True North’s Senior Advisors Eilidh Whiteford and Allister Thomas share their thoughts on the UK Government’s Modern Industrial Strategy, published yesterday.
There’s no shortage of ambition in the UK Government’s Modern Industrial Strategy published yesterday, and much to welcome. The UK has been crying out for just such an initiative to address its economic malaise and to provide policy direction and focus in a rapidly changing and unstable global environment. The document, which appeared along with a slew of accompanying sectoral plans, highlights some of the main structural barriers inhibiting the UK’s competitiveness and sets out a pathway to a leaner, fitter, more productive economy. It won’t grab many headlines, but it does signal a willingness to grapple with some of the UK’s stickier economic challenges, it sets out a clear direction of travel, and it might just boost the Government’s battered credibility. The big question, though, is whether this industrial strategy can make enough tangible difference to the UK economy to deliver a step-change in productivity, and in doing so, boost living standards enough to revive a deeply unpopular government’s electoral fortunes.
There are few surprises in the eight sectors identified as having the greatest potential for high productivity growth. Advanced manufacturing, Clean Energy, Creative industries, Defence, Digital and technologies, Financial Services, Life Sciences and Business Services are all areas of existing strength where the growth potential and the UK’s competitive edge are already widely recognised. It is helpful and timely, however, to have a statement of strategic intent that looks beyond the current electoral cycle, cuts across government silos, seeks to capitalise on areas where the UK has comparative advantage, and addresses some of the structural challenges inhibiting economic growth. There are plans to cut the regulatory burden on business and improve the way the private and public sectors work together to deliver better economic outcomes. Aberdeen’s Energy Transition Zone is highlighted in the Clean Energy Industries Sector Plan as an exemplar of the marrying of private and public capital to advance net zero and deliver a meaningful impact on jobs and GVA.
In fact, the Industrial Strategy plays to many of Scotland’s existing strengths and areas of growth potential. The UK Government’s commitment to creating a more conducive environment for trade will be beneficial for all our exporters, not only those in target growth sectors. In recent years, Scotland has done rather better at attracting inward investment than any other part of the UK outside London and the South East, but has had to work hard for it; the new industrial strategy’s emphasis on regional development should help facilitate a shift in focus towards parts of the UK with high development potential and lower costs, including Scotland. In sectors such as life sciences and technology-related fields, there is undoubted potential to commercialise more of the research coming out of Scotland’s world-leading universities and research institutions, but spin outs and start-up companies have often found it difficult to scale their businesses here. One of the tests of the industrial strategy will be whether it can, in practice, entice more investors to look beyond London and the Oxford-Cambridge corridor.
The industrial strategy also provides evidence of better working relationships with the devolved governments than in recent years, and – in relation to Scotland – a good deal of common ground in terms of policy priorities and objectives, notably in relation to clean energy, high-tech industries and innovation. Notwithstanding the tetchy political dynamics of a potentially close-run electoral contest between the SNP and Labour at next year’s Holyrood elections, both parties are committed to delivering high quality jobs and boosting productivity; and both have made substantial reputational investment in delivering the transition to renewable energy. Both governments working together to deliver these shared priorities can only be to the mutual benefit of people and the economy.
Where political differences are most likely to emerge are in relation to the UK’s significant increases in defence spending and renewed prioritisation of defence procurement highlighted within the industrial strategy. The SNP has historically been more sceptical of US and UK foreign policy than Labour, tending to advocate diplomatic solutions and questioning the economic benefits of increased military spending. Those arguments, however, have less traction in the current volatile geopolitical environment, especially as Scotland’s high-tech defence-related industries have significant potential to deliver well-paid, highly skilled jobs. Labour will want to exploit what they will perceive as a strategic weakness in the SNP’s offer ahead of next year’s elections.
As expected, there is a strong focus on the transition to clean energy as a key driver of job creation, growth and productivity. One of the industrial strategy’s headline messages is around initiatives to reduce power costs for energy-intensive businesses in Britain as part of its bid to boost investment. This includes manufacturing, which faces some of the highest electricity costs globally.
To cut prices, the UK Government proposes to exempt certain industries from levies including the Renewables Obligation, Feed-in Tariffs, and the Capacity Market, as well as harnessing additional funds made available by linking the UK and EU carbon markets. The move raises questions over the impact this may have for the Contracts for Difference (CfD) auction, which is funded by some of these levies such as the Renewables Obligation. The impact won’t be known until 2027 after a consultation, “which will be launched shortly”.
How this links to upcoming decisions on the Review of Electricity Market Arrangements (REMA), also remains to be seen. A REMA decision is expected imminently, with Bloomberg reporting today that the government is “poised to reject” zonal pricing proposals. Many voices within the Scottish renewables industry have warned that the introduction of a zonal pricing system would see investment cancelled or severely stalled as an entirely new market system is put in place. DESNZ uses 2032 as the earliest implementation date - meaning a period of seven years of uncertainty as the industry awaits the final design of this new market. In the meantime, project investment would be at risk at a time when the UK is seeking unprecedented investment levels in clean power technology and infrastructure. Ongoing issues around transmission network use of system (TNUoS) charging, which is penalising northern Scotland projects, are also due for decision from regulator Ofgem in coming weeks.
The UK’s clean power ambitions are predicated on investment in offshore renewables going ahead. Zonal pricing would jeopardise that investment. It is worth noting that the reforms set out in the industrial strategy could take place within the existing national energy market, reducing bills for business without the need to introduce a “zonal” system.
Alongside the main strategy document, the Government has also published the Clean Energy Industries Sector Plan. Much of the detail is already known or publicised; however, the government seems to anticipate a wider role for the Clean Industry Bonus (CIB) scheme, introduced as part of the AR7 CfD round. The scheme, aimed at incentivising investment in manufacturing and jobs, was doubled in May due to high demand. Now, the government is mooting its expansion for application in hydrogen and onshore wind, as well as focusing the investment on areas including floating offshore wind supply chain and creating new criteria of workforce protection and skills in future investment rounds.
Floating offshore wind is one of the high growth specialised areas spotlighted in the strategy. There are interesting snippets on securing test and demo capacity in “different geographic regions” to help realise development and manufacturing capacity. The government has said it will support multiple “value for money” projects in AR7 to enable this. The government has also signalled a commitment to work with industry on the role of “stepping stone” floating projects to enable industrialisation and cost reduction. In Scotland, Crown Estate Scotland’s INTOG leasing round - focused on small scale demo projects as well as gigawatt-scale developments to help decarbonise oil and gas assets - have been categorised within this “stepping stone” brief.
Much of the detail on the shift of the workforce from oil and gas to clean energy and low carbon industries has been left out of the document, instead to be published “shortly” in a separate Clean Energy Workforce Strategy, as the devolved nature of skills development is likely complicating that piece of work. These are challenging times for Scotland’s colleges and universities, with well-publicised financial difficulties overshadowing wider conversations about the skills landscape. But skills will be mission-critical to the success or otherwise of the energy transition and the Scottish Government needs to grasp the nettle.
If the oil and gas sector is very much the elephant in the room in the main industrial strategy document – North East Scotland is described rather euphemistically as a “critical mineral cluster” -- it does at least gain a mention in the Clean Energy Industries Sector Plan in a short note on the future of the North Sea, focusing on fostering an “internationally leading clean energy industry”. Oil and gas is recognised as continuing to play a “central role in the country’s clean energy story” within the context of extraction from existing North Sea fields and grasping transition opportunities, but the role it needs to play in supporting the transition to clean energy is largely unacknowledged.
The UK Government has set itself ambitious goals; its task now will be to stay on course, avoiding distractions and sticking to its chosen path. They may well find some of the obstacles to implementation harder to circumvent than they anticipate, but if they want to see their ten-year plan through to fruition, they will need some high profile early wins to restore confidence in their ability to deliver.