Local energy policy statement: consultation

Chapter 4: Pathway to Commercialisation

Promoting local energy systems models that provide a pathway to a zero carbon future, which are inclusive, and are economically viable to operate in the long-term.

Principles

• Projects that demonstrate a commercially viable and replicable opportunity, in line with the principle of inclusive growth, should be prioritised.

• Low regret opportunities that support a net zero emissions future should be identified and acted upon.

This chapter focuses the importance of developing commercially and economically viable local energy systems and highlights key changes that the energy market will face in future years.

4.1 It starts with research and innovation

Scotland has a global reputation for leading research and innovation in a host of different fields – including energy. Indeed, Scotland is already home to a number of world-class research, development and innovation centres which stretch across the country.

The Scottish Government remains committed to both supporting technical innovation, and individuals and businesses throughout Scotland who are exploring innovative ways to deliver business models that decarbonise Scotland's energy system.

Ensuring that we can learn from these successful projects and transfer this innovation to the wider energy stakeholders will be the driver for encouraging replication across the country, at scale. It is only through replication at scale that Scotland can achieve our net zero ambitions and deliver inclusive growth.

Research and innovation in this area, to prove and scale technologies which can operate in a net zero economy, will be a priority in helping to unlock potential commercial opportunities – both here in Scotland and internationally. The latter of which is explored further in Chapter 5.

4.2 Road to commercialisation

The Scottish Government has supported, and continues to support, a range of innovative demonstration projects through initiatives such as the Low Carbon Infrastructure Transition Programme (LCITP) and CARES.

Going forward, we need to share the learnings from these early projects - building on the ones that were successful and sharing the lessons from those that failed.

Where Scotland's energy system is transformed with the support of public funds, there will be a requirement for all case studies to be published on both the Scottish Government and Local Energy Scotland websites on a regular basis. Wider stakeholders will be encouraged to do likewise, to increase the range of information available to others.

The clear aim has to be to de-risk the sector, making local energy system projects more attractive investment propositions for individuals and local communities, as well as for the private sector, while delivering quality jobs and fair work – thereby, reducing the need for public sector support.

4.3 Public Sector Exemplars

The pace and scale required to deliver net zero by 2045 cannot be delivered by demonstration activities alone - the level of step change required will need to be supported with a greater focus on commercial projects that can attract significant private investment and deliver at scale. Only when this happens, will widespread change be seen.

However, irrespective of whether a project is developed by a community organisation, third sector or private enterprise, there is a need to transition away from reliance on public funding - towards commercially and economically viable systems that can attract private sector investment at the pace and scale needed.

It is widely recognised that the public sector has a role to catalyse and accelerate the transition – for example, by acting as an off-taker and anchor load - to a decarbonised energy system, or through embracing the challenge to decarbonise its buildings at a faster pace than the commercial and domestic sectors.

The Scottish Government recently announced its commitment to decarbonise its own estate by 2028. The approach taken to achieve this will have to deliver a set of economic solutions that demonstrate best value. In this way the public sector does not differ from the private sector.

4.4 Drivers for change - multi-faceted

Previous chapters highlighted the uncertainty of the final design of future energy systems that will deliver a net zero Scotland. It is worth re-emphasising this point, and being clear that flexibility and adaptability should be seen as strengths as they ensure that best value and reliance can continually be assessed.

There are major modifications happening across a number of areas which are disrupting the status quo in the energy market. The drivers for change are not down to a single issue - but are complex and involve a range of factors, such as those outlined below:

• Step change in heat decarbonisation requirements – the Scottish Government will publish a Heat Decarbonisation Policy Statement in Summer 2020, setting out our vision and programme for decarbonising heat in line with Scotland's net zero commitment. This will involve a significant scaling up of project activity over the coming decades, providing opportunities for communities across Scotland.

• New business models – the removal of UK government energy incentives and subsidies has, amongst others, contributed to a need to consider other options to obtain a revenue stream, such as flexibility services, energy co-operatives, peer-to-peer trading, multi-bundled services, aggregation, and virtual private wires.

These options currently are only attractive to/ taken-up by a small consumer base but are expected to become common place, offering more flexible choice for domestic and business users.

• Digital technologies and techniques – such as the capture and application of data-driven approaches to create or improve products and services. These are already transforming sectors across the economy.

This is happening in the energy sector too, reflected by the move from passive to more active energy systems and consumer interactions. For example, heating systems which respond to a user's location or remote commands, or smart devices which can be activated when demand and, therefore, prices are low. This concept is expanded on below.

• Switch to EVs - as EVs become increasingly prevalent within the market, this will impact on peak demand periods for electricity, creating both opportunities and pressures for local distribution networks as drivers look to connect and charge their vehicles. EVs and vehicle to grid may also be expected provide flexibility benefits to the network.

• Energy empowerment of local communities - seeking more local benefit from local energy resources, which has included developing and owning generation or taking a financial or ownership stake in a local project.

Adding to this decarbonising energy usage, energy management, storage, supply has also been the norm for "off-grid" communities out of necessity.

However, the Scottish Government are beginning to see a desire for this more widely in more communities across Scotland. This is encouraging but it's important that we do not lose sight of the need to do so in a way that is inclusive; ensuring the most vulnerable are not worst off.

• Remote and rural areas – seeking to build on the pioneer work undertaken by a number of remote rural communities who have developed local energy solutions that meet their unique needs and circumstances.

Case Study: Crossdykes Wind Farm – Community Shared Ownership

Muirhall Energy Ltd offered the local community an opportunity to acquire up to 10% equity shared ownership in a 46 MW wind farm. The offer was made to five local community council areas throughout Dumfries and Galloway.

The project is now consented and under construction, with completion programmed for summer 2020, and community investment by December 2020.

This is the first subsidy-free wind farm to be constructed, involving both community Shared Ownership and Community Benefit.

The Scottish Government, through CARES, awarded the community a grant to contribute towards costs for the necessary professional advice required to properly assess the opportunity.

This is an exciting opportunity for the community to receive substantial payments from Community Benefit fund, along with substantial income from Shared Ownership and, ultimately, to deliver long-term local ambitions and aspirations, that will be in place for future generations.

4.5 Digitalisation

There will be an increased role for digital technologies and techniques in the future energy sector. These will likely aid more intuitive systems that will have a powerful bearing on the future energy sector. The growth of the digital economy may offer more flexible choice for domestic and business energy users alike.

There is already a growing demand for storage, technological innovation, and smarter networks. Other developments include cloud computing and blockchain, which will transform business models, markets and employment.

These will continue to change the ways in which energy is produced and consumed, and will be vital in realising energy system balancing in a decentralised system with a wider range and number of generators and greater reliance on flexibility.

However, there are challenges associated with the continual digitalisation of the energy system for energy users, such as:

• Encouraging greater consumer engagement in the energy market
• Simplifying what can be a complicated process
• Digital exclusion

There are a number of issues surrounding the concept of smart energy systems. These include the current telecommunications network coverage difficulties experienced across many rural and remote areas throughout Scotland, as well as the lack of compliant metering technology available to energy users (who may not have yet received a smart meter due to either technical or behavioural reasons). It is important to ensure that no groups are left behind during this digital transition.

Through this policy statement and our Energy Consumer Action Plan^[23], the Scottish Government will continue to ensure the consumer voice is heard by making use of our powers and, where powers are reserved, seeking to influence the UK government and appropriate regulatory bodies (such as Ofgem). For our approach to succeed, we need regulators and UK Ministers to be responsive to Scotland's needs.

4.6 Financing the transition

The Scottish Government will continue to support and encourage projects that can demonstrate a clear pathway to solutions that can be self-sustaining and replicated across Scotland efficiently and at scale.

We recognise the challenge of wholescale replication. Successfully replicating place-based projects from remote, rural areas into more densely populated and urban areas (and vice versa) will require an in-depth understanding of the area in question, resources, economy and strategic drivers. This is set out in more detail in Chapter 2.

The Scottish Government will continue to signal to the market, through policy and legislation where appropriate, the priority it gives to renewable and low carbon generation in order to attract resources and investment.

The Scottish Government will continue to support the acceleration of the shift to low carbon, local energy solutions through existing support/ funding programmes, which include:

• CARES - a "one-stop-shop" providing advice and support, including financial support to community groups, third sector, public sector and rural SMEs seeking to develop renewable and low carbon projects.
• Low Carbon Infrastructure Transition Programme (LCITP) – providing support to make low carbon projects commercial investor ready.
• Energy Investment Fund - providing commercial investment for renewables and low carbon energy solutions.
• Energy Efficiency Scotland - which aims to make Scotland's buildings near-zero carbon.
• Scottish National Investment Bank - to be operational during 2020. As highlighted within the Scottish Government's Programme for Scotland 2019-2020, the Bank's primary mission will be the "transition to net zero". Work to shape this is ongoing.

In this way, through clear stable policy and targeted support, new business models will emerge that can attract investment and be replicated both across Scotland and internationally. In order to achieve this, the Scottish Government will ensure that our support is flexible and can be adapted quickly to meet the changing environment.

Our support is augmented by that provided through our enterprise agencies (Highlands and Islands Enterprise and Scottish Enterprise), and other national and UK bodies.

4.7 What can be delivered now?

The delivery of a greater number of local energy system solutions is needed now. However, being an early adopter or a trailblazer can increase the level of risk. These risks can be minimised by considering the importance of place solutions that reflect local characteristics, undertaking a clear local area energy plan whilst also ensuring that lessons are learnt from these early projects.

There remains some fundamental questions to be answered about if and how the existing gas network can be decarbonised to support our net zero aim. However, as stated in Scotland's Energy Strategy, low carbon gas could either fully replace existing forms of gas, or be blended with existing gas to partially decarbonise the network.

The GB gas distribution networks are already investigating the performance of hydrogen and other low-carbon gasses across their infrastructure. This is the case in Scottish Gas Network's H100 project, which is looking to construct and demonstrate a 100% hydrogen gas grid in Scotland. Furthermore, 15 biomethane sites are already injecting low carbon gas into gas distribution networks.

The forthcoming Heat Decarbonisation Policy Statement and Hydrogen Action Plan will set out more detail on the potential role of decarbonised gas in providing heat for Scotland's buildings and industry. As such, the Scottish Government is committed to encouraging prioritisation of low regret local energy systems.

Low regret areas may have one or more of the following characteristics:

• Off-gas grid locations
• Adding new demand in areas with grid constraints
• Adding value to existing constrained generation assets
• Islands
• Remote and rural areas
• High-rise accommodation without gas

4.8 Questions

12. What significant barriers are there to the replication of existing local energy projects and systems in Scotland that this policy statement should take account of?

13. What actions can we take to accelerate the focus on economically and commercially viable low carbon local energy solutions in an inclusive way?