Reform Scotland

The Greening of Energy – Stuart Paton

I recently re-watched an episode of The West Wing from 2004, entitled ‘The Hubbert Peak’. Although we once again have a US administration that operates more like that of Jed Bartlet’s fictional presidency, many of the storylines seem incredibly dated. For context, this was before the US shale boom had taken off. America was genuinely concerned about energy supplies and being over reliant on the Middle East, with all the geopolitical ramifications that entailed. Peak Oil was a big issue. In this episode, senior staffer Josh Lyman met with a range of ‘alternative energy providers’, who when not battling among themselves were proposing supposedly hairbrained ideas such as covering the US with wind farms/solar panels/biofuel farms (delete as applicable). And no mention of climate change.

What a difference 17 years make.

US oil and gas production hugely increased over the following decade on the back of incredible technological advances in fracking, leading to the US being, for a time, the largest oil producer in the world. Production has scaled back somewhat since the oil price drop in 2015 and again, post Covid-19, in early 2020. The economics of this boom, underpinned by debt and poor capital returns, have also been exposed and although oil is now back up to about $60/barrel we are unlikely to see a significant scaling up of the industry. However the US still produces about 12% of daily worldwide oil production, the industry directly employs c1.5 million people in generally well paid jobs and is of course fundamental to how Americans think about their country and their geopolitical relationships.

The US now has 212GW of installed wind and solar power (for comparison, the UK’s total installed capacity of electricity generation is 85GW). Coal now generates just 19% of electricity, largely due to low gas prices driven by fracking. A recent Princeton study, highlighted in an article in the Economist, predicts potential wind and solar in the US covering 600,000 square kilometres – seven Scotlands. This would be development way beyond what was envisaged by Josh’s alternative energy advocates in 2004.

And in that time, climate change has come to be understood as the greatest threat facing mankind. Almost every scientist and the vast majority of ordinary people now accept the reality of man-made climate change – even if what should be done about it continues to be argued over. The last few months have seen a book on the subject by Bill Gates, Mark Carney devote one of his BBC Reith Lectures to it, the Royal Institute Christmas Lectures focus on the topic, and national treasure Sir David Attenborough spend an increased proportion of his broadcast time on it. There has been a clear change in the visibility of the business response too. The power company Oersted (previously DONG) has become a darling of the Danish stock market with its focus on renewable electricity. Major oil companies like Shell, BP and Total are making huge commitments to the ‘Energy Transition’ by setting goals for when they will achieve net zero for their own direct emissions plus the emissions from their customers. Even where they are investing in oil and gas, the majors will focus on large, profitable projects with low CO2 emissions.

All of which raises some questions. Which are the key areas of progress? What should be our realistic expectations for the future? And what is happening here in Scotland, as Glasgow prepares to host the global COP26 conference?

The startling progress of technology

First, technology. The key solution to green energy provision is well understood – electrify as much as possible, as quickly as possible, using zero-carbon generation. For many applications electrification using renewable electricity (and carbon capturing the rest) will be sufficient. Where electrification cannot be used, alternative technologies will be required – for example, green hydrogen derived from renewable electricity for heavy goods transport, and finding alternative manufacturing techniques for hard-to-decarbonise sectors, principally steel and cement. Large-scale carbon capture centred at key industrial locations. such as Humberside and Grangemouth and similar sites internationally, will be vital. This is not a ‘get out of jail free’ card for the industry but rather a realisation that we will keep producing CO2, and that it must be captured and stored over geological timescales.

Let’s consider the specific example of hydrogen (here I declare an interest: I am chair of H2Green, a new company working in this field as part of the Getech Group). Hydrogen is already produced at scale, principally for use in oil refining and for ammonia production for feedstock for fertilisers. There has recently been great excitement about the use of hydrogen as fuel for heavy goods vehicles, for household heating (to replace natural gas), as a high temperature energy source and as a potential energy storage system. Most hydrogen produced today is formed from steam methane regeneration, which produces hydrogen plus CO2. Continued used of this method (so-called ‘blue hydrogen’) will require sequestration of the CO2. Although generally more expensive, electrolysis of water to produce hydrogen is carbon-free assuming that the electricity is carbon free, and hence is termed ‘green hydrogen’. So, a combination of green hydrogen and large-scale blue hydrogen with associated carbon capture could be transformational.

If you are not an avid energy watcher, it is likely to be startling how quickly things are changing in Scotland. In the past few months Scotia Gas Networks and the Scottish Government have started a project at Levenmouth in Fife to generate green hydrogen from their own wind turbines, to distribute through the local gas grid. Some minor changes in houses allow them to use hydrogen for heating and cooking. One could apply this same solution to outlying towns not on the grid and in time to the whole grid. A wind farm project in Orkney generates green electricity during the day and stores the energy as hydrogen during the night, which can then be used in fuel cells at times of peak demand. There is significant progress on carbon capture and storage projects, principally that led by Storegga-Pale Blue Dot at Peterhead. The key technical issues appear to have been overcome, with the vital next step being to scale up the technology. Wave power continues to be actively explored, with Scotland at the forefront of these efforts. Even solar has a part to play in Scotland – Fife Council recently approved a 35MW capacity scheme on a former industrial site. And of course the vast drop in costs for offshore wind over the last decade has made huge-scale windfarms feasible and economic.

The essential role of government policy

Second, government policy. The most significant lever is the Scottish and UK governments’ world-leading, legally binding commitments to net zero by 2045 and 2050 respectively. Most people in the field think the best way of achieving this commitment is via a global carbon tax. However, as this is challenging to implement and often politically unsavoury, many powerful movers, including the EU, China and California, have forms of emissions trading. As the total volume of allowances has reduced and a broader range of industries are covered, the carbon price has increased – in the case of the EU scheme to $60 per tonne of CO2 equivalent. Increasing the cost of carbon is the best way of ensuring that lower-carbon alternatives are implemented and that the focus is on the most economic solutions. Indeed $60-100 per tonne is around the level that many experts think is required to deliver net zero.

Without the ‘simple’, elegant carbon tax solution, the UK and Scottish governments, as with many other national governments, apply a range of allowances and support to encourage decarbonisation. The problem with this approach is that government backs specific solutions (often influenced by lobbyists or other policy aims) rather than the most economic solutions determined by the market. However in the real world, without a global carbon tax, this is a vital element in meeting the net zero challenge. The UK government has recently allocated £1 billion to projects to reduce emissions in homes and industry. The Scottish government has committed £100 million to develop the hydrogen economy. And although sectors like wind are now expected to be economically viable on their own (following years of support through higher electricity bills), other allowances such as the Renewable Transport Fuel Obligation – which requires suppliers of transport fuels to demonstrate a proportion comes from renewable sources – are in place. The commitment to stopping sales of new petrol and diesel vehicles by 2030 is another very significant nudge to consumers. Sadly, an increase in vehicle fuel duty has not been implemented, nor a response to the impact on government revenues as electric vehicles replace internal combustion engines in the next decade.

In the area of home heating, the focus is on policy and incentives rather than technology. Again, the link is to electrification (to install heat pumps and boilers) or longer term to supplying hydrogen to the grid. Here there are issues around providing long-term support to the industry to re-train gas engineers and to provide certainty to contractors that they will get paid – certainty that has been lacking to date. The conversion of the gas grid to handle a significant proportion of hydrogen blended with natural gas is relatively straightforward and could be a stepping stone to a complete switch to hyrdogen.

A final step in policy is dramatic increases in electricity generation capacity and storage capacity, and in   improvements in the grid, each of which is being undertaken. We are already seeing huge investments in offshore wind and solar. These two technologies will underpin much of the growth in renewable electricity generation in the UK and internationally. The increased emphasis on storage options, critical for when the wind isn’t blowing or the sun isn’t shining (which sometimes happens in Scotland), will be part of the solution. However, in the area of providing baseload capacity through nuclear energy there is a clear policy difference between the UK and Scottish governments. Hinkley Point C, with a nameplate capacity of 3200MWe, is already under construction and is due to start generating in mid 2026 at a cost of a mere £20 billion and a very high strike price of £90/MWhr. This is likely to be followed by at least one more large nuclear plant in England or Wales.   

How finance is making green work

And finally, financing. It is important to remember how unbelievably cheap oil is. Therefore, to compete, any other source of fuel has to be cheap and as energy efficient as oil and gas. Thankfully, with regard to electricity generation we are already there. In most parts of the world, wind (even offshore) and solar are already cheaper than gas for electricity generation. Add on the expense of storage and they are cost comparable. In the last year, there has been an increasing emphasis on investors moving away from oil and gas. This will likely continue. As noted above, the major oil and gas companies are largely focusing their efforts away from oil and gas towards renewables.

Given the focus on decarbonisation, what of the role of oil in Scotland? Although production levels have been declining over the past decade, oil and gas remain an important part of the Scottish economy, employing around 100,000 people. Also, most authorities recognise that oil and gas will remain necessary sources of energy even by 2050. Firstly, this is because of the wide range of uses of oil and gas other than for transport or electricity generation (think chemicals, fertilisers, plastics and most other components of modern life). And it is surely better to produce this oil and gas locally and refine it at Grangemouth than importing from the US or Middle East. Secondly, in many countries converting from coal to gas for electricity generation will be an important part of reducing CO2 emissions even if this does not achieve net zero in the medium term. Another key factor to consider is that decommissioning of oil fields is starting in earnest, after many years being discussed and planned, with employment opportunities, particularly in Scotland and the North-East of England. For example, the Ninian Northern field is being decommissioned in Shetland and Brent Alpha on Teesside. Another significant change in the North Sea is a new range of owners, often backed by private equity, who are becoming the dominant players. These investors will aim to extend the life of oil and gas field but are also at the forefront of improving operations, for example through offshore electrification of platforms and have often set challenging targets for reducing their own emissions. 

A landmark agreement between the UK Government and the UK oil and gas industry signed in late March attempts to square the circle of the legal requirement to achieve net zero by 2045 in Scotland and 2050 in the wider UK, the ongoing necessity of affordable and secure energy sources, and the large number of generally well-paid jobs in the industry. The government and industry have committed to unlocking £16 billion over the next decade in low-carbon solutions, principally carbon capture and storage and hydrogen, with a focus on energy hubs including Teesside and Aberdeenshire. This aims to cut CO2 emissions by 60 million tonnes, reduce reliance on imported oil and gas, support UK jobs and reduce support for exporters developing oil and gas projects overseas. The industry will have a strong emphasis on cutting its own emissions, for example through electrification of platforms and rigs. As might be expected, this agreement has been met with dismay by green lobby groups, who have described it as “a colossal failure in climate leadership in the year of COP26”. However, pragmatically, given the need for a just transition and the requirements for oil and gas over the next few decades, this is a huge step forward for industry and the governments. And the economic prize is significant, transferring generally well-paid jobs in the oil industry to well-paid, sustainable jobs in the green energy economy.

A sea change that could save the planet

In the 17 years since that episode of The West Wing was first aired there have been major changes in the energy landscape. In terms of tackling climate change there has been a sea-change, particularly in the past year. However, there are still huge challenges globally and here in Scotland.

First, and most important, is persuading all of society that this is the greatest issue of our time, that it must be taken seriously, and that we all have a part to play. Government is showing leadership in this regard but must do more. Second, we face huge challenges in Scotland, even in the relatively easy-to-electrify sectors of home heating and cooking. We have relatively old, poor housing stock which largely relies on natural gas for heating and cooking. We need to put in place policies which encourage people, on an ongoing basis and with certainty, to insulate their homes better, to change to heat pumps rather than to automatically install a new gas boiler, and to create a large-scale hydrogen network.

Third, and somewhat controversially, the Scottish government should change its policy on nuclear power. It is difficult to envisage a future Scotland, albeit it with very significant wind energy capacity, that can satisfy huge increases in electricity requirements without baseload nuclear power. A range of international companies are investigating cheaper, smaller reactors. We should be actively participating in this research, given the expertise in Scotland and the UK. Indeed, it was recently announced that Highland Council is considering bidding for Dounreay to be the site for a nuclear fusion project.

In all these new sectors – whether it involves retraining heating engineers to work with ground and air source heat pumps, engineers to find better ways to maintain offshore wind turbines, geologists and reservoir engineers to determine optimal solutions for carbon storage, or financiers to fund the projects – Scotland has the capability and capacity to be a leading player in the delivery of net zero.

The last year has changed our view of the world in many ways, and this seems to include the absolute necessity of addressing climate change. This groundswell has been developing for the past few years, since the Paris Agreement in 2015 and ahead of the forthcoming COP26 in Glasgow, due to the extraordinary impact of Greta Thunberg, and the increasing daily influence on our lives. From a technical, governmental and financial perspective much of the groundwork has been laid. We must now do what is needed to meet our commitments to the planet, to each other, and to future generations.

Stuart Paton is chair of H2Green, chair of Getech and former CEO of Dana Petroleum plc

This is the latest in a series of pre-election reports and events in partnership between Reform Scotland and the Scottish Policy Foundation, an independent, apolitical grant-making charitable foundation that works to promote objective policy research in order to inform public debate. The report will be discussed at an online event at 2pm on Monday 26 April with the author, Stuart Paton, as well as Nicola Gordon, president of the Scottish Energy Forum & board member, SEPA and David Ritchie, head of partnerships and engagement at the Scottish National Investment Bank. To register to attend email