Select Committee on Scottish Affairs Written Evidence


APPENDIX 12

Memorandum submitted by Highlands and Islands Enterprise Network (HIE)

SUMMARY

  This paper contains Highlands and Islands Enterprise (HIE) Network's response to the House of Common's Scottish Affairs Committee Inquiry into Meeting Scotland's Future Energy Needs.

  The response concentrates on both the future economic prospects for the Caithness region associated with the Dounreay nuclear plant and the wider issue of renewable energy as a critical part of the UK's future energy mix. The following summarises the key issues described in the paper:

    —  The decommissioning process at the Dounreay nuclear plant is currently providing significant levels of employment in the Caithness area. It is the HIE Network's strategy to ensure that the local economy benefits to the maximum extent possible through the involvement of local businesses and the employment of local people.

    —  The HIE Network recognises that the revised decommissioning programme will impact on the area and to that extent it is also focusing on future opportunities to sustain the economy and community in the longer term eg by developing skills and expertise transferable to other sectors and by diversifying into other sectors.

    —  The HIE Network believes that renewable energy will form a critical part of the UK's future energy mix and that accessing the substantial renewable energy resources of the Highlands and Islands will be essential to this. This presents the HIE area with major opportunities in terms of local business growth and community development.

    —  Successfully achieving Government targets for renewable energy will require a mix of technologies to be developed and deployed. If this is to be achieved further Government support is needed to ensure emerging technologies (such as wave, tidal and biomass) are developed and the benefits of doing so are retained in the UK.

    —  Substantial investment in the grid is essential if this opportunity is to be realised. The transmission connection between the north and Central Belt is critical, as is the need to strengthen the lower voltage distribution system and connections to the islands. A supportive regulatory regime is essential to ensure that upgrades are realised and projects in the highest resource areas (eg islands) progressed.

    —  Community scale renewable energy projects will also play an important part in supporting environmental goals while increasing levels of locally generated power for local consumption.

1.  CONTEXT

  The Highlands and Islands Enterprise (HIE) Network is responsible for economic and community development across a diverse geographical area which covers more than half of Scotland and is home to around 425,000 people. The HIE Network's strategy "A Smart Successful Scotland—the Highlands and Islands Dimension" sets out four strategic objectives: Strengthening Communities; Developing Skills; Growing Businesses; and Making Global Connections. The HIE core gives strategic direction, undertakes area-wide initiatives and provides support services for the whole Network. Our ten local enterprise companies (LECs) each serve a distinct geographical area and take account of differences in local needs and priorities. UKAEA Dounreay is situated in the area served by Caithness and Sutherland Enterprise (CASE).

  Decommissioning activity at the Dounreay site in Caithness is currently a major economic driver in the North Highlands.

  Renewable energy provides opportunities for the Highlands and Islands across all four of the Network's strategic objectives. These opportunities have the potential to benefit some of the remote areas of the Highlands and Islands which have not as yet fully benefited from the remarkable turnaround in the economic fortunes of the Highlands and Islands in recent years. It is part of our vision to demonstrate careful, sustainable use of the area's natural assets. Growth must be achieved in tandem with the area's natural environment and development activity must remain aware of the legacy it leaves for the future people of the area.

  The first part of this response focuses on issues associated with the decommissioning process at Dounreay in Caithness. The latter part considers the wider question of future energy needs and offers our views in relation to the role of renewable energy as an integral part of that mix.

2.  DOUNREAY DECOMMISSIONING

Background

  The Dounreay nuclear establishment has been a major part of the economy of the far north for the last 50 years and currently provides direct employment (between UKAEA and site based contractors) for over 2,000 people. Recent estimates from UKAEA indicates that one in five jobs in Caithness and North Sutherland depends on decommissioning Dounreay and across Scotland it accounts for approximately 2,930 jobs.

  In recent years it is estimated that £80 million per annum has been directed directly into the local economy by UKAEA through wages and salaries and contracts with local businesses. The average salary of UKAEA employees at Dounreay is £24,000 per annum which is significantly higher than the average private sector salary in the Highlands and Islands (£15,000 per annum).

  CASE is working closely with UKAEA to fully understand the implications for labour/manpower requirements during the decommissioning of the Dounreay site. We understand that the Dounreay site will employ, both directly and indirectly, a declining number of people until the site has reached an acceptable end point for decommissioning. It is therefore a priority to ensure that these jobs are replaced by similar high quality jobs in the area.

  Currently (as at November 2004), unemployment levels in the two Travel to Work areas in the Caithness area are 4.1% in Wick and 2.7% in Thurso. Comparable Scottish and UK averages are 2.7% and 2.2% respectively. It is estimated that approximately 30% of individuals directly employed by UKAEA are resident in the Wick Travel to Work area. This figure could well be higher when contractors' employees are taken into consideration.

  The strategy developed and currently being implemented by the HIE Network has two main elements:

    —  To help ensure that the local economy benefits to the maximum extent possible from the decommissioning process itself through the involvement of local businesses and the employment of local people.

    —  To identify opportunities to sustain the economy and community in the longer term—post Dounreay Decommissioning for example by developing skills and expertise which are transferable to other sectors and by diversifying into other sectors.

  UKAEA published an updated version of its Site Restoration Plan for Dounreay, the Lifecycle Baseline, in September 2004. This revised version of the plan differed from the first version in that it indicated that the timescale for the decommissioning programme would be reduced significantly with the forecast end date being brought forward from 2063 to 2036. It also revised the total estimated cost of decommissioning downwards by £1 billion from £3.695 billion to £2.695 billion. UKAEA also indicated their intention to reduce direct employment at the site by approximately 200 over the next three years. Employment will decline steadily thereafter.

  The changes to the decommissioning programme obviously have implications for the area:

    —  There will be a shorter time to identify and establish alternative employment generating projects in order to sustain the economy in the post Dounreay era.

    —  There will potentially be less incentive for businesses involved in the decommissioning process to establish in the area and employ local individuals given the shorter timescale and lower value of available work.

    —  Young people starting a career at Dounreay now are unlikely to see out their working life there as they have in the past.

    —  The area may be less attractive to those with young families given that the employment opportunities present in the past will not necessarily be available to their children.

    —  £1 billion less to be spent over the course of the decommissioning programme.

  It should be borne in mind that timeframes and budgets may change again via the competition process for the management of the site.

HIE Network Involvement

  The HIE Network's response to decommissioning has fallen into four main areas:

    —  Major Infrastructure projects (provision of business space, trials and training facilities).

    —  Supply chain issues (assisting local businesses to become involved in decommissioning).

    —  Lobbying, communication and networking.

    —  Skills related issues (forecasting skills gaps and shortages and delivery of training).

Opportunities for the Future

  The challenges and opportunities outlined are intended to help highlight the issues facing the local area from the decommissioning process in the short to medium term. Maximising opportunities for employment of local people will be achieved by ensuring that local businesses and individuals have the capacity and skills required to meet the needs of the decommissioning process. In addition the longer term strategy to create a sustainable economy post-decommissioning will require partnership working between local, regional and national bodies.

  Potential areas of activity include:

    —  Identifying alternative economic drivers—renewables, waste minimisation, high quality manufacturing.

    —  Identifying and establishing other major projects which could be sited in the area—both from the public and private sectors.

    —  Building on the knowledge and skills base of the area to maximise the potential for transfer to other sectors.

    —  Marketing the area as a source of high quality science and engineering skills.

    —  Establishing the area as a centre of expertise in decommissioning and becoming involved in the global decommissioning market.

    —  Exploring opportunities for developing the knowledge economy in the area through exploitation of Intellectual Property/patents developed during the decommissioning process.

    —  Ensuring that challenges and issues faced in the north Highlands are not eclipsed by other areas where impacts may appear greater but where alternative economic drivers may be more accessible.

    —  Ensuring that the socio-economic responsibilities of the NDA are fully exploited.

    —  Maximising partnership working and ensuring involvement and commitment from a wide range of stakeholders.

    —  Exploring potential for reallocating cost savings resulting from changes to the decommissioning programme to development of alternative sustainable economic activities.

3.  FUTURE ENERGY NEEDS—RENEWABLE ENERGY

  The HIE Network firmly believes that Scotland's future energy mix will be one in which renewable energy will play a critical role. The Scottish Executive has set a target of 18% of Scotland's electricity needs to come from renewables by 2010 and 40% by 2020. This will require 800MW of new generation by 2010 and 2,500MW by 2020. This sits against a UK target of 10% by 2010, 15% by 2015 and an aspiration to achieve 20% by 2020. Achieving these targets will not only bring environmental benefits through carbon emission displacement, but will also offer Scotland a significant opportunity to capture downstream economic and community benefits through technology and project development. As with the decommissioning programme at Dounreay, it is HIE's objective to achieve the highest level of long term economic benefits to the area through the development of a range of renewable energy technologies at both commercial and community scale.

Background

  The renewable energy resources of the Highlands and Islands constitute the greatest concentration of potentially exploitable renewable energy resources in the UK. The Highlands and Islands area has a long history of exploiting this resource, and to this day continues to produce the majority of the UK's renewable energy through its hydro schemes. Opportunities to further develop hydro electricity still exist, but the area's resources also go much wider. Some of Europe's strongest sustained wind regimes can be found in the Highlands and Islands (with load factors up to double the UK average), along with some of the world's best wave and tidal regimes and significant forestry resources with potential for biomass exploitation. It is evident that accessing the renewable resource of the area will be important not just in local terms, but also in the wider Scottish and UK context of meeting national and international commitments.

  The Highlands and Islands also currently house some of Britain's manufacturing, research and development facilities to exploit these renewable energy forms, such as Vestas, Cambrian Caledonian, marine energy business Wavegen in Inverness, and the European Marine Energy Centre (EMEC) offering full scale wave (and later tidal) device testing and accreditation on Orkney. Significantly, the area's long association with the offshore oil and gas industry has ensured an enviable legacy of transferable knowledge, skills and experience in manufacturing and engineering. Research by the HIE Network has demonstrated that many businesses in the area have the capacity to diversify into the renewables sector, including some which have had considerable involvement in the decommissioning process at Dounreay. The HIE Network has prepared a Workforce Development Plan to identify and support the skills development needs of businesses involved in the renewables market as part of its strategy to encourage development of a local industry.

  The HIE Network estimates that there are currently over 600 jobs in the renewables sector in the Highlands and Islands—compared to 1,300 across Scotland as a whole and 8,000 in the UK (DTI Gap Analysis). The average wage range of those Highlands and Islands jobs is £15k per annum for production to £25k for management which is significantly higher that the average wage rate in this area.

An Energy Mix

  It is clear that to meet government targets for new renewable generation a mix of energy supply is required, and this will require new and emerging renewable technologies to be supported to the point where they can compete commercially in the renewables market. Equally important will be the mix of conventional energy sources. Over the coming decade much of Scotland's conventional energy plant will reach the end of its life. While renewables will displace an element of this capacity there will undoubtedly be a need for replacement conventional plant. Again a mix of sources will help ensure security of supply, while also allowing the greatest flexibility to react to power demand fluctuations and to deal with intermittency of increased renewable generation. Decisions over replacement plant will need to be made by government and industry in the very near future.

The Role of Renewables

  Ensuring a mix of renewable energy sources are developed and contribute to the Government's overall energy mix is dependent on continued support for these new technologies. To date assistance has mainly been in the form of grant support for offshore wind, biomass, photovoltaics and research and development assistance. It is essential that this support continues.

  Government assistance has supported the development of a range of wave and tidal energy technologies, but to date few have reached full scale prototype testing. One wave device is currently being tested at EMEC and it is hoped that further devices will come forward to use the centre over the next three years. Plans are also in hand to extend EMEC to also offer tidal energy testing, and a number of potential users have been identified. It is critical that devices are thoroughly tested and their performance independently verified if confidence is to be built in the ability of marine technologies to produce useful electricity. Equally important will be the UK's ability to secure downstream commercial deployment, manufacturing and retain the knowledge base the UK is currently home to. To achieve this will require further incentives from Government—probably in the form of capital and revenue support. The DTI has allocated a £50 million fund to support these technologies. It is important that decisions on how this fund is allocated are made quickly to allow developers to plan for their future activity in the UK.

  Biomass electricity projects have also received considerable assistance in the last few years. However, to date a number of the projects awarded capital grant assistance have not proceeded, and until such time as unspent funds are reallocated or a new fund established there is no further government assistance available to new projects coming forward. In the Highland area alone this is already stalling projects. Again, speedy decisions are required by government to unlock funds that are unspent or to allocate new sources of support to biomass to ensure projects do reach fruition. This support has also in the past focused on opportunities associated with energy crops. It is the HIE Network's view that future funding should not be restricted to energy crop projects but should also be used to support other forms of biomass. This is particularly relevant in Scotland, and the Highlands and Islands, where the greatest biomass potential lies in using existing forestry and wood processing co-products.

  Finally, consideration of the future energy mix should also take into account the role of renewables in both the heat and transport markets. Heating and transport both constitute around 40% each of our total energy use (with electricity sitting at approximately 20%). Both of these sectors should therefore also be tackled. Renewables sources of heat could include solar or biomass, and transport fuels could be produced from biofuels. Incentives to support these wider renewable energy uses are required. We are pleased to note that the Government is looking at the means by which renewable heat can be supported and we very much hope that this work will be progressed quickly.

Electricity Network

  It is widely acknowledged that the electricity grid across the UK is currently ill-equipped to connect numerous and widespread new generation. In particular, the grid across the Highlands and Islands, which was designed to supply centrally produced electricity to scattered communities, is not sufficiently robust to connect substantial levels of new local generation for export south to the centres of population and demand. Constraints also exist further south with bottlenecks in the capacity of transmission lines between the Scottish and Southern Energy area and south of Scotland, the English interconnector and within the English system.

  Investment approval for grid strengthening comes from the industry Regulator, Ofgem. To date is has agreed that investment can proceed to upgrade the transmission system between Beauly (outside Inverness) and Denny (outside Stirling). This will be of strategic importance in allowing the high resource areas elsewhere in the Highlands and Islands to be accessed for renewables development. Consent for the line rests with the Scottish Executive and it is imperative that an early decision is reached to allow downstream projects to be taken forward. Equally important, however, will be strengthening of the lower voltage distribution system across the northern mainland and ensuring investment approval for connection to the islands. Ofgem do not consider there to be sufficient market demand/justification for the latter at this time. This issue is discussed further below, but it is the HIE Network's view that action is need by government and the Regulator to ensure the best renewable resource areas in Scotland are in a position to contribute to government targets.

Regulation

  In April this year, BETTA (British Electricity Trading and Transmission Arrangements) will be introduced across GB. While this will be positive in that it will increase transparency in the market and competition, but it will also bring serious risks to the development of renewables, particularly in the north of Scotland. Under the proposed charging arrangements for use of the transmission system generators in the north of Scotland will pay substantially more than their counterparts further south, by virtue of location (eg the further a generator is from centres of population and demand the higher the charges will be). The Scottish Renewables Forum has estimated that of the total £290 million charging bill payable by generators, £140 million will be met by Scottish generators, despite representing only 13% of total GB generation.

  To exacerbate matters, and despite the short time left until implementation, it is not yet known what the charging regime will be for generators based on the Scottish islands. It is estimated however that charges could exceed £70/kW, over three times greater than northern mainland Scotland charges and substantially greater still than English generators. This is obviously a serious deterrent to developing the renewable resource in these areas and one which ignores the much higher load factors available there. This uncertainty poses a further deterrent to island projects which in turn reduces the ability to make the economic case for grid investment. While Government has retained the option under the Energy Act to introduce a cap on charges in the north of Scotland, there is no certainty how or when this power will be used. Even if it is, it will have a 10 year limit and this is unlikely to be sufficient to support projects using new technologies (such as wave/tidal). A strong commitment is needed from Government to resolve these issues in the interest of achieving wide environmental goals and ensuring generators across the entire GB are treated in an equitable fashion thus protecting the principles of competition.

Community Involvement in Renewables

  Renewable projects are not just at the large industrial level. They also apply at the community and household level and are an effective means of reducing energy consumption and carbon dioxide emissions, especially when combined with energy efficiency measures. HIE's Community Energy Unit (CEU), which delivers the Scottish Executive's Scottish Community and Household Renewables Initiative, is supporting over 140 community-based renewable energy projects across the Highlands and Islands and interest amongst communities continues to grow. The majority of these projects are small scale and linked to community facilities, offering long-term revenue cost savings. Projects supported by the CEU have encompassed wind, solar, wood-fuel, hydro and ground-source heat pump technologies.

  Community interests in commercial scale projects is also increasing and to support continue community involvement in projects of this scale, the HIE Network has recently established a Community Energy Company. The purpose of that company will to offer a range of finance and project management options to communities to assist their investment in commercial scale projects. Income generated from such projects can then be reinvested in a community. Options include the possibly of supporting community development initiatives, meeting the capital costs of implementing local development plans, or sustaining other community activities in the longer term. Alternatively, there might be more strategic developments that such income should be directed to, such as affordable housing in fragile areas. Such decisions shall rest with individual communities who otherwise would be unlikely to have such options available to them.

4.  CONCLUSION

  The decommissioning programme at Dounreay is currently of major economic importance to the Highlands and Islands. The HIE Network recognises the significant impact the decommissioning programme will have on the economy of the area. We welcome support from regional and national partners in meeting the challenge of developing a diverse and sustainable economy in the area in the long-term following the decline in employment at the site. In the short term, our aim is very clearly to maximise local benefit through ensuring local business involvement and employment of locally based personnel.

  While decommissioning activity progresses, we see growing opportunities for the area to develop its substantial renewable energy resources and to capture both economic and social benefits from doing so. We believe that renewable energy will form a crucial part of the UK's future energy mix, but also recognise that achieving government objectives will require sustained effort and support to develop new technologies, resolve grid issues and ensure a positive regulatory framework is developed. We look forward to working alongside government and our national and local partners to ensure that the opportunities associated with this new industry are realised and that renewable energy is able to contribute significantly to meeting our future energy needs.

28 January 2005


 
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