Yes you can use someone from your undergrad department regardless of where the PhD is taking place. That's what I did.
I don't see any need to worry about the 3 year gap.

In which case I would tell him that I needed more supervision than he is able to provide and would ask if he would support another supervisor taking that task on.
How you phrase these things needs great care to ensure it doesn't sound critical or aggressive but him being very busy is the leverage you need to make the change.

I had to suggest two to three potential reviewers on each of my publications.
The editor can pick one or ignore all of them and choose his own.

If you genuinely need your co-supervisor, I would email and then either phone or ask by email for a meeting on date X, Y or Z for face to face feedback and allow them to select whichever of those dates best suits them. Allow them to offer an alternative date. I would also tell them how long you expect that meeting to last. You should try and make it 30 mins. Once the meeting starts you can probably get away with extending that to an hour.
That approach avoids the problem of setting deadlines on them which can provoke a less than friendly response.

The key is being as focussed during that meeting as possible so they trust that you won't waste their time by turning up and waffling like an idiot. You also want to make sure your questions are reasonable for you to be asking at this stage of ypur PhD.

Being well known in his field isn't really relevant because as you've said, the group doesn't appear to be very good at publishing.
In what way is he powerful?

It sounds like you are well into your second year.
If you have a clear idea of what you are doing I would be considering breaking away from your supervisor and working independently. This is my advice for working with all poisonous or incompatible people. If independent working doesn't solve it, I would be considering other options such as finding other opportunities.

Are you in the UK? I ask because if you are, 7 to 8 years is ridiculous.
Your age should not be a concern. I did my PhD in my mid to late 40s. Many people do this in their later years,

In summary, you have to look for areas to take control of your PhD.

I would be very surprised indeed if we emerge from this situation without seeing several universities disappear.
I would however say that many PIs will have secured external funding and I would suggest you continue to contact those who are advertising at the moment. There's a small window to get into a position and if you manage it you might be OK for 2-3 years. That might be enough to ride out the storm.
Unfortunately, not many businesses are going to be hiring either. Well over 1 million people have signed on for Universal Credit in the last 2-3 weeks and that's going to get worse.

As for cold calling, I have to say that my old supervisor always told me that if he had funding he would have either advertised the position immediately or would have allocated it to someone. He might not work the same as others.

In short, I would agree with TQ and Bewildered but with the exception that if I were you, I certainly wouldn't hold off until it was clear that window I was talking about had closed.

By giving you a scholarship, they are investing in you instead of another person.
I think they want you to explain why they should do that in your case.
Why are you specifically worth investing in? What's so special about you?
eng77's post above gives a good suggestion about how to answer that question.

Most of my former PhD colleagues went on to do postdocs in substantially different fields. I guess it depends on the number of applicants a supervisor receives. If you aim your applications at well known institutions and world leading PIs you'll always face difficulties because of the numbers involved. There are plenty of perfectly good PIs who receive only a small number of applicants.

Plenty of people get their PhDs without a single paper to their name so if you are aiming to submit soon I wouldn't overly worry.

I should say though that the only person whose advice matters as regards progress is your supervisors so you should ask for that.

TQ, I can only imagine they want to contact references before interview either as a upfront tool to allow them to select those suitable for face to face rather than wasting time interviewing someone whose references don't back them up, or, more likely, because once they've found a suitable candidate they don't want to mess about for weeks on end trying to get reference letters sorted out. Perhaps in their experience this latter stage has cost them good candidates before.
Either way, if they are asking for this, there's probably a good reason for it.

Unless you feel your referees could be inconvenienced by this I would probably advise not putting potential roadblocks in the way of any recruiter. Especially in a cut-throat game like academia where other suitable candidates are ticking that box.

If one of these potential supervisors is prepared to take you on but has "no good research problems" to work on then you could suggest a topic.
If all else fails, you need to consider moving to another university.
I wouldn't recommend putting your career on hold unless you can secure a definite future position at your current university as TQ suggests. Personally, I wouldn't trust a start date later than about 6 months time but it might be worth a wait.

You mention the standard of your university three times. Is that the root of your reluctance to move elsewhere? If so, I would seriously suggest you revisit that thought process before it forces you to make a potentially bad decision. For example, you go on to say that this university (which is world leading in your field) has no good research taking place to interest you. This seems a very odd contradiction. What makes you so sure that this university is the best in the world by a long shot for this research? I ask because before I started my PhD I had no credible way of being able to judge other than taking the opinions of others.

By the way, I wanted to add that there is absolutely no way that your future is going to be "ruined" by any of this so I wouldn't get overly worried.

rewt, that's an interesting approach.
How does sharing incomplete data benefit you?

On the point of dissemination of results, the issue is really one of timing. Do you disseminate results before publishing and risk facing the problems you are experiencing or do you wait until you are safely published and then do it?
You need to consider the pros and the cons of both approaches.

41 is definitely not too old and the Honours degree probably won't be a problem as long as you have a 1st or 2:1.
Good luck.