CORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1912-ii

HOUSE OF COMMONS

ORAL EVIDENCE

TAKEN BEFORE THE

Energy and Climate Change Committee

The impact of potential Scottish independence on energy and climate change

Tuesday 24 April 2012

Duncan Burt, Dr David Clarke, Dr Brian Tilley, Peter Atherton and Robert Yates

Evidence heard in Public Questions 121 - 161

USE OF THE TRANSCRIPT

1.

This is a corrected transcript of evidence taken in public and reported to the House. The transcript has been placed on the internet on the authority of the Committee, and copies have been made available by the Vote Office for the use of Members and others.

2.

The transcript is an approved formal record of these proceedings. It will be printed in due course.

Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 24 April 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Gemma Doyle

Barry Gardiner

Tom Greatrex

Ian Lavery

Dr Phillip Lee

Albert Owen

Christopher Pincher

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Duncan Burt, Customer Services Manager, National Grid, Dr David Clarke, Chief Executive Officer, Energy Technologies Institute, Dr Brian Tilley, Strategy and Stakeholder Coordination Manager, E.ON Climate and Renewables, Peter Atherton, Head of European Utility Sector Research, Citigroup Global Markets, and Robert Yates, Director, AF-Mercados EMI, gave evidence.

Q121 Chair: Good morning, and a warm welcome. We have seen some of you before, but not all of you. Would you just like to introduce yourselves? It is a very formidable panel today. Peter, we know you. We can start at that end of the table.

Peter Atherton: I am Peter Atherton. I head up Citigroup’s equity utility research team. We cover most of the major European utilities on the equity side for Citigroup.

Duncan Burt: I am Duncan Burt. I head up the customer services team for transmission at National Grid in the UK.

Dr Clarke: David Clarke, Chief Executive, Energy Technologies Institute.

Dr Tilley: Brian Tilley, Strategy and Stakeholder Manager for E.ON Climate and Renewables.

Robert Yates: Robert Yates, Director for AF-Mercados. We are a consultant firm in electricity markets and regulation, office in Edinburgh, headquartered in Madrid.

Q122 Chair: Thank you very much. You will be aware we had evidence last week in public from the Minister and so we would like to return to some of the issues that we discussed then. Do not feel that all of you have to respond to every one of these questions, but equally, if you have anything you want to say, do not hold back. I want this session to be relaxed and informal.

We spent some time last week on the issue of investor confidence, and we are aware of the damage that has been done by a number of changes in policy and a sense that perhaps sometimes it is not certain and predictable, and the damage that has on the very long-term investment decisions that the energy industry requires. Does the possibility of a referendum on Scottish independence introduce another element of uncertainty that is going to affect investor confidence?

Peter Atherton: Yes. In my view, clearly, and I think certainly in my conversations with institutional investors across the world, since we published that note in November and since the certainty of a referendum became clear in January, it does influence their view of risk, and it influences the companies’ view of risk. Put at its very simplest, we are here; we are talking about renewables. If I owned a chain of drycleaning shops in Scotland and I was thinking of building another couple, would the referendum have a big influence on my decision to go ahead with those two additional shops? Clearly not, or it would be very, very small.

We are talking about a sector here that is highly regulated, the utility world, or renewables, which is highly subsidised, and in very simple terms, an offshore wind farm today can expect to be receiving £150 per MW hour, made up of £100 of ROC support and £50 of the wholesale power price; onshore wind £100, £50 support, £50 of wholesale power price. Therefore, the most important thing for a company to make a decision on whether to build an onshore or an offshore wind farm is the guarantee of the subsidy regime. At the moment, we have a UK-wide subsidy regime and, therefore, if Scotland secedes from the UK, it is questionable whether that regime continues. Therefore, there is an element of risk associated with that. When you are talking about multi-billion pound projects when you are talking about offshore wind, and hundreds of millions of pounds when you are talking about onshore wind, clearly, if you don’t have a 100% guarantee that the support mechanism will be acceptable and legally binding and in place for a couple of decades, then you cannot and will not make the investment.

It is perfectly possible for the UK and Scottish Governments to get together and agree what the mechanisms will be post a yes vote in the referendum and a subsequent succession of Scotland, but at the moment, that agreement doesn’t exist, and until it does exist, then the uncertainty will continue. I can say from all the corporates who are involved in investing in offshore wind, particularly in Scotland, that we have spoken to in recent months, all of them have said to us, "Clearly, we will not progress with our offshore wind projects in Scotland until such time as we gain that certainty".

Q123 Sir Robert Smith: Are they, though, quite shy people when it comes to putting that in the public domain? They are willing to tell you, but-

Peter Atherton: Not to the investment community. They tell their shareholders that at public forums, but in a way it is so obvious that it almost needs not to be said, because you cannot get finance, you will not get finance, unless the banks and the financial community have 100% certainty and confidence in the support mechanism. It is obviously perfectly possible to have that if Scotland stays in the UK or outside the UK, but it requires government-to-government agreement if Scotland secedes, so it is almost that you don’t need to say it because it is so obvious.

Q124 Sir Robert Smith: Also, you cannot necessarily get the Scottish Government agreement before the referendum because you do not know who the people will elect to run an independent Scotland if it were to go independent.

Peter Atherton: Correct. We wrote a second note on this point, and our solution-which obviously may not be politically acceptable, but as far as the financial community is concerned, this would be a solution-the Scottish Government could write a letter today to the UK Government and say, "As far as renewables or the 2020 targets are concerned, the constitutional position of Scotland does not make any difference, so the UK-wide support mechanisms will apply to the independent Scotland". It would appear, because they haven’t written the letter, that the Scottish Government do not want to write the letter, and whether the UK Government would reply to it is also questionable.

Q125 Chair: During our session last week, the Minister came brandishing a list of investments that had been announced in the last 18 months or so and asserted that these proved there was no lack of confidence in the SNP-run government. Do you think that was a reasonable claim?

Duncan Burt: I would say that the policy context in Scotland in support of renewables is certainly very strong. From my perspective, dealing with applications to connect to the system and both from wind, onshore and offshore, and the development of new renewables such as tidal and marine, there remains very strong interest in Scotland and very strong development, particularly of those current proven technologies in terms of onshore wind, biomass, and in terms of upcoming development of offshore wind. Obviously, a number of questions are raised by the current debate, but certainly from the point of view of connection activity and interest, it remains very strong, and in terms of our investment, they are based on indications we have had or public statements we have seen in terms of the need for an ongoing GB-wide market. Those investments are continuing.

Dr Tilley: I would probably build on that, and say that E.ON is investing over £100 million at the moment into two new onshore wind farms in the Highlands of Scotland. We were also successful last year in tendering for Forestry Commission Scotland sites, where we are spending considerable amounts of money in developing those projects as well as having considerable interest in marine. I think it is probably building on a strong renewable focus from the Scottish Government for marine over the last few years, but also in terms of their roadmap out to 2020 and beyond, and the combination of both political will but also public support, as recently shown in opinion polls, is giving investors some confidence to continue to invest in Scotland. I would say probably the biggest challenge facing us and other companies is trying to get resolution around electricity market reform, which covers not just Scotland but the wider part of the UK.

Q126 Chair: Yes. Is that a general view? How does the balance of uncertainty stack up? You have EMR, unfinished business waiting for the legislation, you have some tax changes that were not consulted on in advance last year affecting the industries, and you have this other factor, the slightly more vague factor about independence. In the scale of things, are you saying EMR is by far the most important element in that?

Dr Tilley: Yes, I am, but I think clearly there are a number of issues that will need to be resolved if there is a vote in favour of independence. The obvious one is how the renewables obligation will continue to be funded and also what Scotland will do in terms of electricity market reform. Will it embrace that, and will we have effectively a single GB energy market with two countries operating? Clearly, there is experience of that in other countries. In Continental Europe, we have seen the Nord Pool, and I guess we can learn lessons there, but also what is happening closer to shore in Ireland, with the Republic of Ireland and Northern Ireland working as an all-island market.

Q127 Sir Robert Smith: Would not a consumer in an independent England start to shop around the whole of Europe to see where the best deals were for connection?

Dr Tilley: I think the challenge will be-I am not sure if this is the point you are alluding to-that at the moment, in terms of funding renewable investments in Scotland, some of those costs are being effectively paid for by consumers in England and Wales, and clearly, as a part of any settlement for independence, such issues will have to be resolved, and investors will have to have clarity on how it is done to see whether future projects are effectively fundable.

Robert Yates: I think we have distinguished the uncertainty between onshore wind and biomass and offshore wind, wave and tidal. The level of subsidy for those different technologies is substantially different. If you are investing in onshore wind or biomass, you can feel reasonably sure that, whatever the arrangements might be in the wake of a referendum that voted for independence, the needs of the rest of the UK for that renewable electricity to meet its renewable obligations under the EU directive mean that is an attractive source of renewable energy and it would be sensible for the rest of the UK on economic grounds to continue to support that subsidy. Offshore wind and wave and tidal power in Scotland is relatively expensive.

Looking at a Europe-wide supply curve of renewable energy, that is offshore and wave energy in Scotland, it is expensive, and if you were standing in the shoes of a rest of UK Government, you might say, "Do we want to support that? We can probably, if we need to, source renewable energy from another Member State to meet our EU obligations. We can probably get that more cheaply elsewhere in Europe".

Dr Clarke: I support all of that, because the cost issue at a detailed level is almost secondary, which may seem a little counter-intuitive. If you look at the modelling work that we do for the long term out to 2050, and we look at, as you know, the UK energy system across the whole space, and we look across power, heat, transport and infrastructure and how that integrates together, if you are looking in that world, the impact as we see it of an independent Scotland making its own completely independent decisions about energy policy in terms of technology north of the border, then we see the cost impact nationally being very small indeed. The cost-optimal solution for the UK is to source a high proportion of renewables from Scotland, so in that context, you would say, "Nationally, it would appear, superficially at least, to make little cost impact," but the challenge comes down to what happens at the interface points, whether it is an interface between England and Scotland in the context of electricity wires and gas pipes, or whether it is an interface clearly out to other countries offshore. But the critical issue is the capacity point and the management of the interface across the England/Scottish border in terms of how that works together and how that is regulated together.

On your question about uncertainty, if you have a single regulatory framework that spans the two, clearly the industry is going to see that as lower-risk than if we have some completely separate regulatory environment with a one-off, if I can put it that way, trading arrangement across the border. All the modelling we undertake at ETI suggests, frankly, the detail of what goes on is less important than one or two very critical interface issues.

Q128 Chair: Do you have any sense that the Scottish Government has really thought about these rather key decisions at this stage? The impression we had last week was that it probably has not done so. There were some sort of slogans like, "We are going to have an oil fund" although it was not quite clear where the money was coming from; "We are going to have a geographical carve-up of the assets, but, by the way, we do not want the liabilities". There were some basic positions like that, but what you have just described in the last two or three answers, is that this is very important for the future of market, very important for England’s ability, if no longer with Scotland, to meet its renewable targets, and very important from the point of view of the consumers and who is going to pay. This looks to me as though as it is an agenda that the Scottish Government has scarcely scratched the surface of.

Robert Yates: The issue is a very complicated one, and it is probably not one understood by many people. If you look at the submissions to the Committee, there are different interpretations of the scope for trading renewables. A number of people have assumed that to swap renewables obligations with EU Member States, you need to be connected to them in some way, and that is not what the directive says. It simply requires that that renewable energy is consumed within the community, so it would be quite possible for the rest of the UK, for example, to come to an arrangement with Sweden or Bulgaria. It is a complicated subject and it is within the bounds of possibility that the Scottish Government has not fully understood the implication, to maybe think they are locked into the rest of the UK in a way that the EU directive does not envisage.

Dr Clarke: I can say the same. The only evidence I have, in any viewpoint on this, is the fact that this Committee has called an inquiry into it. I have seen no other questioning or questions.

Chair: We are used to breaking new ground.

Q129 Albert Owen: Dr Clarke, you said the interconnectors were important, and of course the UK now is talking about connections with Iceland and Norway as a very important connector. Do you think Scotland could benefit from that more than the UK, or would the cost of it be far too much for an independent Scotland to envisage?

Dr Clarke: If I can put it this way, the cost of an independent Scottish-financed interconnector-the National Grid can probably provide a much more accurate answer than I can-but a cable to Iceland to pick up geothermal or to Norway to pick up hydro is going to be fiendishly expensive. That is my summary of it. The challenge, I think less perhaps on the Icelandic one, but on the Norwegian one, is whether the electricity will be as cheap as you expect, because most people in Europe think they are going to get a lot of clean electricity from Norway at the moment. You can sense a price competition coming on here to a degree. So I bow to the experts.

Duncan Burt: To follow up on that, it is true to say that there is a general move across Europe for greater interconnectivity between markets. That is good from the point of view of security of supply and integration of deep liquid energy markets in Europe, which is good for consumers. In terms of the cost, these interconnectors typically tend to be funded by an assessment of the benefits they deliver in terms of smoothing power fluctuations and prices between the two markets, so from an economic perspective it is fair to say you can think of them as effectively self-funding; the benefits outweigh the costs of building them, and that would apply to a development from the UK to Norway or from Scotland to Norway, as long as Scotland and England and Wales markets remain well interconnected, which indeed they are. As we move to a lower-carbon grid with greater penetration of renewables, the opportunities to smooth any variability in supply by having greater interconnection between countries and across the Continent as a whole we see as a very strong case and a very positive one, both for security of supply and for consumers generally.

Dr Tilley: Perhaps another way of also looking at it is that a lot of the offshore projects are in England and Welsh territorial waters, and were there to be much greater interconnection, those projects will benefit quite substantially in terms of opportunities to serve other markets as well. So clearly, yes, Scotland would benefit, but also the rest of the United Kingdom would also benefit. If we believe some of the reports about the potential long-term opportunities for offshore wind, then greater interconnection will clearly help in supporting that right across the UK.

Peter Atherton: I was just going to try to answer a little bit of your previous question. I think you have to distinguish between the existing renewables and what is likely to be built in Scotland and what is likely to be built this side of the referendum. What we have in Scotland at the moment is the old legacy hydro assets, which are great, that provide the bulk of the renewable output at the moment, and then you have onshore wind. Scotland has had a competitive advantage within the UK context for the development of onshore wind over the last seven or eight years because wind conditions are reasonably good, but more importantly, you get planning permission. You get permits in Scotland, whereas you find it very difficult to get a permit in North Wales, for example, or in the more windy parts of the UK. I don’t think anybody has any great problem with the idea that incrementally the onshore wind capacity can be increased. E.ON have talked about their current investments this side of the referendum. You are talking about relatively small ticket items running into a few tens of hundreds of millions of pounds.

The Scottish Government, though, have big plans, and they have decided that by 2020 Scotland will be producing around 35% to 40% of the overall UK target, which requires at least 10 GW of offshore wind and more onshore wind, with a total price tag of around £45 billion to £46 billion in their own estimates. It is that leap which is questionable. It would be questionable even if the constitutional position doesn’t change, but it is highly questionable if the constitutional position does change, because who is going to provide the £4 billion of subsidy required to finance those assets? If the UK Parliament decides that the entire UK consumer base is happy to stand behind that, as we are currently, then investors will invest more or less what they would have invested anyway; whether they would provide the full level of investment is questionable, but they would invest no more or less than they otherwise would. But if the counterparty to the agreement is Scotland, without any support from the 92% of the UK population that isn’t Scotland, then I see it as nigh on impossible that that investment will be forthcoming.

Q130 Barry Gardiner: That was in your report and you have outlined that very clearly. That was the question I wanted to come on to, but can I draw you back from that first? I am sorry to use you for a boring facts rather than for opinion, which is what you are here to give, but I just wanted to establish the figures here because, at the moment, I think DECC’s estimate is that in order to meet our 2020 renewables targets we need not to have 15% of energy, but we need to have 30% of electricity coming from renewables. Their roadmap shows approximately 90 to 140 TW hours required in 2020. Independently, the SNP have said-no pun intended-that as much as 51 TW hours of electricity could be generated by 2020 from renewables in Scotland, but they want to provide 100% of their own electricity consumption from renewables. What I am trying to establish here-I am sorry that the Clerks could help me on this one-is if they were to have 100% of their own electricity demand met from renewables, how many of their 51 TW hours of electricity would that constitute? In other words, how much of what they produce would even be left over for consumption by England and the rest of the UK?

Peter Atherton: The Scottish Government’s roadmap plan envisages two things. One, you are exactly right, total gross demand within Scotland, which would be around 50 TW hours in that time, is met by renewable output, but they also say that they will produce as much again as that from conventional sources, nuclear and fossil, which means that they are anticipating total production in Scotland to be around 85 to 90 TW hours in 2020, and for that surplus to be exported down into England. Currently, Scotland produces around 50 TW hours, 40 of demand, 10 of export a year. The Scottish Government plan is not that they have a system that is 100% renewables, far from it. They are envisaging a system that is basically twice the size that it is today in terms of its patterns of use power. Fifty TW hours, which equates to total gross domestic demand of renewables, 40-ish of other power and that other power would be exported.

You are right. The latest guesstimate of the Committee on Climate Change of the TW hours required to meet 2020 targets for the UK is about 120 TW hours. So, in a situation where the Scottish Government plan was fully implemented, of the 120 required to meet the 2020 targets, 50 would be being produced within Scotland. I think most independent analysts would argue that on current trends, if you ever got to the 120-and that is questionable, of course-Scotland is more likely to be producing, say, 30 to35. If you start from the premise, "Does the rest of the UK have to replace that power to meet the targets?" you are looking at replacing maybe 30-35 TW hours of renewable power. Of course, the target would be lower in 2020 if Scotland left, so it may be lower by 10%, so you are may be down to 105 to 110 of the TW hours you are aiming for, of which you have to find 20 to 30 that you otherwise would have been expecting to get from Scotland, and that is not an impossible thing. That is a couple of large-scale offshore wind farms. It is not a gigantic amount for the rest of the UK. It may be that it is cheaper to buy the power from Scotland or it may not be cheaper to buy the power from Scotland, but the future UK Government has lots of choices. It doesn’t have to buy the power from Scotland because there is something magical about that power. It is not cheaper, by and large, particularly the offshore stuff, than building it off the coast of Wales or off the coast of England, or indeed, importing it from other places. The onshore wind power will be cheaper, and of course from an investor’s perspective, another thing that we are worried about is that the future UK Government may decide not to hit the 2020 targets.

Duncan Burt: If I can just add to that as well, I would agree with Peter’s figures in terms of the facts. We do see continued strong growth in Scotland, and Committee Members may be familiar with our scenarios for 2020 and our Gone Green scenario, which is our central scenario for hitting the 2020 targets, which is roughly 30% of electricity supply, as you say, from renewables. Sea is about 106% of Scottish demand equivalent being delivered by renewables in Scotland, and how that evolves, as Peter says, is very open at the moment. You can swing significantly either way, based on the development of a single large offshore wind farm or a number of onshore wind farms in a geographic area. Whether you can hit 100 or 80 or 120, you are taking a view as to the rate of development of onshore in Scotland, which, as Peter says, is lower cost than offshore, versus the rate of offshore development in Scotland and the rate of offshore development in England and Wales.

Q131 Barry Gardiner: Let me try to divide up some thoughts here into first of all the investors’ scenario. Given that you have said, Mr Atherton, that the consumer base in Scotland is far too small to support the level of subsidy-that is the £46 billion of investment and the £4 billion of subsidy each year-what do you as a panel consider the likelihood of that subsidy being supported going forward in an independent Scotland by Scotland and the rest of the UK trying to broach this together?

Dr Tilley: I might answer in a slightly different way, because I think it is-

Barry Gardiner: Well, I didn’t answer it at all, so you can answer it in your own way.

Dr Tilley: In many ways, irrespective of the independence question, our company, and I know others as well, are committed to try to significantly reduce the cost of offshore wind, and I think, if offshore wind has a long-term sustainable future-and we sincerely hope it does-the costs do have to come down, and DECC have already signalled that they want those costs to come down to around about £100 a MW hour by 2020. The UK consumer needs to see that those costs are coming down to continue to support that industry, so I guess that is partly how I would-

Q132 Barry Gardiner: Was that an answer or was that a further conundrum? It contained a condition: the consumer in the rest of the UK would have to see those costs coming down in order to continue to support that level of subsidy is what you said. Is that right?

Dr Tilley: DECC have already signalled that they want the cost to come down to £100, and long term we do want the cost of offshore wind to be more on a par with other technologies. We are still in the early stages of developing the offshore sector and we have three operational offshore wind farms at the moment in the UK, and we are building two more at the moment, and we think there are opportunities to cut those costs and I think that will make it politically acceptable, but also from a customer’s perspective acceptable. I am optimist by nature and I believe we will get those costs down, which will help to drive the industry forward.

Q133 Barry Gardiner: Mr Yates, in your earlier comments, when you were talking about the ongoing nature of onshore wind and biomass and the sort of confidence that you had in that sector, you distinguished that from marine renewables and offshore wind. We have heard from Dr Tilley that he believes that offshore wind has an optimistic future in terms of the subsidy it can generate. Do you share that optimism vis-à-vis marine renewables?

Robert Yates: The current costs of offshore wind are around £140 to £150 a MW hour, and for wave and tidal we are looking at figures substantially higher, probably in excess of £200 a MW hour. Yes, there would be expectations that the technology will improve and that the costs will come down. We all hope that that will be the case. Against that, a lot of the wind farm sites that are scheduled to be developed are in a much more harsh marine environment, particularly in Scotland. It has a better wind regime, but necessarily that is linked to a much more harsh wind and wave environment, which is going to have a significant impact on costs. While you might wish that the cost might come down, I am not aware of any evidence in the form of technical studies that would be able to support that beyond a general-

Q134 Barry Gardiner: Help me to deal with your analysis of what it will do to the subsidy that may or may not come from the rest of the UK into that Scottish marine renewables market. If consumers in the rest of the UK are given a choice of sourcing onshore wind from the Continent or nuclear from France as a low-carbon option, how do you see them putting the money into marine renewables in Scotland?

Robert Yates: Simply on economic grounds, I think it would be difficult to justify to the rest of the UK that you have decided as a rest-of-UK Government to support offshore wind in Scotland as an expensive option when there are cheaper ways of meeting the renewables targets elsewhere in Europe.

Dr Clarke: I agree with that, and the point about technical design studies is they do exist, because we have done those, and they are in the public domain. I sit on the Offshore Wind Task Force for DECC and, through the task force, we have clearly seen there is traction to make towards this £100 a MW hour figure and the anticipation is we will get progress on that. The work we have done around floating wind structures for particularly the west coast of the UK in slightly deeper water, where the wind regime is much better, suggests we should be able to get a bit lower than that probably. The challenge there is twofold. Now you are talking about offshore wind, marine renewables in Scotland and so on and a whole bunch of other options across the UK that are probably going to be cheaper, which will include fossil fuels with CCS potentially in terms of longer-term climate change targets.

Barry Gardiner: Perhaps not by 2020.

Dr Clarke: Precisely my point. It is not by 2020, and the concept of a high level, or a much higher than today, level of interconnection with mainland Europe is also not going to happen by 2020, because, while I accept that these interconnectors do tend to be self-financing, a business model has to be developed that will convince the investors it is worth building in the first place. I struggle to see this happening in the near term, frankly, so I think the reality is to say yes, that you can see cost progress on the renewables, but the reality is the alternatives, broadly speaking, are the ones we have now.

Q135 Barry Gardiner: Dr Clarke, that would work if it were not for Mercados and Mr Yates’ submission that of course it is possible for the rest of the UK simply to badge renewables elsewhere in Europe and not physically import the stuff. Is that not right, Mr Yates?

Dr Clarke: Can I just stress a distinction here between renewable energy and meeting renewable energy targets and UK climate change targets, yes?

Barry Gardiner: Yes, absolutely.

Dr Clarke: That is the area I play in-the UK climate change targets and reducing the cost of energy in those fields.

Q136 Barry Gardiner: But if the rest of the UK Government decides to meet its renewable targets, it does not need to buy renewable energy to use in the rest of the UK to do that. What it can do, and this was the Mercados submission, is simply pay to badge renewables that are being used in the rest of Europe.

Robert Yates: I believe it would need to be additional renewable capacity elsewhere in Europe. There are-

Q137 Barry Gardiner: It can’t count to both Germany and France or-

Robert Yates: I think the EU position in the directive is it would be unreasonable for renewables in another Member State to be added to the UK’s statistical base if that then caused an increase in fossil fuel production in that country, so there needs to be some evidence of additionality.

Q138 Barry Gardiner: Looking beyond 2020, is it your view that England and Wales and Northern Ireland will need a physical supply of renewable electricity in order to meet the 2050 climate change targets in any event?

Dr Clarke: I struggle to see how we would do it without UK based low carbon generation at an affordable level.

Peter Atherton: Your question is an excellent one and it gets absolutely to the point. Will the UK provide a subsidy? It is speculation, and speculation isn’t bankable, and until it is definitively sorted out-as I say, I take my analyst hat off for a second-I think for you guys it is going to be tough sell to your constituents if you sign up to a Bill that says England and Welsh and Northern Ireland citizens will send £4 billion a year to subsidise Scotland.

Sir Robert Smith: I think my constituents might not object.

Peter Atherton: It is all the jobs and things, and I am slightly puzzled by this assumption that if for some reason Scotland secedes, certainly for the 2020 target, I see no particular problem-it may be slightly more expensive, but I see no particular problem-why all the power could not be generated within England and Wales and Northern Ireland. We are talking about a relatively small differential between what is already planned for England and Wales and Northern Ireland to compensate for the realistic output from Scotland. Two or three more offshore wind farms off the coast of England will all be built anyway, so far.

One of the big changes of course, in the last couple of years is the Government’s treatment of co-firing biomass. If you go back two and a half years, they were expecting 5 to 10 TW hours; now they are expecting 40 TW hours. You could just give co-fired biomass another leg up and quite feasibly get another 20 to 30 TW hours out of co-fired biomass if you really, really want to hit the 2020 targets. Of course-and as lawmakers, I am sure you wouldn’t be able to suggest this yourself-by far the cheapest way of meeting the 2020 target is probably to pay the fine for not meeting the 2020 targets.

Barry Gardiner: You are right, we couldn’t possibly suggest that.

Peter Atherton: You might change the law, because the Climate Change Act is perfectly changeable by Parliament. France has been in breach of the original European Union directive for the liberalisation of energy markets since the mid-1990s, and as far as I am aware it has never paid a cent of fines. We talk about these targets as though Brussels is going to send over the Horses of the Apocalypse and kill our newborn babies if we don’t meet the targets.

Chair: Just for the record here, though, this is not about sending home Abu Qatada. This is about meeting targets, which we believe should be met for global climate change purposes, and whether there was a financial saving by some device, I do not think that would be something that we would countenance, because we have a very strong view about the urgency of responding to the science.

Q139 Sir Robert Smith: I do not want to destroy your theme, but you did mention that part of the plan from Scotland was the conventional electricity going south as well. Is that plan straightforward and deliverable?

Peter Atherton: They are essentially assuming that all the conventional plant as currently exists, with no closures-though we know that the coal mines will start to close-basically stays, so the two nuclear stations stay operating and the gas stations. I think there is in the plan at least one more CCGT required to meet it, so there is a small increase in the gas capacity. The Scottish Government plan basically assumes that, as I say, if Scotland doubles the overall capacity of the generation system, it can be a stable system because it has the conventional plant and fossil plant. I think the National Grid will be best to comment on this, but looking at it, what happens when the nuclear plants shut and you have a system so saturated with renewables is an interesting technical question.

Q140 Sir Robert Smith: When is the nuclear life expectancy-

Peter Atherton: Early-ish 2020, somewhere between 2020 and 2025. It is very likely both Hunterston and Torness will be closed.

Q141 Barry Gardiner: I am concerned to find out your view-and we go back to the investment climate, if you like-about how this might affect marine renewables, because it seems to me that the scenario that you have sketched out of investment confidence in an uncertain political climate is that it will have variable impacts across the technologies, and those technologies that are at a lower development stage, I would have thought, are clearly the most vulnerable. I would just like to get a clear articulation from you of your views on that on the record.

Peter Atherton: In a way, no, because marine renewables are still very much in the R&D phase, so to progress that is a relatively small-ticket item-tens, eventually hundreds of millions of pounds-and I have no doubt the Scottish Government independently could support that, should it choose to. The industrialisation of that technology when you want to roll it out, and you are talking about ticket items of multi-billion pounds, that is when you will need a much greater support mechanism, a credible counterparty. Would the Scottish, 2.5 million households and 300,000 businesses in Scotland, be a credible counterparty for a £3 billion tidal project in Orkney or something like that? Probably not.

Dr Tilley: Where we would come from is that marine renewables is probably a decade or so behind where offshore wind is today, so it is clearly in terms of large-scale commercialisation a post-2020 technology. We believe right across the UK it is part of the generation mix for helping to substantially decarbonise the power sector by 2030 and helping us with those longer-term carbon goals. If we can get the marine sector on a much more competitive basis longer term, then in theory it will be able to compete with other low-carbon options. If we look at it in that longer-term horizon, hopefully marine both in Scotland and England and Wales will be able to compete with other alternative technologies.

Dr Clarke: I think that is the absolute crux of this because, if you are going to consider marine, you have to look at it as a very long-term option. I would go further and say the reality is, in terms of an investor coming to a project, would you back a marine project with the uncertainties? Even in 10-15 years’ time, would you consider backing a marine project with the uncertainties that come with it, with the probability that you are probably going to have to get extra grid connection capacity because it is going to be where it is, and you are then faced with reliability concerns, which will remain, because nobody will have put significant numbers of machines in the water at that stage? Against all of that and the cost that comes with it, would you choose to invest in that or in an offshore wind farm which is now at £85 or £100 a MW hour, whatever it is, known technology and so on, probably with the same interconnection requirements, but otherwise lower risk? Which would you take? You would take the wind. In that context, I think the marine renewable piece is a very long-term question, frankly, for everywhere in the UK, and it is questionable whether it will get there in time, even with the investments we are putting behind it.

Q142 Sir Robert Smith: Does anyone in the investor community factor in Donald Trump’s influence in this whole debate?

Dr Clarke: From my secondhand experience of dealing with the investor community, everything that produces uncertainty is bad. That is it.

Q143 Sir Robert Smith: I had better remind the Committee of my entry in the Register of Members’ Financial Interests to do with the oil and gas industry, in particular a shareholding with Shell. One of the sort of medium-term low-carbon solutions that we have touched upon is carbon capture and storage. How do you think progress on that would be affected by any uncertainties of independence?

Dr Clarke: From the perspective of all the analysis work, the modelling we do across the UK, and the technical developments we are investing in around CCS, both for separation- gas separation at power plants, transmission networks and the storage sites, I think the answer is, for the short to medium term, very little impact. The best storage sites that we have identified to date are predominantly in the southern North Sea. They fit in terms of proximity very well with a Yorkshire/Humber development around fossil fuel plants and with the Midlands, if the transmission runs are acceptable for the gas, but basically we see CCS in the short to medium term, by which I mean after about 2030, is likely to be dominated by the most economic sites being off the coast of England and the power stations that go with those in England.

For the longer term, you do start to see opportunities in the north North Sea, where transmission runs are a little bit longer. The sites are looking at the moment to be slightly poorer quality in terms of storage sites than the southern North Sea ones-less well-characterised, so greater uncertainty-but longer term, there are some opportunities there as well.

Q144 Sir Robert Smith: So in the short term, you are saying from a UK perspective, whether there is separation or not doesn’t make much difference, but from a Scottish perspective, given that one of the frontrunners at the moment is a Scottish site in terms of the current competition-

Duncan Burt: We would disagree with that view of England being potentially preferential to Scotland at the moment. There are different challenges with all these sites. As you note, there are a number of potential sites in Scotland on the east coast, over at Aberdeen and further down at Grangemouth, that are very promising from a CCS point of view. We would certainly agree that the debate is having no impact in terms of the development of those projects at the moment. From our perspective, Grangemouth remains a very promising project, alongside other projects we are looking at in the Humber area, but as the Committee has already noted, the development time scales for CCS are very long-term.

Q145 Sir Robert Smith: Development times are long-term and, therefore, the funding model would be a post-separation model and the funding model is still going back to this debate about the consumer paying a premium to get the low-carbon nature of the CCS. Does it have the same locational challenges in terms of, if you are funding something, do you not want to see the economic benefit in your own country, rather than someone else’s?

Duncan Burt: That is a debate for policy-makers. I definitely note that a lot of the debate around the development of CCS and indeed marine energy has both a low-carbon energy side to it and, as you know, an industrial development side to it as well, and that is absolutely out there, but definitely I see two tiers in this. One is about achieving decarbonisation and, indeed, significant decarbonisation of the electricity sector at best cost, and that involves a debate around onshore wind and it involves a debate around the rate of development of CCS. Then you have a second debate about the achievability of total decarbonisation of the electricity sector as part of a very significant decarbonisation to 80% by 2050. On those kind of time scales, you are looking at the development at this stage of all possible technologies to see which ones will out as the best and cheapest over 20 to 30 years. On that scale, early investment in CCS and in marine, which at present looks more expensive, is very prudent, because who knows what sort of innovation and technology position we will be in in 15 to 20 years’ time when these projects and these sources of supply become potentially significant players in the UK? You come back to the same point, that all of this development is around delivering the lowest cost, best cost decarbonisation that we can.

Peter Atherton: But it is best cost within the borders of the United Kingdom. We are not contemplating providing £1 billion to the Belgians or the Dutch or the Republic of Ireland because CCS may be better options in those countries than it is here, but we want to spend the money in the United Kingdom. If you go back to the original renewables directive, it is an unusual directive in the sense that it effectively gives you an exemption from the single market, and it was recognised at the time that this, in meeting the renewable targets, would provide a significant burden on to consumers and on to the economies of Europe, and it would be more acceptable to the public if that money was spent internally, so everybody was allowed to basically support their own renewables sector without going to the cheapest option. But the European Union and the Commission are working on plans that post-2020, countries will be more encouraged to source renewables from the cheapest option, but that is not definitely going to be implemented and certainly isn’t the position now.

Everybody in Europe has developed their own renewables industry because it is costing the consumers a lot of money and the acceptability of that is based around, "At least we are spending that money internally and we are getting the jobs in the industry on the back of it". There is no doubt that if Scotland becomes a separate country, then the population of England and Wales and Northern Ireland will have that debate about whether the money should be spent internally or whether that money, because it may be a little bit cheaper, should be spent in a separate country.

Duncan Burt: I would observe that that debate is already starting. I don’t think it is necessarily a post-2020 one. We have had Charles Hendry already discussing potential for renewables in Ireland as part of the all-island discussions. I am sure that those debates will continue and grow over the coming years as we get closer to the targets and those targets come into sharper focus for policymakers. Again, while it appears there is absolutely a national focus of development of renewable resources, and that has both a decarbonisation and a sort of job/industrial policy edge to it, I can see already growing internationalisation of some of the sourcing of these supplies in some of that debate.

Q146 Sir Robert Smith: I think most of you have probably over the morning signed up to the idea that a more efficient solution, even if you separate the two countries, is to try to keep the same market going as a UK-wide market, so in other words, not separating the electricity market.

Duncan Burt: Yes. Certainly from my point of view, that is right. We see the larger, more integrated a market you can have, the better that is in terms of supply, liquidity and benefit to consumers. Indeed, that is the direction of policy at a European level, where we are seeing very strong drives towards integration between national markets, north-west Europe, between Ireland, the UK and France and then more broadly across central Europe as well.

Peter Atherton: Absolutely. I don’t think anybody is envisaging the Scottish market becoming a separate market from the GB market, but the point is, if you take that market at the moment, or anybody, they sell power into Germany and buy power out of Germany, but they sell at the wholesale power price in Germany. If that power happens to be renewables, as it often is, which is costing 150 to produce, they sell it at 50 because that is the German power price. They don’t sell it at 150. The Germans don’t pay the subsidy for the renewables coming out of Denmark.

Dr Tilley: I guess where we are coming from is that we just want a single GB market, but it is fair to say that if there was independence, there would be two separate independent regulators, but we would want as much consistency across the two regimes as possible, and indeed, the EU Third Package supports closer co-operation between regulators, so we would want as much consistency right across GB, not just from an EMR perspective, but on the broader regulatory regime.

Q147 Sir Robert Smith: It does seem yet another area where the neat, tidy idea of total independence comes up against the practical realities of modern complex life. We have already heard that the pound is likely to stay, the Bank of England is likely to stay, the Queen is likely to stay and NATO is likely to stay. Now it looks like, if it was going to be an effective future, the UK electricity market is likely to stay.

Dr Clarke: I think it is fair to say that in this current market, operating very similar, if not the same, systems that interface very cleanly is going to be the cost-optimal solution, and that is just not integration and interfacing in the technology, but also in the business model and the regulations, just be clear.

Robert Yates: There are no economic incentives either for England and Wales or for Scotland to pursue separation of the existing GB-wide electricity market, both from economies of scale and security of supply. The ability to balance the incentives is all to retain that GB-wide electricity market. Post-separation, I imagine there would be various actors on either side who would wish to see changes in how that market operated to reflect their own respective positions, but the underlying economics remain the same.

Chair: I should also draw attention to my interest, including the presidency of the Renewable Energy Association, an unpaid post, but also as a director and shareholder of businesses in the energy industry.

Q148 Dr Whitehead: Let me pursue that question of single energy markets a little further. You say that there would be positions taken about changes that people might wish to make. How would those possible changes-for example, an independent regulator, presumably discussions about joint grid measures, gas pipelines, where stuff originates one side of the border and lands on the other side of the border, strengthening electricity DC grids for the transmission-fit into the retention of a single electricity and indeed gas market for the UK as it stands at the moment?

Robert Yates: Probably we can look across to Ireland and the all-island energy market as some template for a market you might develop in a separated GB with regulators either side of the border, but some co-ordinating body with delegated powers that oversees issues such as those that you raise. There is a broad spectrum of possibilities and there are useful templates around the world of how different regions are co-operating to develop their markets, so separate regulators, a co-ordinating body, two tiers of regulation. There is a variety of possibilities.

Dr Tilley: It is an interesting question you raise, because over the last few years there has been huge debate around transmission charging, and you could see a scenario in which Scotland may want to completely socialise charges right across its own country, but England and Wales retains location charging, so it would be interesting how that would pan out in that world.

Q149 Dr Whitehead: I think my question is, how would it pan out? Presumably you would need identical tax regimes, for example, in order that whenever energy offers were brought to the balancing market, they would weigh up against each other. You would need an issue of who would presumably pay for grid strength, any more grid extensions, and how that would be then organised, and those are the sort of issues that one needs to think about.

Dr Tilley: Yes. I would say from a generating perspective, clearly if you have locational transmission signals in England and Wales and then you have a postage stamp approach in Scotland, that will obviously affect potentially where you may want to locate plant compared with how things are today or if you have complete socialisation, so it will affect potential investment decisions.

Duncan Burt: Yes, exactly. As Mr Yates has said already, there are a number of different examples around Europe that you can draw on where there are already energy markets that operate across national borders, across nations. I think we would say that it is almost an obvious point that the closer you can get in terms of policy alignment between regulators, between countries involved in a single energy market, the better. The more changes you introduce, then the different incentives you put on parties, but that does not mean you cannot continue to have a single market operating. You just have slightly different financial incentives on parties that are based in different parts of that market, and the best example of that is probably the level of pan-European trading that we have across the electricity and gas market at the moment, where you have very liquid markets and a high degree of trading across countries and interconnectors with very different regulatory regimes and tax regimes and incentive regimes on things like planning and location. That works. As Dr Tilley said, it poses questions about how you handle certain aspects of it, and the more different the regimes are, the more difficult it becomes to answer questions such as, "How do you manage things such as grid strengthening?"

Q150 Dr Whitehead: But is there an issue relating to two points, firstly the fact that a number of other trading arrangements are between what we might say are reasonably equal partners? In terms of the imbalance of supply, demand and population between England and Wales, Northern Ireland and Scotland, presumably a single trading regime would effectively would be on, shall we say, English terms in order to work, and any divergence from that could be a problem as far as-

Duncan Burt: It is a fair question, yes. The Committee can probably most helpfully think about the fact that Scotland represents about 10% of the UK market, and the UK market represents very roughly about 10% of the European market, give or take, and the amount of alignment, as I referred to earlier, that we are now seeing at a European level means that debate is kind of already going on in terms of how you align European electricity and gas markets, and that will affect the UK and it will affect Scotland, England and Wales equally, whether they are one nation or separate entities.

Peter Atherton: You raise a really important point that we touched on in our notes, which is let us leave to one side for a moment the standard asset risk, because the subsidy regime or the subsidy components are curtailed or changed in some way. As an investor in renewables in Scotland, you are also then vulnerable to changes in policy in the rest of the UK. If shale gas takes off, so the UK Government decides on a very gas-centric approach going forward, that will make a big difference. The UK Government could decide, for example, to have a crash course in compensating for what will not be UK renewables any more, a crash course in renewables off the coast of Wales or off the coast of southern England, and change the transmission charging arrangements in order to facilitate that, which could substantially impact on the economics of renewables in Scotland because all of a sudden you make transmission charges coming out of Scotland very, very expensive.

The Scottish Government can’t do anything about that. They can make transmission as cheap as chips in Scotland, but it doesn’t make any difference. If it is very, very expensive to get the power down south through England, it will discriminate against it. There are a series of follow-on risks for renewable investors, even if you have enough confidence in the basic subsidy regime. You also need effectively an undertaking from the UK Government that they won’t do other policy changes that could materially impact on the economics of the renewables in what is then a separate country.

Dr Tilley: That is a fair comment, and I think what I would stress is that it is important that, from an investor perspective, existing investments are not harmed, because if they are, then that is a recipe for deterring future investment that is required right across the low-carbon space. It is essential that existing investment is protected if there are changes to the regime.

Q151 Dr Whitehead: But bearing in mind what we know about the leeways provided for investments in renewables according to EU directives-I appreciate it is difficult to sort of think across this new terrain-essentially, as far as grid investment is concerned from an England and Scotland and Wales perspective, one would be potentially looking at investment in another country using finance raised in the first country, and then hoping that would then work as far as the products of that investment are concerned, and that goes for grid strength, but also I assume that goes for interconnectors, so why would, for example, one decide that one wanted an interconnector with Norway, funded from England, Wales and Northern Ireland, landing in Scotland? That would be equivalent to landing it in France or Denmark. Presumably one might then say, "Let us land it in Berwick rather than-"

Dr Tilley: Yes. If the interconnector went on to National Grid’s rate base, raising the asset value, and that cost of socialising will be absorbed by consumers in the UK, then what you would probably do is put it at risk, so the interconnector, like BritNed has been developed, is at the risk of the developers.

Duncan Burt: Effectively, it says the idea is that these investments are funded by the people who then use them, but that applies very clearly to interconnectors. It applies to the whole transmission network in GB as well. You can argue about how the actual charging regime works to do that, but its over-arching aim is to be cost-reflective, and that is an over-arching new policy aim in terms of development of interconnection as well, so the two things are broadly in alignment. The types of extreme scenarios where you get very significant divergence in commercial and charging regimes from that which we see now, it is right that we worry about them and investors will certainly look at them, but the chances of something coming along which significantly distorts existing UK and EU policy direction I would say is fairly unlikely.

Q152 Albert Owen: Can I move to oil and gas production specifically in Scotland? If there was an independent Scotland, do you think that the tax revenues from oil and gas should be given straight to the Scottish Government?

Duncan Burt: Certainly that is not a question that-

Albert Owen: We would like your opinions. We have had the opinions of academics and politicians and we would like yours. It is a straightforward question, because the next part of the question is that if there is going to be decommissioning of platforms in the future, should that be shared by the UK and Scottish Governments? It is from that basis that I make the question.

Duncan Burt: National Grid’s focus is onshore in gas. We have no expertise in offshore oil and gas.

Albert Owen: I am sure there is somebody on the panel that would like to-

Dr Tilley: We do have some-

Albert Owen: There is one brave person. Dr Tilley.

Dr Tilley: -interest in the UK central basin in the North Sea. What I would say is-I am not trying to duck the question-what we want is clarity over the tax regime as quickly as possible. Quite clearly in terms of tax revenues, it is also important to recognise that decommissioning costs can be offset against taxable profits, so I think that is part of the issue, isn’t it? It is all going to be part of the financial settlement if there is a vote in favour of independence, and I think it is just bearing in mind the issues that need to be looked at; on one hand, if Scotland was to get the tax revenues, then there needs to be a recognition of the fact that companies who have those liabilities can use those decommissioning costs to offset taxable profits and that will clearly affect the revenue streams.

Q153 Albert Owen: Another thing. I know this is probably overtly political and you don’t want to enter into it, but the Scottish Minister said to us that his opinion was that over the years of production of oil and gas up to a referendum and if independence came, then Scotland hasn’t had benefits from it, so he doesn’t believe that it should have any future from the oil and gas, but he did feel that the decommissioning should be carved up in a way that if an oil field is in production for, say, 40 years-30 years prior to independence and 10 years of independence-then they should only pay the latter share, yet the arguments we have heard from yourselves when you are talking about electricity is that it is a British market and that is investment being made on a British level. Doesn’t the same apply here? I think, Mr Burt, you said that Scotland was 10%. I am not sure if that is quite the accurate figure, but shouldn’t they have 10% of the decommissioning cost prior to independence?

Duncan Burt: All I know is that I am an expert in transmission charging, and transmission charging is very simple compared to this kind of debate. I am sure there is devil in the detail all over the place on this, and I would bow to what is, I am sure, going to be a lengthy discussion with policymakers on how that might be settled.

Albert Owen: Okay. I will see if I can draw some-

Peter Atherton: This is obviously just a personal view, it is nothing to do with my professional capacity, but one thing I have been struck by, taking an interest in this area, is that the Scottish Government’s proposal is that the assets of the UK are divided largely on a locational, geographical basis and the liabilities are done proportional to population and one is bigger than the other, as far as Scotland is concerned, and that is how the maths work.

Q154 Albert Owen: I am sure you will have an opinion on this one. If I move on to skills in the North Sea sector, are there sufficient skills within the oil and gas industry, do you feel, to have a separate Health and Safety Executive for Scotland and the UK, or do you feel that there needs to be one body because of the lack of skills or the lack of duplication in many cases which would incur extra cost to companies or potential ones to invest in the North Sea?

Dr Tilley: Probably the link here is in terms of my answer around regulation, and if you are going to have two independent countries, they are going to want two independent regulators. From an energy market perspective, I would assume similarly that they would want two separate HSE departments under that regime. I am not qualified to comment whether there are sufficient skills to enable that to happen, but I would have thought, with two independent parliaments, they would want that as an aspiration at the very least.

Q155 Albert Owen: Mr Atherton, a personal view. How do you think that would impact on-

Peter Atherton: Honestly, I have no expertise in offshore skill base.

Duncan Burt: Perhaps if I broaden the question. We are on the record in terms of the importance of skills, not just in offshore oil and gas, but really across the energy sector at a time in both electricity and gas of significant construction and growth, so anything which-going to the heart of your question-duplicates effort is obviously going to be a matter for concern. If it significantly expands the role, I would say that the kind of measures we are talking about here in terms of potentially duplicating or adding to some of the HSE bodies feel to me that as long as there is adequate signalling of that in advance, which I am sure there would be, and clear direction on that, then there is time to build the skills and to develop people to make sure that we can resource fully. That is exactly what is going on at the moment across the electricity sector in terms of building up nuclear skills or building up the kind of skills that we use in transmission. As long as you have enough time to build those skills through schools and universities, then you can prepare people and you can prepare the qualifications and you can get the supply chain in terms of materials and skills and jobs to do what you need. Having early sight and early clarity of that kind of development is important.

Dr Clarke: I think that it is absolutely crucial. If you move down a track about separate regulators and separate standards, if we are now into a world where people who are being trained in universities, for instance, in England for leadership roles in the offshore sector now have to be trained in two different-even subtly different-styles of regulation, I just see it becoming an additional cost.

At the moment, ETI funds a centre for industrial doctorate students at Edinburgh University; they also use Exeter and Strathclyde Universities as part of the same consortium. They operate a training programme that uses expertise and skills from these universities, and I see it becoming just too complicated, frankly. If I am a company, and I used to play this role for Rolls-Royce, if I am now looking at recruiting skilled researchers from universities, I am now in a world that says, "Well, I might as well look even more offshore for my recruits, because I have this diversity of training regimes in the UK. It is probably not so different to what I see in Germany. I will look harder over there as well". I just see it bringing additional risk and additional cost in the training programme in the UK, and then the rollout of those people in the UK environment quickly and effectively. Yes, as Dr Tilley said, you can see that you may legitimately say you need a separate regulator involved, but if the standards and the regulation inside it start to look different, just because-

Q156 Albert Owen: Do you think there would be danger of goldplating at the Edinburgh level? Is that what you are saying?

Dr Clarke: I don’t think it is goldplating. I am not sure I would see how that worked. My worry is I am going to get a poorer solution.

Dr Tilley: We clearly would want consistency. We have an operational wind farm in Scottish waters, in the same way we have one that we are building in the Thames Estuary and we have in other regions in England, and clearly we would want the same kind of regime from a health and safety perspective for all of our sites right around the UK coast as opposed to different regimes that we are having to comply with, often with the same people involved.

Q157 Sir Robert Smith: I think it is partly building on the fact that Professor Kemp when he gave his evidence said, "A lot of expertise is embedded in the Department of Energy and Climate Change here in London, and the Scottish Government would have to acquire their expertise somehow". Obviously, especially oil and gas, it is a mature but long life left province, so an awful lot of the information, the history of licences and so on, is all based in London. The Minister in response to questions did sort of concede that yet again this was another area where maybe a joint agency or some kind of joint working might be more seamless than to try to replicate.

Peter Atherton: Certainly, around nuclear safety the HSE’s role in the nuclear plants in Scotland will be very, very difficult, and also Ofgem. It is buried in one of the documents in the Scottish Government that they do intend to set up their own regulator and replace Ofgem, and Ofgem has a limited talent pool and presumably some of them would have to move to Scotland and that would create some level of additional uncertainty. It is not possible to say how big it would be, but as far as utilities are concerned, facing a new regulator who may come at things slightly differently-or significantly differently; who knows?-creates another level of risk.

Dr Tilley: I think some institutional framework that enables that close co-operation by two separate bodies but essentially applying the same principles right across would be very helpful. That is what we mean by closer co-operation, and that might work.

Dr Clarke: Yes, and if you look at what we do at the moment-I work both for the Department for Energy and Climate Change here in Whitehall Place and in Edinburgh, the group up there-clearly the population in terms of the scale of the group we work with in Edinburgh is much smaller than the one we work with here in Whitehall, that is for sure. But at the moment they are using the same kind of information base from us and I think you have seen them making similar decisions based on that, so the framework needs to remain tight.

Q158 Sir Robert Smith: If you took the offshore oil and gas on a territorial basis, about 90% would probably be in Scottish jurisdiction. Therefore, you would have to have a fairly massive ramping up of resources, personnel, human resources in Scotland, and you would have to get them to locate in Scotland.

Dr Clarke: You could subcontract it all back to Whitehall.

Sir Robert Smith: Given the maturity and the level of expertise already developed-

Dr Clarke: I said it only half in jest, because I think that is the reality, as you are looking at a very mature industry with a very mature capability in the Department for Energy and Climate Change and in BIS to a degree already. In some of the less mature technologies in markets we are seeing coming through now, it might be a different story.

Q159 Sir Robert Smith: On the skill shortage, certainly every two years there is the big exhibition and conference of Offshore Europe in Aberdeen, and going to some of the stands, you think you are going to find out more about the company, but in the case of a couple of the operators-I think it was Shell and Chevron-the only people on the stand were the global human resources recruitment department looking to recruit, because this skill shortage isn’t just a Scottish or a UK challenge; it is a global challenge when it comes to oil and gas.

Dr Clarke: I think there is a global challenge in the energy industry full stop, because certainly across the UK this is an area that we haven’t invested in heavily in skills development for this sector over the last 20 years. We are now ramping up very fast in that area and you see a number of other countries in the same boat.

Sir Robert Smith: Regulators have to recruit from people with the expertise in the industry, so anything that can be done to minimise the duplication would be effective.

Duncan Burt: Definitely, from our point of view, the key point in terms of institutional arrangements is that-Dr Tilley’s point earlier-the policy thrust and direction is aligned inasmuch as is possible. That is the key thing from the point of view of developing markets, developing arrangements and developing investment. As long as there is early sight, then I am sure organisational arrangements can be facilitated and will represent a small part of the more general organisational arrangements that might be needed, whatever settlement came out of a referendum.

Dr Clarke: I would ask you to bear in mind not just alignment-I support that completely- but also clarity of the interface in terms of how it operates across the interface and where the distinction is drawn.

Q160 Sir Robert Smith: One aspect that has just come back to me is the subsidy that goes to the distribution in the north of Scotland, that is currently paid for by all the UK consumers.

Duncan Burt: That is right, yes. Yes, that is right. The hydro benefit reflects the higher distribution costs in the north of Scotland, so their-

Peter Atherton: From memory, it is not a huge amount. It is about £40 million to £50 million, which makes quite a big difference to the build in the north of Scotland, but in the renewable scheme of things it is not a massive amount.

Sir Robert Smith: Do you think it could survive the separation agenda?

Peter Atherton: It would fall to the whole population of Scotland, so the Central Bank would pay for it, I guess.

Duncan Burt: I wouldn’t even try to guess how that would be settled out as part of any settlement. Yes, it is definitely there and it would need to be dealt with.

Q161 Albert Owen: With your reluctance to answer the previous question, I am not sure what kind of response I am going to get on this one. It is about a Scottish oil fund. Do you think one should be set up? You don’t have to speak on behalf of your organisation; just give me a personal view. Do you think there should be a Scottish oil fund, post independence? Just to tease it out of you, Mr Atherton, you mentioned shale gas. Do you think the UK should set up post-independence a shale gas fund in the United Kingdom?

Peter Atherton: I did on video watch the evidence of the two professors, and I must admit, I have never really thought about the pros and cons of having funds associated with it. If you have a surplus there, you might want to stick it in a fund. I thought they made a pretty decent case about why it is sensible to have a fund-that it is effectively a temporary revenue stream and you don’t want to base current expenditure on that revenue stream. Of course, in the political world, the revenue stream that lasts 30, 40, 50 years is going to be very, very hard not to dip into, whether it is put initially into a fund or is used to fund current revenues. There is obviously a case to be made to have one if you have a surplus. The question is, do you have a surplus?

Albert Owen: That is the question, and they have been running deficits to the figures that we had over the last ten years. Only three years there was a surplus, so there would not be a lot of money going into it. Anybody, any other comments on that? No, you don’t want to comment on it. Okay. Fair enough. I did try, Chair.

Chair: I think we have probably come to the end of our questions, unless there are any burning issues that you think we should have probed you about that we have not done. Thank you very much for your help and we look forward to pursuing some of these matters with the Scottish Government.

Prepared 9th November 2012