Scottish Government

Chapter 4: Proposals for change

57. We have seen so far in this consultation paper the importance of ensuring that we do not make the same mistakes with respect to Scotland's next energy revolution as were made with respect to oil and gas. This chapter sets out measures which could be taken to generate greater benefit for Scotland and for local communities from the low carbon revolution. In taking forward these measures, the Scottish Government works from the over-arching principle that low carbon energy projects in Scotland and in Scottish waters should bring direct benefits to Scotland nationally and to local communities.

Action 1: Reform of the administration of the Crown Estate in Scotland

58. This consultation paper has already suggested that there are significant anomalies regarding the way in which the Crown Estate in Scotland - assets belonging to the Scottish people - is administered. The Scottish Government believes that the legislative framework in which the Crown Estate Commissioners operates should be modernised to take account of devolution.

59. Particularly significant is the fact that the revenues from administering these assets of the Crown in Scotland, flow out of Scotland. This includes the revenue stream generated by renewable energy projects and carbon capture and storage projects in Scottish waters. Revenues linked to the exploitation of Scotland's natural resources should not disappear to a general fund at HM Treasury. They should be clearly identified and invested to support the development of Scotland's new renewable energy industry and for future generations.

60. Benefits should be realised by Scotland at both a national and a local level. If the Scottish Government were successful in securing the revenues from the Crown Estate in Scotland, part of those revenues would be invested in a fund for the nation's future generations as outlined in action 2. The remainder would be used to benefit local communities, for example through skills development; purchase of community land; and support for other local projects.

61. However, it should not be assumed that the reform that is needed is all linked to revenue streams. There are a number of other areas where fundamental change is urgently required to reflect the post-devolution landscape and the importance of accountability and transparency in the management of public assets in Scotland.

62. Firstly, the Crown Estate Commissioners manage Scottish Crown property rights over the seabed within Scotland's territorial waters. It seems particularly anachronistic that management of the seabed should not sit with the Scottish Government in a post-devolution context. This is all the more the case in view of the fact that the recent flow of powers in the marine environment has been away from London and towards Scotland. Those rights and all the Crown property rights forming part of the Crown Estate in Scotland are also legally distinct from the Crown rights managed by CEC in the rest of the UK, as they are constituted in Scots law. These Scottish rights also include Crown rights that have no equivalents in the rest of the UK, such as those to salmon, native oysters and native mussels in Scotland. It is unclear to the Scottish Government why the CEC should continue to manage these Scottish rights.

63. Secondly, the current framework means that two separate public bodies have administrative responsibilities in granting the required permissions for an offshore development. The Crown Estate Commissioners have a role in granting a lease to developers for use of the seabed and the Scottish Government - under the Marine (Scotland) Act 2010 - issues licenses for development. This duplication adds to the administration required to get an offshore project up and running; it is potentially confusing for developers (who may be more used to the arrangements in other European countries where one body performs both roles); and is a duplication of public effort and expense.

64. Thirdly, the Crown Estate Commissioners do not need to report to the Scottish Parliament on their activities in Scotland while they do report to the UK Parliament. This means that the CEC are unaccountable to Scottish Ministers and no transparent mechanism exists for the broader policy objectives of Scotland's elected government to be taken into account by them in their business and operations. The CEC are able to sell parts of Scotland's Crown property with no oversight from Scottish Ministers. In addition to the seabed, their holdings include sensitive and historic sites such as the King's Park in Stirling. Existing reporting and accountability mechanisms are insufficient and are an area which requires reform.

65. Fourthly, the Crown Estate in Scotland - the property, rights and interests belonging to the Crown in Scotland and therefore to Scotland's people - should be managed in a way that takes account of and is responsive to the needs of local communities. The CEC operates under the Crown Estate Act 1961 with the commercial management of the Crown Estate as their principal driver. However, this Government believes Scotland's publicly owned assets can and should be managed more in support of other public policy objectives in Scotland, including promoting community stability, resilience and empowerment. The CECs' current approach is not serving Scotland's local communities well and requires change.

66. Furthermore, it is vital that the CEC engage much better with local communities across Scotland, particularly those in rural or fragile areas likely to be directly impacted by offshore low carbon energy developments. These communities must feel that their interests are being taken into account and that they are enjoying tangible levels of community benefit from the development of low carbon energy. The CEC must play a much more substantial role in making that happen.

67. The Scottish Government works in close partnership with the Crown Estate Commissioners on the day-to-day practicalities of ensuring that offshore renewable projects can get off the ground and on other matters. That positive and improving relationship is of great value to this Government. However, it is clear that the legislative framework in which the Crown Estate Commissioners operate is out-dated given the day-to-day realities of devolution. That framework requires urgent review by the UK Government in partnership with the Scottish Government.

Action 2: Creating a Future Generations Fund

68. The Scottish Government believes that Scotland missed out on too many opportunities in the past with respect to Scotland's oil and gas exploitation. Chapter two of this paper highlighted examples from Norway and Shetland of what can be achieved if the right strategic decisions are taken. In that context, the Scottish Government is of the view that an appropriate way forward for Scotland, in ideal circumstances, would be to follow the example set out chapter two in establishing a Future Generations Fund for Scotland.

69. A Future Generations Fund will:

Provide the kind of long-term legacy fund which Scotland should have created but failed to create - unlike others such as Norway - in order to capitalise on its first energy revolution with the discovery of North Sea oil and gas.

Provide a source of investment in key areas such as skills to foster a successful renewables and low carbon revolution in Scotland.

Overcome remaining barriers to early-stage development to transform the scale of opportunity for Scottish involvement in renewable energy developments in Scotland.

Invest in Scotland's future generations once the renewables and low carbon revolution has started to bring material benefit to Scotland and its communities.

70. Initially, the Future Generations Fund could be used for a range of purposes to help expand Scotland's low carbon energy sector, such as:

• Investment in skills development in the onshore and offshore renewables sector, working closely with local authorities and the relevant skills bodies.
• Providing capital loans for investing in community renewable projects.
• Investing in the supply-chain base: helping build the supply-chain expertise inside Scotland rather than elsewhere.
• Encouraging innovation activity focused on the demonstration and deployment of new technologies offshore to commercialise technology in Scotland that can then be deployed at home and across global markets.

71. This Future Generations Fund would complement the ongoing work of the Scottish Government in seeking to promote and secure investment in the wider infrastructure needs of the offshore renewables sector. As set out in the National Renewables Infrastructure Plan ( N-RIP), there are a series of potential sites across Scotland, which with the right level of investment, could support the development of offshore renewables projects in Scotland.

72. For example, the First Minister announced a £70m investment ¹² in early November to strengthen port and manufacturing facilities and supply chain provision for manufacturing offshore wind turbines and related components. Scottish Enterprise and Highlands and Islands Enterprise are currently welcoming applications for the initial offshore wind phase from ports, manufacturers and wind farm developers.

73. Much more could be achieved if Scottish Ministers had immediate and unrestricted access to the Fossil Fuel Levy ( FFL) monies which currently sits at nearly £200m. Under the terms of the Energy Act 2004, these funds must be devoted to "promoting the use of energy from renewable sources" and could be used to leverage in crucial private sector investment into Scotland's offshore infrastructure.

74. The UK Government's recent request to Scottish Ministers to agree to effectively relinquish the FFL monies into the, as yet undefined, concept of a future Green Investment Bank in return for a 'ring-fenced' sum for Scottish projects falls well short of Scottish Government's long argued case to have the funds made immediately available, for much needed support to accelerate key renewable developments in Scotland. Scottish Ministers continue to make the case for release of the FFL in a way that allows for immediate investment in infrastructure for offshore renewables in Scotland which will have the potential to service offshore projects in Scotland, the rest of the UK and Europe.

What would the Future Generations Fund contain and how could it be maintained in future?

75. Some Government resource could be invested in the Future Generations Fund initially to support its proposed activities aimed at supporting the emergence of Scotland's offshore energy sector. While we recognise that the investment needs of the renewables and low carbon sector would not be met by such a Future Generations Fund alone, the investment made would demonstrate this Government's commitment to creating a long-term legacy for Scotland.

76. As the low carbon sector expands and moves towards greater profitability over the course of the next decades, it would only be fair that some of those benefits should return to the Future Generations Fund for the benefit of all in Scotland.

77. As proposed earlier in this chapter, if the Scottish Government were to gain control over the Crown Estate Commissioners' revenues generated in the offshore renewables sector, some of that money could make up the lion's share of resources in the Future Generations Fund thus ensuring long-term funding streams that could be recycled into further investments.

78. The Future Generations Fund's revenues would then be invested to directly benefit Scotland's communities in a number of ways, as well as providing much-needed investment in continuing skills development opportunities, as the low carbon sector evolves over time. A portion of the Future Generations Fund would also be invested in order to secure a lasting revenue stream in the same way as oil funds have operated across the world.

79. These mechanisms are, of course, in addition to the Scottish Government's long-standing call for the return of North Sea oil and gas revenues. The latest forecast from the Office for Budget Responsibility ( OBR) suggests that the North Sea will now generate £50.8 billion between 2010/11 and 2014/15. This compares with receipts of approximately £45.5 billion in the previous 5 years (as a comparison, between 1964/65 and 2009/10, the UK Government has raised approximately £283 billion in direct tax revenue from oil and gas production after adjusting for inflation at 2010/11 prices). If only a fraction of these receipts were returned to Scotland, the Future Generations Fund could quickly become a formidable funding reserve fit to help Scotland's low carbon and renewable revolution lead the world. This would be the true legacy of our oil and gas revolution: a funding stream that kick-started the next revolution in low carbon. We therefore reiterate our call for those North Sea oil and gas revenues to be returned to Scotland.

80. Scottish Ministers recognise that the size of the proposed Future Generations Fund from offshore energy projects will likely never reach the scale of a fund that could have been created from the oil and gas revenues lost from Scotland; however it is crucial that Scotland does not yet again lose out on this next energy revolution.

81. There are important principles at stake on ensuring fairness in benefits arising from the exploitation of natural resources. The evidence from the Independent Expert Group to the Commission on Scottish Devolution ¹³ found that there was much international experience of revenues from natural resource exploitation being shared by different levels of government. Prior to Scottish devolution, Northern Ireland and the Isle of Man benefitted from formal arrangements for sharing North Sea Oil revenues. Ensuring Scotland receives a direct revenue stream from the new energy revolution is simply a matter of fairness and is entirely in line with international practice. It is a proper means of providing an input into the cost of supporting the infrastructure necessary to underpin the sector.

How could such a Future Generations Fund be set up under the current devolution settlement?

82. Legislating in the Scottish Parliament to create a Future Generations Fund as a separate, free-standing entity with its own legal identity would theoretically be possible. However, the Scottish Government would not have the powers to invest revenues contained in the Future Generations Fund for the future, because such revenues would have to be spent in the following financial year as part of the annual Budget proposals; nor do we have powers over the substantial oil and gas or renewable revenues. This would undermine the ability of the Future Generations Fund to act as a potentially long-term repository of revenues from energy sources which could be used for the benefit of future generations.

83. While a Future Generations Fund would clearly be the most appropriate vehicle on which to take forward our aspirations, it is equally clear that the Scottish Parliament gaining increased powers over revenues, borrowing rights and investment powers are crucial if a Future Generations Fund is to be able to maximise the extent of the value that it can bring to Scotland.

Action 3: Creating a "register of community benefit"

84. Earlier in this consultation paper, we saw evidence that communities can encounter difficulties when it comes to understanding the levels of benefit that they might expect to derive from a development in their locality. It is important then to ensure greater transparency in these processes which would help local communities better understand the levels and types of community benefits that they could realistically be able to achieve from a renewable energy development.

85. The Scottish Government sees merit in the creation of an open and transparent, publicly accessible register where there would be the publication of the community benefit levels that renewable energy developers offer, have offered or will offer, and other opportunities for communities to get involved in their developments. This would promote best practice commercially among developers of all renewables technologies and provide significant leverage to help communities negotiate on an equal footing. The Scottish Government proposes to legislate to require the creation of such a register, within devolved powers.

Action 4: Enhancing community benefit within the terrestrial and emerging marine planning systems

86. It is a well-established principle that the determination of development proposals under town and country planning legislation should not be swayed by incentives. The models of community benefit and the barriers to accessing those benefits set out elsewhere in this consultation paper are common factors that flow from the consenting of many wind farms across Scotland. Benefits to date have been entirely voluntary, maintaining (by separation) the objectivity of decision-making on wind-farm proposals by either the Scottish Ministers or planning authorities. Developer contributions, on the other hand, allow planning authorities to approve proposals where off-site works are required by means of legal planning agreements or under local government or other legislation. For wind-farms, this may, for example, be related to local road improvements.

87. Work is underway under the banner of Community Renewables Scotland to provide access to finance at the high risk pre-planning stage where applications may still be turned down. An initial business case was developed by Scottish Agricultural College and Community Energy Scotland and has now been published. It confirms the potential demand for a pre-planning loan fund to encompass the needs of both the wider community and land manager/farming businesses. The report identifies potential to transform the scale of community and local ownership of renewables in Scotland - with 900 MW of wind and hydro and up to 80 MW of heat - within the next 5 years, unlocked by pre-planning finance. There would also be the opportunity for coastal communities interested in developing offshore renewables to access the fund.

88. Scottish Ministers would be interested in stakeholders' views on these matters. In relation to good governance, transparency and maximising community benefit could the terrestrial and the emerging marine planning system - within their legal remits - operate more creatively? For example, could a Statement of Community Benefit could be introduced to accompany applications for wind-farm developments?

Action 5: Maximising community benefit opportunities from renewables projects on property owned by the public sector.

89. The public sector must lead by example in providing community benefits from any renewables developments on the public estate.

90. Forestry Commission Scotland is looking to act as a flagship for providing community benefit through emphasising the importance of securing leading-edge community benefit in negotiations with potential development partners. This could be in the form of, for example, equity participation. The Scottish Government will give priority to adopting similar approaches on other government-owned property and we would also expect the Crown Estate Commissioners to adopt a similar approach with respect to their holdings, particularly on land. When developments are commercially viable, a similar approach should apply for marine, taking into account the fundamental differences and overall economics.

Encouraging debate

91. Views are sought on the five principal actions set out in this chapter but we also want to encourage discussion and receive suggestions about other possible ways of securing benefits for Scotland's communities from the exploitation of our natural resources. This includes views on to whom the revenues secured should accrue and how they should best be utilised.

Further action by the Scottish Government to realise the full benefits of our low carbon energy resources

92. This paper has clearly set out the case for Scotland's communities to secure the full benefits of Scotland's low carbon energy revolution. The actions suggested in this paper will go a long way to realising those benefits, but in parallel the Scottish Government is also clear that maximum benefit for the people of Scotland can only come when Scotland has full control over its energy resources.

93. We have already set out a clear and unambiguous case in our National Conversation that Scotland needs many of the legislative powers over energy policy which are currently held by the Westminster Government. The current complex and arbitrary split in powers between the Scottish and UK governments is a real impediment to the development of low carbon energy in Scotland - whether in the artificial 12 mile limit for CO2 storage offshore or in Ofgem's lack of accountability and discredited transmission charging regime. At present the UK's arrangements do not properly incentivise the development of the greater low carbon energy potential of Scotland; nor do they allow Scotland to secure the full benefits from developing those resources.

94. The Scottish Government has always maintained that the current system of transmission charging for electricity acts as disincentive to low carbon generation in the best places for this generation. The current Ofgem charging system results in Scottish electricity generators paying the highest grid charges in the UK because it levies higher charges on generators furthest from the main centres of demand for connection and use of the grid. This favours generation in the Southern part of the UK and presents an inbuilt bias in the UK transmission regulatory system against Scottish-based generation.

95. Generators in the North of Scotland face the highest charges in the UK of around £21.58 per Kilowatt Hour, compared to a subsidy of £6.9 per Kilowatt Hour in London. As a result, Scottish generators produce 12% of UK generation, but account for 40% of the transmission costs, or about £100 million per year more than their fair share.

96. Moreover, the way in which the new offshore transmission charging regime is being developed by Ofgem is likely to compound the mistakes of the approach to onshore charging. The Scottish Government believes that instead of the discredited, discriminatory Ofgem approach, we should be moving towards a transmission system where low carbon is incentivised rather than disincentivised, whilst protecting the needs of consumers. The current system of transmission charging is being reviewed by Ofgem in its TRANSMIT review ¹⁴, and the Scottish Government - supported by the Scottish renewables industry - will again make the unanswerable case for an alternative transmission methodology based on a flat rate charge for all generators, irrespective of where on the grid network they connect.

97. Full legislative competence and control of revenues from energy would provide a lasting benefit, building on the points made in this paper - and it is on this basis that the Scottish Government continue to make the case to the UK Government to use the forthcoming Scotland Bill to transfer full powers to the Scottish Parliament.