Scoping Note on a Scottish Publicly Owned Energy Company

This scoping note provides the Economy, Jobs and Fair Work Committee of the Scottish Parliament with evidence to consider in its review of proposals for establishing a Scottish Publicly Owned Energy Company (POEC). Conducted over a short period, the scoping note is based upon a rapid review of the literature on public and not-forprofit energy companies, the Scottish Government’s Strategic Outline Case document, discussion with a number of interested stakeholders and the evidence and views presented to the EJFW Committee during its inquiry on the draft Scottish Energy Strategy in 2017. In its consultation on the draft Scottish Energy Strategy (January-May 2017), the Scottish Government sought views on the potential role and remit of a publicly owned energy company to help the growth of local and community projects. In October 2017, the First Minister made a commitment to establish a not-for-profit, publicly owned energy company to supply energy to consumers at as close to cost price as possible. A Strategic Outline Case was published by the Scottish Government in March 2018 setting out a series of operating models for delivering on the core objective of providing competitively priced energy and helping to alleviate fuel poverty. The options set out in Strategic Outline Case centre around the establishment of an energy supply company (a retailer of gas and electricity to customers). This scoping note reviews the evidence on establishing a Scottish publicly owned energy supply company as well as wider evidence on what the purpose and model of a POEC could be. A number of key points emerge. GB electricity (and to a lesser extent gas) supply is a low margin market, a point recognised in the Strategic Outline Case and reinforced by many sector stakeholders. The number of smaller suppliers in that market has grown rapidly in the past five years, and an increasing number of these are offering fixed rate or very low margin tariffs. The latest data suggest that the pre-tax margin on the average dual fuel consumer bill is just under 5%. Importantly, this is almost all delivered by the gas component of bills. Average electricity pre-tax margins were below zero for 2016. In the current market, successful suppliers are those that can procure energy at lowest prices, have the most efficient billing and customer relations systems, and are best at hedging risk. This is the market into which a Scottish Government-owned supply company would be entering. Taking a wider view of the purpose a POEC might ultimately fulfil, the review conducted here suggests four overarching objectives a Scottish POEC could have: * Creating new energy infrastructure platforms; * Accelerating wider energy system transformation; * Increasing engagement and participation in the energy system; * Reducing costs to consumers. This review concludes that a Scottish publicly owned energy company can deliver on a number of these objectives. It also suggests that it is possible to integrate these wider objectives into planning for the POEC, even if the focus for the POEC is initially as an energy supply company. Further, it suggests that it is essential to consider these wider objectives in the context of how the POEC will interact with existing energy policy initiatives. The EJFW Committee may wish to support further public debate on both the purpose of the POEC and how it will work alongside existing policy, by considering the following questions: How might a Scottish energy supply company work best to support fuel poverty reduction? How can the POEC be best designed to maximise alignment with wider Scottish energy policy objectives, and to remove all potential tensions with other policy objectives? Should a new Scottish POEC be more than solely a licensed energy supply company? How might the POEC be designed to make space for objectives and functions beyond the retail of gas and electricity? What benefits might this have

Making the Macroeconomic Case for Near Term Action on CCS in the UK? The Current State of Economy-wide Modelling Evidence

Key messages: * Developing an economic narrative on the role of CCS (Carbon Capture and Storage) in the wider economy will help extend the current policy debate to involve a wider stakeholder audience – this is critical if we are to move the discussion forward. * The most compelling narrative at this stage in the UK policy context may be the ‘sustained contribution’ narrative, which focusses on the potential role of CCS in enabling the sustained contribution of sectors where we have already invested, from which we currently realise value, and from which we need to realise growing value. This relates directly to themes in the UK Industrial Strategy. * Two types of industries are particularly relevant to this narrative: the energy-using/emitting industries that may engage in CO2 capture, and the fossil fuel supplying oil and gas industry, where much of the skills, expertise and physical infrastructure that would be required to set up a CO2 transport and storage network already exist. * From our initial exploration of the evidence, we suggest that due to their capital intensity, jobs are difficult to create in CCS-relevant industries, while, due to the strength of their domestic upstream supply linkages, the loss of any one job is likely to have relatively large knock-on negative effects on other jobs. * Experimental work on price pressures suggests important but potentially very different patterns of how and by whom CCS may ultimately be ‘paid for’. Where there may be impacts on the competitiveness of high value industries in some contexts and on consumer energy bills in others, these would have very different economic and political implications

Reframing the Value Case for Carbon Capture and Storage

In meeting long term climate ambitions at regional and national levels, there is a need to retain and ultimately grow high value jobs and production activity across the economy. This is reflected in the ‘Just Transition’ element of the 2015 Paris Agreement and will always be a preferable outcome to job offshoring/GDP loss and not meeting targets in the short and long term (UNFCCC, 2015, p4). The inevitable consideration of how best to value alternative approaches to deliver against these ambitions requires a broadening of focus from project cost metrics to a political economy and ultimately wider societal perspective. A key conclusion of the current study is that the most useful and easily communicated way of measuring a broader economic impact of Carbon Capture, Utilisation and Storage (CCUS) investments and associated government support is in terms of the expenditures required to sustain existing and/or create new jobs and/or other outcomes valued by society. Such a focus is likely to be particularly important in the UK context of the 2019 HM Treasury Spending Review, where all investment projects are likely to be judged on the basis of contributing to prosperity going forward and value delivered per pound spent. This is an important context for the CCUS Delivery and Investment Frameworks planned for 2019 in the UK Government’s CCUS Action Plan Economic multiplier methods enable a transparent and rigorous initial assessment of how many direct, indirect and induced supply chain jobs may be sustained and/or created where a solution like CCUS is introduced to allow industries to decarbonise and continue to grow in key regional locations

Reframing the Value Case for CCUS : Evidence on the Economic Value Case for CCUS in Scotland and the UK (Technical Report)

The key message emerging from our research is that CCS could play a key role in sustaining over 26,000 direct jobs in the on-shore support industry that have traditionally associated with oil and gas, and around another 18,000 supply jobs associated with this industry and the emerging offshore renewables sectors. This would be through delivery of infrastructure and capacity for CO2 transport and storage around Scotland associated with off-shore geological sites. The research also highlights how having access to CCUS services could help our process industries decarbonise, thus helping sustain jobs in those industries and offering opportunities to attract inward investment in low or decarbonised industrial clusters. In this context the Scottish Petroleum and Petrochemicals industry already supports over 6,650 direct and supply chain jobs. CCUS, and in particular CO2 transport and offshore geological storage, could therefore could be crucial to Scotland in the context of the ‘just transition’ from fossil-based economies to a ‘clean’ energy and industrial future. The research has been conducted with reference to, but aims to add to, the evidence base on potential political economy value generation that may be associated with CCUS in Scotland and the UK. We highlight the ‘just transition’ focus that underpins the Paris 2015 agreement and is of immediate concern in a Scottish context, where the Scottish Just Transition Commission has been established in December 2019. We review a range of studies on the economic impacts of CCUS and conduct a new preliminary analysis of the potential jobs multiplier impacts associated with CCUS for Scotland. We conclude that ‘techno-economic’ measurement of CCUS project metrics are important but insufficient, and not the first consideration in considering the broader political economy value statement and narratives around the role of CCUS. In meeting long term climate ambitions at regional and national levels, there is a need to retain and ultimately grow jobs and production activity therein. Thus, a fuller political economy perspective becomes necessary. We demonstrate that economic multiplier methods enable a transparent and rigorous initial assessment of how many direct and indirect supply chain jobs and GDP may be sustained and/or created where a solution like CCUS is introduced to allow industries to decarbonise and continue to grow in key regional locations. We report multiplier evidence for Scotland. For example, in 2014, the Scottish Petroleum and Petrochemicals industry had full-time equivalent, FTE, employment of just over 1,900. But, through indirect and induced supply chain linkages, the total number of Scottish FTE jobs supported by the industry’s activity was over 6,650. In the on-shore ‘Mining Support’ industry, which services the off-shore oil and gas industry, just over 26 thousand direct jobs equates to more than 44 thousand Scottish FTE jobs are supported by demand for the on-shore industry’s services. We consider how multiplier results can be set against the spending requirement to compute the ‘cost per job’ (CPJ) metrics for the CCUS scenario in question, enabling comparison with CPJ outcomes can then be compared for alternative CCUS projects and/or a range of other options where government support and investment may be directed. With its high ‘employment multiplier’, the on-shore ‘Mining Support’ industry delivers the most jobs relative to its current expenditure levels, and thus has the lowest final expenditure requirement per job of the CCUS relevant industries considered (just over £86k). We note that the economic multiplier impacts would be larger if fuller links to the off-shore oil and gas extraction sector, currently accounted within the UK Continental Shelf, were included

Potential Wider Economic Impacts of the Energy Efficient Scotland Programme

We estimate that the combination of enabling energy efficiency gains via the above spending and the knock-on impacts of realising this gain on household spending power, will deliver a cumulative boost of £7.8 billion to Scottish GDP over the next 30 years (a timeframe that allows time for all loans on later spending to be paid off). The GDP boost also equates to the sustained delivery of an additional 0.23% in Scottish GDP into the long term. The GDP boost would be associated with around 6,000 sustained (full-time equivalent) jobs, realised in the fourth year of the programme and largely sustained in the long term

Who Ultimately Pays for the Electricity Network Upgrade for EVs? [Research Briefing]

The UK and Scottish Governments have set ambitious targets for the roll out of electric vehicles (EVs). The predicted rapid expansion in EV ownership over the next couple of decades will see a shift in demand away from petrol and diesel fuels and towards electricity. The mass roll out of EVs is likely to require upgrades to the electricity network itself, which will carry significant costs. The Centre for Energy Policy is partnering with SP Energy Networks in a National Centre for Energy Systems Integration (CESI) project that integrates energy and economic system modelling approaches to investigate the crucial question of who ultimately pays for the costs of upgrading the power network to facilitate the intended roll out of EVs

The Just Transition Challenge : Avoiding Carbon Leakage and Jobs Off-Shoring in Decarbonising International Supply Chains

Industrial decarbonisation is a major challenge in terms of both emissions reduction and the ‘just transition’ element of the 2015 Paris Agreement. It raises issues of potential carbon leakage and associated offshoring of jobs and economic value (GDP) if carbon reduction policies impact the location decisions of industry. We use economic multiplier metrics to help quantify the extent of these potential displacement effects. Focussing on cement production as a particular decarbonisation challenge, we demonstrate that displacement of currently EU-based production activity could potentially lead to reductions in domestic jobs and GDP, combined with a net increase in global CO2 emissions. Our key conclusion is that a strong argument exists to address the industrial decarbonisation challenge where emissions are currently located. The ‘just transition’ element of the Paris agreement emphasises the need to retain and grow jobs and GDP whilst meeting climate targets in the long term. This will always be a preferable outcome over jobs off-shoring/GDP loss and not meeting targets in the short and long term

Modelling the Distribution of Costs from Network Upgrades for Electric Vehicles (EVs)

This project integrates energy and economic system modelling approaches to investigate the crucial question of who ultimately pays for the costs of upgrading the power network to facilitate the intended roll out of EVs. Our approach facilitates consideration of a range of indirect, and possibly unanticipated and unintended, consequences of network development for EVs through impacts on markets, prices and incomes across the economy. Such effects may affect both the actual pathway of the roll out, and who ultimately pays for required actions. The project involves collaboration between the University of Strathclyde’s Centre for Energy Policy and Scottish Power Energy Networks (SPEN). The EPSRC National Centre for Energy Systems Integration (CESI) brings together an interdisciplinary team of experts to gain a deeper understanding of the value of taking a whole systems energy approach to the energy trilemma. The CESI flexible research fund supports collaborative, multi-disciplinary, whole energy systems research projects that investigate the UK’s future energy system. For more information on the Centre and our research fund, please see our website www.cesienergy.org.uk

Energy efficiency policy analysis with TIMES : Assessment of energy efficiency modelling approaches and their potential impact on policy

This report looks at different approaches to modelling energy efficiency within TIMES, the whole energy system modelling framework used by the Scottish Government to inform energy and climate change policy decisions. The findings are based on six different energy efficiency scenarios for residential heating. This has two objectives: To identify different approaches for energy efficiency scenario modelling in TIMES, and provide an assessment of strengths and limitations of each modelling approach. To give recommendations on how to use TIMES effectively for energy efficiency policy analysis. There is no single energy efficiency scenario which is superior to the others, as each focuses on different policy targets which could come into conflict with each other. For example, the results of some scenarios prioritise energy efficiency improvements whereas others prioritise cost reduction or emission reductions. Policy makers should understand the compromises involved in using each of these scenarios and prioritise certain indicators over others