Scottish energy strategy consultation: the future of energy in Scotland

Chapter 3: Meeting our energy supply needs

2050 Vision

• Scotland has achieved almost complete decarbonisation of the energy system - in line with domestic and international climate change targets - with the equivalent of half of all energy consumed delivered from renewable sources by 2030;
• Scotland is a world leader in renewable and low carbon technologies and services - and continues to offer technology solutions in oil and gas, and excellence in subsea engineering. This knowledge and expertise is exported internationally;
• Scotland's urban communities benefit extensively from low carbon heat networks;
• Carbon capture and storage is operational at large-scale and has played a crucial role in decarbonising Scotland's energy system and industrial processes;
• New forms of flexible generation and demand management services are widespread; and
• Shared ownership of renewables and of local energy systems maximise the benefits to Scotland's communities.

Key Facts

75% Of Total Energy Consumption In Scotland Is Supplied By Oil And Gas

79% Of Primary Heating Is From Gas

59.4% Of Scotland’s Electricity Consumption Is Met By Renewables

Local Generation Of Electricity And Heat Has Increased By 400% Since 2011 And Now Accounts For Almost 600 mw Of Operational Capacity

Transforming The Energy System

62. The transformation of the energy system in Scotland, as part of the drive to tackle climate change, has the potential to bring new economic, environmental and social opportunities to individuals, businesses and communities. Modernising energy provision in this way will require careful management and substantial investment from both private and public sources.

63. Scotland is already an internationally-renowned centre of energy innovation and expertise across a wide range of technologies and services. We are well positioned to take advantage of future supply chain opportunities - diversifying into burgeoning areas of activity such as oil and gas decommissioning, offshore wind energy, energy system management and marine renewables, and capitalising on new emerging opportunities such as energy systems integration and low carbon heat.

64. The future energy mix in Scotland will be determined by factors including:

• the rate of innovation in energy technologies;
• the relative cost of producing energy across a range of technologies;
• energy demand (itself driven by innovation and changing lifestyles) and consumers' response to a more flexible energy system;
• global market conditions;
• regulatory framework (e.g. the grid charging regime, removal of barriers to more flexible generation and demand side measures, or retail market); and
• political decision making and support offered by government schemes.

65. The uncertainties of forecasting our energy transition means a flexible approach must be taken towards decarbonisation to help encourage a balanced combination of energy sources, adaptable to changing market conditions. This will enable Scotland's energy system to react and respond effectively to changes in supply and demand.

66. This draft Energy Strategy does not, therefore, specify a single energy mix for 2050; but instead seeks to highlight the range of technologies and fuels that will supply our energy needs over the coming decades. It focuses on the following five priorities:

• continuing to support the recovery of North Sea oil and gas as a highly regulated source of hydrocarbon fuels;
• supporting the demonstration and commercialisation of Carbon Capture and Storage and CO ₂ Utilisation;
• exploring the role of new energy sources in Scotland's energy system;
• increasing renewable energy generation; and
• increasing the flexibility, efficiency, and resilience of the energy system as a whole.

Non Domestic Rates

The Scottish Government recognises the important interaction between the energy system and the tax regime. The business rate regime plays an important role in commercial investment decisions. The Scottish Government's objective is to maintain a highly competitive business rates regime, including the following proposals for 2017-18:

• a reduction in the rates poundage;
• an expansion of rates relief under the Small Business Bonus Scheme; and
• limiting the application of the large business supplement to fewer properties.

Unlike other parts of the UK, there is a permanent exemption from rating valuation for micro-generation plant. We have also committed to expand the current rates relief relating to new-build and community-benefit renewable energy schemes in the context of the 2017 revaluation.

The 'Barclay Review' is an external review of business rates, established to explore how rates in the future might better reflect economic conditions and support investment and growth. It is due to conclude in summer 2017. A Scottish Government response will follow quickly.

67. We have drawn on a range of sources and analyses in setting these priorities. To complement the economic modelling which underpins the draft Climate Change Plan, the Scottish Government has consulted a range of energy specialists and considered analysis published by a number of research organisations, including the Committee on Climate Change, Energy Technologies Institute, International Energy Agency, Ofgem, and National Grid.

Continuing To Support The Recovery Of North Sea Oil And Gas As A Highly- Regulated Source Of Hydrocarbon Fuels

68. A challenge for all global energy systems is the availability of cost-effective substitutes for hydrocarbons. Hydrocarbons remain embedded within all advanced economies and are used in the following ways:

• in energy systems - hydrocarbons are used in power generation, transportation, and space heating;
• in industry - oil and gas provide important feed-stocks for industrial and chemical processes; and
• in manufacturing - hydrocarbons are a raw material in many everyday products.

69. Despite efforts to reduce greenhouse gas emissions, it is likely that fossil fuel consumption will be prevalent for decades to come and, under some scenarios, global demand for oil and gas will continue to rise until the middle of this century ^[8] . The IPCC 5th Assessment Report states that even at very low concentration levels of CO ₂, a significant fraction of global energy supply in 2050 may be provided by fossil fuels.

70. Over the past five decades, North Sea oil and gas production has established an industry that has generated over £330 billion in corporation tax and duties and currently supports over 330,000 jobs across the UK, of which 124,500 are estimated to be in Scotland. Oil and gas continues to meet around three quarters of our total energy needs in Scotland and is a significant strand of export-related economic activity in supplying hydrocarbons for non-producing nations in the EU and further afield.

71. At this stage in the transition, the Scottish Government remains committed to maintaining domestic oil and gas production and maximising economic recovery from the oil and gas fields in the North Sea and west of Shetland.

72. Production of oil and gas in the North Sea is a highly-regulated industry, with some of the most advanced and comparatively least polluting production methods in the world. In maintaining domestic production, our offshore oil and gas industry can contribute more to lowering net global emissions than under a scenario where Scotland becomes more dependent on imports. This is due to a number of possible imported crude oil sources having a higher carbon-intensity than Scottish production ^[9] .

73. This approach also has wider economic benefits. 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 exposure to security of supply risks. This is supported by analysis under the UK's fifth carbon budget produced by the Committee on Climate Change ^[10] .

74. Moreover, as part of a managed transition, the oil and gas industry should also seek to strengthen actions to reduce the carbon intensity of the global energy mix. This could include the production of new, lower carbon fuels, and the further exploration of new business models which increase the penetration of lower carbon technologies. Utilising knowledge and know-how from the oil and gas industry will be essential if cost effective renewable energy generation is to be achieved.

A positive contribution from the oil and gas sector

Ahead of the United Nations COP21 Summit in Paris, oil and gas companies representing more than 10% of global primary energy supply vowed to strengthen investments in natural gas, Carbon Capture and Storage and renewables. Investment and R&D from these companies could substantially improve the rate of technological development in low carbon technologies.

The expertise gained through 40 years' experience of operating in the North Sea, such as vital subsea skills, will prove invaluable for the engineering and innovation challenges posed by the low carbon transition.

Scotland's expanding offshore wind supply chain builds on established expertise and experience in oil and gas and significant investment in port and harbour infrastructure - such as Nigg Energy Park, test and demonstration facilities at Hunterston and Levenmouth - and support for inward investment and supply chain development.

In addition, the infrastructure that is in place from our hydrocarbon energy system provides a range of future opportunities. For example, many of the skills and supply chain requirements for future hydrogen infrastructure already exists in the oil and gas sector, with vast experience of producing, storing and transporting gases.

Actions:

The Scottish Government will:

• continue to work with the Oil and Gas Authority ( OGA), the UK Government and industry to avoid premature cessation of production and maximise economicw recovery of oil and gas through encouragement of innovation and investment, in line with Scotland's Oil and Gas Strategy, the OGA Corporate Plan and its Sector Strategies;
• with input from the Energy Jobs Task Force, provide continued ongoing support for the oil and gas industry as it adapts to the current economic challenges, ensuring that the sector can be competitive for decades to come;
• maximise opportunities for the transfer of skills and knowledge from the offshore oil and gas sector to support the development of manufacturing and low carbon industries - through the Energy Jobs Taskforce and the Energy Skills Action Groups and supported by the Transition Training Fund, and through the implementation of the Skills Investment Plan;
• support investment in the Oil and Gas Technology Centre, creating the conditions which help realise the ambition for Scotland to be the "go to" place for oil and gas technology solutions; and
• work with our enterprise agencies to implement the Decommissioning Action Plan, maximising the economic benefits from decommissioning of oil and gas assets for the Scottish supply chain - developing the infrastructure and capability to secure Scotland as an international decommissioning centre of excellence.

Exploring The Role Of New Energy Sources

75. Advances in technology mean that new and innovative ways of using hydrocarbons are emerging. Some of these advances could have a transformative impact on the energy system and lead to lower net carbon emissions, such as:

• production of hydrogen as a low carbon energy carrier; in stationary power and Combined Heat and Power ( CHP), in the gas main supply for heating, or to power fuel cells in cars, vans, buses or even marine vessels; and
• Liquid Natural Gas, Compressed Natural Gas and Liquid Petroleum Gas - in particular, biomass-derived versions of these - to join liquid biofuels as options for replacing fossil diesel and petrol as cleaner fuels in internal combustion engines.

76. Scotland's existing hydrocarbon industries will be well placed to capitalise on these new opportunities.

77. To support the emergence of new technologies and energy sources in a way that maximises their benefits to the economy and for consumers, and in an environmentally sound way, the Scottish Government will draw on the range of powers available to it, including the land use and marine planning systems (see below), energy consenting and licensing.

Planning

Land Use Planning

• The planning system plays an essential role in planning and delivering energy projects, through the development management process for projects from local scale to larger scale commercial schemes, and also development plan policies. The Scottish Government has published a consultation on the future of the Scottish Planning System. Responses are invited to the proposals by 4th April 2017. The Consultation will pave the way for a planning bill to be brought forward later in 2017.
• As part of an infrastructure first approach to development, land use planning will play a key role in helping to deliver new low carbon energy projects and infrastructure, informed by the strategic approaches set out in this Energy Strategy and as described by our consultation on Local Heat and Energy Efficiency Strategies.

Marine Planning

• The marine planning system supports the sustainable development of offshore renewable energy in Scotland's Seas. Published in March 2015, Scotland's National Marine Plan establishes the strategic framework and planning policies for managing the marine area around Scotland. Marine licensing and consenting decisions for offshore renewable energy projects are made in accordance with the Plan.
• Sectoral Marine Plans for Offshore Wind, Wave and Tidal Energy contain Scottish Government policies, including their spatial strategy, that steer commercial scale offshore renewable energy development. They contain the key strategic social, economic and environmental considerations for progressing offshore renewable energy.

78. In some cases, the Scottish Government may choose not to support particular technologies, on environmental or social grounds, or because of their potential negative impact on greenhouse gas emissions. Underground Coal Gasification ( UCG) is an example of a technique the Scottish Government has chosen not to support, following a thorough assessment of the scientific evidence ^[11] , and as set out to Parliament in October 2016, it is proposed that UCG will have no place in Scotland's energy mix ^[12] .

79. In all cases, the Scottish Government is committed to examining the evidence and engaging with citizens of Scotland to gather their views and understand their needs and perspectives. Our approach to evaluating the potential impact of unconventional oil and gas is an example of this evidence-based and measured approach.

Unconventional oil and gas

• The Scottish Government has put in place a moratorium on proposed developments involving hydraulic fracturing or coal bed methane extraction in Scotland. No such developments will be permitted while the moratorium remains in place.
• The Scottish Government has also undertaken an extensive period of evidence-gathering, which has included analysing and assessing the potential economic, social, health and climate change impacts.
• Accompanying this draft Energy Strategy consultation will be a full public consultation on unconventional oil and gas ( UOG). Individuals, communities, businesses and interest groups across Scotland will all have an opportunity to put their views across on the range of evidence available to Scottish Ministers.
• Once that consultation closes and the responses have been independently analysed, Ministers will consider the full range of evidence, and make a recommendation to Parliament on the future of unconventional oil and gas in Scotland and invite Members of the Scottish Parliament to vote on the issue.

80. The Scottish Government also recognises the importance of understanding how new energy sources and industries can be developed or introduced in a way that promotes economic opportunity, while minimising any significant additional long-term pressure on meeting Scotland's climate change targets, or other sectors.

81. This draft Energy Strategy proposes to explore the role for hydrogen in the energy system in Scotland and seeks views on our approach to doing so.

82. At point of use hydrogen is a zero emissions fuel, and by 2050 could be a major component of the UK's energy system.

83. The versatility and flexibility of hydrogen gas and hydrogen fuel cells offers the potential to provide a range of services to the energy system and to integrate low carbon solutions across the heat, power and transport sectors.

84. Fuel cells could enable the more efficient use of natural gas, through combined heat and power ( CHP) applications at a range of scales. Fuel cells using natural gas can be modified to operate using hydrogen at a later date.

85. The Scottish Government has supported a number of projects which demonstrate how hydrogen produced from renewable sources via electrolysis can be produced, stored, and used when required for local energy and transport. There is significant potential for these projects to be replicated or scaled-up in the future. Hydrogen may have the potential to deliver the lowest cost and least disruptive solution for the decarbonisation of heat.

Hydrogen as a means to decarbonise heat

• The draft Climate Change Plan pathway includes a moderate amount of hydrogen gas in the gas network from the mid-2020s. This is consistent with some test sites in the UK and Europe.
• However, there may be areas of the gas network where hydrogen could fuel 100% of the gas demand - as is proposed by the H21 Leeds City Gate project ^[13] . In Scotland, the Scottish Government is supportive of SGN's interest in the practical demonstration of blending hydrogen with natural gas in the network. In the longer term, these trials could be extended to carry 100% pure hydrogen, as part of a carefully planned conversion to parts of the gas network.
• While more analysis will be required, there is some evidence to suggest that hydrogen can offer significant cost savings for customers compared to alternative low carbon heat sources such as electricity, or district heating. A recent KPMG report also found it more practical and more acceptable to customers ^[14] .
• Hydrogen gas at scale will most likely require natural gas (methane) as the source feedstock and as such in order to be low carbon, carbon capture and storage facilities will be a necessary system requirement. Scotland is therefore uniquely placed to support an emerging hydrogen economy.
• These proposals, at national scale, have the potential to substantially reduce the total system cost of decarbonisation, but they will require further innovation in technology, high-volume hydrogen production at an acceptable cost, and a carefully managed hydrogen 'switch over' - as with the switch to natural gas in the 1970s.
• Coordinated activity by the public and private sectors over the next five to ten years will be essential to achieve any large-scale roll out of hydrogen and fuel cell technologies from the mid-2020s.

Actions:

The Scottish Government will:

• following publication of the final Climate Change Plan, review the role for new technologies and energy sources as transitional fuels for use in transport, heat and industry, with practical demonstrations where necessary;
• consider how planning can support the future energy system, through policies within the current and future iterations of Scottish Planning Policy and the National Planning Framework; and
• collaborate with UK government, local government, industry and academia on the UK hydrogen routemap, establishing the strategic basis for hydrogen in the energy system, whilst continuing to fund innovative projects involving hydrogen.

Supporting The Demonstration And Commercialisation Of Carbon Capture And Storage And CO ₂ Utilistaion

86. Scotland's North Seas are the largest carbon storage resource in Europe. Coupled with our existing oil and gas capabilities, ready supply chain, and existing pipeline and platform infrastructure, this means that Scotland is currently the best-placed country in Europe to realise Carbon Capture and Storage ( CCS) on a commercial scale.

87. The near-term demonstration of small scale projects leading to the medium and large-scale deployment of CCS, along with the development of CO ₂ Utilisation ^[15] ( CCU) applications, will be critical for the cost-effective decarbonisation of heat, power and industry.

88. The United Nations Inter-Governmental Panel on Climate Change ( IPCC), the International Energy Agency ( IEA) and the UK Committee on Climate Change all identify CCS as an essential lowest cost climate mitigation technology. The IPCC's fifth assessment report states that without CCS it would cost 138% more, globally, to achieve a scenario keeping the rise in global average temperatures to below 2 Degree Celsius.

89. The development of CCS would protect Scottish businesses against future carbon price rises and secure economic benefit in the supply chain. This knowledge and expertise could be transferred to international markets, with Scotland playing a leading role in global decarbonisation efforts.

90. Scotland has the existing pipeline infrastructure and CO ₂ storage capacity to support the development and deployment of commercial scale CCS. If managed and planned effectively, Scotland could have strategically located CCS decarbonisation systems across the country. This could be achieved by, for example:

• ensuring Scotland's competitive advantage in CCS is maintained by protecting our legacy oil and gas infrastructure and the extensive CO ₂ storage potential in our depleted oil and gas fields for repurposing for use in a future CCS system;
• supporting the transition efforts of Scottish oil and gas firms and domestic supply chain companies to deploy their expertise and skills to develop future CCS industrial opportunities; and
• building on Scotland's world-renowned academic and research reputation, including the links between the Scottish Government and European projects proposed in the North Sea Basin in Norway and the Netherlands, and applying the learning from the collaborative CCS research work being developed in Guangdong Provence in China.

91. The Scottish Government welcomes the report on CCS in the UK by the parliamentary advisory group led by Lord Oxburgh showing that CCS technology can be delivered at just £85/MWh over a 15-year period; a lower cost and faster delivery than nuclear power and comparing favourably to many renewable energy options ^[16] . However, efforts to realise the commercialisation of CCS in Scotland have suffered a set-back as a result of the UK Government's decision to remove £1 billion worth of funding to a ground breaking project. There is now an urgent need for strong inter-governmental collaboration and the Scottish Government will continue to press the UK Government to offer a renewed CCS strategy to mobilise CCS activity and secure a demonstrator project in Scotland.

Actions:

The Scottish Government will:

• work with industry to assess opportunities for small scale CCS demonstration and CO ₂ utilisation projects in Scotland across a range of sources including the application of CCS within industrial processes;
• explore the opportunity to combine bioenergy production and CCS - with a view to maximising the benefits for the energy system as a whole;
• maintain pressure on the UK Government to align its CCS strategy with Scottish energy priorities;
• support the commercialisation of CCS through securing a demonstrator project, building on the conclusions of the Scottish and UK Government funded research into CCS; and
• work with industry and the Oil and Gas Authority to ensure the retention of existing critical infrastructure, including key oil and gas pipelines suitable for use with CCS.

Increasing The Generation Of Renewable And Low Carbon Energy

92. The Scottish Government is committed to supporting the continued growth of the renewable energy sector in Scotland, as a key driver of economic growth and an essential feature of the future energy system.

93. Scotland's renewable energy success has been built on a high level of ambition and leadership by the Scottish Government, together with, until 2015, a relatively stable UK-wide support regime.

94. Since December 2012, the Scottish Government has provided significant capital finance to support renewables through our Renewable Energy Investment Fund ( REIF) operated by Scottish Enterprise. To date the fund has focused on marine energy and community renewables - filling a market gap.

Renewable Energy Investment Fund

• Over the past four years, REIF has given vital support to most of the major projects deployed in the community energy sector in Scotland. Scottish Enterprise - working in strong partnership with the CARES contractor Local Energy Scotland, and with other partners, including Social Investment Scotland and commercial lenders - has helped to facilitate deals and streamline diligence costs of community energy projects. REIF has been vital to the development of the marine energy sector in Scotland, and has been recognised in Europe in this regard as a template for investment.
• To date, £59 million has been invested through REIF to support over 30 projects, levering in more than twice this amount in private investment.
• REIF has been responsive to market conditions and policy priorities. For instance, it has been instrumental in driving forward shared ownership of energy projects - supporting pioneering projects such as Fintry to make the most of their investment opportunity, and underpinning the Stewart Energy partnership project in Lesmahagow.
• Future support will be designed accordingly to align with priorities emerging from the finalised Energy Strategy and to reflect market need.

95. Our success is demonstrated by the most recent statistics showing that 59.4% of Scotland's electricity consumption came from renewable sources in 2015 - meaning that the 2015 interim target of 50% has now been exceeded, and installed capacity continues to grow - towards the existing 2020 target of 100%.

96. Scotland's natural renewable resources have an important role to play in contributing beyond the borders of Scotland, and can contribute cost effectively to decarbonising the wider- GB and European energy system. Scottish renewable electricity is estimated to have displaced over 13 million tonnes of CO ₂ across the GB system in 2015.

97. The Scottish Government Heat Policy Statement 2015 reiterated an ambition for 11% of heat demand to be met by renewable sources by 2020. Significant progress has been made towards this target with renewable heat representing 5.3% to 5.6% of non-electrical heat demand. And renewables in transport now represents 3.2% of road transport fuels in the UK, towards the 2020 target of 10%.

98. These sectors each contribute to the existing renewable energy target to deliver 30% of energy from renewable sources by 2020. Indicative figures show we are halfway toward this target, with 15% of energy from renewables in 2014.

99 Scotland's climate change targets require the complete decarbonisation of the electricity sector, with a significant contribution from renewables. Modelling indicates that between 11 and 17 Gigawatts of installed renewable capacity will be required by 2030. Likewise in heat and transport, significant progress in decarbonising energy supply will be required with a considerable role for renewable sources. The Scottish Government's new ambition to deliver 50% of all energy needs from renewable sources is designed to provide unambiguous support for the further growth of the Scottish renewables industry.

2030 Renewable Target

• This draft Energy Strategy seeks views on the implementation of a new 2030 'all-energy' renewables target - to deliver the equivalent of 50% of Scotland's heat, transport and electricity consumption from renewable sources.
• We have made good progress to date, with the equivalent of 15.2% of Scotland's consumption estimated to have been met from renewable sources in 2014, more than double the share in 2009.
• Scottish Government analysis underpinning the draft Climate Change Plan shows that by 2030, the equivalent of between 44% and 50% of Scotland's demand for energy for heat, transport and electricity could be generated by renewable sources.
• While this level of renewables will be challenging, a 50% target represents an ambitious but achievable goal. Setting this target demonstrates the Scottish Government's commitment to a renewable future - and to the continued growth of a successful renewable energy sector in Scotland.
• Our Energy Strategy must remain flexible to advances in technologies and wider market developments, however. Alongside the 50% renewables target, we also invite views on how we might set an alternative target or targets to encourage the full range of low and zero carbon energy technologies to achieve the most cost-effective pathway towards our long-term emissions reduction targets.

100. Renewable technologies can offer significant economic opportunities, enabling new or emerging sectors to develop products and services for use in Scotland and around the world, and provide more stable costs for industry and households.

101. Greater provision of renewable energy offers the opportunity for Scotland to capitalise upon our established expertise. Scotland already outperforms other parts of the UK low carbon sector - generating 18% of all UK turnover at £5.6 billion in 2014.

102. Scottish companies and research institutions are now at the forefront of innovation in renewable technologies and services. Financial support from the Scottish Government and its enterprise agencies have established Scotland as a world leading location for research, development and commercialisation of a range of renewable energy technologies and services.

103. Scotland has particular expertise offshore. Our support for floating offshore wind best-demonstrates the Scottish Government's continued commitment to future renewable technologies. Recently, our support for other low carbon technologies as a partner for renewables, especially new forms of energy storage, has helped to demonstrate new business models. With the appropriate market support, these types of project can offer better services to the grid and better outcomes to consumers.

104. For at least two decades, Scotland has cultivated a particular specialism in marine renewable technologies, which offer so much potential to the Scottish economy - and to rural communities throughout the world. With Scottish Government support, the MeyGen project in the Pentland Firth is the world's first utility scale tidal array. The Offshore Renewable Energy Catapult is also based here, building expertise in offshore wind and marine technologies. And the longer term potential of wave energy is supported through the establishment of Wave Energy Scotland - a bold new initiative to support wave energy technology development.

105. As other countries look to further develop this sector there will be opportunities for Scottish companies to export their skills and expertise.

106. But renewable technologies remain expensive options in most cases when compared with traditional fuels. The Scottish Government's priority is therefore to see the cost of renewable energy provision continue to reduce - resulting in lower costs to the consumer.

107. A recent study by the Department for Business, Energy and Industrial Strategy ( BEIS) showed the potential for renewable technologies to reduce costs, becoming more cost-effective generation sources than conventional gas fired power stations into the 2020s. The lifetime cost of onshore wind is estimated to fall to £63 per megawatt hour generated, below the comparable cost from gas in the same timeframe. Offshore wind costs are also estimated to reduce, becoming competitive with gas by 2030. This analysis demonstrates the potential for onshore wind, offshore wind and solar PV to produce electricity at a lower cost per megawatt hour than the proposed Hinkley C development. To unlock these cost reductions, it is imperative that deployment continues, utilising the rich pipeline of renewable projects in Scotland.

Technology	Opportunity
Onshore wind	Current and consented onshore wind capacity is enough to power the equivalent of every household in Scotland twice over. Onshore wind currently provides lowest cost renewable electricity at scale. Now a mature renewable technology - marking an important point in the development of the industry. To support the future development of onshore wind in Scotland, the Scottish Government will: consult widely with stakeholders on a range of factors influencing the next phase of onshore wind, as set out in the accompanying Onshore Wind Policy Statement; work with industry to meet the challenge of delivering onshore wind without subsidy, including the scope for use of public sector and corporate Power Purchase Agreements; under the current consultation and beyond, we will continue to work with industry and island councils to make the case for remote island wind being a distinct technology; and continue to work with the Ministry of Defence, air navigation service providers and developers to support a more proportionate and affordable approach to mitigating impacts from onshore and offshore wind development on aviation radar.
Offshore wind	There is huge optimism for further development of offshore wind in Scotland. Scottish waters remain open for business and the pipeline of development continues to grow 25% of Europe's offshore wind resource can be found around Scotland's coastline. Offshore wind is a large-scale technology with the potential to play a pivotal role in our energy system over the coming decades. Innovation in offshore wind, and especially in technologies like floating wind, which offer scope for development in deeper water, will play a significant role in positioning Scotland as a world centre for energy innovation. To support the future development of offshore wind in Scotland, the Scottish Government will: continue to support innovation and cost-reduction, through our Enterprise Agencies and partners such as the Carbon Trust and Offshore Renewable Energy Catapult; and until closure, deliver support for offshore wind under the Renewables Obligation (Scotland).
Hydro power	Hydro power in Scotland is a mature and reliable source of electricity - accounting for 27% of all renewable electricity generated in 2015. 88% of total UK hydro capacity is in Scotland - enough to power the equivalent of over 1,000,000 homes. Hydro power (including pumped hydro storage - covered elsewhere) will play an important role as part of a balanced energy portfolio and we are keen to work constructively with the UK Government and the industry to ensure hydropower's sustainable future. The Scottish Government will: reinforce its commitment to encourage and promote hydro power within the limits of our powers and continue to create a supportive environment for small scale and community hydro power in Scotland.
Marine renewables	Scotland has a third of UK's tidal stream resources and two thirds of its wave resources. The potential exists to generate more electricity than we currently need from the waters around the Scottish coast. Scotland is home to the world's leading wave and tidal test centre (The European Marine Energy Centre); the world's largest planned tidal stream array (MeyGen); and the world's largest tidal turbine (Scotrenewables). In summer 2016, Scottish firm Nova Innovation successfully deployed a second tidal turbine in the Bluemull Sound and began exporting power to the Shetland grid. To support the future development of marine energy in Scotland, the Scottish Government will: work with the sector to demonstrate to the public and private investment community the strong industrial potential of marine energy and to press for continued UK Government support; continue to offer support through REIF and other financial mechanisms; and support innovation and cost-reduction through the continued funding of Wave Energy Scotland.
Solar PV	Solar Photovoltaic (Solar PV) capacity in Scotland is estimated to be enough to power the equivalent of approximately 50,000 homes. Favourable levels of solar radiation combined with temperate climate is conducive to further solar PV investment - especially in Eastern Scotland and the Central Belt. Combining storage with wind and solar assets presents the most valuable solution for the energy system as a whole, allowing demand to be managed locally. To support the future development of Solar energy in Scotland, the Scottish Government will: consider the on-going role for solar (and other renewable technologies) as part of a further review of energy standards within building regulations; and ensure that Good Practice guidance for shared ownership developments fully recognises the opportunities for solar.
Bioenergy	Biomass provides almost all (90%) of existing renewable heat in Scotland - sustaining rural employment. Biomethane is currently used for heat but could also provide a renewable feedstock for electricity production, which when combined with CCS, can result in negative emissions. Biofuels in transport, when from sustainable sources can deliver significant carbon savings when compared to fossil fuels. To support the future development of Bioenergy in Scotland, the Scottish Government will: commit to the development of a whole-system Bioenergy action plan, following the publication of the final Climate Change Plan.

Renewable Electricity

108. The main technologies that generate renewable electricity are onshore and offshore wind, wave and tidal, hydro-power, solar photovoltaic panels and bioenergy - a summary of these technologies and the Scottish Government's proposed actions are set out in the Box above.

109. In the immediate future, the renewable energy sector faces investment challenges. Current uncertainties over the support for renewables under UK revenue support schemes - including remote island wind, offshore wind (both floating and fixed) and wave and tidal under the Contracts for Difference scheme - are now jeopardising the future deployment of renewable electricity technologies in Scotland. The Scottish Government calls on the UK Government to provide greater long-term certainty over these support mechanisms - and for greater clarity on the future of the Levy Control Framework, under which the costs of renewables support is currently managed.

110. Onshore wind is now a mature renewable electricity generation sector and is now the lowest cost renewable electricity technology. But new projects now face a highly uncertain route to market. With the right regulatory framework, new onshore wind projects can be economically viable without subsidy - sometimes known as a 'subsidy-free' or 'merchant' wind.

111. This draft Energy Strategy sets a challenge to the renewables industry to make Scotland the first area in the UK to host commercial onshore wind development without subsidy. The accompanying draft onshore wind policy statement sets out further detail and invites views on this position.

112. As well as the 'route to market' concerns, it is important to consider a range of factors influencing the next phase of onshore wind, including our approach to repowering wind farms that are reaching the end of their 25 year planning permission period.

113. With appropriate regulatory support, offshore wind development has a very bright future in Scotland. The offshore resource in Scottish waters is amongst the best in the world. The cost of offshore wind continues to fall and our understanding of its potential impacts on sensitive marine wildlife is improving, which will support the long term sustainable development of the technology. There are several fixed offshore wind projects in development and now a substantial pipeline of innovative floating wind projects, offering a glimpse of the enormous potential for this technology. Scotland is at the forefront of offshore renewables generation with world-leading innovative projects in offshore wind, including the European Offshore Wind Deployment Centre, Beatrice offshore wind farm, Aberdeen Bay and Hywind Scotland, the world's largest floating offshore wind farm.

114. Solar and hydro-electric schemes - both small and large-scale - have considerable potential to support the decarbonisation of Scotland's electricity supply. Particularly when combined with storage they present the most valuable solution for the energy system as a whole, allowing demand to be managed locally. Recent cuts by UK Ministers to financial instruments supporting solar and conventional hydro-electricity projects and the absence of a price stabilisation mechanism to support investment in further pumped hydro storage capacity are hampering investment in these vital technologies.

115. As discussed in Chapter 5, the Scottish Government's approach to renewable energy must also continue to drive innovation in new local energy system models, and increase the scope to work in partnership with host communities and local government to enhance the uptake of shared ownership with local communities.

116. Our ambitions in these areas are framed by two new targets:

• 1 GW of community and locally-owned energy by 2020, and 2 GW by 2030; and
• at least half of newly consented renewable energy projects will have an element of shared ownership by 2020.

117. These targets mark a sustained commitment to ensuring that the benefits of renewable energy projects are shared with communities. The Scottish Government is now exploring the scope for the Scottish Government to offer increased Power Purchase Agreement ( PPA) provision under a 'sleeve arrangement' within the national collaborative contract (which allows public bodies to choose green electricity). The tender for a replacement of the current contract will start in late 2017. More information on this proposal can be found in the accompanying Onshore Wind Policy Statement. If the contract is expanded, the Scottish Government would seek to ensure that community energy or small scale projects (not just onshore wind) are in a position to submit commercially viable bids to sleeve their energy through the main contractor. This might require some aggregation of the proposition. Support to help community and small scale projects develop their tendering abilities would be a necessary part of this proposal.

Renewable Heat

118. Renewable heat is predominantly generated by woody biomass and biogas, often converted to biomethane, solar thermal and heat pumps. In the future, deep geothermal may also feature as a renewable heat source.

119. Our renewable heat sector is growing - and in combination with innovative business models, new technologies and new heat infrastructure, Scotland has the potential to deliver considerable carbon savings by addressing heat needs at the local scale.

120. Just as with renewable electricity, however, it will be necessary to provide regulatory and stable financial support to stimulate the required levels of private investment in decarbonised heat solutions. The Scottish Government has consistently championed the need for support of this kind, whilst supporting efforts to identify opportunities for heat efficiency, heat recovery, and renewable sources.

121. The continuation of the UK Renewable Heat Incentive ( RHI) scheme (or an equivalent) beyond 2021 will be critical to encouraging investment in and development of renewable heat technologies to the benefit of householders and businesses across Scotland. The RHI should not exclude key renewable heat technologies - such as solar thermal - and must continue to use the most up to date information to determine support levels, taking into account Scottish circumstances.

122. Some low carbon heating solutions, such as heat pumps, rely on electricity, which will increase demand not only on the electricity generation sector, but place additional pressure on the distribution network.

123. As a means of distributing heat to homes, businesses and public buildings, district heating allows the efficient use of a range of heat sources, creating a heat network which can supply towns or whole cities. While not appropriate for all areas ^[17] , in the right locations district heating can result in lower carbon emissions, more affordable heating and supply long-term investment in infrastructure which can be adapted to meet changing energy demands.

124. Half of the total estimated capacity of district heating schemes in Scotland are currently supplied by renewable sources.

125. However, there are challenges in delivering the benefits of district heating, including:

• reducing the cost of capital for large-scale infrastructure. With a smaller customer base than the gas network - the cost of new schemes and extensions cannot be socialised across all customers, which increases the risk and cost of capital;
• consumer protection - district heating is currently a largely unregulated market and a Special Working Group was established to identify the necessary steps for regulation of the market; and
• district heating is only applicable in certain areas - being most economical where heat density is high enough.

126. The accompanying District Heating Regulations consultation paper considers the role that regulation could play in developing District Heating in Scotland, as part of SEEP.

Glasgow Housing Association ( GHA), in partnership with WSP Parson Brinckerhoff and Scottish Gas, have been grant awarded £2.5 million through the Scottish Government's Local Energy Challenge Fund to implement a new, innovative district heating scheme in South Glasgow. The project will demonstrate the UK's largest air source heat pump, which has been manufactured by Glasgow-based Star Renewable Energy, and is focused on improving quality of life for residents by engaging users with their energy usage and tackling fuel poverty. The system will incorporate 350 homes in total, the majority of which are owned and managed by the housing association.

Using electricity from onsite solar photovoltaic panels, it will use thermal storage, a 10,000 litre hot water store, to balance the load profile with greater efficiency. The system controls will also allow electricity grid management services by advancing power consumption in periods of grid surplus and demand reduction in periods of grid deficit.

Renewable Fuels for Transport

127. In the transport sector, renewable energy is supplied by biofuels (gaseous and liquid), which, when from sustainable sources can deliver significant carbon savings when compared to fossil fuels.

128. There are, however, a range of issues that mean they are not a panacea to transport sector decarbonisation:

• quantities of sustainable biomass for biofuel manufacture are limited and would be unable to meet current demand for road fuel production;
• some bioenergy crops can cause wider social and economic problems - if they compete for land for food production, for example;
• the emissions savings relating to biofuels depend heavily on the type of material used to generate the fuel; and
• current biofuels can only be used in small amounts and remain compatible with existing engine designs and despite developments in new generation biofuels, only incremental additional use is expected in the medium term.

Thermal storage

Thermal storage provides a way of managing the peaks and troughs of heat demand over a period of time. Heat stores may store heat in the form of hot water, for example in large insulated tanks, above or below ground or in phase change materials, often taking up less space than hot water. However technologies can range significantly in scale: from hot water tanks and electric storage heaters in homes providing hours of storage to large-scale underground tanks (or old mines) holding hundreds of thousands of m ³ of water providing inter-seasonal storage for a district heating network.

Greater thermal storage capacity has the potential to reduce the cost of delivering our heat needs. Thermal storage can be used alongside heat recovery, solar thermal panels, heat pumps, biomass boilers, and combined heat and power ( CHP). It can be part of a wider approach to managing our energy system, including the electricity network.

Thermal storage can utilise intermittent energy sources such as wind and wave generation, and potentially bringing down the cost of decarbonisation through greater efficiency. Thermal storage can enable CHP plant to run at maximum capacity, reducing the number of hours run at part load which enhances overall efficiency. It can provide 'grid balancing services' by enabling electricity generation equipment such as CHP to be switched on and off at short notice without negatively affecting the heat supply that users need.

The CIBSE Code of Practice for Heat Networks provides guidance on thermal storage in heat networks and the cost of financing such stores is supported through Scottish Government Programmes such as the District Heating Loan fund and innovative applications for individual homes have been supported through the Local Energy Challenge Fund.

129. These issues have resulted in an expectation that effective biofuel use for transport decarbonisation in the overall transport sector is unlikely to reach above 10% for some time.

130. The main mechanism for the promotion of biofuel use, the Renewable Transport Fuel Obligation ( RTFO), is set by UK Department for Transport. A consultation on proposed amendments to the RTFO is open until 22 January 2017 ^[18] . The proposals include a range of measures to reduce the impact of transport by increasing the supply of biofuels, making them more sustainable, and realising the industrial opportunities from developing advanced biofuels. They include:

• establishing long-term targets to 2030 to provide industry certainty;
• a growing sub target for the contribution of advanced 'development fuels';
• setting a sustainable contribution from crop derived fuels and encouraging fuels from waste;
• extending rewards under the obligation to include aviation fuels, hydrogen and renewable fuels of non-biological origin; and
• targeting those transport sectors that are difficult to decarbonise such as aviation and freight.

Actions:

The Scottish Government will:

• call on the UK Government to provide a stable, supportive regulatory regime to provide certainty to renewable investors and developers - giving appropriate support for investment in renewable energy, establishing a route to market for onshore wind, and clarifying the future for the Levy Control Framework
• seek to address grid constraints in Scotland for distributed power generation at local, regional and national level, through engaging with the National Infrastructure Commission and working with local authorities, Ofgem, National Grid and Distribution Network Operators;
• put in place measures which ensure that at least half of newly consented renewable energy projects will have an element of shared ownership by 2020;
• support the future development of a wide range of renewable technologies through addressing current and future challenges, including market and wider policy barriers (see box on pages 41-43);
• building on the successes of REIF, design future support to meet energy priorities;
• following the final Climate Change Plan, begin work on a Bioenergy Action Plan to enhance our understanding of the opportunities of bioenergy for Scotland's energy system;
• continue to offer financial support and advice to domestic and business customers of all sizes to uptake renewable heat technologies and asks that the RHI continue to cover a wide range of technologies including, biomass, heat pumps and solar thermal renewables to allow all potential Scottish investors and customers to obtain the benefits of the RHI scheme;
• work closely with the UK Government to ensure adequate incentives are put in place to continue to encourage the uptake of emerging renewable heat technologies post 2021 when the current RHI will end;
• carefully consider with local government the role for regulation in the development of District Heat Networks on a large scale, and for the development of Local Heat and Energy Efficiency Strategies as part of Scotland's Energy Efficiency Programme; and
• following the current consultation, work with the UK Government to ensure the RTFO provides an important long term contribution to the decarbonisation of transport.

Increasing The Flexibility, Efficiency And Resililence Of The Energy System As A Whole

131. While efforts to reduce demand and achieve efficiencies in Scotland's use of electricity will have an impact on the amount of electricity we consume, the potential for large scale electrification of heat and transport will place increased demand on the renewable electricity sector and the networks that support it.

132. The draft Climate Change Plan pathway shows that electricity demand could increase by approximately 30% in Scotland as a result of further electrification. To accommodate this increase, flexibility and efficiency of the electricity system will be of increasing importance as well as the resilient supply of electricity throughout Scotland.

133. Scotland has been at the forefront in experiencing and meeting network challenges that are a result of decarbonisation and decentralisation. In recent decades we have connected some of our best renewable energy resources located in places remote from our main population centres. This has been achieved through considerable investment in our transmission and distribution network assets. Over the period 2013-21 at least £7 billion will be invested in Scotland's electricity transmission networks alone.

134. Continued network investment is required to harness Scotland's remaining renewable resource potential and meet future challenges and deliver opportunities. This is especially true of the Scottish islands. The further development of the transmission network to connect the Northern and Western Isles of Scotland could release some of the best and untapped renewable resources in Europe.

135. There is also great potential for investment in a range of smart, flexible and grid-friendly technologies that can provide a range of benefits to the energy system in Scotland. These technologies can maximise our renewable energy potential, use existing assets more fully, balance energy supply and demand, and enhance the efficiency of the energy system. This is closely linked to our ambitions for new local energy system models. Emerging evidence suggests that flexibility measures, alongside an increased penetration of renewables, is the basis for a future "lowest cost" system ^[19] .

136. Innovation and development works in Scotland have demonstrated that these technologies can work to allow bottlenecked parts of the energy system to be managed in a more strategic way, for example:

• Scottish Power Energy Networks' Accelerating Renewable Connections ( ARC) project used smart technologies to improve access to the distribution network and facilitate generation around network constraints at both distribution and transmission voltages. The £8.4 million trial was funded by Ofgem's Low Carbon Network Fund (now the Network Innovation Competition); and
• Orkney is home to what was the UK's first smart grid, enabling renewable generation to be connected to Orkney's distribution network at a considerably lower cost than conventional network management. A new Active Network Management approach has been devised to make better use of the existing network by instructing generators to control their output to match the available network capacity.

137. As well as new flexibility mechanisms and battery storage, pumped hydro storage ( PHS) is a mature and highly flexible technology, and, as one of the few large scale means of storing energy, could play an even greater role in our future energy system. Pumped hydro storage currently provides 24 GWh of aggregate storage capacity in Scotland, a range of ancillary services to the grid and is highly complementary to renewables investment, such as onshore wind.

138. In Scotland, Scottish Power is proposing an expansion of its existing Cruachan plant, whilst SSE is proposing their 600MW project at Coire Glas and conversion of its existing Sloy Hydro power station to PHS, both which have been consented by the Scottish Government. 2020 Renewables with Buccleuch are developing plans for a 400MW PHS at Glenmuckloch surface coal mine which was recently consented by the Scottish Government and the ILI Group are proposing three 400MW PHS stations in Scotland.

Scotland's islands

• Many of Scotland's island communities are already successfully demonstrating complex energy solutions: energy innovation is being driven by their isolation from mainland energy and supply networks, and the availability of some of the most powerful renewable energy resources in Europe.
• Orkney's role as a 'living laboratory' has great advantages in terms of identifying problems and solutions to energy challenges from which other parts of Scotland can learn:
• Orkney is home to what was the UK's first smart grid, enabling renewable generation to be connected to Orkney's distribution network at a considerably lower cost than conventional network connection; and
• Orkney's 'Surf and Turf' and 'Big Hit' projects demonstrate a fully integrated energy model where hydrogen is produced using electricity from tidal and onshore wind turbines, stored in a fuel cell, and used to provide low carbon heat, power and transport. The projects will benefit the community through providing employment and training as well as reduced harbour electricity costs and increased revenue.
• However, despite these opportunities, our island communities face higher fuel costs and often have harder-to-treat housing and more extreme weather conditions, meaning that fuel poverty rates on the Islands are some of the highest in Scotland.
• Moreover, the lack of interconnection with mainland electricity networks acts as a barrier for renewable developments when competing for market support with projects across mainland Britain.
• The Scottish Government has long argued for a separate Contracts for Difference allocation process for remote island wind and has worked in partnership with UK Government and Island Councils to form the Scottish Island Renewables Delivery Forum - an intergovernmental working group set up to address the barriers to the deployment of island wind and marine technologies.
• The Forum funded research that found that, while island wind could capture some of Europe's best wind resources providing benefits up to £725 million for Island economies from 2015 to 2040 as a result of construction and operation of renewables generation, the projects face unique costs that obstruct deployment under existing support mechanisms.
• The recent announcement made by the UK Government to consult on the treatment of non-mainland GB onshore wind projects has jeopardised financial investments made by developers in good faith and undermines Scotland's renewables potential.

139. The Scottish Government endorses the recommendations of the Pumped Storage Working Group which was established to work with government and key stakeholders to better understand the opportunities and barriers to deploying new pumped hydro storage capacity in the UK. This group recently commissioned an independent report that highlighted the value of PHS to the grid ^[20] .

140. Enhanced flexibility and network expansion can be complemented by increased connection with other electricity markets and networks. When energy resources and assets compete fairly, increased connection can allow for their more efficient use between countries.

141. In 2017, the UK Government and Ofgem will design a routemap for flexibility and smart energy systems in order to facilitate greater flexibility in the energy market. The Scottish Government intends to participate fully in this process.

Balanced electricity mix

142. The Scottish Government supprts a balanced mix of electricity supply. As well as renewable technologies, in the absence of adequate storage capacity, thermal electricity generation is required to provide important base-load capacity and support the resilience of the electricity system.

143. At the moment, there are not sufficient incentives in the market to build new, efficient thermal generation in Scotland. A number of market and regulatory changes will be required - most of which are reserved to the UK Government - in order to deliver the resilient, low carbon electricity mix in Scotland envisaged in this strategy.

144. The Scottish Government takes the view that important strategic and regional factors merit much stronger consideration in future system design and planning as part of the transition to a low-carbon future energy system. These include the location of existing infrastructure and sites designated for energy production, existing transmission infrastructure, sources of large-scale industrial emissions and proximity to pipeline and storage networks.

145. The current transmission charging regime, for example, has a particularly detrimental effect. The North-South gradient of location charges actively discourages the rebuilding of thermal plant in Scotland where new thermal assets have an important role to play in contributing towards system operability, resilience and restoration. This is a priority concern for us and we eagerly await the publication of National Grid's Northern Security Assessment.

146. Looking ahead to 2050, this Energy Strategy must consider a future after the current generation of nuclear electricity plants in Scotland. The Scottish Government's policy is that these plants should not be replaced with new nuclear generation, under current technologies.

147. To ensure Scotland can continue to benefit from reliable, flexible generation capacity in the future, this draft Energy Strategy invites views on the future of Scotland's decommissioned thermal generation sites.

Actions:

The Scottish Government will:

• work in collaboration with BEIS and Ofgem in developing the Smart Energy Plan for the UK: seeking a fair treatment for storage and flexibility mechanisms, including pumped hydro storage ( PHS);
• reiterate the proposal for the UK Government to implement a 'cap and floor' regime to provide a more appropriate regime for PHS and work with key stakeholders to realise the opportunities and overcome the barriers to deploying new PHS capacity in Scotland;
• support innovation and demonstration of new forms of storage - including support for The Power Networks Demonstration Centre ( PNDC) - a unique world-class facility designed to accelerate the adoption of new, 'smart' technologies within advanced power grids - and work under the Energy Technology Partnership; and
• work with industry, academia, local authorities and environmental groups to consider proposals for re-powering existing large-scale electricity generating sites - recognising their potential strategic role in future system design and planning as part of the transition to a low carbon energy system.

Consultation questions

• What are your views on the priorities presented in this chapter for energy supply over the coming decades? In answering, please consider whether the priorities are the right ones for delivering our vision.
• What are your views on the actions for Scottish Government set out in this chapter regarding energy supply? In answering, please consider whether the actions are both necessary and sufficient for delivering our vision.
• What are your views on the proposed target to supply the equivalent of 50% of all Scotland's energy consumption from renewable sources by 2030. In answering, please consider the ambition and feasibility of such a target.
• What are your views on the development of an appropriate target to encourage the full range of low and zero carbon energy technologies?
• What ideas do you have about how the onshore wind industry can achieve the viable commercial development of onshore wind in Scotland without subsidy?
• What are your views on the potential future of Scotland's decommissioned thermal generation sites?
• What ideas do you have about the role of hydrogen in Scotland's energy mix and the development of hydrogen production in Scotland?