources for properties off the mains gas grid. It will also encourage appropriately-sited low carbon district heating, where that is the most appropriate 'low regrets' heat decarbonisation technology. Beyond that we will develop SEEP in the context of wider changes to heat policy set by the UK Government (see section below on renewable and low carbon heat).

Our 2016 Programme for Government confirmed a minimum of £0.5 billion for SEEP over the 4 years from 2017/18. We are already funding SEEP pilot projects in 23 local authorities. These are looking at integrated programmes to improve the energy performance of residential, commercial and public buildings, and investments to decarbonise the heat supply.

We are also developing as part of SEEP a significant new approach to Local Heat & Energy Efficiency Strategies ( LHEES) and district heating regulation – with associated legislation later in this Parliament, if appropriate (see box in section on ' Innovative local energy systems').

Twelve local authorities are also considering approaches to LHEES within the wider SEEP pilots, supported by Resource Efficiency Scotland, Scotland Futures Trust and our enterprise agencies.

In May 2018, our SEEP Routemap will set out more detail on the transition programme and the role of legislation. The first priority will be to bring forward the Warm Homes Bill in 2018. This will set a new statutory fuel poverty target – demonstrating our commitment to resolving this issue, and our support for those most in need of help to heat their homes.

SEEP will build on our current successful support offering, which provides free impartial advice and a range of financial mechanisms. These mechanisms include low-cost loans for small and medium-sized enterprises ( SMEs) and households to install energy efficiency and low carbon heat measures, as well loans for district heating projects.

A pilot project, offering a cash back incentive to SMEs who take out loans for energy efficiency measures, will begin in early 2018 for a limited time. This aims to increase the uptake of energy efficiency measures amongst SMEs, achieving both energy cost and carbon savings.

The Scottish Government will continue to work closely with local authorities and COSLA on the design of SEEP, and to support the development of local energy efficiency and heat strategies – providing the basis for public and private infrastructure investment in energy efficiency and heat decarbonisation, including district heating. Planning policies at a national and local level support energy efficient buildings, and encourage consideration of district heating development and wider decarbonisation projects.

Building Standards

In addition to SEEP, action over the past decade has delivered staged improvements to energy standards within building regulations. This has resulted in emissions from new buildings built to current standards being, on aggregate, around 75% lower than those built to standards in force in 1990, with corresponding reductions in energy demand.

We will begin a further review of energy standards in 2018, and investigate a number of measures that offer greater potential for reductions in emissions and energy demand from new buildings, and from work that is undertaken in existing buildings.

The review of energy standards, originally planned for 2017, was deferred briefly to support a clear focus on current reviews of both fire safety and compliance and enforcement of building regulations, which are being undertaken in light of recent events in Scotland and elsewhere in the UK.

Industrial

Scotland's industrial sector accounts for over half of our exports and total business research and development expenditure. The sector also sustains a significant number of high-value jobs across Scotland.

Scottish industry is also playing a leading part in the collective European and UK efforts to decarbonise – increasingly adopting sophisticated IT and automated technology, and investing in more energy-efficient equipment or reusing waste heat.

These advances make factories smarter, safer, more efficient and environmentally sustainable. They can also reduce costs through improved competitiveness and enhanced productivity. Reducing the carbon intensity of industry and increasing energy productivity are key priorities in Scotland's Manufacturing Action Plan. ^[14]

This Strategy sets out our commitment to manage the transition towards a future energy system in a way that reduces the risk of domestic industries relocating overseas, where climate or energy regulation may be less stringent (referred to as 'carbon leakage').

We want to continue removing barriers to energy efficiency and decarbonisation investment, building on recent uses of our devolved powers. For example, we have amended our Renewables Obligation legislation to exempt Scottish energy intensive industries reducing the energy-related costs that they face.

Investing in energy efficiency can lead to reduced operating costs, protection against energy price rises and provide an income stream through the recovery or use of heat.

We understand that securing these investments can be challenging – for example, payback periods for equipment or technology are often considered to be too long. Board decisions can also be difficult to reach due to the multi-national nature of many of the businesses, with strong global competition for capital resulting in a barrier to investment. Regulatory regimes and the tax system can also distort the commercial case for diverting investment capital to less productive uses.

Our recently convened energy intensive industries' roundtable discussion highlighted where there are opportunities to increase investment into energy efficiency measures across industrial sectors such as refining, chemicals, metals, mineral products, paper and food production.

Government, agencies and industry must collaborate to improve our competitiveness and productivity, and to strengthen the case for low carbon investment.

We are working with our energy intensive industries to build on existing programmes of support, and to provide incentives for industrial energy efficiency or decarbonisation. We will support efforts to deliver the Energy Efficiency and Industrial Decarbonisation Roadmaps ^[15] for the energy intensive sectors, and look at specific Scottish aspects within the UK Sector Deals being developed under the UK Industrial Strategy.

We will also continue to work with industry to encourage investment in key industrial clusters, such as Grangemouth, where energy efficiency, bio-technology and carbon capture utilisation ( CCU), and CCS could offer significant opportunities for decarbonisation and economic growth ^[16] .

We are also liaising with the UK Government to work out how the proposed UK industrial energy efficiency scheme can be designed or developed to ensure that Scottish sectors are given good opportunities to access support or advice.

We are planning to develop a collaborative agreement with key industrial sectors in Scotland, which will:

• raise understanding by sharing good practice;
• identify key opportunities for industrial energy efficiency and decarbonisation; and
• identify and overcome barriers to investment.

We will publish a discussion paper in 2018 that considers how to achieve these outcomes in a way that builds on our existing commitments in SEEP and the Scottish Manufacturing Action Plan.

Renewable and Low Carbon Solutions

We will continue to champion and explore the potential of Scotland's huge renewable energy resource, and its ability to meet our local and national heat, transport and electricity needs – helping to achieve our ambitious emissions reduction targets.

Renewable and low carbon energy will provide the foundation of our future energy system, offering Scotland a huge opportunity for economic and industrial growth.

Our resources and potential resources have a value which extends beyond Scotland, and can help decarbonise the wider- GB and European energy system. Scottish renewable electricity displaced an estimated 9.4 million tonnes of CO ₂ across the GB system in 2016.

Successive Scottish Governments, through a mixture of ambitions, targets and direct action, have enhanced our renowned reputation for renewables – wave, tidal, solar and wind.

Nova Innovation’s Nova M100 tidal turbine (Credit: Scottish Enterprise)

Since 2012, the Scottish Government has provided significant capital finance to support renewables through our Renewable Energy Investment Fund ( REIF). In five years, the Fund has invested £60 million and supported over 20 projects. REIF has successfully supported community renewables – helping to secure deals and streamline diligence costs – and marine energy, where it has been recognised as at a European level as an exemplar for investment.

We will build on the success of REIF to broaden its scope beyond renewables to include low carbon energy solutions as an Energy Investment Fund, and bolster its funding with up to £20 million made available in 2018-19.

The new Energy Investment Fund will be operated as a transitional measure before the Scottish National Investment Bank becomes operational, as the latter is expected to have low carbon investment as part of its mission-based approach to maximising investment growth in Scotland.

Since 2015, the Scottish Government has also operated the Low Carbon Infrastructure Transition Programme ( LCITP). The LCITP stimulates commercial interest and investment, building on Scotland's vast potential in the low carbon sector. It helps projects to develop investment-grade business cases, and to secure public and private capital finance.

The LCITP has accelerated the deployment to date of over 50 low carbon projects through providing over £48 million of financial support. We will now build on LCITP's success by establishing a Low Carbon Innovation Fund, investing a further £60 million to deliver innovative low carbon energy infrastructure solutions.

Renewable and Low Carbon Electricity

We are well on the way now to meeting our target of generating the equivalent of 100% of Scottish demand from renewable sources by 2020.

All renewable and low carbon solutions will have a role to play; this section focuses briefly on some of the key sectors and opportunities.

Coigach Community Wind Turbine
(Credit: Highlands and Islands Enterprise)

Community Benefit and Shared Ownership

Community benefit payments can be a valuable source of income for communities located near to renewables developments. As of November 2017, over £12 million had been paid out to communities over the preceding 12 month period.

We accept that the support mechanisms and investment conditions for new renewables projects have changed considerably. However, our expectation remains that developers should continue to offer meaningful community benefits in line with our Good Practice Principles.

We also want to see a significant increase in shared ownership of renewable energy projects in Scotland – putting energy into the hands of local communities, and delivering a lasting economic asset to communities across Scotland.

Our ambition remains to ensure that, by 2020, at least half of newly consented renewable energy projects will have an element of shared ownership.

Shared ownership will play a key part in helping to meet our targets of 1 GW of community and locally-owned energy by 2020 and 2 GW by 2030. We expect community involvement in onshore wind developments to continue to play a vital role in reaching these targets.

The new Community and Renewables Energy Scheme ( CARES) contract up to 2020 has supporting shared ownership opportunities as a top priority. The support and advice available through CARES has been praised by both developers and communities.

The Scottish Government will continue discussing shared ownership issues with our stakeholders. These discussions will form a key part of our review of Good Practice Principles for Shared Ownership of Onshore Renewable Energy Developments, which will take place during the course of 2018.

Technology - Onshore wind

We will push for UK-wide policy support for onshore wind, and take action of our own to prioritise and deliver a route to market – combined with a Land Use Planning approach which continues to support development while protecting our landscapes.

Opportunity

Onshore wind is now amongst the lowest cost forms of power generation of any kind, and is a vital component of the huge industrial opportunity that renewables create for Scotland. The sector supports an estimated 7,500 jobs in Scotland, and generated more than £3 billion in turnover in 2015. Campbeltown is also currently home to the UK's only turbine tower fabricator. We are determined to build on these strengths.

Our energy and climate change goals mean that onshore wind must continue to play a vital role in Scotland's future – helping to decarbonise our electricity, heat and transport systems, boosting our economy, and meeting local and national demand.

That means continuing to support development in the right places, and – increasingly – the extension and replacement of existing sites with new and larger turbines, all based on an appropriate, case by case assessment of their effects and impacts.

It means continuing to provide a route to market for that power – in ways which reduce and ultimately eliminate any additional costs for consumers.

And it means developers and communities working together and continuing to strike the right balance between environmental impacts, local support, benefit, and – where possible – economic benefits deriving from community ownership.

This can be done in a way which is compatible with Scotland's magnificent landscapes, including our areas of wild land. This means that the relevant planning and consenting processes will remain vitally important. A major review of the Scottish planning system is well under way, and will continue as now to fully reflect the important role of renewable energy and energy infrastructure, in the right places.

More detail on our wider approach to onshore wind is set out in the Onshore Wind Policy Statement, published alongside this Strategy.

Technology - Offshore wind

We will open consideration of new opportunities for development in Scottish waters – and renew our support for the development of an innovative and competitive supply chain in Scotland.

Opportunity

Offshore wind is now substantially cheaper than new nuclear electricity generation. With countries around the world investing more in offshore wind renewables projects, global expenditure is expected to reach £210 billion in the next decade.

The competitiveness of Scottish offshore wind has been underlined by Scottish successes (Beatrice, Moray and Neart na Gaoithe) in recent Contract for Difference auctions. And Scotland is now home to the world's first floating offshore wind array, in waters off Peterhead – a project made possible by the distinct and higher support offered through Scotland's renewables obligation legislation.

Our deeper waters in particular offer tremendous potential for future development.

Scotland's first National Marine Plan ^[17] (2015) sets the overall framework for the management of Scotland's Seas, including energy installations. The first review report is due in March 2018, providing an opportunity to establish whether the National Marine Plan reflects the priorities set out in this Energy Strategy.

Marine Scotland also produces "Sectoral Marine Plans" to support the development of offshore renewable energy, and is currently beginning the identification of potential areas for new offshore wind energy sites. This work will culminate in a Sectoral Marine Plan for Offshore Wind in deeper Scottish waters.

Crown Estate Scotland, the body which manages the leasing of Scotland's seabed on behalf of Scottish Ministers, has now begun to consider the potential case for and approach to issuing new leasing rights for commercial-scale offshore wind projects. Crown Estate Scotland will be speaking to local, Scottish and UK stakeholders during 2018 and asking for views on their proposed approach.

There is huge industrial and economic potential attached to offshore wind development. Our offshore wind supply chain is strengthening and expanding – building on Scotland's established oil and gas expertise and experience. Scotland has the necessary competitive advantage and the building blocks – a skilled, committed workforce, excellent port infrastructure and a strong innovation hub.

That innovation is being spearheaded by Offshore Renewable Energy Catapult, whose cost-cutting activities we are pleased to support and host through their Glasgow headquarters and their operations at Levenmouth. The same can be said of the activity taking shape at the European Offshore Wind Deployment Centre near Aberdeen.

We are determined to continue supporting and growing this sector in Scotland – creating more opportunities for Scottish manufacturers and our supply chain from the developments taking place in our waters and beyond.

The UK Government's Industrial Strategy rightly points to the achievements of the offshore wind industry, and the potential that it represents. We will continue to work with the UK Government to ensure that its approach under the proposed offshore wind Sector Deal takes Scotland's offshore wind potential and opportunity fully into account.

Technology - Island wind

We will provide full support for the emerging proposal to provide Scotland's island wind a route to market – offering a new opportunity for our island communities to participate in the energy transition.

Opportunity

The Scottish Government and our partners have pressed the UK Government consistently for a long period over the need to support remote island wind. That means providing a distinct and meaningful opportunity for large wind developments on the Western Isles, Shetland and Orkney to compete for long-term contracts, through the UK Government's Contracts for Difference ( CfD) process.

We have welcomed the UK Government's recent confirmation that it will provide this access as part of the next CfD auction round, subject to consultation. But that means getting the details and the design right, and providing confirmation and certainty as quickly as possible. We will continue to work with our partners, and with the UK Government, to ensure that this is the case.

Technology - Wave and tidal energy

We will continue to champion the Scottish wave and tidal energy sector – supporting the research, development, innovation and demonstration that will maintain Scotland's competitive advantage.

Opportunity

Scotland continues to lead the world in developing and supporting wave and tidal energy technologies. That is due partly to consistent and committed support from the Scottish Government and its enterprise agencies, but mainly due to the passion, expertise, investment and innovation of the industry.

Although securing further cost reductions and a route to market remain big challenges, Scotland continues to deliver world firsts.

• Scotrenewables – developer of the world's most powerful floating tidal turbine – is exporting an impressive amount of power to the Orkney grid.
• Nova Innovation successfully deployed a third turbine at the Shetland Tidal Array earlier this year and has more than doubled its workforce.
• The first phase of the MeyGen tidal project is now operating at full 6 MW capacity.
• The European Marine Energy Centre ( EMEC) has tested 30 different wave and tidal energy devices to date – more than any other single site in the world.

Our Wave Energy Scotland ( WES) technology programme – funded entirely by the Scottish Government – has supported over 60 projects, engaged 170 organisations from industry and academia, and made over £25 million available so far to support innovation.

The sector is already integrating storage, grid management and transport solutions into demonstration projects. It has also developed an impressive Scottish supply chain, providing high value jobs and creating diversification opportunities for Scotland's world class marine services, subsea and oil and gas sectors.

The Minister for Business, Innovation and Energy has agreed to chair a new short life industry working group. This group is working to agree the priorities for securing the future growth of the sector in light of changes in UK Government energy policy and EU exit.

Technology - Solar photovoltaic power (solar PV)

We will consider the role for solar and other renewable technologies under the forthcoming review of energy standards within Building Standards and the next National Planning Framework.

Opportunity

Solar PV can make an increasing contribution to Scotland's energy needs. There is enough capacity in Scotland to power the equivalent of over 50,000 homes, and potential for the sector to provide low cost energy, system stability ( e.g. through storage) and create jobs.

Solar will play an important role in a low carbon energy system, helping meet Scotland's renewable generation ambitions. Combining storage with wind and solar assets presents a valuable solution for the energy system as a whole, offering the potential for demand to be managed locally. This kind of flexibility and control will be important as electric vehicles become an integral part of the transport system.

The Scottish Government is considering, as part of the Planning Review, the potential to expand permitted development ( PD) rights for certain renewable installations (removing the need to apply for planning permission for certain developments). Solar will also be considered under the forthcoming review of energy standards within building regulations.

Technology - Bioenergy

We will develop a Bioenergy Action Plan to provide clearer scope for the development of bioenergy in the Scottish energy system. We will also conduct research to improve our understanding of the potential contribution that bioenergy can make towards meeting Scottish energy demand.

Opportunity

Biomass provides almost all (90%) of existing renewable heat in Scotland, with biogas also used to produce heat . We will continue to engage with stakeholders as we develop our Bioenergy Action Plan.

Our approach will apply the following guiding principles:

• Policies to support bioenergy are consistent with the ambitions laid out in this Strategy, and with Scotland's Climate Change Plan and land use strategy.
• Bioenergy schemes deliver greenhouse gas emission reductions that help meet Scotland's climate change targets.
• Bioenergy schemes represent good value for money, deliver benefits for communities, and help tackle fuel poverty.
• Biomass is produced and managed in a sustainable way, and should be used in heat-only or combined heat and power schemes to exploit available heat and local supply.
• Demands on land for food, energy crops and other non-food crops are managed equitably.

We will conduct research to improve our understanding of the potential contribution which bioenergy can make to meeting Scottish energy demand (power, heat and transport fuels). We will also develop closer ties to UK Government plans to develop a Bio-economy Strategy under the Clean Growth Strategy.

Technology - Hydro Power

We will partner with the hydro sector to support their ambition, including helping them to explore potential solutions through our Hydro Task and Finish Group. Following the Barclay Review of Non-Domestic Rates, in early 2018 we will 'fast track' the plant and machinery consideration in respect of hydropower.

Opportunity

Hydropower has a long and illustrious history in Scotland, which can continue, with small scale hydro playing an important role in our economy and our energy mix as we make the transition into a low carbon future.

Over 90% of the UK's power from hydro is generated in Scotland, and the sector is important to our growing economy – both in terms of generating investment into the construction industry, and in creating valuable local jobs, often in our most rural areas.

Whilst hydro is a mature and reliable source of electricity, small scale hydro in Scotland has experienced a number of challenges in recent years. The Scottish Government remains committed to working closely with the hydro sector, including helping them to explore potential solutions through our Hydro Task and Finish Group established in 2017.

Non Domestic Rates and The Barclay Review

The proposals set out in the 2018-19 Draft Budget show our commitment to competitive non-domestic rates. We have accepted most of the recommendations of the external 'Barclay review' that concluded in August 2017.

For example, any new-build property will from April 2018 only enter the valuation roll once it is first occupied, and then from that point be liable for no rates for a further year. Any improvements or expansions in respect of existing properties will not lead to rates increases for a year. These new incentives to drive investment and growth are unique in the UK, and have been widely welcomed by business.

We are also targeting specific support through rates reliefs for community renewables, hydropower and district heating respectively. These will continue, pending the outcome of the review of plant and machinery rateability, as recommended in the Barclay report. We have committed to 'fast track' plant and machinery considerations in respect of hydropower, and have been working closely with the sector with a view to this commencing in early 2018.

We will also engage stakeholders to scope out a potential separate review of plant and machinery rateability beyond the hydropower sector.

Low Carbon and Renewable Heat

Heat regulation is devolved to the Scottish Parliament. However, many of the issues which affect the heat market, such as the gas network, electricity and oil, are reserved. Our longer-term approach to decarbonising heat will depend on UK Government decisions on the future of the gas network.

We know that the UK Government has now commissioned work on the long-term direction of heat decarbonisation. This will help to determine the most appropriate mix of solutions, such as district heating, electrification of heat with heat pumps, and gas network decarbonisation.

We expect the UK Government to have taken these decisions by the early 2020s. We will continue to work closely with the Department for Business Energy and Industrial Strategy, urging them to come to a decision as rapidly as possible – and to carefully consider Scottish circumstances and the aims of this Strategy as they take decisions on the future of the gas network, and the overall mix of heat decarbonisation in reserved areas.

The Scottish Government will thereafter develop and identify the best approach to the long-term decarbonisation of the heat supply in a future Climate Change Plan, and will adjust the actions under the Energy Strategy accordingly.

We will continue to use the powers at our disposal to prioritise the decarbonisation of Scotland's heat supply. This will include, as an integral part of SEEP:

• a priority to reduce heat demand as set out in the heat hierarchy of the Heat Policy Statement; and
• promoting low carbon heat via low regrets options as set out by the Committee on Climate Change ^[18] , such as:
  • district heating projects where appropriate, delivering affordable, low carbon heat efficiently; and
  • renewable heat technologies to individual properties, particularly in areas off the gas network.

We will also:

• support investment and consumer protection, as outlined in our second SEEP consultation on Local Heat & Energy Efficiency Strategies and Regulation of District and Communal Heating ^[19] ;
• continue to provide support for low carbon heat supply and heat demand reduction through our existing funding programmes ( e.g. District Heating Loan Fund, Low Carbon Infrastructure Transition Programme), and develop new funding programmes under SEEP;
• work with stakeholders to consider future support for low carbon renewable heat, including discussions with the UK Government around the ending of the current Renewable Heat Incentive commitment period to 2020-21.

The Scottish Government will continue to provide support for low carbon heat supply, including investments in heat networks

Geothermal Energy

Geothermal energy is the natural heat that exists within our planet. This heat can be used for space and water heating.

The Scottish Government has worked with regulators to produce guidance for those interested in undertaking a deep geothermal project in Scotland.

We made around £0.2 million available under the Low Carbon Infrastructure Transition Programme ( LCITP) to explore the technical feasibility, economic viability and environmental sustainability of the geothermal resource in sites in Fife, North Lanarkshire, Aberdeen, Aberdeenshire and Clackmannanshire.

And we are making £1.8 million available for a large scale deep geothermal district heating network to serve the low carbon HALO Kilmarnock development being built on the former Johnnie Walker bottling plant.

Low Carbon and Renewable Transport

Our approach to a low carbon transport system involves a range of measures to drive down transport emissions across all modes, creating a cleaner, greener transport network where sustainable travel modes are the norm.

Traditional motorised vehicles of all types contribute to transport emissions, but low and ultra-low emission vehicle ( ULEV) technologies are available which can reduce or eliminate these. As cars and light vans contribute the largest portion of overall emissions, that group is a priority for action.

Electrifying this sector – using a range of options including batteries, hydrogen fuel cells and hybridisation – could achieve a large percentage of the overall reductions required by our Climate Change (Scotland) Act. However, a range of other technologies across different sectors – from those improving efficiencies, to advanced liquid and gaseous biofuels – will play a part in the wider decarbonisation of transport.

The Scottish Government is already supporting innovative approaches to decarbonising transport, such as the Aberdeen Hydrogen Bus Project.

Aberdeen Hydrogen Bus Project

Ten hydrogen buses run on two routes in the city, with an integrated hydrogen system producing and storing hydrogen produced on-site to fuel the bus fleet – Europe's largest fleet of green hydrogen buses.

The Scottish Government and Scottish Enterprise provided a total of £3.3 million support in 2013 for the project. The Scottish Government provided an extra £3 million in 2017 to double the fleet of hydrogen fuel cell buses to 20 vehicles. The additional 10 buses are expected to be deployed in 2018.

We have confirmed our intention to support the use of ULEVs, and to phase out the need for new petrol and diesel cars and vans by 2032. To meet that commitment, we will:

• expand our electric charging infrastructure between now and 2022, making 'range anxiety' a thing of the past in Scotland;
• work with each of our delivery partners to create Scotland's first 'electric highway' on the A9, with charging points along the route;
• accelerate the procurement of ULEVs in the public and private sectors, transforming public sector car and van fleets by the mid-2020s and commercial bus fleets by the early 2030s;
• introduce large scale pilots across the country, removing barriers and encouraging private motorists to use ULEVs;
• address the particular challenges to expanding the charging infrastructure in Scotland, such as charging in tenement properties; and
• take steps to better integrate electric vehicle policy within wider energy systems policy including renewable generation and energy storage systems.

Many of the key fiscal levers still rest with the UK Government; we will urge them to use their powers to help shape the market, including through vehicle standards and taxation.

More ULEVs will mean higher electricity demand, creating particular pressures for local distribution networks as drivers look to connect and charge their vehicles. We are already discussing these issues with Scotland's grid operators, and starting to consider different options and approaches.

There will be big challenges here – but opportunities too, for example, in developing solutions such as smart chargers, and interfaces which can manage and reduce pressure on electricity networks. The development and use of innovative software can reduce the need for investment in more expensive and disruptive "hardware", in the form of grid upgrades. There is a big innovation opportunity here for Scottish businesses, and a chance to develop and export the necessary technology and solutions. Initiatives such as the "My Electric Avenue" project ^[20] have already looked at some of these issues, and others are underway.

A report by Transport Scotland and Urban Foresight published in 2016 ^[21] concluded that large numbers of EVs across Scotland can help support 'whole-system' energy solutions by:

• providing significant and distributed energy storage capacity, able to absorb intermittent loads from renewable generation;
• helping to integrate more micro-generation;
• increasing overall energy efficiency; and
• potentially providing a source of grid power input when required.

Land Use Planning and the Planning Bill

Place is at the heart of how we live our lives. The shared vision of National Planning Framework 3 and Scottish Planning Policy includes a growing, low carbon economy where we live in sustainable, well-designed places.

Renewable energy is a core part of our planning policy, as it provides a key means of reducing greenhouse gas emissions as well as significant economic opportunities.

The planning system already supports the energy system in the following ways:

• guides wind farms to appropriate locations, setting positive policies for heat network installations and other renewable generation technologies;
• encourages grid connections which can help decentralise power systems across Scotland, noting the role and value of energy storage solutions where the grid is weak;
• supports designing places to promote active travel; our streets are already changing to accommodate electric vehicle charging infrastructure; and
• supports the creation of a national carbon capture and storage network.

We are currently reviewing the planning system, with a Planning Bill introduced to the Scottish Parliament on 4 December 2017, designed to support the planning and delivery of infrastructure and high-quality homes, and improving places.

We want to deepen the relationship between communities and the planning system. This can be done through formal and informal means, including continued use of the 'place standard' as a means of considering and evaluating place quality.

We also want to improve the connection between our national policies and regional priorities – providing for new and emerging regional partnerships to support national planning policy.

We expect to publish our next National Planning Framework in 2020, in parallel with Scottish Planning Policy. The period running up to this will create opportunities to collaborate on a revised set of planning policies wholly in line with the goals of this Energy Strategy and the Climate Change Plan.

Innovative Local Energy Systems

We will empower our communities, supporting the development of innovative and integrated local energy systems and networks.

Local Energy Systems

Scotland aims to maintain its leadership in developing local energy systems – building on the global shift away from centralised generation and passive consumption.

Scotland has a legacy of strong community engagement in local renewable generation, led by rural Scottish communities, including islands. These groups have led the way in developing innovative local energy solutions, overcoming their limited access to national infrastructure.

The Scottish Government has supported a number of these early pilot projects through initiatives such as the Low Carbon Infrastructure Transition Programme and the CARES Local Energy Challenge Fund. We recognise the importance of local solutions in National Planning Framework 3.

We are determined to build on this, and can learn a great deal from our work to date as we continue this transition towards energy systems which more directly benefit local economies and consumers.

The main challenges we face are expanding these principles into more densely-populated and urban areas, and identifying sustainable, replicable commercial models.

We need to move from projects with a single beneficiary to ones that are more strategic – covering larger geographical areas, and involving partnership arrangements between communities, local authorities, the public and private sectors.

From innovation to commercialisation

Delivering low carbon energy, including local energy system and efficiency improvements, will depend upon greater private sector activity and investment in Scotland's low carbon sector.

Our ambition is to help commercialise these projects, removing the need for Scottish public sector subsidy or assistance. This means improving the ways in which we identify, manage and mitigate risks – cutting costs and generating new income streams and revenue. This will make the projects more attractive investment propositions, both for the private sector and for communities.

A number of demonstration programmes have supported the delivery of low carbon projects across Scotland in recent years. These early projects are risky, and not all will work as planned, or translate into commercial propositions. Our priority will be to ensure that we learn from any failures, and can repeat the successes. This will cut more carbon and increase our ability to export the technologies and systems in question to other parts of the world.

We are aware that the UK Government will launch a new Industrial Strategy programme – "Prospering From the Energy Revolution". This programme, alongside other initiatives, such as Ofgem's Network Innovation Competitions and Low Carbon Networks Fund, will help develop world-leading local, smart energy systems, delivering cheaper and cleaner energy across power, heating and transport – creating high-value jobs and export capabilities.

Local Energy Systems: Scotland's Islands

Many of Scotland's island communities are already successfully demonstrating complex energy solutions. Their isolation from mainland energy and supply networks creates a strong incentive for innovation, helped by some of the most powerful renewable energy resources in Europe.

Orkney, for example, is home to what was the UK's first smart grid – connecting renewable generation to Orkney's distribution network at a considerably lower cost than conventional network connection.

The 'Surf 'n' Turf' project demonstrates a fully integrated energy model, with hydrogen produced using electricity from tidal and onshore wind turbines. This is stored in a fuel cell, and used to provide low carbon heat, power and transport. A European-funded project called 'BIG HIT' will build on the Surf 'n' Turf project in Orkney by producing hydrogen from renewable sources for transport and heating.

The projects will benefit the community by providing employment and training, as well as reducing harbour electricity costs and increasing revenue.

There are many other examples of innovation on Scotland's islands and remote rural communities, supported by Local Energy Scotland ( https://www.localenergy.scot/). For example, the Mull Garmony Community Hydro scheme and the Assisting Communities to Connect to Electric Sustainable Sources Project ( ACCESS) project – a cost-effective platform for enabling the real time matching of local electricity generation and local electricity demand at a distribution network level.

We intend to develop a local energy systems position paper, containing detailed principles, along the following lines.

• Local Heat & Energy Efficiency Strategies in use at a local level, creating a strategy to guide investment in energy efficiency and heat decarbonisation. Led by local authorities, working closely with their communities, this will set out a long-term prospectus for investment in new energy efficiency, district heating, and other heat decarbonisation programmes.
• Communities empowered wherever possible to develop and commission local energy system plans where they are the full or part owners of the final scheme.
• All local projects encouraged to use existing energy infrastructure before developing projects with new transmission or distribution requirements.

These principles will support and promote the following outcomes:

• Systems designed and developed in line with local need;
• Active, energy efficient consumers (both residential and non-residential);
• Lower annual energy bills; and
• Opportunities for local supply chains and investment in local businesses.

Solar PV array on the Isle of Eigg, Inner Hebrides; part of a community owned renewable electricity system on the island. (Credit: Highlands and Islands Enterprise)

Local Energy Planning

The Scottish Government is committed to developing strategic approaches, based on locally distinctive needs, opportunities and priorities. This includes consulting on a new statutory framework for Local Heat & Energy Efficiency Strategies ( LHEES).

Led by local authorities working closely with their communities, this will provide opportunities for communities to not only develop their own energy projects, but also to have their voices heard in the planning processes for energy developments.

The Scottish Government has already supported local authorities to develop strategies for district heating infrastructure through the Heat Network Partnership Strategy Support Programme, using tools such as Scotland's Heat Map ^[22] . We are also supporting the voluntary approach to LHEES through the SEEP Phase 2 pilots, with 11 local authorities receiving support in piloting LHEES development from 2017-19, as part of a capacity support programme.

Local authorities and city regions will have an enhanced role in this strategic approach – helping to deliver new investment and to manage the local challenges of decarbonisation. We expect Local Heat and Energy Efficiency Strategies to inform, and be informed by, the development plan for the area.

System Security and Flexibility

Scotland should have the capacity, the connections, the flexibility and resilience necessary to maintain secure and reliable supplies of energy to all of our homes and businesses as our energy transition takes place.

Scotland enjoys a supply of energy from a range of indigenous sources, and has the potential to generate much more. We expect our energy system to change considerably over the period set out in this Strategy.

Our continuing efforts to reduce demand will affect the amount of electricity and gas we consume. But the possible electrification of heat and transport on a large scale could place much greater demand on the renewable electricity sector, on other forms of low carbon or cleaner generation, and on our grid.

Renewables will play a huge part in meeting our future energy needs. But there will be roles too for other sources and technologies – for thermal generation with carbon capture, for pumped storage hydro and other forms of storage, and for smarter, more interconnected networks.

The Scottish Government has always worked closely and effectively with the UK Government, Ofgem, National Grid and Scotland's grid operators and generators on matters of energy and system security. This will remain hugely important as we move to a low carbon, decentralised system.

System Security and Flexibility (Electricity)

Scotland needs a balanced and secure electricity supply. That means a system and a range of technologies which provide sufficient generation and interconnection to meet demand. It means an electricity network which is resilient and sufficiently secure against any fluctuations or interruptions to supply.

For example, efficient and flexible gas-fired generation is a natural complement to a high renewables future – especially when fitted with CCS technology. Gas-fired generation can be scheduled and controlled, meaning that it can be instructed to power up or down depending on rising or falling demand. It provides "inertia", helping to maintain a stable frequency across the network and increasing its resilience.

These attributes have a strong locational value, as the network benefits from having this synchronous generation spread across the network. However, this locational value is not sufficiently reflected in existing market and regulatory mechanisms.

We believe that a more strategic approach which takes this locational value into account, and which supports controllable thermal generation in each region of the country, would be in the best long-term interests of consumers in Scotland and across GB.

That needs market mechanisms and incentives which provide a sufficient and fair incentive to maintain – or to invest in new – efficient, controllable generation in Scotland.

This means looking again at the full set of current market and regulatory arrangements including the Capacity Market, which is reserved to the UK Government, network access and charging arrangements, and balancing services.

Investors in facilities connecting to the electricity network face a range of costs and opportunities. We need to ensure that the various market and regulatory arrangements, together, do two things – incentivise choices that lead to lowest energy costs to end consumers, and remove barriers to the offering of services that contribute to security of supply.

Achieving this needs long-term contractual arrangements that give investors confidence, that allow comparisons between different technologies, and that place sufficient value on security of supply and resilience – both for the GB system as a whole, and in each region.

Pumped Storage Hydro

This approach would also provide a stronger opportunity for more large scale pumped storage hydro ( PSH). Scotland already hosts PSH facilities, at Cruachan and Foyers. These stations can store large amounts of power, releasing that energy when demand on the system is high.

We believe that investment in new PSH capacity in Scotland could greatly enhance the flexibility and resilience of our electricity network and power supplies. These are major infrastructure projects, with considerable economic and industrial value attached.

The Scottish Government believes that more can be done to reduce the risks and remove the barriers to the major investments required to deliver these developments. We will continue to work with the developers and with the UK Government to find a fair and reasonable solution which supports their build.

Smart, flexible networks

The electricity market is evolving, reflecting changes in technology and in our expectations and behaviour as consumers – a process which smart meters and smart appliances are accelerating.

New approaches are being developed, which take into account the extent to which our local networks – designed to accept power transfers from the high voltage network, and from a relatively small number of large generators – are now increasingly home to myriad forms of small and micro generation.

There are also new ways to store electricity and to manage the times at which we choose to use it. The UK Smart Systems and Flexibility Plan ^[23] , published in July 2017, looks at the issues and potential benefits connected with this shift, and some of the actions necessary to realise these. Its scope includes steps to enable smart consumers, markets and businesses, and how to support more flexibility across the system.

These are common issues and opportunities; the Scottish Government will continue to work with the energy sector, with Ofgem and with the UK Government to ensure that Scottish consumers, businesses and other energy users are able to benefit from the necessary and relevant changes.

Electricity storage

The UK Smart Systems Plan includes a strong commitment to improving the prospects for and uptake of electricity storage. We are seeing remarkable growth and changes in storage potential and technologies – such as the availability and reducing cost of batteries which can help manage and control domestic demand, with much larger applications able to complement large scale renewable generators connected to higher voltage networks.

Electrolysers, which can provide an alternative form of energy storage in the form of hydrogen, particularly long-term or seasonal storage, are also becoming more efficient and less costly.

The ability to store power can help businesses and communities in areas where the network capacity is limited or weak – having reserve or stand-by power available can protect against temporary losses of supply. It also provides an opportunity to earn additional revenue through providing power and other related services to the grid.

The Scottish Government agrees that storage is a strategically important issue, with real potential benefits for Scotland. We will continue to support innovation and deployment in this area, and to work with energy sector and academic stakeholders on steps designed to accelerate its penetration and value across Scotland.

We are providing support for new and innovative storage solutions through the Low Carbon Infrastructure Transition Programme. For example, Nova Innovation will build and operate an energy storage solution for the Shetland Tidal Array ^[24] – a key aim of this project is to demonstrate the economic, technical and system benefits of Nova's combined renewable energy and storage approach, overcoming local grid constraints.

Nuclear power

We have confirmed the Scottish Government's continued opposition to new nuclear stations, under current technologies. The economics of these stations are prohibitive, especially given the falling costs of renewable and storage technologies.

We believe that the criticism directed towards the UK Government's support and long-term contract for the proposed station at Hinkley – on the grounds that it is risky, expensive, and a bad outcome for UK consumers – is wholly justified.

Our priority will continue to be to support energy efficiency, develop Scotland's huge renewable resource and to promote storage and flexibility. We are aware of increasing interest in the development of new nuclear technologies, such as Small Modular Reactors. We are duty bound to assess new technologies and low carbon energy solutions, and will continue to do so based on their safety case, value for consumers, and their contribution to Scotland's low carbon economy and energy future.

The UK Industrial Strategy focuses on nuclear decommissioning, and rightly acknowledges the expertise which exists across the UK. We will work with the UK Government to ensure that the proposed Sector Deal delivers meaningful support and benefits for Scottish businesses which are experienced and active in this area.

Interconnection

Scotland's security of supply, and our ability to export and import power when needed, is enhanced by our interconnection with other power markets and networks. Scotland's current and long-standing interconnections with England and Northern Ireland are good cases in point.

There are currently several UK interconnector projects at various stages of development. These include the NorthConnect cable that would enable renewable electricity to be traded directly between Scotland and Norway.

Ofgem's initial assessment of this project ^[25] has concluded that it is likely to benefit consumers, and that it could also improve our security of supply by providing access to a vast alternative source of renewable generation when required.

We will continue to work closely with NorthConnect, and consider in more detail its potential economic and supply chain benefits for Scotland, as well as its implications for investment in domestic capacity and security of supply.

System Security and Flexibility (Gas)

Scotland's natural gas network consists of over 25,000 km of pipes, supplying energy to around 1.9 million consumers. It is designed to meet extreme peaks in heat demand, and is one of the most reliable networks in the world. The distribution network in Scotland is connected to the UK's National Transmission System, the high pressure network that transports gas from a range of sources across the country.

Security of energy supply and gas storage remains reserved to the UK Government. However, the Scottish Government will continue to engage closely with the department for Business, Energy and Industrial Strategy on resilience and security of supply in Scotland.

Our current supplies of gas come from a mixture of North Sea gas fields and imported supplies from pipelines within continental Europe, or from liquefied natural gas ( LNG) from international markets. The production of natural gas from the North Sea is declining. By 2025, the UK is expected to be importing 67% of its gas from outside the UK.

LNG and Liquefied Petroleum Gas ( LPG) play a crucial role in supplying energy to the Scottish Independent Undertakings ( SIU's) located in Oban, Campbeltown, Wick, Thurso and Stornoway. These towns have separate networks which aren't directly connected to the main distribution networks but maintain the benefits of gas.

Heat accounts for 51% of the energy consumed by Scotland's homes and businesses, with 79% of Scottish households using mains gas as their primary heating fuel. These figures show the extent to which Scotland currently relies on natural gas.

Our commitment to energy efficiency, and the growth of more diverse heat networks, means that demand is likely to reduce; however, gas will remain an important part of Scotland's energy mix for the foreseeable future. Meeting this demand, and balancing the needs of consumers with a lower carbon secure energy system, will be a key challenge.

The shift to decarbonisation creates new possibilities for the gas network. It could provide a flexible asset able to transport and store a range of low carbon gases, including hydrogen, biogas, biomethane and bio- SNG (substitute natural gas). There are currently 13 biomethane sites in Scotland connected to the gas distribution network – producing enough gas to supply the equivalent of 85,000 homes – and there are more sites in development.

This could make an important contribution to reducing heat emissions, while having little impact on the way consumers use their appliances. It could also provide a useful role in electricity grid management, energy storage and the transport sector.

Some regulatory and market changes will be needed – most of which are reserved to the UK Government – in order to deliver a resilient, flexible and smart low carbon gas network in Scotland. The commercial viability of CCS will also have a bearing on the long-term role of gas.

Oil and Gas Industry Strengths

We will support investment, innovation and diversification across our oil and gas sector, working with industry to advance key priorities such as maximising the recovery of remaining resources, subsea engineering, decommissioning and carbon capture and storage – collaboratively addressing the challenges of today and preparing the sector and its workforce for a positive role in Scotland's future energy system.

Oil and Gas

A strong and vibrant domestic offshore oil and gas industry will play an essential role in our future energy system, with the sector's expertise invaluable in supporting jobs and skills. Almost all scenarios confirm that oil and gas will continue to play a significant role for decades to come in meeting future global energy demand. Demand for gas in particular is expected to continue to rise until the middle of this century.

North Sea oil and gas production is highly-regulated, with some of the most advanced and comparatively least-polluting production methods in the world. Maintaining domestic oil and gas production can lead to lower net global emissions than under a scenario where Scotland depends more on imports. This is due to a number of possible imported crude oil sources having a higher carbon-intensity than Scottish production.

The latest Environmental Report published by Oil & Gas UK ^[26] also shows strong progress on carbon intensity, with North Sea oil and gas production increasing and greenhouse gas emissions from production continuing to fall. This is encouraging and provides a strong basis for the oil and gas industry to continue to reduce the carbon intensity of the global energy mix, and to explore new business models which increase the penetration of lower carbon technologies.

As the UK is now a net importer of oil and gas, a balanced approach where we reduce our reliance on imported fossil fuels, where practical to do so, can help reduce exposure to cost and supply fluctuations – minimising our vulnerability to security of supply risks. This is supported by analysis produced by the Committee on Climate Change under the UK's fifth carbon budget.

There are still significant opportunities in the North Sea, with up to 20 billion barrels of oil equivalent remaining – which could sustain production for at least another 20 years.

That is why we continue to support Maximising Economic Recovery from the North Sea. We will go on working constructively with the industry, to encourage new exploration in the North Sea and to enhance the capacity and competiveness of our world leading supply chain.

Oil and gas also has a role as a destination fuel within the power sector and heavy industry – for use in CCS, for example, as well as heating and transport, through conversion to clean hydrogen.

Expertise gained through 40 years' experience of operating in the North Sea, such as vital subsea skills, can help overcome the engineering and innovation challenges presented by moving to a low carbon future. For example, Scotland's oil and gas industry has developed a cluster of companies with expertise in underwater engineering which is among the strongest in the world. Approximately half of the subsea installations in the world today are in the North Sea. This is a strength that we want to build upon and develop even further.

We have an opportunity to extend those skills and knowledge into other sectors. We can do this by ensuring that the appropriate investments are made – into our supply chain to keep it competitive, and into our infrastructure to ensure that we have the appropriate research and testing. We also need investments into technologies applicable to both oil and gas and other subsea areas, including renewable energy ^[27] .

The skills and expertise in our oil and gas sector could also assist other sectors in overcoming the technical and engineering challenges of our future energy system. So far, our Transition Training Fund has helped over 2,800 individuals, which is due to close in 2018-19, to retrain and secure new jobs or opportunities in the oil and gas sector and wider economy. We will continue to work with Skills Development Scotland to deliver this fund, keeping its focus on key opportunities within the Scottish economy.

Oil and Gas Decommissioning

The Scottish supply chain is already capturing a large share of the value of the decommissioning contracts available and underway from some North Sea operators, from well plugging and abandonment through to onshore dismantling and disposal.

We are supporting investment in decommissioning capacity across Scotland – with in the region of £2.5 million likely to be allocated in this financial year through the Decommissioning Challenge Fund.

Our latest Programme for Government commits a further £7.5 million towards establishing a deep water port in Scotland which is compatible with the largest decommissioning vessels and highest value projects.

Alternative Hydrocarbon Resources

New and innovative ways of using hydrocarbons are already emerging, and will continue during the coming decades.

Rising demand for alternative hydrocarbon resources in the form of LNG (Liquefied Natural Gas), LPG (Liquefied Petroleum Gas) and CNG (Compressed Natural Gas) could potentially reduce emissions – especially when derived from bio-sources. The marine, power generation, industrial, road transport and residential sectors could all play a part in pushing up demand for these alternatives.

We support the uptake of these energy streams, where the current infrastructure is able to meet the expected growth in demand. Investment could support economic development, safeguarding and creating jobs in the energy sector.

The Scottish Government may choose in some cases not to support particular technologies or fuel sources. Underground Coal Gasification and Unconventional Oil and Gas (see below) are examples of this.

Unconventional Oil and Gas

The Scottish Government has undertaken one of the most far reaching investigations of any government, anywhere, into unconventional oil and gas.

This work began in 2013 with the establishment of an Independent Expert Scientific Panel to examine the evidence on unconventional oil and gas, including hydraulic fracturing, or 'fracking', and coal bed methane extraction.

The Expert Panel reported its findings in July 2014. After carefully considering its findings, the Scottish Government introduced a moratorium on onshore unconventional oil and gas in January 2015. This created space to explore the specific issues and evidential gaps identified by the Panel, and to undertake a comprehensive period of public engagement and dialogue.

In early 2016, the Scottish Government commissioned a further suite of independent research reports to address the evidential gaps identified by the Expert Panel. The reports, covering health, economic and environmental matters (including analysis of climate change impacts), allowed for the consideration of further independent expert scientific advice, including from the British Geological Survey, Health Protection Scotland, and the UK Committee on Climate Change.

In January 2017 the Scottish Government launched a four-month public consultation on unconventional oil and gas, Talking "Fracking", which received more than 60,000 responses. Approximately 99% of responses who expressed a view were opposed to fracking.

Responding to the publication of the consultation responses in early October 2017, the Minister for Business, Innovation and Energy announced that the Scottish Government does not support the development of unconventional oil and gas in Scotland and that the Directions which gave effect to the moratorium in January 2015 will remain in place indefinitely.

In late October 2017, the Scottish Parliament voted overwhelmingly in favour of the Scottish Government's preferred position of not supporting unconventional oil and gas. The Scottish Government's preferred policy position will be subject to a Strategic Environmental Assessment. Once finalised, the policy on unconventional oil and gas in Scotland will also be reflected in the next iteration of the National Planning Framework.

Further information, including links to the parliamentary statements, the research reports, and the consultation responses, can be found at:
http://www.gov.scot/Topics/Business-Industry/Energy/onshoreoilandgas

Hydrogen

Hydrogen is flexible, and could help to decarbonise heat and transport while providing wider energy system benefits. As it produces no harmful emissions at point of use, it can also help improve air quality.

It can provide many of the same uses as fuels such as gas and oil, and be transported by road or pipeline, potentially using re-purposed infrastructure. However, hydrogen does not exist naturally and must be produced from other energy sources. This production can be scaled from large centralised sites to local units, closer to point of use, with the energy transmitted by electricity or gas.

Hydrogen could also potentially deliver the lowest cost and least disruptive solution for decarbonising heat. Alongside green hydrogen (produced from renewables), the deployment of hydrogen at scale will most likely require large volumes of natural gas (methane) as a source feedstock.

Hydrogen also has a variety of industrial applications that can contribute to decarbonisation. For instance, it can be used with captured CO ₂ (or CO ₂ from biomass) to replace fossil fuels in the production of hydrocarbon-based chemicals such as methanol and transport fuels. It can also be used in the production of 'green' ammonia, which is used in the manufacture of fertilisers.

While markets are starting to develop on the back of progress and innovation to date, there is still much more scope to reduce costs and to make hydrogen a much more realistic prospect, improving access to emerging international markets.

We have supported several projects which demonstrate how hydrogen can be renewably produced, stored, and used when needed for local energy and transport. There is potential to replicate or scale up these projects.

The Scottish Government has worked with the UK Government and other partners to develop the 2017 Hydrogen and Fuel Cells Roadmap ^[28] . We remain committed to supporting further research and development in this area, including proposals by SGN to assess the viability of constructing and operating the first hydrogen distribution network in Scotland.

Carbon Capture and Storage ( CCS)

There is widespread international recognition that CCS will be essential to cost-effective climate policies – a position reflected in Scotland's draft Climate Change Plan.

Scotland's waters in the North Seas provide the largest carbon storage resource in Europe. Coupled with our existing oil and gas capabilities, ready supply chain, and existing pipeline and platform infrastructure, Scotland is one of the best-placed countries in Europe to realise CCS on a commercial scale.

The Scottish Government has been a strong advocate of the opportunities CCS could bring to Scotland, and has consistently supported its development, both as important decarbonisation infrastructure and as an industrial opportunity for Scotland. This is why we were concerned at what we regard as the short-sighted decision by UK Ministers to remove £1bn funding for CCS projects in 2015.

CCS is currently the only viable technology capable of mitigating industrial scale climate change in some of the most carbon intensive industrial processes – such as cement production, oil and gas processing and the production of aluminium, steel and ammonia. CCS would also be critical to unlocking the potential for large scale hydrogen production.

Scottish Government support has helped develop a world-leading academic and research reputation in CCS. We have also forged important international collaborations, both in the North Sea Basin and Guangdong Provence in China.

The Scottish Government is also supporting the innovative ACORN CCS project at St Fergus, near Peterhead. Building on past studies and with an emphasis on repurposing existing infrastructure, this aims to demonstrate a lowest cost, full chain CCS project that targets industrial emissions.

Carbon Capture Utilisation ( CCU) could also help Scotland shift to a lower-carbon, more sustainable and circular economy through better management and re-use of its carbon. In doing so, it can also help create new, potentially lower carbon manufacturing processes and opportunities ^[29] .

The UK Government has also renewed its commitment to Carbon Capture Utilisation and Storage ( CCUS) in its Clean Growth Strategy, and has a set out a range of actions to support the cost effective development of these technologies, including establishing new leadership groups and allocating funding for CCUS projects.

The Scottish Government will continue to work closely with the UK Government, and the Oil and Gas Authority, to ensure that Scotland's priorities, opportunities and interests are reflected in this work – such as the preservation of critical infrastructure and the demonstration of CCS and CCU projects in Scotland.

Acorn Carbon Capture and Storage ( CCS) Project ^[30]

The Acorn CCS Project at St Fergus, supported by Scottish Government and EU funding, aims to demonstrate a lowest cost, full-chain CCS project that targets industrial emissions.

The project, currently at a feasibility stage, aims to stimulate an ambitious new pathway to securing CCS in Scotland, and targets the following milestones:

2020-2025 – Demonstrator project at St Fergus exemplifying the viability of full-chain CCS, at lowest cost;

2025-2030 – Pipeline investment to connect early adopted industrial emitters to north sea storage;

2030-2040 – Extend pipeline investment to enable UK-wide connection to Scottish storage, and bring online second phase industries, which could include the energy sector;

2040 onwards – Commercialisation/privatisation, with access opened up to storage on international market.

Port of Cromarty Firth (Credit: Highlands and Islands Enterprise)

Near-term actions

The near-term actions relevant to each Strategic Priority are summarised below:

Strategic Priority - Consumer Engagement and Protection

Scottish Government Actions

• Develop the aim to create a publicly-owned energy company that could be operational by 2021.
• Further engagement on a publicly-owned energy company is planned for the end of 2018.
• Develop an energy consumer Action Plan to look into consumer considerations in more detail across the energy sector.
• Hold a summit of energy suppliers and consumer groups to address the needs of Scottish consumers.
• Establish a Consumer and Competition Task Force made up of key stakeholders to tackle consumer issues generally – energy will be a priority theme.
• Consult on the most effective way to implement newly devolved powers in relation to consumer advice and advocacy.
• Put in place a robust and accessible framework of consumer protection as SEEP develops.
• Deliver a Smart Meter Advice Project delivered through Home Energy Scotland to enable customers to make the most of the energy use data provided by their smart meters.
• Fund a pilot project to examine how to extend the benefits of competition to vulnerable and disengaged consumers – with face to face advice and support for them to switch energy supplier or tariff.
• Introduce financial health checks – addressing the poverty premium and helping people switch to the lowest tariffs.

Strategic Priority - Energy Efficiency (Buildings)

Scottish Government Actions

• In May 2018, publish a SEEP Routemap and introduce the SEEP Transition Programme.
• Continue our existing programmes as SEEP develops, including our national advice services (Resource Efficient Scotland and Home Energy Scotland) and financial support such as HEEPS loans, SME loans, District Heating Loans and Salix loans for the public sector.
• Evaluate and monitor the SEEP Pilots to influence the final design of the SEEP programme.

Strategic Priority - Energy Efficiency (Industrial)

Scottish Government Actions

• Continue to support business, industry and public sector collaboration through working with the enterprise agencies, SEPA and the Scottish Manufacturing Advisory Service.
• Pool leadership and expertise from industrial sectors by working in partnership through a new Scottish energy intensive industries forum.
• Build on our Manufacturing Action Plan and SEEP commitments by publishing a discussion paper in 2018 looking at a range of options to attract new investment in industrial energy efficiency or decarbonisation.
• Work with the UK Government on the development of the new Industrial Energy Efficiency Scheme proposals announced under the Clean Growth Strategy.

Strategic Priority - Renewables and Low Carbon Solutions

Scottish Government Actions

Low Carbon Funding

• Establish a Low Carbon Innovation Fund, investing a further £60 million to deliver innovative low carbon energy infrastructure solutions.
• Broaden the scope of REIF beyond renewables to include low carbon energy solutions as an Energy Investment Fund, and bolster its funding with up to £20 million made available in 2018-19.

Onshore wind

• Push for UK-wide policy support for onshore wind and take action of our own to prioritise and deliver a route to market.
• Build on the positive and practical provision for onshore wind in our planning system under the next National Planning Framework and Scottish Planning Policy.
• Implement the new Onshore Wind Policy Statement, which underlines the continued importance of this established, low cost resource.

Offshore wind

• Work with Crown Estate Scotland and Marine Scotland on new offshore wind opportunities, including floating offshore wind.
• Continue to work with the sector, our enterprise agencies and other partners to increase the industrial and supply chain benefits for Scotland of development in our waters.
• Contribute to UK Offshore Wind Sector Deal discussions between industry and the UK Government.

Local and small-scale renewables

• Review guidance on business models to support local energy projects.
• Target specific support through non-domestic rates relief for community renewables, hydropower and district heating respectively. These will continue pending the outcome of reviewing plant and machinery rateability, as recommended in the Barclay Review.
• Consider the role for solar and other renewable technologies under the forthcoming review of energy standards under Building Regulations, and the development of the next National Planning Framework.

Bioenergy

• Conduct research to better understand the potential contribution of bioenergy to Scotland's energy demand (power, heat and transport fuels).
• Work with stakeholders to develop a bioenergy Action Plan.

Marine energy

• Continue to champion the tidal and wave energy sector in Scotland.
• Support Wave Energy Scotland with its internationally recognised research and development programme.
• Work with the marine energy industry working group to agree five priorities to secure the future growth of the sector in light of changes in UK Government energy policy and EU exit.

Low carbon heat

• Continue to support the development of low carbon heat supply and heat demand reduction through our existing funding programmes ( e.g. District Heating Loan Fund, LCITP), and the development of new funding programmes under SEEP.
• Develop district heating regulation in Scotland to support investment and consumer protection, as outlined in our second consultation on Local Heat & Energy Efficiency Strategies and regulation of district heating.
• Work with stakeholders to consider future support for low carbon and renewable heat, including discussions with the UK Government about Heat decarbonisation pathways and future support for renewable heat beyond the Renewable Heat Incentive.

Low carbon transport

• Take the lead in promoting the use of ultra-low emission vehicles ( ULEVs) and phase out the need for new petrol and diesel cars and vans by 2032.
• Introduce large scale pilots across the country, to encourage private motorists to use ULEVs and remove barriers to their use, working closely with Transport Scotland, network operators and others.

Strategic Priority - Innovative Local Energy Systems

Scottish Government Actions

• Develop a Local Energy Systems position paper.
• Continue to support local energy systems project through existing and future schemes ( e.g. LCITP, CARES and Energy Investment Fund).
• Disseminate and share learning from all projects supported so that others can learn from, develop and replicate.
• Promote local energy systems that provide a credible low carbon alternative, and which are economically viable to operate in the longer term.
• Develop Local Heat & Energy Efficiency Strategies with local authorities to provide a collaborative approach that allows local communities to play an active role in planning for low carbon systems.
• Continue to support communities to develop, benefit from and own local energy systems where appropriate.

Strategic Priority - System Security and Flexibility

Scottish Government Actions

• Continue to work in partnership with National Grid, network owners and other key partners on electricity security and system issues in Scotland.
• Ahead of the relevant regulatory price control reviews, develop:
  • a Scotland Electricity Network Vision statement, and
  • a Scotland Gas Network Vision statement.
• Collaborate with UK Government, Ofgem and others to deliver the goals in the UK Smart Systems and Flexibility Plan.
• Continue to closely engage with SGN in their 100% Hydrogen pilot project.

Strategic Priority - Oil and Gas Industry Strengths

Scottish Government Actions

Oil and gas

• Continue to work constructively with the industry to encourage new exploration in the North Sea and enhance the capacity and competiveness of our world leading supply chain.
• Support research and innovation through the Oil and Gas Technology Centre ( OGTC).
• Continue to work with Skills Development Scotland to deliver essential support through the Transition Training Fund ( TTF).
• Enhance the capacity of our decommissioning capacity and capabilities through the Decommissioning Challenge Fund and support for a deep water port in Scotland.

Hydrogen, CCS and CCU

• Establish new forums to help us work with industry and academia to advance and track progress on CCS , CCU and Hydrogen.
• Continue to make support available for innovative hydrogen projects and trials.
• Continue to commission evidence on the impact of technology, regulatory and market barriers to hydrogen and CCUS opportunities in Scotland.
• Support the ACORN CCS project.
• Continue our membership of the Global CCS Institute.
• Continue to work with the UK Government and Oil and Gas Authority to progress Scottish CCS interests, including protecting existing critical infrastructure assets.
• Build on our initial work carried out in 2017 to develop a roadmap towards a Carbon Dioxide Utilisation Strategy for Scotland.