Chamber and committees

Our intention is to get there, but it will be challenging to do so in the present financial environment. We will do what we can in this parliamentary session to try to get to that 10 per cent target. I do not have the clarity right now on what budgets will look like next year or the year after that—there is a level of uncertainty about that. However, that is certainly the target that we are aiming to deliver in this parliamentary session and there is no lack of desire to try to achieve it and to ensure that that investment happens in this session.

When a health board puts forward a business case for a capital investment project, it will go through the normal process in Government for considering proposals, but it must be set alongside all the other competing demands in the capital budget—a capital budget that, I should say again, has been cut. We have to balance it against the competing priorities in NHS Scotland and the different proposals from different boards. If the board brings forward a proposal, it will go through the normal process, but it will also have to be considered alongside all the other capital projects in NHS Scotland.

There are broadly three reasons for companies defaulting. Alongside greater volatility, greater competition in the marketplace results in suppliers dropping out of the market. We have discussed that at committee previously. The proportionate size of the mutualisation level has also failed to keep pace with the scale of the way in which the industry has developed. There are also aspects around the way in which companies pay into the scheme. For example, as it stands, some of the default comes about because the companies pay only on an annual basis, and that is sometimes after the end of the financial year. Ofgem is looking to move that payment to a quarterly basis where the money is ring-fenced during the year and, if the company goes out of business at the end of the year, that money can be recovered.

A variety of factors therefore result in companies dropping out of the marketplace and that then contributes to the overall cost of the mutualisation process and the defaulting on mutualisation, and that is why, given the volatility and greater competition of the past five years, we have seen a significant increase in the need for mutualisation to be exercised.

Thank you, convener, and good morning.

The draft order under consideration is a minor amendment to the Renewables Obligation (Scotland) Order 2009. Before I move on to the amendment, it might be helpful to provide some background information on the scheme.

The renewables obligation scheme was introduced in 2002 to support renewable electricity generation projects. Equivalent schemes are in place in England and Wales and Northern Ireland, and are managed under separate legislation. All three United Kingdom schemes are administered by the Office of Gas and Electricity Markets. Throughout its existence, the Scottish obligations scheme has remained largely aligned with the England and Wales scheme.

The scheme closed to new generation capacity across the UK in 2017, but it will remain operational until 2037. Some 565 existing generators are accredited under it. That accounts for 8.8GW of renewables capacity in Scotland.

The obligation requires electricity suppliers to source a percentage of the electricity that they supply from renewable sources. Accredited renewable generators are awarded certificates according to their output per megawatt hour. They are then sold to suppliers. That incentivises renewable generation by providing projects with revenue in addition to the wholesale energy price.

Electricity suppliers fulfil their obligation by providing the required number of certificates to Ofgem in proportion to the amount of electricity that they have sold. Alternatively, they can make a fixed payment into a buy-out fund at a higher price than procuring certificates typically requires. That fund is then recycled back to suppliers that provided certificates to Ofgem. However, when some suppliers fail to meet their obligations, a shortfall in the fund is created, which reduces the value of any recycled payments. A mutualisation mechanism exists within the scheme to prevent excessive shortfalls. If the shortfall exceeds a certain threshold, existing suppliers are required to pay the unmet obligations of suppliers that did not meet their obligations. In each of the past five years, mutualisation has been triggered due to an increasing number of suppliers defaulting on their obligations.

The amendment order under consideration will alter how the mutualisation threshold is determined under article 48 of the Renewables Obligation (Scotland) Order 2009. The mutualisation threshold has failed to keep pace with the growth in the scheme and proportionality. It is now considerably smaller than it was when it was first introduced.

The aim of the amendment is to better protect customers by restoring the balance of risk between generators and suppliers. As the cost of the scheme to suppliers is passed on to consumers in their energy bills, any increased costs associated with mutualisation are also passed on.

The amendment will alter the mutualisation threshold for Scotland from a fixed value of £1.54 million to 0.1 per cent of the forecast costs of the scheme across the UK. It will also restore alignment with the scheme in England and Wales regarding mutualisation as the UK Government made a parallel amendment in 2021 to move to a variable level of scheme costs. Critically, the amendment will ensure that suppliers and, in turn, their customers are not more likely to face the costs of mutualisation in Scotland than they are in England and Wales.

Finally, a further provision is included in the proposed Scottish statutory instrument, allowing Ofgem to publish the mutualisation threshold for the 2023-24 obligation period as soon as reasonably practicable after 1 April. Ordinarily, Ofgem must publish the threshold before the new obligation period starts but, given that the SSI will not come into force until 31 March, it is allowed to publish the threshold later than that.

For the reasons that I have set out, I believe that the proposed amendment is necessary and proportionate, and I am more than happy to answer any questions before we move on to the debate.

The scheme was designed on that basis. However, the much more deep-rooted issue—the committee has covered it previously—is the way in which companies, particularly suppliers, have been able to enter into the market without the necessary financial protections in place, and how that led to all the problems that we have had with higher costs and energy prices during the past 18 months in particular.

Ofgem is working on how it can put further protections in place to reduce the risk of companies falling out of the market so quickly and on greater financial protections for them because, in the end, the consumer ends up picking up all the associated costs. The threshold will help to make sure that the mutualisation process operates more fairly, which means that those who meet their obligations are not unfairly penalised because of other operators who do not meet their obligations.

That makes a change.

Thank you, convener. I apologise for being delayed in arriving for the committee’s session.

The portfolio draws together many of the key strands that are required to deliver on the Government’s ambitious and world-leading plans around climate change, biodiversity and the transition to net zero, while continuing to support the most vulnerable in society and deliver a safe, accessible and affordable public transport system.

Our 2023-24 budget comes against a difficult financial backdrop, as we work collectively to tackle the acute cost crisis that faces the country while managing inflationary pressures across our budgets. That has required reprioritisation towards those programmes that most effectively deliver on our key outcomes.

In the 2023-24 budget, we will spend more than £3.5 billion on transport, including investment of more than £1.4 billion to maintain, improve and decarbonise Scotland’s rail network. That includes the provision of £15 million to allow the exploration of a pilot to look into the removal of peak-time rail fares as part of our fair fares review. We will invest £426 million to support bus services and their users, and will provide access to free bus travel for more than 2 million people, including all under-22s.

We will continue to increase our investment in walking, wheeling and cycling, to which we are allocating £190 million in 2023-24, as well as spending £440 million to support our lifeline ferry services, connecting our vital island communities and supporting priority harbour projects.

We are providing record investment to protect and restore nature, including our peatlands, and to tackle the causes of biodiversity loss. We will also continue to support our forestry bodies to deliver the woodland creation target, which will result in 16,500 hectares of new planting in 2023-24.

We recognise that substantial investment is needed to deliver on our waste and recycling targets. In this budget, we are investing more than £47 million to drive Scotland’s circular economy, which will reduce reliance on scarce resources and reduce waste.

We are committed to taking strong action to meet the climate challenge and are investing more than £81 million in climate action. That includes investment in the just transition fund, to accelerate the development of a transformed and decarbonised economy in the north-east and Moray.

Finally, we will continue to provide significant budget for energy to make our homes and buildings warmer, greener and more energy efficient, and we will increase funding to support the fuel poor through our heat transition. In the short term, we will continue our fuel insecurity fund next year, which we will provide with some £20 million of investment.

The portfolio budget delivers on an ambitious agenda, but it is not without risk, such as the on-going impact of Covid on public transport patronage and revenue, and inflationary pressures across the portfolio that impact significantly on areas such as pay, infrastructure projects and contracts.

I can, however, reassure the committee that I will continue to reprioritise within my budget, not only to meet our legal, statutory and contractual commitments, but to achieve value for money against a challenging financial position.

I am happy to respond to any questions that the committee has.

I think that just over £60 million is being provided to help to support bus services. That includes an element for the community bus fund. Provision of £5 million of capital funding and £1 million of resource funding is accessible to local authorities to look at developing initiatives that are aligned with the powers in the Transport (Scotland) Act 2019. They could look at the franchising model or at running their own bus services.

The bus funding that we are providing in the next financial year includes provision specifically to support local authorities to develop proposals and to work through some of the details of how they might want to use the powers in the 2019 act to do that.

We have to be quite careful and take our time in ensuring that we run the right pilot. There is a danger that £15 million could be spent on running a pilot, at the end of which we say that patronage levels have increased. However, would those people be people who were always going to return to using rail anyway or the same people who were already using it? Is the approach making it more accessible to those on lower incomes? We need to be careful to ensure that the pilot is meaningful.

That is why the work that is being taken forward by officials in Transport Scotland and with ScotRail will have to demonstrate how we can ensure that the pilot will provide us with the level of data and understanding that we are looking for. I want us to take our time to ensure that we make the right choices and that we have the right processes in place to be able to evaluate the pilot effectively; otherwise, we will lose that opportunity.

Yes. I am happy to provide any further information that would be useful.