UNCORRECTED TRANSCRIPT OF ORAL EVIDENCE
To be published as HC 1912-i

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 17 April 2012

Professor Jo Armstrong and Professor Alex Kemp

Fergus Ewing MSP and David Wilson

Evidence heard in Public Questions 1 - 120

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Oral Evidence

Taken before the Energy and Climate Change Committee

on Tuesday 17 April 2012

Members present:

Mr Tim Yeo (Chair)

Dan Byles

Barry Gardiner

Ian Lavery

Albert Owen

Christopher Pincher

John Robertson

Laura Sandys

Sir Robert Smith

Dr Alan Whitehead

________________

Examination of Witnesses

Witnesses: Professor Jo Armstrong, University of Glasgow, and Professor Alex Kemp, University of Aberdeen, gave evidence.

Q1 Chair: Good morning. Thank you both very much for coming in. This is our first public evidence session on this subject and there is a great deal of interest in it. I am sorry we are running a few minutes late. We have a quite tight timetable. We will still try to get through this particular session by 11.30am.

I will start with a general question. Even though North Sea oil production may have peaked, if we have high and possibly rising oil prices, is it possible that the economic benefits of North Sea oil may still go on increasing?

Professor Kemp: Are you addressing me?

Chair: I will allow you to decide for yourselves who wants to answer which questions.

Professor Kemp: The tax revenues from North Sea oil are the function of various factors. They are a function of oil and gas prices, of the production and the investment and operating costs. It is the interaction of these that determines how much tax revenues will accrue to the UK Exchequer. Looking forward, if we wanted to estimate these tax revenues, we would have to take a view about oil prices, ongoing investment and the associated capital allowances and the associated production. So that is why it is not so easy to do it and why you can find quite big variations in what revenues might accrue, depending on these assumptions.

Professor Armstrong: If I may just add a little, I think it is important to distinguish between two features here. One is about North Sea tax revenues and the other is about North Sea employment and activity. Since I was in the industry in 1984 or through the early 1980s we have seen prices go from $100 to $10. We have still seen activity grow significantly. We have seen areas that were hitherto too remote, too difficult, too extreme to develop being developed. So the oil price effect is important for maintaining jobs and maintaining export potential from the sector. Higher prices will also feed through to higher tax revenues but as production is on its downward path those tax revenues are going to be more and more difficult to maintain. You also have to think through the effect of higher oil prices on the wider economy, be that of Scotland or the UK. The OBR recently undertook a piece of work that showed that with high and rising oil prices, the negative effect on the economy is almost as great if not greater than potentially the effect of the additional North Sea tax revenues you might raise.

Q2 Sir Robert Smith: I must declare my interests in the oil and gas sector, especially as a shareholder in Shell. That is in the Register of Members’ Interests. On that net benefit to the economy, the thing the industry keeps highlighting is the rising costs of operation and also, as we go to more challenging fields, the higher capital costs of exploration. While obviously the higher operating costs and capital costs do produce employment and activity, they do reduce the net economic benefit even if the price is going up.

Professor Armstrong: The rate of return is falling, yes. Whether or not you can do things more efficiently and you can therefore manage to maintain an overall positive rate of return, clearly you would shut in production. The boom years have probably gone but the benefit from maintaining production is clearly still there, otherwise production would have shut down when prices were at $50, $60, $70 a barrel. The fact that they are $100-plus now is helping maintain those marginal older fields.

Professor Kemp: It would certainly be that the large price increases over the last decade got all the attention but over the same period costs have increased between twofold and threefold as well. The result, however, has been that tax revenues have actually come up a bit over the last few years, despite the cost increases. There has been technological progress and that has had quite a significant effect as well. For example, if we look ahead a few years we are going to get quite a lot of extra oil production from West of Shetland through the further development of the Clair field, which a number of years ago was quite uneconomic. We do factor technological progress into our modelling to some extent and that is why we postulate that we could get quite a big growth in oil production from West of Shetland based on phase 2 of Clair, and we are saying in another number of years from phase 3, and the redevelopment of Shihallian, which has extra reserves from what was initially thought.

So, yes, all the time we are in the maturing phase of the North Sea but remember the average recovery factor for oil is 38% so there is a lot of scope for technological progress to enhance that recovery, as the example I have given of West of Shetland indicates.

Q3 John Robertson: Professor, in The Economist-I believe it is very popular north of the border these days-it has been attributed to you as saying that 18% of oil production would cover the GDP for Scotland but you also say that the fall in North Sea production has been falling by about 6% a year. Is that likely to continue and if so where then does the Shetland oilfields come into this in timescale? Will they come in quickly enough to allow this 18% of GDP to be maintained or is there going to be a fall and do we need to look elsewhere in, if not only the short term, perhaps the medium term?

Professor Kemp: First of all, I have said nothing about a share of GDP, nothing at all ever.

John Robertson: Attributed to you.

Professor Kemp: You mustn’t take The Economist too seriously. They commissioned me to write a study for them in 1999 about the future of the oil and so on and then they embellished it on a grand scale about independence and oil, which I said nothing about.

Q4 John Robertson: Were these figures wrong?

Professor Kemp: I have done no research on the Scottish GDP. That is not my forte- the size of the oil sector and its effects is, so you can ask me anything about that. You asked about production falling. It peaked in 1999, falling about 6% or 7% per year. Last year was a rather traumatic 18%.

Q5 John Robertson: Was there a particular reason for that?

Professor Kemp: It was due to an unfortunate coincidence, shall we say, of a lot of planned shutdowns and unplanned shutdowns in mature fields. That 18% decrease will not continue. Our own modelling says that if things go reasonably well, that is if we don’t have a lot of unplanned shutdowns, there should be a moderation in the decrease rate and for oil it is even possible that there will be a stabilisation for a few years. Gas, however, is likely to continue going down. In the last decade or so the success rates have been more towards oil than towards gas. The decline rate in oil should certainly moderate. Gas will continue to decrease.

Q6 Chair: There is a certain amount of interest south of the border in how the oil revenues might be split up in the event of Scottish independence. Should Scotland get everything that comes from their waters?

Professor Kemp: What I did in my memorandum to you was to indicate what might happen if independence came and not push any subjective political views at all, which is not what an economist like myself should be doing. There is a presumption that the median line would be employed to divide the North Sea, originally through negotiation but if negotiation failed then possibly by referral to an international court. The median line need not be employed but it forms the starting point. That would just be the normal kind of procedure when for adjacent states you had to divide the area under what would be Scottish control and what would be the rest of UK.

Q7 Chair: So the median line is a basis for negotiation?

Professor Kemp: It would be the starting point for sure. It was a starting point in the UK’s negotiations with Norway and the other states and on the west side with Ireland and with Denmark through the Faroe Islands. There is always argument about uninhabited islands in particular; if Rockall is part of Invernesshire has been an issue since 1972.

Q8 Chair: Would it be seen as excessively partisan on the part of the English to suggest the population of the UK might be a fairer basis for making the split?

Professor Kemp: Negotiations on boundaries have never happened on that basis.

Q9 Albert Owen: You said there were negotiations prior with Ireland. The territorial waters are clearly marked out, aren’t they?

Professor Kemp: Yes.

Q10 Albert Owen: So what negotiations would go ahead?

Professor Kemp: With Ireland?

Albert Owen: Yes, for instance with Ireland. It wouldn’t be just England and Scotland. I am a Welsh MP and we would have some interest in this as well.

Professor Kemp: There were prolonged negotiations with Ireland, very prolonged actually. Eventually there was agreement on the Irish Sea and so on, but then they have also contested to the north, for example around Rockall. They haven’t recognised Rockall as part of the UK, for example. I can only repeat that in all the North Sea negotiations, including those involving the Netherlands, France, Belgium and Germany, the median line has been the starting point. When it has gone to the international court, sometimes the international court has given a different definition, as it did for Germany in its dispute with Denmark, for example.

Q11 Albert Owen: Can I move on to the oil fund for Scotland. Is there a case for setting up an oil fund at this time when we are in deficit periods where we are cutting budgets on services? Do you agree with the First Minister that it can be done in this period?

Professor Kemp: I personally have argued the case for an oil fund for the UK and for Scotland for quite some time. The reason is that oil revenues are different from income tax or VAT, for example, because oil revenues come from the depletion of the reserves and the reserves are part of the nation’s capital stock, just like plant, equipment, houses and so on are. So if you deplete those, you are in effect diminishing your capital stock. That is not a very good idea so an oil fund can ensure that you maintain the capital stock. The basic reason for having one is that it can ensure that the revenues are not spent on public consumption, that they are invested and the income from the investment is what can be called permanent income, which can lead to permanent consumption if that is wanted, but you maintain your capital stock.

Q12 Albert Owen: So you don’t think we have to be in budget surplus to put aside money in an oil fund?

Professor Kemp: No, I don’t. I also think that relying on oil revenues for normal budget purposes is dangerous because they are quite volatile. As the chart in my paper showed, when we tried to replicate the Scottish share as it would have been over the last number of years, there was a huge volatility and for normal budgeting that is very undesirable. If you put the oil revenues in a fund then, of course, when the oil price is low there would not be much to put in, when it is high there is more to put in, but that is fine. It does not disturb your normal budgeting. You invest that and you get the income annually and you can have a party with that or use it for whatever, but you maintain your capital stock. That is the basic idea.

Professor Armstrong: You could be using your current income to fund capital investment, which therefore would be for future benefits and produce your future income stream. So I think it is important that we think through the money that we have, is it for a fund for future use or is it for a fund for infrastructure that is for future use. But the current situation that we are in from Scotland’s perspective is there is not a surplus to generate funds to put in a fund, so if a fund is required something else will have to be cut to make that happen. It is for intergenerational reasons possibly a good thing to do, and potentially economic reasons too.

Q13 Albert Owen: Am I right to read into what you are both saying that you agree with it in principle but you do think-certainly you, Professor Armstrong-that in difficult times perhaps it should be put aside?

Professor Armstrong: You have to think through what is the best alternative use of the scarce resources that you have and there is a variety of different things you could use it for. Simply using it for current consumption, as Professor Kemp says, is ignoring the fact that at some point you are going to have to wean yourself off that funding stream because it is not going to be there in the future. If it is about short-term measures to get you into a new position then there is a justification for that, but it is not clear that at the moment we have such surplus that it would be possible. Indeed, the First Minister has indicated that it would only be possible to set up a fund as and when fiscal conditions were possible.

Q14 Albert Owen: Is that what he said?

Professor Armstrong: Yes, he has said that.

Q15 Albert Owen: I do not want to misquote him in any way, but he has talked about a proposal to invest £1 billion to create an oil fund, over £30 billion in 20 years. Do you think that could be achieved?

Professor Armstrong: Arithmetically I think I have shown that it is possible and I think also the First Minister indicated that the oil fund would only happen as and when fiscal conditions were capable for that to happen. So arithmetically you can get it but where do you get your £1 billion from?

Q16 Albert Owen: At what rate of return? At 4%?

Professor Armstrong: 4% is what you would need to have, assuming a 2% inflation rate, and the 4% really is based on what the Norwegian fund is currently targeted to deliver.

Q17 Albert Owen: That is not the figures that we have been given. Again, I am no expert on this so I am asking the questions, but the figures we have been given show that since 1998 the maximum rate of return achieved by the Norwegian fund is 2.9%, so that would not raise £30 billion.

Professor Armstrong: The 4% is their target. I think the evidence would suggest they haven’t achieved that 4% but that is still their target.

Q18 Albert Owen: But there is no evidence that that has been achieved anywhere else with an oil fund in any other country?

Professor Armstrong: I think it depends on what timescale you are looking at and which oil fund.

Q19 Albert Owen: The timescale the First Minister has talked about is over 20 years. I know rates fluctuate, but he is just guessing at it, then?

Professor Armstrong: The arithmetic is possible to get the £30 billion. Quite where you would put it would depend on which stock markets, which property arrangements, which investment funds you would be seeking to put it in.

Q20 Albert Owen: Sure, but the Norwegians are very canny people as well, aren’t they?

Professor Armstrong: Yes, and they have had fluctuations too so, again, it does depend over which timeframe you are measuring it.

Q21 Albert Owen: Would you like to comment on the projection that the First Minister has said? Do you think that is a realistic target, £30 billion over 20 years?

Professor Kemp: I would like to see how the calculation is worked out. It is very difficult to give an appraisal of just a headline figure like that.

Q22 Albert Owen: I am sorry, but he is saying it is a key economic driver for an independent Scotland, so we are asking a pretty legitimate question here. If an oil fund was set up, would you get that kind of rate of return? I am sure the Scottish Government will be putting that to the people of Scotland in the run-up to a referendum on independence.

Professor Kemp: Yes, it is a legitimate question to ask the Minister, because he said it, not I.

Q23 Albert Owen: We will ask the Minister. We have a Minister coming in this morning, but we really do value your opinions.

Professor Kemp: Oil funds round the world have different rules but quite a few of them have fund managers and over the last decade or so it has been quite difficult for fund managers of pension funds. I am a member of the investment committee at my university. We change our fund managers and they all promise but they don’t actually have a very big return. The last decade, this century, has not been good for any returns on pension funds or sovereign wealth funds at all so I am not surprised that the Norwegian oil fund has not had a big return. It is the same with just about every other fund.

Q24 Albert Owen: But since 1998? What about the boom years?

Professor Kemp: Remember the FTSE index was 36,930 in December 1999. What is it now? About 5,700? So that is an indication of how difficult it is for any fund manager to make big returns but at least they are just about preserving their wealth. That would be the first point, preserving the value of the fund rather than dissipating it.

Q25 Albert Owen: Just to come back to you, Professor Armstrong, you said, basically, it depends what it is being spent on. Isn’t there a danger that money set aside will be taken away from the very infrastructure projects that have been ongoing for the last decade and are proposed for the next decade? There just isn’t enough money to go round.

Professor Armstrong: I certainly wouldn’t want to put words in the First Minister’s mouth. That would be definitely the wrong thing to do. But certainly I think the whole issue about borrowing capacity and seeking to borrow to fund infrastructure is clearly a strong desire, a strong wish to use that as a route for funding infrastructure. We have said in our paper that while a wealth fund or an oil fund would be justifiable on intergenerational grounds and potentially economic grounds, if you have the kind of looming Dutch disease coming through from Scotland’s point of view, it is difficult to see where you are going to find that £1 billion, and it is £1 billion locked away year on year for the next 20 years. It is not that you can dip in and dip out. You are losing £20 billion-plus in real terms of spending capacity. So, yes, it is a big issue about whether it is the best use of those scarce resources and some assessment of value for money ought to be done to determine whether it is best to put it in that or put it into infrastructure, be that broadband or roads or rail infrastructure.

Q26 John Robertson: As for the fund itself, according to the figures I have, the clean-up process that would be needed by 2040 comes to about £30 billion. £30 billion to clean up the North Sea from old rigs and various bits and pieces, and I think that only covers 50% of it, which is the UK obligation to it and they said that they will pay for half of the clean-up. Allowing for the fact that independence comes along, then that 50% clean-up would, of course, transfer to the owners of the area, which would be Scotland. So how are they going to find £30 billion by 2040, even with this fund, to do this clean-up?

Professor Kemp: First of all, I am agreeing with your figure on the possible decommissioning costs over the next 30 years. Our independent modelling suggests that £30 billion is on the cards and, by the way, the bulk of that would be in what would become Scottish waters because the most extensive platforms are in the East Shetland basin. They are very big ones and they will most certainly be in Scottish waters. If there were separation, the costs would be tax deductible against the income generated within what would be the Scottish waters. There is no doubt about it, that is an extra cost.

Q27 John Robertson: Sorry, just to interrupt. We were talking about the First Minister said he was going to have his £1 billion and then he was going to get up to £30 billion and Professor Armstrong said that they were trying, if I am right, to borrow on the back of something like this fund.

Professor Armstrong: No. They are two separate things.

Q28 John Robertson: No? Did I misunderstand you? Okay. But how could you borrow when you know you have got a bill of £30 billion sitting there?

Professor Armstrong: Well, in my understanding it would be coming through the tax.

Professor Kemp: The £30 billion would be tax deductible. That is what it is. They would reduce the net tax receipts, but over the 30-year period-

Q29 John Robertson: Could you explain that? I am not an economist so tax deductible doesn’t mean an awful lot to me. All I know is that if the place needs cleaning up, how does it get cleaned up?

Professor Kemp: The decommissioning costs are a deduction against the revenue tax, the corporation tax, the supplementary charge. What that means is that the taxpayer would, in effect, be funding, we think, between 50% and 60%-odd, depending on which taxes are applicable of those costs.

Q30 John Robertson: So the fund would not be involved? It would just be the taxpayer that pays it?

Professor Kemp: It would be the tax revenues that would be reduced because of the tax deductibility of the costs, yes. Of course, over the 30-year period it will certainly be that, there will be a lot more costs as well, but there will be a lot more revenues and we have to see where the balance lies. What we have found is that we can see production on a significant scale continuing beyond 2042-we stopped our modelling after 30 years-and some fields will go to 2050. So there will be tax revenues all through that period, which will certainly be enough to cover all the costs of investment and decommissioning.

Q31 John Robertson: There would be no money to surely invest-

Professor Kemp: How much will remain as net tax revenues? We would have to do quite a lot of modelling to see it.

John Robertson: No, I appreciate that.

Q32 Sir Robert Smith: That goes back to Professor Armstrong’s point that you can get a nice simple formula that says £1 billion in per year plus a return of 4%, because that is what the Norwegian target is even though they haven’t achieved it, gives you £30 billion, but missing from that equation is where the £1 billion comes from and how you get the 4%.

Professor Kemp: Yes. On the tax revenues, I said in my report to you that we can certainly do the modelling but it is a quite time consuming piece of work. I gave a guesstimate for the next 10 years that the net tax revenues annually could be between £5 billion and £10 billion, depending on what oil prices are and what investment and capital allowances are and what production there is.

Q33 Sir Robert Smith: I suppose the Minister has to explain in terms of what DECC have to prepare for and what the Scottish Government have to prepare for in the event of a decision to separate the two, because there is a lot of uncertainty for investors in knowing-just now the Chancellor is coming up with guarantees on decommissioning costs. Those would have to be transferred across. The history of this country being intertwined for 300 years means that health and safety is a UK-wide element and at a time of skill shortages there is going to have to be two health and safety regimes for the English, Welsh and Northern Ireland and for Scotland. Similarly, the licensing and the environmental controls. There is a lot of thought still needs to be put forward as to how-

Professor Kemp: Absolutely, and in my paper to you I did emphasise these problems of what happens to the licences, some of which have 20, 30 years to go. Would a Scottish Government honour them? Then there is all the knowledge required to monitor the progress of licence obligations, like development plans, decommissioning plans, the fallow initiative, stewardship initiative on the licences. A lot of expertise is embedded in the Department of Energy here in London and a Scottish Government would have to acquire expertise in that. Similarly with the taxation issues, the main taxes now, corporation tax and supplementary charge, apply on a UKCS-wide basis, so if you had a dividing line then there would be issues that you could not offset costs in one area against the income in another area. Also, just to understand the tax positions of different licensees, HMRC in London has a big database and the files are very involved, and HSE as well, so there would be a lot of issues like that, which would have to be settled if investors weren’t going to be unsettled.

Q34 Sir Robert Smith: In that sense of investment unsettlement, obviously the investors are making it clear they do not want to fall out with the current Scottish Administration or with the UK Government and they also recognise that in a democracy it is up to the people to choose their destination and where they want to go and they have to work with the consequences. But from an investor point of view, would it seem to make sense that the decision on whether to separate or not should be taken as soon as practically possible to end one uncertainty factor in their minds?

Professor Kemp: I can understand that. On the other hand, if you want to have an informed electorate when the referendum comes, there are a whole lot of issues, not only relating to oil and gas, which I think I have unveiled a bit in my paper to you. There are so many other aspects of the economy and elsewhere that haven’t been properly debated and researched. So an informed electorate hopefully would make a more informed decision. I don’t think there is yet enough information on a lot of the issues.

Q35 Sir Robert Smith: We have been concentrating on the specific North Sea related tax, but some companies have put it to me that in deciding where to base- obviously their frontline operations go to wherever the operations go but one of the holy grails of having our North Sea is to try to locate as many global offices and regional offices into the UK-one of their other uncertainties is all the employment taxation and employment conditions and whether you would locate people in a separate Scotland or south of the border in the remainder of the UK for those wider operations.

Professor Kemp: Yes, I can understand that, especially when taxes start to vary, whether employment or corporate taxes start to vary in Scotland compared to the rest of the UK. It reminds me of when I was writing my history book of the North Sea of the situation in the Frigg gas field where there was an accommodation platform that serviced the platforms on the Norwegian side and on the UK side. All the people wanted to work on the UK side, even though they were Norwegians, and this was because Norwegian taxes were much higher and eventually a formula had to be designed for part of the time in the UK and part of the time in Norway. So, I agree, these issues could arise if taxes start diverging and the location of the tax point becomes an issue. At the moment, for tax purposes in the North Sea you have to have an office. You can have a branch of a foreign company but it has to be located in the UK and that becomes the taxable point. There could be a question whether that is in Scotland or in England.

Professor Armstrong: We do already have uncertainty in tax. We have new tax powers in Scotland. The Welsh Assembly is looking for new tax powers. Northern Ireland is looking for corporation tax devolution. So the uncertainty around tax is here. We are talking about a different type of uncertainty and one that is more complex and potentially more wide reaching, but uncertainty is now here and it is something that investors are going to have to come to terms with.

Q36 John Robertson: Is it likely that an independent Scotland would continue to be part of an existing GB energy market under the BETTA?

Professor Kemp: That is the electricity trading arrangement? Well, I would guess so but I am not claiming to have particular direct expertise on that. I think it would certainly be in the interests of both Scotland and the rest of the UK if the BETTA arrangements continued.

Q37 John Robertson: What kind of arrangements would be required for that? Would it cost money to do it?

Professor Kemp: I would have thought it would just be an agreement that those BETTA arrangements continued.

Q38 John Robertson: Another one on independence. Does Scottish independence mean that Scotland would need its own separate energy regulator?

Professor Kemp: I think we are particularly prepared and have expertise in the oil and gas sector, and regulators could mean electricity and so on, which maybe I shouldn’t speak about. But for the oil, it is almost certainly the case, virtually certain, that a Scottish Government would want to have its own Department of Energy and to fulfil the licensing and related obligations currently undertaken by the Department of Energy. So in my paper to you I did say that that would be one of the issues, getting the expertise in that. I just can’t imagine that a Scottish Government would do any other than have its own Department of Energy.

Q39 John Robertson: Given that charges on either side of the border would ultimately become different, what would happen under those circumstances? That is an economic question. If prices are dearer in England or prices are dearer in Scotland-

Professor Kemp: You mean for energy, for petrol and-

John Robertson: Well, for energy itself.

Professor Armstrong: But the prices are different across the regions of the UK.

Q40 John Robertson: Yes, but it is one country at the moment. If you have two different countries with two systems, two different regulators, what needs to be there to allow that to happen? At the end of the day somebody has to pay somebody the balance.

Professor Armstrong: I am not too sure. Do you think it is taxation or just consumer charges?

Q41 John Robertson: Let me ask you a question, just to go back to the oil point for a second. Professor Armstrong, you said that there is an uncertainty around taxation. Going back to the £1 billion for the oil fund, would it lead to public spending cuts in Scotland, especially as the Prime Minister has said it is going to allow Scotland to have its own tax-raising powers? Would that affect it in the increase or decrease?

Professor Armstrong: Scotland does have its own tax-raising powers.

Q42 John Robertson: Yes, it just doesn’t use them, but they are going to have a lot more.

Professor Armstrong: It is going to have more and it will have the flexibility, therefore, to decide whether or not it raises more to allow £1 billion of oil revenue for the fund.

John Robertson: So is it likely that-

Professor Armstrong: The current numbers suggest that if you put £1 billion of North Sea funds into a separate oil fund you are having to cut £1 billion of spending somewhere else unless you get significant efficiency savings. Politicians across the land have argued for efficiency savings as a way of-

John Robertson: Never managed it.

Professor Armstrong: Well, they also argue that they have delivered it, so I suspect it is also part of a way of making people be more efficient. But at the moment the numbers that we have for Scotland-and the numbers on expenditure and revenues are at best guess estimates because we don’t have a set of independent accounts for Scotland-would suggest £1 billion for a fund means £1 billion of cuts somewhere or efficiency savings or raising taxes elsewhere to compensate.

Q43 John Robertson: Can I ask you a question about the sort of exploitation we were talking about earlier and about the agreements and licences that have been issued under the UK. How does that happen with Scottish independence? Who would be liable for any remuneration under the circumstances? What would happen there?

Professor Kemp: What I said in my memorandum is that that would certainly be an issue requiring clarification. The obvious thing to do to minimise the transitional problem would be for a Scottish Government to honour these licences and in effect take over those that were applicable to the Scottish sector.

Q44 John Robertson: What about the payment for all the investment that has been done, which has been billed through the UK Government? Would payment have been made to the UK Government for taking things over? Subsidies have been made and the subsidies have not been made by Scottish taxpayers only. They have been made by UK taxpayers.

Professor Armstrong: And UK taxpayers have received all the tax revenues.

Q45 John Robertson: As has Scotland, if you transfer something that has value.

Professor Kemp: There are not subsidies in the oil and gas. Maybe in the electricity but not in the oil and gas. They are all paying taxes.

John Robertson: Money that has been subsidised to build things?

Q46 Sir Robert Smith: I suppose the point John is making is the net tax take for the UK has been how the investment has been made and so the UK has shared that cost of not forgoing tax to make the investment and now you are separating and allocating it to a different jurisdiction.

Professor Kemp: I think I see what you mean. The capital allowances to develop fields are not set against tax and that reduces the tax take at that time. After that, of course you get tax payment. Is that what you mean? If we are developing a field now, that will generate capital allowances, that will reduce the tax take, but in a few years time you will get tax revenue and it is going to be independent in the intervening period? Okay.

Professor Armstrong: I suppose a discounted cash flow analysis could be done of the value of the capital allowances versus the value of the revenues received and if there was a mismatch then-

Q47 John Robertson: And possibly the revenues that you might have already taken into consideration for your budgets without independence. What happens there? Governments still have to budget. We have to budget beyond 2015, say. If an independent Scotland has come along, the UK will still have budgeted up to that point and beyond for the United Kingdom being as one nation. The uncertainty of going into independence will therefore have a detrimental effect on the budgets that have already been set by the UK Government.

Professor Armstrong: Well, that is right.

Professor Kemp: Yes, but the UK Government would have less expenditure. It wouldn’t have the burden.

Q48 John Robertson: They would have the set-ups there, there is no doubt about it, and obviously the Scottish Government would have to set these things up. Is it that expensive?

Professor Armstrong: To set up all sorts of new governance arrangements?

John Robertson: Yes.

Professor Armstrong: We don’t have a revenue and tax regime, for example. We don’t have anybody to collect taxes. We don’t have a Treasury.

Q49 John Robertson: What does that cost?

Professor Armstrong: I should imagine it costs more than you might like to think. Currently we are paying a share of that, effectively what is classified as non-identifiable expenditure in the public accounts. Scotland pays its share of those costs, which are effectively national costs or treasury.

Q50 John Robertson: How long do you think it would take to put all that together and just set a value on it if we started today?

Professor Armstrong: That is not something I have any knowledge of.

Q51 John Robertson: Guess. Years? Five minutes?

Professor Armstrong: I am not prepared to go down that-

Q52 Laura Sandys: A small question but you are funded-or you are partners in universities-by some of the largest investors in the oil and gas sector plus some of the operators.

Professor Armstrong: I am not funded by anybody in the oil sector.

Q53 Laura Sandys: All right, but these are people that you work with in terms of the research you do. When you ask them, are they enthusiastic or are they negative about the possibility of Scottish independence?

Professor Armstrong: I don’t work with any of the oil companies.

Q54 Laura Sandys: Have they not brought this subject up or discussed it in any way?

Professor Kemp: They generally don’t want to get involved in the political debate.

Q55 Laura Sandys: But does it make their investment more certain or less certain? How much is this adding to their risk?

Professor Kemp: As I indicated in my paper to you, there are a whole range of issues that need to be resolved if independence were to happen, which clearly affect the oil companies, like the future of their licences and their tax position.

Q56 Laura Sandys: Do they feel this has thrown up a lot of risk in their investment profile into the future?

Professor Kemp: In general around the world they acknowledge political risk. The UK is regarded as high political risk because in the last 10 years there has been a jump in tax three times out of the blue. The UK is high political risk for a lot of investors who have been caught three times just in the last 10 years, so this is just another one.

Q57 Chair: This is a very important point and we are certainly aware of the concerns of the industry about sudden tax changes. It has been a hot issue for some time. Are you saying that the possibility of Scottish independence does not in any way increase the political risk that the industry already faces?

Professor Kemp: Clearly there is an additional uncertainty. There must be, yes. I am saying that, and in my paper to you I elucidated the nature of these risks on the future of the licences, the working of the tax system, HSE. All that kind of thing has not been clarified.

Q58 Sir Robert Smith: One of the overlaps between the earlier discussion on electricity and the discussion on oil and gas, of course, is the potential for carbon capture and storage. In the first stage there is a competition to try and provide some capital funds but the longer term lure is a contract for difference where the consumer will pay for the costs of the CCS through their bill. Is there also an uncertainty to be thought of as to where you locate your CCS operation in terms of getting a return on that investment?

Professor Armstrong: Certainly some of the written submissions to this Committee clearly indicate that if you don’t know who your counterparty is or if your counterparty is in a different region and you don’t have a contract at the moment then if that creates that uncertainty it might argue for not being in Scotland.

Professor Kemp: There are plenty of other areas where clarification on the implications of independence are required. With respect to your specific question, yes, clearly we don’t know what the policy of a Scottish Government would be with respect to incentivising low carbon investments like a CCS, carbon capture and storage. Again, it is another area where clarification is desirable.

Q59 Dr Whitehead: If the assumption would be, in terms of an independent Scotland, that the better system would be maintained, that is the balancing, settlement and dispatch arrangements would be identical therefore across the whole of the two countries subsequently, how would that then affect consequential possibilities of decisions by the Scottish Government in future, for example about differential taxation rates as far as energy prices are concerned, and indeed balancing requirements as far as the particular make-up of Scottish energy supplies are concerned?

Professor Armstrong: Anything to do with what the Scottish Government’s plans might be clearly have to be put to the Scottish Government and how they think those mechanisms are going to operate. I think what we are suggesting at the moment is that there is an awful lot of questions that need to be posed and answers given to get greater clarity and therefore reduce the uncertainty and the risks for any investment.

Q60 Dr Whitehead: I am making the assumption that an independent Scotland would, of course, have its own ability to raise or lower taxation on any particular product or service. As Professor Kemp has mentioned in his written submission to this Committee, there are a number of pipeline transfers originating in Scotland and landing in north-east England. There are requirements for export of Scottish power for a large number of grid strengthening operations to be undertaken. In your view, how would those reconcile themselves with the possibility of differential tax arrangements as far as both energy supplies and energy balancing arrangements were concerned within Scotland subsequently? Would it inevitably be necessary that two different systems would have to emerge unless it were the case that the Scottish Government were to undertake a voluntary agreement never to alter the taxation arrangements or diverge those from those of England, Wales and Northern Ireland?

Professor Armstrong: One might argue whether there are direct comparisons here, but how does the tax regime affect pricing for gas across the interconnector between the UK and the Continent, for example? Clearly any Government looking at its tax levers needs to understand the broader commercial implications of any tax differentiation it might put in place. The reality of most taxes is that, certainly on the corporate side, the level of flexibility is much less in reality, what levers can you pull will be far fewer than you might want to do from a political perspective. So you are limited by what the market is going to allow you to put in place. Would we have differential taxation? Potentially. Is it likely to be significantly different? Not if it is going to detrimentally affect the wider business interests. So I am not sure the reality of your question might be significantly different from what is currently being proposed.

Chair: I think that our next witness has been waiting a little while. We had probably better draw this to a close now. Thank you very much indeed for coming in and giving us some interesting answers to reflect on.

Examination of Witnesses

Witnesses: Fergus Ewing MSP, Minister for Energy, Enterprise and Tourism, Scottish Government, and David Wilson, Director of Energy and Climate Change, Scotland, gave evidence.

Q61 Chair: Minister, good morning. Do you have a colleague who is about to join you?

Fergus Ewing: Yes, I do. I think he is just outside.

Chair: He is allowed in if he wants to come in. May I welcome you very warmly while we are waiting for him. We are very grateful to you for coming to give evidence to us today. I think it is, certainly during my chairmanship, the first time that a Member of the Scottish Parliament has appeared before this Committee as a witness and if that makes it an historic occasion, then we welcome that very much. Would you like to introduce your colleague now that he is here?

Fergus Ewing: Yes, certainly. David Wilson is the head official in the Scottish Government’s Energy Department.

Q62 Chair: Thank you. The enormous success of the SNP in the last few years has meant that we now have to take the possibility of Scottish independence seriously. It is an issue on the agenda that perhaps before has been regarded as completely hypothetical, but no longer. Would you agree that that success unfortunately has had the effect of creating a huge new element of uncertainty and that in an industry like energy, which depends entirely on investors making very long-term decisions, the direct and unavoidable consequence of the success of the SNP has been to raise the cost of capital for investment in Scotland’s energy industry?

Fergus Ewing: Thank you for your opening remarks, Mr Chairman. We are always keen to make history, especially in Scotland, so I am delighted if we are making perhaps a footnote in history today by this appearance.

To answer your question directly, no, I don’t agree with that. Plainly nothing is certain in life. Predictions made by politicians, economists, racing tipsters and astrologers cannot with absolutely certainty predict what is going to happen in the future. I think all of those who are in business, and I think that is the essential thrust of your question, recognise that all business decisions involve an element of risk and whether or not to proceed with a development is all about the management of that risk.

To answer your question in a different way, I think the record shows, Mr Chairman, that even since the, as you termed it, historic victory last May there has been very substantial investment in Scotland in the energy sector. I think that allows us to argue with some confidence, based on a series of facts of investment decisions, a list of which I have here that I am very happy to share with the Committee, that these decisions taken by major companies throughout the world show that there is not a lack of confidence in Scotland. For example, I can just mention a few of the most recent decisions taken by actual investors, major companies in the world. In the last few weeks we have seen Gamesa choose to locate in Leith rather than in Hartlepool, and I should say that the Scottish National Party wishes England to succeed and Scotland to succeed. We wish to have even more harmonious relations between us following independence. Gamesa’s investment will create perhaps 800 jobs and investment of £125 million. That has closely followed investment announced by Samsung in Methil in Fife of around about the same order. It has also followed in the last few weeks a very substantial announcement by Global Energy in Nigg, which has significant plans in the energy sector to create up to 2,000 jobs, initially in oil and gas but subsequently in renewables. Of course, perhaps tellingly, there has just been announced in the past few weeks the fast tracking of the decision to allow significant upgrading of the Scottish grid, ahead of our friends down south I believe, although I am not an expert in the matters down south. That investment will see fast tracked £7,000 million of investment in the grid.

Would these investments be made if the world was afraid of coming to Scotland? I don’t think so. I think that is the view of a very large number of commentators, although I would submit, Mr Chairman, that more significance should be given to decisions made by actual investors rather than to commentators, no matter how distinguished or illustrious they may be. Be that as it may, there has been a whole raft of commentators from Mary Robinson to Al Gore to Institute of Directors’ spokespeople through to consultants in the energy field who have argued, and I think on the basis of a factual grounding of what has actually happened in Scotland, that Scotland is a great place to invest in renewables.

I don’t have the exact quote in front of me but I think I can remember its thrust that the head of Vattenfall, a significant company involved in this, recognised that one of the reasons why Scotland is a great place to invest is the strong leadership from the First Minister, Alex Salmond, and in my humble way, I guess, from myself as Minister for Energy. Therefore, that strong leadership, combined with a goodly proportion, if I could put this way, of the wave and tidal and offshore wind and onshore wind capacity, mean that Scotland is a terrific place to invest.

My message here today is that we see the opportunities for an integrated UK energy market as providing the best continuing means of realising the economic, environmental and social benefits of the policies, that we have respectively espoused north and south of the border, for many decades to come.

Q63 Chair: Thank you for the commercial. Why does the Scottish Government think that the economic benefits from the North Sea have yet to peak?

Fergus Ewing: I am sorry, could you repeat the question?

Chair: Why does the Scottish Government say that the economic benefits of the North Sea have yet to reach their peak?

Fergus Ewing: That is not the way that I have characterised this particular quote. I am not aware specifically of the quote to which you are referring, but plainly if we look at oil and gas and the history of oil and gas in Scotland we see that so far the UK Government has accreted around £170,000 million but we understand that from analyses of the remaining reserves of oil and gas there are huge benefits yet to come, economic benefits total around £1.5 trillion, although all these figures are dependent upon a large number of calculations that are dependent upon the oil price, Mr Chairman, obviously.

But it does seem to us from our perspective in Scotland that those in particularly the Treasury in Westminster in relation to their approach to Scotland’s oil or North Sea oil, whatever you want to call it, have been proceeding on the assumption that it was about to run out every 10 years. That has been unfortunate because, apart from anything else, it has meant that young people have perhaps been deterred from pursuing a career in oil and gas because they have thought, because the Government has perhaps indicated thus, that it was about to run out. I think it is now clear, and I think Charles Hendry recognised in one of his recent visits to Scotland-and I have very good relations with Charles-that oil and gas is here to stay in Scotland and that there are three or four decades of oil and gas yet to come. That is just indubitably the case.

The question really, though, is are there the right policies, particularly fiscal policies, to ensure that there is a reasonable opportunity that those oil and gas reserves, much of them in small fields, which are not like the Forties field or so on, can be viably extracted, and that takes us on to another debate. But it is absolutely clear, Mr Chairman, that the value of Scotland’s oil and gas reserves at £1.5 trillion is absolutely extraordinary and therefore it behoves us to ensure that that second opportunity for Scotland is grasped with both hands and effectively husbanded and stewarded.

Q64 Chair: Just for reference, the quotation I referred to was from a publication, An oil fund for Scotland: Taking forward our National Conversation, in which the Scottish Government said, "While North Sea production may have peaked, the value of future production is likely to increase with the possibility that the full economic benefit to Scotland has yet to peak". Can we move on to what will happen in the event of independence to the tax revenues from oil and gas production? How do you propose that those should be allocated, as between Scotland and England?

Fergus Ewing: Plainly, this is a hugely important question. I think the first question, Mr Chairman, it seems to me, is to determine under international law to whom the assets would belong. Although I am a lawyer, I make absolutely no claim to be an expert in these matters but I think it has been long argued, and I believe fairly established from my perspective, that the principle of the meridian line, that is all points from the dividing line are the same distance from the Scottish and the rest of the UK coastline, is broadly known as the principle of equidistance and that that principle is enshrined under international law. We are all bound by the law whether or not we like, and sometimes we may dislike laws and quite frequently, but we are bound by them and in democracies we operate by them, whether they are local, national, EU or international. It does seem to me that given the international law on the basis of equidistance, with the benefits of those oil and gas revenues, we would calculate that the lion’s share of the remaining oil and gas would accrue to Scotland, lying in Scotland’s international waters. That would mean that Scotland would be an exceptionally wealthy country; in fact, by our analysis, including oil and gas revenues, sixth in the OECD by reference to GDP per head.

I suppose the absolute answer is, firstly, international law has to be looked at and then, secondly, plainly there are discussions to be had with the UK Government on these and other matters, but I believe these discussions should proceed on the basis of goodwill and common sense.

Q65 Chair: So the financial costs for any clean-up would also be allocated on the same basis?

Fergus Ewing: Which financial costs are you referring to?

Q66 Chair: In the event that North Sea assets have to be decommissioned at some cost to operators or the public sector, responsibility for those assets that lay in the waters that Scotland is laying claim to under international law, the liabilities will arise in the same way?

Fergus Ewing: That is not how I see it, Mr Chairman, so perhaps I can just set out how I see it for the benefit of-can I perhaps answer your question?

Q67 John Robertson: By 2040, £30 billion is going to be required for clean-up. Under the UK, the UK Government has to pay that. If you are in charge of it and you own these oil rigs do you have to pay for it?

Fergus Ewing: Mr Robertson has put the question in a slightly different way, both in tone and substance.

John Robertson: I am trying to make it easy for you.

Fergus Ewing: That is extremely kind of you, but I think I can answer the question fairly clearly. The question of future entitlement is based under international law. The question of past history, past obligations is somewhat different and plainly, given the UK has received £170,000 million from oil drilled by rigs that have to be decommissioned, then the UK has already received the revenue in respect of those rigs. It would seem to us to be reasonable to suggest that having received all the revenue-none of which has accrued to Scotland in comparison with Norway, which has a massive oil fund, having used the funds prudently-the costs that accrue from the revenue, which has accrued entirely to the UK, should in principle be a UK responsibility.

Q68 John Robertson: I find that absolutely incredible. Scotland has benefited as much from oil as any other country within the United Kingdom and as part we have our obligations, we are British, and therefore we have got this money. Tell me if I am right, you are saying that as an independent Scotland not only do you want to control whatever oil and gas is out in the oil and gas fields for Scotland alone but you also want to make sure that the UK Government pays for any clean-up that will subsequently happen in 28 years time. Is that what you are saying? How would that hold up in a court of law? You are a lawyer. You should know that.

Fergus Ewing: I think it is fair to say, Mr Chairman, that it is unlikely there is going to be a broad meeting of minds between myself and Mr Robertson today on this, and I suspect on many other matters, but can I perhaps answer his question thus. If one looks at countries that have discovered oil, Norway established its oil fund in 1990. It didn’t actually make investments until 1996 but, be that as it may, in the relatively short period since 1996 it is currently worth £330,000 million. Scotland has an oil fund of zero. If we look at other countries or states that have funds of this nature we see Alberta and Alaska. Western Australia announced on 22 February this year that it was about to establish a fund in order to ensure that it does not lose the benefit of the massive mineral wealth that is being extracted in Western Australia, which I am sure Members will be extremely well aware of. So it is creating its sovereign wealth fund there. I think it is reasonable, Mr Chairman, to expound the principle that a country, a state, that discovers a huge windfall of benefit should be able to ensure that its citizenry benefits in the future and future generations benefit, not simply those who were alive at the time when the wealth was created. That idea of a legacy seems to me to be prudent management. Unfortunately, it has not happened in Scotland and I think it is reasonable for us to make that point here this morning.

Q69 Sir Robert Smith: How would it work with an asset that had been producing for a certain length of time, was transferred, in the event of a decision for independence in a referendum, to be a Scottish asset but still had 20 years life in it? How would you apportion the benefit and the costs between the two regimes?

Fergus Ewing: I think I have really answered in principle that international law will determine the issue of entitlement.

Q70 Sir Robert Smith: No, the decommissioning. You are saying that the remainder of the UK should pick up all the decommissioning costs for the Scottish waters.

Fergus Ewing: Decommissioning, as Sir Robert Smith, knows is a highly difficult and complex matter and in fact we still do not know what proposals are going to arise from this year’s Budget. There is to be a consultation. But in relation to future arrangements for decommissioning, once those UK fiscal measures and once the consultation issues, proposals, are clearer, we will be better able to examine these matters. Plainly, decommissioning is a cost liability in respect of major oil developers, and indeed that liability has passed on, I understand, from every company that has owned a particular field, which, as Sir Robert Smith knows, causes problem. But in principle, given that the UK has received substantial revenue from these rigs, it seems correct that the UK has a moral and certainly a legal obligation to be responsible for the decommissioning of these rigs. It has already happened in the past.

Q71 Dan Byles: Could Scotland not at least share some of the decommissioning costs?

Fergus Ewing: I think the point is if there is a rig that is still going to produce oil and gas for, say, 20, 25 years then perhaps some of that cost should be shared.

Q72 Dan Byles: Did Scotland not share in the past benefits?

Fergus Ewing: Who do you want me to answer, Mr Chairman, him or him?

Chair: Robert first.

Q73 Sir Robert Smith: Did not though the UK, out of the tax incentives and tax reliefs, invest in that asset that would then be producing a revenue that the UK would no longer be getting? It does not seem quite so simple to say because it was built before independence all the liability has to transfer or does not have to transfer, even if it continues to function after independence. Surely the benefit has been capped to the original entity that made the investment and there is going to be a continuing cost.

Fergus Ewing: I think, characteristically, Sir Robert makes the point reasonably and plainly. I think it would be reasonable to consider and look at a principle for resolving this particular matter on the basis that decommissioning relief provided to a given field should be met by the Scottish and UK Governments in proportion to their share of the tax revenue received from the field. That would be one way in which I think it would be reasonable to look at these matters, but I emphasise that I am simply offering an off-the-cuff opinion in the interests of being co-operative for the purposes of these proceedings today.

Chair: Your co-operation is very much appreciated.

Q74 Albert Owen: Just before I go on to the oil fund for Scotland, thank you for providing the list of these recent investments in Scotland. I have just had a chance to briefly look at them and one of them, for instance, has a prediction that some £750 million of renewable energy projects have been delivered in the last 12 months. You are not suggesting that it was started and finished in 12 months because of the Scottish Government change? There have been investments over many, many decades in Scotland as part of the United Kingdom. This is not a new phenomenon that companies are coming into Scotland. You were not making that point, were you?

Fergus Ewing: I was making the point that the £750 million of renewable electricity projects, that figure was provided by Scottish Renewables, which is a well respected body in Scotland, and this is following work carried out by Mott MacDonald, who Members will know are a firm of high repute in these areas. Of course, all these projects will not have been started and finished-

Q75 Albert Owen: That was my point. The way you have produced this was to give the impression that since the Scottish Government has come in all this investment has followed into Scotland. I am just asking you a perfectly sensible question, that many of these projects will have started prior to the change of Government over many years.

Fergus Ewing: I understand that the projects have-

Q76 Albert Owen: It is a simple question. You keep overriding and putting your points. I am just asking a very simple question, that this investment may or may not have happened had the Scottish Nationalists not been in power.

Fergus Ewing: Well, that is asking me to answer an hypothesis.

Q77 Albert Owen: Some of the projects had already started before the SNP came into government.

Fergus Ewing: You said would this investment have happened if we were not in power. That is a hypothetical question. I can’t answer that but can I just address the point-

Q78 Albert Owen: Can I just say I did work in the North Sea in the 1970s. There was no SNP in power then and companies were investing in Scotland, so I am just making that point to counter the point that you have made.

Fergus Ewing: That is fine, I accept that. Perhaps if I may, Mr Chairman, just offer an explanation that the Scottish National Party did not just come to be the Government in Scotland in 2011. We were the Government from 2007 and we have made it fairly clear, I think, it is certainly no secret, as from 2007 and a long time prior to that that we wished to hold a referendum on the future of Scotland’s governance, and in particular proposing independence for our country.

Sir Robert Smith: Not in any hurry.

Fergus Ewing: Well, that is another debate. I think it is right that people should have the time to study these matters carefully, Mr Chairman, and this proceeding, I hope, will contribute towards that. But these decisions were made-£750 million of investment since the SNP came to power in the knowledge that we proposed a referendum on independence. So none of this investment was made other than in the circumstance where the investors knew that we going to hold a referendum.

Albert Owen: With respect, you have made the point.

Chair: The date of the Scottish referendum I think falls outside the responsibilities of this Committee, although some of us feel that as the SNP had been planning this for five years perhaps they might now like to get on with it, but we will let others be the judge of that.

Q79 Albert Owen: My point was it would have been nice to have a piece of paper from you looking at investments in Scotland over the last 30 years and projecting it into the future maybe, rather than just give it for this period that you have put in front of us. That was my point. That was the question I asked, had there been previous investment, and you acknowledged that there had been and there is likely to be in the future. You don’t see any big upheaval. Is that clear?

Fergus Ewing: Not really, no, but I am very happy to provide any further information that the Committee wishes. I don’t have notice of these questions so I think I can hardly be faulted for not providing that information.

Q80 Albert Owen: I am sorry, I don’t wish to get into a protracted argument with you but you have just presented this to us, which we have to digest when we are asking questions. I am saying that there has been previous investments over previous decades, substantially in Scotland as part of the United Kingdom. That is a fact, isn’t it?

Fergus Ewing: Of course there has been and we welcome that. Investment didn’t begin in 2007 nor have we suggested that is the case.

Q81 Albert Owen: Good. Thank you. On the oil fund for Scotland, I am not sure if you were in for the previous witnesses, but I asked the academics about this and they agreed with it in principle. But the question I want to ask you as a Government Minister is do you think it is right to set aside-let’s say the comprehensive spending review has already been set and independence happens within that period-£1 billion in a oil fund at a time when budgets are being cut in Scotland on services right across the board?

Fergus Ewing: Well, I am afraid I don’t again necessarily accept the assumptions that underlie that question but I think I have already argued quite clearly-

Q82 Albert Owen: Let me ask the question clearly then. Sorry, we are having a little bit of difficulty here. I am just saying to you if there was independent Scotland, at the first opportunity would you be setting aside £1 billion per annum?

Fergus Ewing: I think we really need to answer the question in a different way, Mr Chairman, and I mean this in all seriousness.

Q83 Albert Owen: No, I think we ask the questions and you answer them.

Fergus Ewing: Well, I try to answer them but it depends whether, Mr Chairman, I am going to be allowed to answer the question.

Chair: Let’s have the Minister’s answer. I am very interested to hear it.

Fergus Ewing: Yes, I thought you may be. Plainly, Mr Chairman, the ability to establish an oil fund depends upon the Scottish Government pursuing and continuing to pursue a series of prudent policies with regard to financial management of our overall handling of our responsibilities, but also it depends upon having a stable and effective fiscal regime for oil and gas. That is the key here. If there is a stable and effective fiscal regime for oil and gas in an independent Scotland, then and in those circumstances will there be continuing investment. As I know Sir Robert Smith knows, because he and I have worked very closely with people like Malcolm Webb on these issues, I think it is reasonable to say that the three tax changes that Professor Alex Kemp mentioned, especially the 2011 change, have undermined confidence in the UK as an oil and gas regime across the world. I know that from my year as Minister and I have just come back from a series of visits in the United States and Canada for a week, last week in fact. I know for a fact beyond peradventure that what has happened in the UK last year has substantially undermined that confidence. What is required is to restore that confidence as a sine qua non of success in pursuing the objectives of enhanced oil recovery and enhanced gas recovery.

Q84 Albert Owen With respect, I agree with you on that and we made that point to the British Minister at that time and I have raised the issue with the Chancellor as well, so there is no argument there. The question I am asking you is, if Scotland became independent, which is the purpose of having this inquiry in which you have agreed to take part, would money be set aside in a fund from year one of a Scottish Government, as the First Minister indicated in his London School of Economics speech, or would you wait for the economy to improve substantially so that you wouldn’t have to make cuts elsewhere? That is the question. I think it is a legitimate question.

Fergus Ewing: I expect that contributions to the oil fund would commence as soon as it was financially appropriate so to do. I would point out that in 1990 Norway established its oil fund but I am advised that it did not start making investments for six years. So, plainly, one can have an oil fund without an absolute priority of putting investment into it straight away. But the desire, as Mr Owen has said, is to proceed there as quickly as possible, subject to the financial circumstances prevailing at the time. I think, Mr Chairman, with respect, it is a bit like asking the Chancellor of the Exchequer, were he sitting here, to say what his next Budget is going to be, or indeed, his Budget the year after that. It is not something that I think it is reasonable to expect definitive answers to, although plainly the First Minister has set out the desired approach that we have.

Q85 Albert Owen: Minister, I don’t think I am misquoting the First Minister of Scotland when he said that he would settle on it when there is a deficit in Scotland’s balances of payments. He also said that over a 20-year period that that fund would grow to some £30 billion and it would be a main economic driver for a new Scottish Government. So that is the background at which I am asking the question. I am not-

Fergus Ewing: As it happens, I visited the Museum of Finance in New York where a man of Scottish descent, Alexander Hamilton, established the first deficit financing over strong opposition from Thomas Jefferson, if I correctly recall my recent tutorial. So deficits are sadly with us for a while. That does not mean that one cannot set aside money for future generations.

Q86 Albert Owen: I am sure your economics as well as your knowledge of history would say that that money would have to come from somewhere else, that if there was a settlement for Scotland over that period and you were putting £1 billion aside into an oil fund with that money accumulating at, say, 2% to 4% per annum, yes, for the future, the money would have to come from elsewhere. Public services would have to be cut. Do you see it that way?

Fergus Ewing: Public services have to be prudently managed in government and that is what we do and that is what we should continue to do. I think I have answered the last question in the way that I wish, it may not be absolutely to your liking.

Q87 Albert Owen: I will ask you another question then and I hope you will answer it clearer to me. With the predictions that you have for setting up this fund, based on the Norway model, £30 billion over 20 years would mean a 4% return. Do you expect that to happen? Have you worked out how you arrive at that conclusion or would you say the reality is that it would be closer to the Norwegian fund of some 2.9% rate of return per annum, so that would not give you £30 billion that the First Minister said it would?

Fergus Ewing: One can argue what future investment returns are going to be a year. I am not sure that I am an investment expert. For the record, Mr Chairman, I understand that Øystein Olsen, the Governor of the Norwegian Central Bank, said last week that they expected future real return should be 3% and not 4% based on its past performance. But be that as it may, it is not possible for me to state with accuracy what the future rates of return of this type are going to be. Plainly they will depend upon a variety of financial conditions prevailing at the time and, as I think I mentioned at the beginning, it is just not possible for us to be absolutely certain about things. Nor is it sensible for us to pretend to the public that we can be absolutely certain about what is going to happen in the future. That always seems to me to be riding for a fall.

Q88 Albert Owen: I totally agree, but there again earlier on you were making huge speculation about how rich Scotland would be if it had control over its own oil. So I think you are just as guilty of that as anybody else. But I was quoting the First Minister of Scotland who was making the case for independence, of which we are talking about here. He said they would get some £30 billion. It was not some Mystic Meg sort of character, it was the First Minister of Scotland. What you are saying is that you see it as the Minister of Energy, if you were responsible for energy in the future, that the fund would be set up when the economy is prudent to do so, when the economy is showing signs of greater recovery?

Fergus Ewing: That may be ab initio.

Albert Owen: I think I will leave it at that, Chair.

Q89 Chair: Just for absolute clarity, on the contributions, the £1 billion a year to the oil fund, I accept that we can’t predict how revenues will go in the future, we do not know. So let us look at the historical figures. Even including Scotland’s geographical share of North Sea oil revenues, there has not been a single year in the last decade where there was a surplus of £1 billion. There have been several years where there have been very substantial deficits, even after including Scotland’s geographical share of the North Sea oil revenues. Are you saying SNP policy would be, regardless of the fact that there has never been a year when there has been a surplus of £1 billion, even including the geographical share, that they would set aside £1 billion year at a time when, as Albert Owen mentioned, there may be other very severe budget cuts and prices?

Fergus Ewing: Perhaps I could answer that by saying that the statistics produced by independent civil servants called GERIS, which is Government Expenditure and Revenue in Scotland, and incidentally I am happy to provide more information-

Chair: I have it here myself.

Fergus Ewing: Right. They show that Scotland ran a current budget surplus in the following years, 2005-2006, 2006-2007, 2008-2009 compared with the last time that the UK ran current budget surplus was in 2001-2002. So there have been three years in relatively recent times where Scotland ran a current budget surplus.

Q90 Chair: The highest of those surpluses was £787 million?

Fergus Ewing: I don’t have the precise figures before me-

Chair: I will give them to you in that case. I have them for you. These are exactly the figures, in 2005-2006, £740 million, in 2006-2007, £704 million, in 2008-2009, £787 million. In 2009-2010, that surplus of £787 million turned into a deficit of £8.9 billion. Against that background are you saying, just to be absolutely clear, that the SNP Government, if Scotland was independent, would set aside £1 billion a year even when it was running a deficit of £9 billion?

Fergus Ewing: I have already said, Mr Chairman, what exactly we will do in the future will depend upon the circumstances prevailing at the time. I think I have established there has been a fairly substantial surplus and that that, therefore, would have allowed us, had we the power, to make provision into an oil fund in respect of at least those years of a fairly large sum of money in comparison with the oil fund we have at the moment, which is of course zero. I think the most important point here that I would stress to this Committee is the future oil and gas fiscal measures, and perhaps most important of all is to have measures that encourage and incentivise the incremental process of EOR and EGR. Without that then the stranded assets will be oil and gas fields in the North Sea because through fiscal measures they will no longer be viable to extract. My concern is that that damage done, especially in the 2011 Budget, has aroused extremely strong feelings unfortunately in some of the boardrooms throughout the world where these decisions are made. Therefore, what is absolutely key, Mr Chairman, is the future oil and gas fiscal measures that are taken. We think that there should be a stable oil and gas tax regime that allows developers to have certainty over the period of the life of the development. That has not happened in the UK, sadly.

Q91 Sir Robert Smith: Do you think alarm bells might ring when they see the First Minister assuming that he can take £1 billion every year regardless-in his speech-from the economy? They will think, "Hang on a minute, what kind of regime is there going to be which is going to have that demand on it?" Your answers are much more measured, that as and when possible the rate of return wouldn’t be as predicted Norway but as actually achieved, so three maybe instead of four. So the headline figure of £30 billion in 20 years wouldn’t be achieved but if that is an aspiration, is that not putting a concern in the mind of the investors that it is going to try and take more out than is possible?

Fergus Ewing: No, I don’t. I say this with having had several meetings with some of the major players, and Sir Robert Smith will probably have met with the same companies too because I know that he has pursued these matters for many years. The real alarm bells were rung sadly because of the Budget measures that were introduced in 2011. More specifically the rise of 50% to 62% for post-93 fields that in some circles has been regarded as expropriation or an equity graft and something that just has not happened in any other regimes throughout the world. That is what has caused alarm bells. What is needed to turn the alarm bells off is an absolute commitment for a stable fiscal regime that does not come along and move the goalposts after investors have spent £2,000 million, £3,000 million, £4,000 million and not got a dollar back for 10 years.

But to answer Sir Robert’s question perhaps directly, my understanding is the First Minister has not made a cast iron commitment because that would not be appropriate. He has given an example of what we would like to achieve dependent upon the financial circumstances at the time and the correct decision, which of course will taken in account of the circumstances and would be taken on prudent grounds at the time. So it is wrong, I think, to characterise this £1 billion, as it seems to have been this morning, as a cast iron commitment. It was not. It was an indication of the sort of the contribution we could make and I think it is reasonable to say, it is the sort of contribution that Norway has been able to make in spades over the years. Norway is not that dissimilar to Scotland.

Q92 Sir Robert Smith: Obviously there is the unravelling in the detail of how decommissionings were allocated and the certainty on decommissioning relief and so on to be achieved. But there are also, and that affects the life of an investor and an operator, the licensing regime that is currently managed from the UK Department of Energy and Climate Change, and there is the health and safety regime that is currently a UK-wide regime. Have you put any thought into, at a time of skill shortages, how both the remaining part of the UK-which I suppose isn’t so much your concern-would still continue its responsibilities and how Scotland would establish the licensing, the data handling and the regime for health and safety and its policing?

Fergus Ewing: On the two issues of licensing and health and safety, as a matter of principle, Mr Chairman, the Scottish Government believe that we should broadly continue with the existing regulatory regime with as little change as possible, subject to the overriding need to provide a stable long-term fiscal regime. So far as health and safety is concerned, I think we can say that the safety of employees and of those who have cause to go to rigs installations is absolutely paramount, that the UK has a good record, having learnt from tragedies over the years. I and Charles Hendry argued very strongly in the EU, for example, that we should continue with the regime that we have and not have imposed by way of a regulation a new EU measure. All of these things have to be kept under review and the impression I have is that the oil and gas sector is in a constant learning process where no one can afford to be complacent in the slightest. That is why we are very happy to continue with the HSE regime that we have that imposes, quite correctly, rigorous standards, and to make sure that those are imposed.

There may be an additional cost to Scotland in order to do that. I think that is something that I would acknowledge, but I hope we would all agree that that is a reasonable approach and one that could readily be implemented without any particular difficulty, Mr Chairman.

Q93 Sir Robert Smith: Already regulators throughout the world are finding it a challenge recruiting enough skilled staff at the moment. To have a parallel operation both north and south of the border would obviously need a net increase in staff within the old UK boundaries. Do you think there is any scope for some kind of joint agency arrangement?

Fergus Ewing: Yes, I think we would very much like to work together in that way and avoid any significant duplication. As a principle, that must be correct. The important thing, though, is health and safety is paramount, it must be continued. There may be some extra costs, they will be relatively modest and they will be costs well worth paying.

Q94 Dr Whitehead: I want to talk about climate change targets in particular but before I do that could I just clarify for my own interests the position that a future independent Scottish Government might take on nuclear decommissioning. Would it be your understanding that an independent Scotland would take on the decommissioning costs of Scottish reactors? Would it have an ambition to have a separate repository for those decommissioning reactors or would it contribute to the repository that would otherwise have been available for the whole of the UK had Scottish independence not been achieved?

Fergus Ewing: These are important questions and in Scotland we have nuclear installations. We have made it clear that provided the safety case can be made that the lifetime of those nuclear power stations should be continued, we would have no objection provided the case is safely made. That is a point we have made clear. There will come a time when nuclear power stations need to be decommissioned. The SNP have always taken the view that the fact that decommissioning costs are an unknown but very substantial is a very serious drawback to nuclear power, and the question of the liability for the decommissioning costs is something that we will have to look at extremely carefully. We do take the view that these nuclear power stations were set up by the UK and therefore it would seem to me that, although this is not a definitive answer because these are all matters of consideration and consultation, the same principle that I expounded to Sir Robert Smith should apply, namely if we take Torness and say there is 10 years to go and there is 30 years that have elapsed-I am not seeking to be exact here about those figures but just as an example-then 10 years to go, and 30 years under the UK then we have one quarter of the decommissioning costs. Some apportionment of that sort, I think, Mr Chairman, would seem to me to be reasonable in principle, although there may be other methods of apportionment that may present themselves following advice from officials to be even more reasonable.

Q95 Dr Whitehead: Would you agree, however, that the proportion of installed capacity of nuclear power in Scotland is roughly twice that of England, Wales and Northern Ireland, and indeed the production of nuclear power in Scotland is about two and a half times that of the UK in terrawatt hours per year? So presumably that would mean that the historic benefit of that nuclear power to Scotland was disproportionate to that of England, Wales and Northern Ireland. Wouldn’t that influence the question of considerations on decommissioning?

Fergus Ewing: It is an argument. I don’t think it is one that I am instinctively attuned to but we would always consider these arguments. I think the one I have expounded seems to me to be a reasonable way to proceed rather than to pursue an argument that the costs be divided on the basis of an assessment of how significant or insignificant a particular matter was when compared to other types of electricity generation. That seems to me to be moving slightly away from the issue, which is, as you said, Dr Whitehead, who pays the bill, how will it be allocated. I have said that it could be done on the basis of a proportion of life pre and post-independence. I think that is a reasonable way, but if there are other means of allocation, apportionment, which arise and which are even more reasonable-sometimes when one gets advice from people like Mr Wilson here, one finds that one’s initial view needs to be amended-then we would be happy to look at that.

Q96 Dr Whitehead: On the question of apportionment, as far as climate change targets are concerned, have you discussed with the European Union, or is it your intention to discuss, how the apportionment of targets might be allocated over future periods, particularly in the context of the fact that already Scotland has a higher proportion of renewables within its supply than England, Wales and Northern Ireland? As I am sure you know, the discussion on the European targets for renewables and so on were apportioned on the basis of pre-existing renewable arrangements and the UK target at that time was less, for example, than 20% basket in the EU because of its lower initial achievements of renewable energy. Scotland is the opposite. Would you consider therefore that Scotland would undertake higher targets on climate change mitigation?

Fergus Ewing: I am not sure that I fully understood that question, Mr Chairman, but I understand from Mr Wilson that he is champing at the bit, having fully understood it. With your permission, would it be in order for Mr Wilson to answer?

Chair: Absolutely.

Fergus Ewing: Thank you.

David Wilson: Can I just unpack the question slightly. There are two separate points you have raised, the first is the climate change targets, the second is the renewable energy targets. On the climate change targets, Scotland already has a set of statutory and binding targets based on the 42% reduction by 2020 and then 80% by 2050. We wouldn’t expect that trajectory to change but one of the questions we would have to look at, there would need to be some detailed work about the basis of both the base year and the numbers that the greenhouse gas inventory would refer to. So there is a piece of statistical work there about exactly what numbers we are referring to, but the 42% and the 80% set in Scottish legislation, and likewise the 34% and 80% set in UK legislation, that is UK and Scottish legislation rather than EU directives and we would expect that to stay the same. But there is, as I say, a statistical issue about the base of the numbers.

On the Renewable Energy Directive, which has set the target of 15% of the UK’s energy from renewable sources, you are correct to say there would have to be some decomposition, if you like, of the UK’s targets into a Scottish equivalent as Scotland would become part of the EU and the rest of the UK-for want of a better word-equivalent and that would be for negotiation between Scotland and the UK Government, and if necessary with Europe.

Q97 Dr Whitehead: Do you have any view on what that decomposition might then consist of in terms of likely proportion that an independent Scotland would contribute towards EU basket totals?

David Wilson: To use a phrase from the Minister earlier, our expectation would be that the overall basket of reduction of the 15% would still apply. In other words, the UK’s arrangements wouldn’t change overall but how it is allocated between Scotland and England, or Scotland and the rest of the UK, would be a matter for negotiation at the time.

Q98 Dr Whitehead: My question then is, would you anticipate that that negotiation would result in a substantial increase of commitment on the part of Scotland, as far as its contribution at that point, independently to an EU basket?

David Wilson: There may be scope for some increase but that would be a matter for the negotiation. We would be happy to take 15% and the rest of the UK take 15%.

Q99 Dr Whitehead: As far as the 42% is concerned, that you have mentioned, is that something you would be confident would be achievable within an independent Scottish energy market arrangement?

David Wilson: We feel that we are on track to achieve the 42% at the moment and we are undertaking work on whether or not that could be achieved post-independence. It depends on the statistical rebasing that I mentioned earlier.

Q100 Dr Whitehead: That would be done with renewables?

David Wilson: It would be done with renewables, with renewable heat, with electric vehicles. There is a whole range of measures set out in our report on proposals and policies that was published last year, which sets out how the trajectory, at least up until 2020, would be achieved.

Q101 Dr Whitehead: Would it be the intention of that statistical analysis to take account of the balancing mechanisms that would be necessary under a high renewable economy and the extent to which, therefore, some of those carbon costs would be exported as a result of that balancing?

David Wilson: We would need to do an assessment of that. Of course that is also covered by the emissions trading scheme that would be EU-wide. But we don’t think that that would lead to any insurmountable difficulties because the emissions trading scheme already has a Scottish allocation within it, so we don’t expect that to cause any great difficulty.

Q102 Dr Whitehead: For example, balancing might be achieved by carbon capture and storage, which, certainly in terms of the present UK projections, looks quite likely in terms of getting carbon emissions down within the non-renewable sector to a level that is compatible with their role in the future energy economy. Would it be anticipated that an independent Scotland would take its share of the consequences of that as far as emissions are concerned?

David Wilson: I am not totally following that line of questioning. You would expect under an integrated GB system that there would be back-up provided from fossil sources, both providing back-up to renewable sources in Scotland, that could be provided within Scotland or through importing and exporting on the Scotland-England interconnector. That already happens and in terms of the current greenhouse gas inventory on which the CO2 emissions are based, it is based on the emissions trading scheme account and we are not expecting that to change going forward. Just to be clear-and perhaps the Minister might want to reiterate this as well-the 100% targets that we have set for renewables is on 100% of Scotland’s own use. We are expecting significantly greater output of electricity in Scotland than is needed in Scotland and correspondingly exports, and much of the back-up for Scotland’s renewable energy would be provided within Scotland. For example, as you rightly say, the CCS project that has been developed by SSE at Peterhead, which is probably one of the most exciting gas CCS projects, can provide back-up and load following, and provide the complementary electricity supplies that we would expect to go alongside our renewable sources.

Q103 Dr Whitehead: I think the essence of my question probably is that in terms of back-up, some of which would presumably come from outside Scotland, would an independent Scotland energy economy regard that as essentially interconnection and therefore not counted in the carbon accounts as far as Scotland was concerned, or in the context of what we talked about earlier in terms of the continued unified market as far as energy is concerned and internal devices as far as balancing was concerned, would it therefore be counted as far as Scotland’s carbon emissions are concerned?

David Wilson: Just to be clear, at the present time the targets you referred to, the much talked about 34% reduction to 2020, they are all based on a production estimate of greenhouse gas emissions. In other words, what emissions are made within a particular area, whether it is Scotland or the UK, there are separate consumption based estimates, which is a wider assessment of, based on our personal use, where those emissions were actually emitted, which could be outwith an area and you have to use both. The current targets that you described are based on production and if Scotland were to be importing, if you can define these things, fossil fuels to provide back-up from, say, England, or indeed anywhere else, then that wouldn’t account in Scotland’s production estimates of CO2 but it would be in our consumption estimates.

Q104 Dr Whitehead: So you would export the carbon effectively?

David Wilson: Under the way the accounting works, much of the benefit in terms of the overall CO2 emissions from Scotland’s renewables bizarrely enough is taken in the English account because much of it is regarded as being exported.

Q105 Sir Robert Smith: You mentioned the exciting potential of CCS and Peterhead, and the long-term UK model for encouraging that is the consumer paying through a contract for difference. Do you think there is any risk that the English and Welsh consumer would start to think that they could get a better deal by buying something from the French or the Irish once they were no longer part of a United Kingdom?

Fergus Ewing: We would not see that as a likely or indeed a sensible scenario and we do envisage that there should be a continued integrated UK energy market. That is a view that I think has been largely shared following the work at the British Irish Council and endorsed by Charles Hendry who said, "What sense would it make not to use the potential of the renewable energy off our shores as all of these islands and purchase fossil fuels from a faraway country?" He has expressed that view himself. We agree with that and of course we have seen the approval of the grid investment that presupposes that Ofgem anticipate that there will need to be far greater volumes in gigawatts of electricity from Scotland in future, I think rising to 6,600 megawatts by 2016. Not so very long ago it was under 1 gigawatt. So the fact that Ofgem have authorised that increase in grid capacity not only will reduce constraint payments, which is desirable across the UK, but also presupposes the benefits of an integrated UK market from Ofgem as the regulator’s perspective are clear. That is a view that has been recognised and supported by a huge number of players in the industry and commentators. In short, England will continue to need Scotland’s renewable energy and we feel that that need will be likely to increase as time goes on because of uncertainties about continuity of supply, keeping the lights on as indeed were expressed in the White Paper last May by DECC. That is a very real issue, Mr Chairman, that perhaps has not been the subject of as much consideration as it may merit, without in any way being alarmist about this. So England and Wales will continue to require Scotland’s renewable energy and will require more of it.

Of course, the issue at the moment about offshore wind is cost, but there are signs-and we can supply you with more details perhaps than this session will permit-of significant progress that has been made to reduce the cost of offshore wind. That, I think, would then remove any possible motive for purchase of electricity elsewhere than from Scotland, or indeed Ireland, which Charles Hendry has said should be part of a market operating together.

Q106 Sir Robert Smith: The converse is that Scotland benefits from being attached to a larger grid in terms of balancing and maintaining failures.

Fergus Ewing: It is mutual benefit, yes. We benefit from having consumers and the large integrated market met the cost of incentivising renewables and that is a shared policy and has been for a long time, but there is an absolute need south of the border for the actual electricity. So there are mutual needs that will drive this forward and we think that that is a good thing.

Also, of course, is increased moves in the EU to see further connections and electricity pools exist in other places, for example Nord Pool between the four Scandinavian countries. Ireland has already been mentioned. Cross-border electricity markets are no new thing, they exist already and can be made to work and have been made to work successfully.

Q107 John Robertson: We have used up nearly all our time, I appreciate that, we have lots of questions on renewables that you probably would have liked to get asked and various things about energy markets but we are not going to have time to do all that. So can I go back to this paper that you issued us and ask you-as you very kindly offered our previous speaker that you would send us information as a reply-to give us an update on every single one of these as a timeline? I know three of them and I know they were basically down to Glasgow City Council who had done all the hard work to get them. I noticed particularly on 19 December from SSE that you did give credit to Forth Ports, Dundee City Council and Scottish Enterprise. You have not done anything like that with any of the others so I can only assume that it must have been the Scottish Government who did it all by themselves, and yet I know that not to be the case.

The thing about the SSE one that is very interesting is that this is the same company, the second biggest company in Scotland, that has warned, "The independence referendum will increase the risk it attaches to investment projects". That is what they have said. The firm also went on to say there is also an increased likelihood of regulatory and legislative change to the energy supply and it said it does not have a view on whether Scotland should be independent or not but it did ask that Scotland should remain part of a single UK energy market. If you don’t want to answer these questions today about the energy market and whether it should be a UK one or the regulatory legislative change that is bound to happen according to this large company, I would appreciate it if you would update us on this and make sure that we have, shall we say, not the political points scoring here but the actual facts of what has happened because I have my doubts that some of these projects may or may not exist any more.

Fergus Ewing: Could I answer the first question in relation to Glasgow City Council? I am delighted to acknowledge the work that has been done by all parties who have contributed towards these projects. It is very rare that any individual politician or group of politicians achieve success; it is a team effort. I don’t think that I claimed that the Scottish Government had single-handedly delivered all these projects. If I did-

John Robertson: It was an inference.

Fergus Ewing: I don’t think I did but, be that as it may, the achievements in Scotland-the massive achievements actually-in balancing our renewable energy ambitions has been achieved because we worked very closely with local authorities, with companies and with academia and experts such as Professor Kemp here and many others. So it is a team effort and I would like to make it clear that that is our view.

In relation to the second point, I can’t quote verbatim from the SSE statement to this Committee but I did have a quick glance at it this morning. I think if you look at paragraph 7 of that statement you will find that it refers to the risk of uncertainty through the lack of resolution of the EMR process. It is undoubtedly the case that the fact that we don’t have a clear set of rules under the EMR is causing an element of investor uncertainty and investor hiatus. I know that from Chatham House meetings I have had with financiers and I say that from the point of view that we want to make this work. We want EMR to work and we would therefore like to be part of the institutional framework, and at the recent Joint Ministerial Committee, where I represented the Scottish Government, I made some suggestions to the Deputy Prime Minister about how we could do that most constructively. But I think the real risk is the uncertainty created by the UK Government’s EMR process and the need to get that right is the absolute priority.

Let me turn, in conclusion, to the SSE comments that Mr Robertson says they have made their statement. Although they have made it clear that they, like most companies, don’t want to get involved in politics or express their view about it, they did not actually say that independence would lead to additional regulatory changes. They simply said that there are questions that they wish answered and I very much hope, Mr Chairman, that the work that this Committee does following the submissions that we have made and other witnesses have made will help to address some of those issues and we can take forward this conversation with our colleagues in Westminster to answer them all.

Q108 John Robertson: In the UK energy market?

Fergus Ewing: I have made it clear that our preference is to continue with an integrated UK energy market. That is, I think, almost a necessity under the EU framework under which we operate. In order for the UK to meet its targets it will need Scottish renewable energy. In order for the EU to meet its targets, my belief, although I am not expert to answer Dr Whitehead’s line of questioning about CCS, is we will need CCS to be applied and unless this can be applied into, I have heard it said, hundreds of power stations across the EU, the EU targets are unlikely to be capable of being met because the greatest possible reduction in carbon emissions comes from power stations that can be retrospectively fitted with CCS. So we have a commonality of interest here. We have a commonality of interest-

Q109 John Robertson: Can I ask you about the two coal-fired power stations in Scotland, are you going to close them in 2015 if you have independence?

Fergus Ewing: Mr Chairman, we are not responsible for operating power stations in Scotland, so it would not be for us or any Government to close them.

Q110 John Robertson: Under the EU rules coal-fired power stations such as Longannet and Cockenzie have to close. So that is a big, big reduction of power coming to Scotland-a big reduction, bigger than nuclear.

Fergus Ewing: We would like to see CCS applied. Unfortunately the history of CCS in the UK has been a story of vacillation followed by disappointment.

John Robertson: But even if it was successful there would be nothing post 2020-2025.

Q111 Chair: Which are the countries that have succeeded in CCS so far? I can’t quite remember which ones they are. There is no country in the world that has got anywhere economic-I think the jibe about UK policy on CCS is rather out of place at this point. As Mr Robertson has mentioned, the EU directives will require the closure of the very high emission coal-fired power stations by 2015. We take it that an SNP Government in Scotland would abide by those directives?

Fergus Ewing: Yes, of course it would and I am aware of the rules about it, the emissions of some of the gases, but perhaps Mr Wilson can give the copperplate answer, with your permission.

David Wilson: Just to be clear, in terms of the two power stations referred to, Scottish Power have already announced that they will close Cockenzie under the Industrial Emissions Directive and we accept that. Scottish Power have made an application, which the Minister has consented to, for that to replaced by a combined cycle gas turbine plant and we are working closely with them to see if they commit to that investment.

In terms of Longannet, it is scheduled to remain open beyond 2015 because of the particular way that Scottish Power have used that station and they are considering their options for how to take that forward. Unfortunately they will not be able to take it forward due to CCS because of all the history that has already been referred to. But, again, we are working very closely with Scottish Power in terms of both those stations, to work with them to ensure the sufficient thermal capacity in Scotland to make sure that back-up is provided to complement renewables and that is what this-

Q112 John Robertson: You are going to give us something-

Fergus Ewing: We are very happy to respond to any request for information, Mr Chairman, from your Clerk and we are happy to do that.

Q113 Chair: Thank you. Just in conclusion, on this point about coal, of course it is not the job of the Government to operate the coal-fired power stations but it would be your job as Energy Minister in an independent Scotland to have a view about the role in which coal might play in Scotland’s energy mix. So what is your view about that?

Fergus Ewing: We obviously need to abide by our EU obligations in respect of emissions and my understanding is that we really do need to make quick progress. I accept that this is not a political point, it is one that applies to the rest of the UK too. We need to make very prompt progress with regard to CCS technology. I was simply alluding to the fact that the previous projects in Scotland, Peterhead in 2007 and Longannet in 2011, were disappointments but I understand the reasons for particularly the Longannet decision, Mr Chairman, so I am not challenging in any way that decision. I am not saying it was the wrong decision for the UK Government but I think to make rapid progress the need is to apply CCS, if possible, to four or five power stations, otherwise it is difficult to see-as I understand from companies such as Scottish Power Iberdrola-how they could be operated economically given the overlay of the EU rules and the cost of carbon and so on. My understanding is that that makes it very hard for any coal-fired power station, north or south of the border, to be operated, so we share a common dilemma here and I think we want to address it in, broadly speaking, as I understand it, the same fashion. If I am impatient it is simply because this has been talked about in Scotland for a long time and plainly we would all like to see more progress.

Q114 Dr Whitehead: On that particular subject, would you agree that 60% of total electricity generated in Scotland last year was either from nuclear or coal, all of which will be decommissioned within the 10 years unless, as we don’t think will happen, CCS will come to Scottish coal-fired power stations? Does that not in your view very seriously unbalance the Scottish energy economy, bearing in mind the level of renewables that there are in Scotland at the moment? What particularly view would you take of that great difficulty that would arise for the Scottish energy economy over the next period?

Fergus Ewing: Absolutely fair question. I think what would be useful, Mr Chairman, if we provide the Committee with our EGPS, which was published relatively recently, this year. Our Electricity Generation Policy Statement shows, on the basis of independent modelling, one method by which we could achieve our targets by 2020 of producing the equivalent of 100% of the electricity we consumed from renewable resources. I should say just last year that we exceeded our target for renewables, which was 30%. We delivered 35% from renewables, which is a pretty good result. I think that that has been recognised as well by Charles Hendry and his colleagues.

Dr Whitehead makes a perfectly fair point, there needs to be a variety of supply. I think it was Churchill who said that when it comes to electricity supply the solution is variety and variety alone. That is certainly true until such time as, in the transition to a low-carbon economy, some of the technical problems preventing storage of energy from renewable sources can be overcome. Until that is the case, there will continue to be a requirement for a balanced supply. Our EGPS, a copy of which we will ensure the Committee has since it is interested, does set out our view as to how this might be achieved, but if upon receipt of the EGPS there are further questions that Dr Whitehead or any other Member has, we would be delighted to seek to answer them.

Q115 Barry Gardiner: Mr Ewing, can I just check that your arithmetic and mine are going in the same direction. It was when you talked about the decommissioning costs for nuclear and-you were plucking figures, I know, out of the air-you suggested that if there were a 40-year life span and 10 years were post-independence and 30 pre-independence then it should be divided so that Scotland paid for the 10 years. But, of course, Scotland has been part of the United Kingdom for that 30 years as well pre-independence, so you weren’t suggesting, were you, that Scotland should only pay for the period proportionately when it was post-independence, but for its equitable share of the pre-independence life of the plant as well? Is that correct?

Fergus Ewing: No, I was not really suggesting that. I think probably we would have to-

Q116 Barry Gardiner: Why would that in any possible scenario suggest to you that it was equitable arithmetic?

Fergus Ewing: We think it would be equitable based upon the proportion of the lifespan. At least I think that is a reasonable way-

Q117 Barry Gardiner: But you are part of the United Kingdom at the moment, are you not? That is why you want independence.

Fergus Ewing: We are.

Q118 Barry Gardiner: Therefore, you are part of the 30 years that that plant would have contributed to the life of the United Kingdom, including to Scotland, are you not?

Fergus Ewing: As I said earlier, I put forward this mode of allocation of expenses on the basis that it seems to me to be one reasonable method of doing it.

Q119 Barry Gardiner: But I am pointing out to you, Mr Ewing, that actually by any sort of rational calculation or reasonable calculation of the arithmetic, it is not a reasonable allocation.

Fergus Ewing: Well, not to you but we are happy to reflect on that, as I indicated earlier. Perhaps we could just leave it there.

Q120 Chair: I think the point has been well made by Mr Gardiner. You have laid a lot of emphasis, and I think we have all been impressed by the emphasis you have put on the need for a fair allocation of responsibility for the liabilities. You said to the extent that those benefits have been enjoyed by the UK, therefore the rest of the UK should meet its share of the liabilities. I assume, therefore, it would be the policy of SNP to apply this same principle more widely, that when it comes to the allocation of responsibility for the national debt the fact that Scotland has had a higher share of its GDP in public expenditure and therefore a higher share of the borrowing is attributed directly to Scotland, that Scotland will assume a share of the national debt that reflects that higher share of public expenditure as a proportion of GDP?

Fergus Ewing: If I may say, Mr Chairman, with all respect, we are straying into matters relating to Treasury responsibility. So I think it would be imprudent of me to offer an opinion in a portfolio area where I am not the Minister but I am very happy to revert to you with any response to specific inquiries perhaps pursued in writing.

I say that not to avoid the question, because I can quite easily give an answer off the cuff but it is not my ministerial responsibility, you understand, and the importance of a reasonable element of precision I think means that it would be sensible for us to reply to you in writing in that matter.

Chair: All right. Thank you very much for coming in this morning. It has been a very useful session from our point of view, and thank you to your colleague as well.

Fergus Ewing: Thank you.

Prepared 19th April 2012