The challenges of changing Scotland's economy

The great energy transition is taking place all over the world. But there can be few countries which present as many opportunities, challenges and dilemmas as Scotland.

On one hand, there are “natural resources that are the envy of the world” offering “a golden ticket for UK growth”.

That was the viewpoint of Rain Newton-Smith, director-general of the CBI business umbrella organisation, speaking at its annual Scottish dinner in Glasgow on Thursday night.

While the rest of the economy flatlined last year, the net zero portion of it grew by 9%, she claimed, adding that Scotland can offer investors the added lure of a relatively highly-skilled workforce, the research strengths of its universities and financial skills to make projects work.

On the other hand, the fossil fuel industries appear to be declining faster than the green ones can rise.

And the industries that ought to be gaining from the transition from fossil fuels are suffering from a gap in demand while that potential remains out of reach.

In recent days, Mitsubishi Electric announced plans to cut 440 jobs from its Livingston workforce making air source heat pumps. While it retains many more to continue making equipment, that market remains far from mature.

It requires sticks and carrots to help homeowners make the transition from fossil fuels and to build the skills base to install and maintain pumps. These are roles for government.

Alexander Dennis, the long-established bus builder in Larbert and Falkirk which is now controlled from Canada, has announced 160 job losses.

The company still employs 1,800 people around the UK but says government policies at Westminster and Holyrood are making it hard to compete.

Public funds are being poured into renewal of low-carbon bus fleets, with strings attached to contracts that add to labour costs. The same is not expected of workers’ pay and conditions on imported buses.

There is a 10% tariff, raising the price of an electric bus as it arrives in Britain - a lower import tax, points out Alexander Dennis’ boss, than diesel buses.

And then there’s the Grangemouth refinery. Government policies are directed at reducing demand for refined oil, so the refinery’s owner, Petroineos, sees little prospect they can turn around repeated annual losses.

New, more efficient, refineries can send us refined product and that is what PetroIneos is pledged to provide.

If they can ensure the road tankers keep rolling out of Grangemouth with sufficient petrol, diesel, heating and aviation fuel, then the impact on the Scottish economy should be limited to the loss of 400 jobs there and – let’s not forget – a source of earnings for some of the 2,000 to 5,000 contractors on the Grangemouth complex on weekdays.

But there is a symbolic significance to dismantling the plant at the centre of Scotland’s economy which, for 100 years, has been fuelling and lubricating every aspect of that economy.

Especially when it’s unclear what will replace it.

With its location, history, pipelines and transport links by sea, rail and road, the Grangemouth site is well placed to become a hub for bio-fuels, using grain to propel aircraft or forestry and food waste for other fuel uses, or as a centre for cracking water with renewable power to isolate hydrogen.

That much has been established in phase one of Project Willow, with phase two of this, where the stakeholders consider their options, now under way.

But for workers losing their jobs at Grangemouth, that thinking about how to offer a "just" transition from fossil fuels could have been under way years ago, with those plants designed, approved and under construction.

Other countries are building these hydrogen plants and moving ahead with Sustainable Aviation Fuel. Huge subsidies are going into green manufacturing in the USA and China.

According to Ms Newton-Smith at the CBI, Britain has moved down the table for green investment, also being overtaken by France and Germany. It has lost "first mover" advantage in developing new technologies and industries.

Investors are restless to get going, she says. The CBI has identified £57bn of “green growth opportunities” this decade.

But, as she also points out, “this stuff is complicated”. It’s also risky.

So while Scotland is a world leader in setting targets, it’s not enough to set out visions which the climate change watchdog describes as stalled, with targets which have ceased to be credible.

Investors are looking for detail and action which joins up and confronts hard choices.

As with the heat pump market and electric buses, governments have a vital role in shaping markets and can do so in ways that reduce investors’ risk.

One example of special interest to Petroineos is the market for sustainable aviation fuel (SAF). The pace at which airlines are required to switch to low-carbon fuel will determine demand.

Can airlines be incentivised to co-invest with SAF manufacturers, or should government step in with mechanisms to put a floor under the price of fuel?

To no-one’s surprise, the CBI boss highlighted the case of her organisation’s members in the oil and gas sector – five tax changes in two years and another one looming when the Treasury sets the limits on investment allowances.

Questioned later about this in front of the CBI audience, Iain Murray, Scotland secretary in the UK cabinet, hinted there could be a softening of the stance on the industry’s tax incentives to keep investing in remaining offshore oil and gas assets.

Even if Grangemouth won’t be refining that crude oil, a lot of the high-emissions black stuff will still be required to keep the economy moving.

Fierce lobbying by the industry may be getting through. The CBI leadership was boasting of how many meetings it has had with the new team in charge in Whitehall. Not everyone will be reassured by that.

Ministers have been reminded that if growth is their key mission, then international investors want to see consistency in policy - and they have other places they can invest.

“To put it simply,” said Ms Newton-Smith, “it’s very hard to make the case to global boardrooms for more investment in renewable energy in the UK when current revenues aren’t profitable.

"And while we get the need (for more tax revenue), it’s not going to work to take with one hand without encouraging with the other”.

Nor, she added, does it help to have the air of gloom emerging from Downing Street.

Business likes to think positively, and it’s looking for more hope and optimism.