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Contents
2
Overview
3
The relative attractiveness of different countries for investment
4
Factors impacting investment decisions
5
Attitudes to political risk
7
An International Perspective
Overview
As part of Pinsent Masons’ involvement in the Scottish Low Carbon Investment conference in
October 2012, we asked delegates to complete a survey to capture views on a range of factors
affecting investment in Scottish renewables. The survey was also subsequently opened to members
of the Aberdeen Renewable Energy Group (AREG).
Representatives of 50 organisations from a broad cross section of market participants completed the survey. Respondents included: developers and technology providers, such as Sunamp Ltd, Aquamarine Power, Mainstream Renewable Power and Carbon Free Developments; professional advisers, such as PwC and GVA Grimley; academic institutions, including The University of Edinburgh, The University of Strathclyde, and Adam Smith College; and public sector bodies, such as Aberdeen City Council.
The results create an interesting snapshot of how a number of organisations with operations in Scotland view the country’s place in the global renewable energy world.
The headline findings of that survey were that:
• Respondents indicated that they saw the UK as the most likely destination for investment during the next 3 years, with China and Germany representing the biggest challengers
• Consistency of government policy and commitment to renewable energy at a national governmental level is seen by respondents as the most important factor impacting investment decisions – a point which brings into sharp focus the impact that UK coalition ambiguity on energy policy will have had during 2012
• 70% of respondents disagreed with the statement that ‘A change in the constitutional position of Scotland within the United Kingdom would cause me/my organisation to consider it more favourably in our investment priorities’. This perhaps reflects a need for the ‘Yes to independence’ campaign to make clearer their message to Scottish and international stakeholders on renewable energy in Scotland, and address concerns about the sources of funding for such projects in a post-independence environment.
Clearly views have been shaped by a year which has arguably surpassed any other in terms of levels of regulatory reform and political change – factors which will carry over into 2013 and beyond.
The challenge will be for market participants and government to continue the good work that has already been done to promote Scotland as a global renewable and alternative energy ‘centre of excellence’ on the world stage against a backdrop of continued uncertainty. As other nations vie for investment, the focus and energy that has been put into building Scotland’s reputation must not be allowed to dissipate.
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The relative attractiveness of different countries
for investment
Respondents to the survey were asked to score several countries based on their likelihood of investment there within the next 3 years. The UK gained the highest aggregate score, and while some caution needs to prevail given that the respondents to the survey were predominantly UK-based, it is encouraging that there is significant appetite for investment within the UK.
China and Germany are the next best-placed, narrowly leading the USA. Perhaps one common denominator across all of these countries is that they have potential for investments of significant scale, although it is surprising that Germany is not considered to be subject to more investment given its stated ambition to move away from nuclear power. As with Spain, it may be that the ongoing uncertainty within the Eurozone is affecting confidence. Spain in particular could have featured higher in the ranking in previous years.
Other countries were cited by respondents with Canada, Norway and the United Arab Emirates featuring, as was the African continent. Looking at the UK specifically, perhaps unsurprisingly, 84% of respondents cited Scotland as the most attractive region in the UK for investment, with only the North East and South East of England being mentioned as alternatives. Given the significant scope for development that exists in Wales and the Pennines, it is notable that there is not greater appetite for investment in those areas among respondents.
International links will yield major opportunities
The amount of “international investment” in this sector is only increasing. The competition for capital remains truly global in nature. This is particularly the case in countries where the requirement for new energy infrastructure is even more pressing than our own – such as in Africa for example. While a clear strategy for investment in the UK is sensible for indigenous operators, opportunities for overseas investment should not be overlooked. Significant opportunities of scale exist in onshore wind in particular, with Germany, Africa and China all offering different attractions. A key driver for developing a sustainable renewables industry in Scotland is ultimately the export of technology, knowhow and skills in future to the benefit of the domestic economy, and it is worth developing those relationships now with the major global players to prevent others from stealing a march. In that way we can make sure that wherever capital is required there is
an opportunity to reap economic benefit.
In terms of inward investment, while the UK and Scotland in particular do remain particularly attractive, the next phases of Electricity Market Reform as well as further review of the level of Renewables Obligation support will be crucial in delivering on the potential that both the UK and Scotland (within or without) it can deliver.
Euan McVicar is a Partner and Project Finance specialist in the Energy and Natural Resources team at Pinsent Masons. 200 180 160 140 120 100 80 60 40 20 0 Australia China France Germany Japan Qatar Spain USA UK Pinsent Masons | Scotland’s Place in the Renewable Energy World
Factors impacting investment decisions
Consistency of, and government commitment to, national energy policy Availability of financial incentives
Availability of a skilled work force Public opinion on renewable energy Strength of legal regime
Scale of investment opportunity
Certainty of tax treatment/fiscal regime Regulation – for instance, the planning regime Access to a strong supply chain
Overall economic position of the host country Quality of infrastructure 250 200 150 100 50 0
Survey respondents were asked to score the importance of several factors on investment priorities. Perhaps unsurprisingly, consistency of, and government commitment to, national energy policy is seen as the most important factor to respondents – a point which brings into sharp focus the impact that UK coalition government ambiguity on energy policy during 2012 will have had. All players in the sector – whether developer, funder, utility provider, or supply chain operator – need clarity from the government in order to make what are sizeable investments.
It is also striking that certainty over the tax treatment of investments and the prevailing fiscal regime is the second most important factor although – in reality – this and clarity of government commitment go hand in hand.
Regulation comes in a close third. Lengthy and high profile planning disputes, such as that involving Donald Trump in Scotland, are clearly a cause for concern. Again, these are areas where a clear and cogent approach to renewable energy at a governmental policy level could have an impact.
Perhaps surprisingly, respondents seem less concerned about the overall economic position of the country in which investment is proposed, and the strength of the legal regime. Given that some in the industry are calling for the state effectively to underwrite pricing mechanisms, the ability of a state to meet those obligations should arguably be a more significant factor. Further, it is perhaps paradoxical that, given concerns expressed around regulation, the quality of the host country’s legal regime is not more highly valued. Integrity and independence in the legal system are key to alleviating the level of political risk which organisations seem to fear most.
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Planning processes have come a long way in Scotland
Regulatory issues, such as the planning regime, are always high on the list of considerations for stakeholders, but we have seen some progress in these areas. For example, in 2012 Stornoway Wind Farm was finally consented by the Scottish Ministers. The scheme – now comprising 36 wind turbines with a maximum installed capacity of 129.6 megawatts (MW) – has been the subject of a long and sometimes difficult consenting process over a period of more than 10 years. I have been involved throughout advising the applicant Lewis Wind Power Limited (a JV between AMEC and EDF).
The whole consenting process in many ways characterises the political, procedural and cultural changes which have occurred in the past decade. Originally conceived in the era of the Labour-led Scottish Executive, the bigger scheme was refused consent by the SNP-led Scottish Government (elected in 2007) whereas the smaller scheme has benefitted from the pro-renewable stance of that Government (re-elected in 2011).
Further, the 14 month determination period for the smaller scheme is now typical for an application for a major electricity generation project. But perhaps the biggest difference has been the cultural change which has been driven by the Scottish Government. Applicants can now engage more directly with stakeholders and those stakeholders are now generally more willing to engage and negotiate a solution. AMEC and EDF showed admirable patience and commitment to doing business in Scotland. The changes we have seen should mean that others will not be expected to commit the same levels of time and cost to the consenting process.
While not all applications will be successful, the timescales for determination and the culture of consultation and engagement now in place make the process more transparent and the outcome more certain. That can only be good for attracting investment into the right developments in the right places.
Jennifer Ballantyne is a planning expert in the Energy and Natural Resouces team at Pinsent Masons
Attitudes to political risk
Respondents were asked to agree or disagree with a number of statements, the results of which were as follows:
Yes
No
Don’t Know
The speed of progress on UK Government energy policy has caused delay in my investment decisions / the investment decisions of my organisation.
70%
24%
6%
The Draft Energy Bill in its current form
represents a 'lost opportunity' for the UK.
62%
30%
8%
Uncertainty over the constitutional position of Scotland within the United Kingdom has caused a delay in my investment decisions / the investment decisions of my organisation.
32%
60%
8%
A change in the constitutional position of Scotland within the United Kingdom would cause me/my organisation to consider it more favourably in our investment priorities.
22%
70%
8%
It is notable that delay and confusion over the draft Energy Bill seem to have had a more significant impact among respondents than uncertainty over Scotland’s constitutional future. That may simply be a reflection of the level of investment planned for
England and Wales.
A relatively low 32% of investors say they have delayed investment decisions as a result of the independence debate – perhaps as they seek to close projects before any new regime would be introduced. However, one note of caution would be the finding that 70% of respondents disagreed that a change in the constitutional position of Scotland would cause them to look upon it more favourably in investment decisions. It may be reasonable to suggest that investors are not necessarily anti-independence, and that more detail and further reassurance is needed for Scotland to remain attractive. Certainly, when respondents were asked what single thing could be done to boost the attractiveness of Scotland as a destination for investment, comments around devolution were a consistent theme, with one respondent saying “cease consideration of Scottish independence and commit to continued membership of the United Kingdom” and another stating simply “sort out independence one way or another.” Other suggestions included greater consistency in planning decisions, reducing high island grid charges and finding financial backing for subsea interconnectors.
Scottish Government has work to do
Scottish First Minister Alex Salmond’s commitment to, and reliance on, renewables is in sharp contrast to the mixed messages from Energy Secretary Ed Davey, his Minister John Hayes and Chancellor George Osborne at a UK level. The survey results do not show an opposition to Scottish independence, but do illustrate the concerns and need for detail and clarity on what it would mean for the industry. Scottish Government has promised details in White Paper to be published in November 2013 but the renewables industry will need to see something before then, as autumn 2014 is well within the current business planning and investment cycle. At the same time the UK Government is developing its case for Scotland staying in the union and it will be interesting to see its arguments on renewables, a single market for energy, and its reliance on Scottish renewables to help hit UK targets.
Alastair Ross is Head of Public Policy at Pinsent Masons
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An International Perspective
Interest in renewable energy has increased exponentially in recent years as policymakers around
the world seek access to secure, cheap and clean energy supplies. Here, several of its Partners from
across our international network discuss the strength of the Scottish renewables brand overseas and
the opportunities arising as a result.
How important is familiarity with Scotland and the Scottish brand in driving forward the renewables agenda and creating investment confidence?
Euan McVicar, partner, based in the UK: “I think it is hugely important. Within the renewables sector, Scotland is seen as both part of but distinct from the rest of the UK. The Scottish Government’s commitment to renewables and consistent strong messaging has helped differentiate Scotland and has given comfort to a number of investors and potential investors.
“The importance of consistent positive messaging cannot be underestimated. If familiarity with brand Scotland is the first step towards attracting investment, then positive progress is being made. Undoubtedly Scotland can be an exemplar – although investors are starting to ask questions about what independence could mean.”
John Yeap, partner, based in Hong Kong: “The consistency of message is helping Scotland punch above its weight on the international stage. Scotland is a good example with no similar exemplar amongst countries in the Asia Pacific region, though Denmark is also well-regarded among industry participants in Asia Pacific.”
How would you assess Scotland’s position in the Asia Pacific region?
John Yeap: “There is some interest in Scottish and other European renewable energy assets. It could come from both investment funds (including sovereign wealth funds) and companies that are directly, or indirectly, involved in the renewable energy sector. We also know of developer/operator clients keen to invest in the UK RE. Sources are from, but not limited to, the Republic of Korea, Japan, Singapore, Hong Kong, China, and Malaysia.
“Companies from the region are comfortable in investing in European countries in general, especially the UK. In the key renewable energy markets specifically – namely Australia, China, India and Japan – Scotland is recognised as important contributor to the development of renewable energy markets globally. It is indeed viewed separately from the UK, and has a clear place in the hearts and minds of many investors.
“On the offshore side, the principal actor is China. It is slowly but surely developing offshore wind and is conducting some experiments on the offshore marine energy front. I believe there have meaningful exchanges between Scotland and China on this front and this should continue going forward. The big challenge is that China is keenly interested in developing this sector domestically.
What of the broader global investment perspective?
Euan McVicar: “What we see with potential investors in the Asia Pacific region is true of other jurisdictions too. We are seeing deals involving US private equity and increasing levels of both debt and equity being funded from Germany –
a country which understands the asset class well.”
Dr Ulrich Lohmann, of Pinsent Masons’ Munich office: “There is awareness in Germany of Scottish and UK markets within the
renewables sector, but this sits alongside development opportunities of a significant scale closer to home – such as private equity house Blackstone closing a €1.2 billion, 288MW windfarm.
“One of the opportunities of a significant scale closer to home (from a German perspective) is the issue of connecting the North Sea windfarms to the grid. The provider in charge, Tennet, is prepared to invest €1bn, but €15bn are required. Insurers such as Allianz and Munich Re (both based in Munich) are said to be eyeing the opportunity. This would appear to suck up a big part of the available cash. The challenge for Scotland is to export its knowhow to that which already exists within Europe.”
How are things moving forward in Africa?
Akshai Fofaria, an Africa energy specialist who splits his time between London and the African continent: “It is different to Asia – things are moving more slowly in terms of renewables. Scotland and Scottish industry does appear to be emerging as a player, although its exposure has been mostly outside of renewables to date. RBS has a strong presence in West Africa in terms of project and oilfield financing, while Aggreko has recently been awarded a large coal power station contract in South Africa. The ‘Scottish’ brand therefore recognition exists and will likely be increasingly sector-wide.
“Competition is strong in the more developed African countries, with large companies from Denmark, Germany and India all having significant interests. There does not seem to be much Scottish penetration as yet in the Northern African arena, but Scotland has relationships that it can attempt to exploit in West Africa, the sub-Saharan region, Malawi and South Africa. This presents quite a mixed array of opportunities and risk, from the micro aid based level, to large scale commercial enterprises in a growth industry. Scotland’s current position as knowledge sharer and advisor allows it to demonstrate its industry’s capacity and experience.”
How have Scottish ministers sought to engage potential foreign partners in terms of sharing skills and knowledge? James Elwen, Partner and Head of Pinsent Masons’ Qatar office: “Alex Salmond’s visit to Doha in 2011 generated significant awareness among an influential group of potential investors. The visit provided the stimulus for a useful discussion which invited views on how Scotland’s experiences in embracing the green economy could potentially be applied to Qatar and the wider region. Members of the Doha business community certainly were engaged and engaging when it came to discussion of the advantages of sharing of skills, expertise and research between the two nations.”
How would you assess the impact of the regulatory and policy background on global attitude to the Scottish and wider UK renewables market?
Euan McVicar: “There is comfort in coming to Scotland and it is seen as good place to do business. However the amount of regulatory uncertainty affecting the UK as a whole in recent times has been unhelpful. Will we really see significant Carbon Capture & Storage or Offshore Wind investment until more is known about likely pricing under EMR? The investment community needs more certainty if large spending commitments are to be made.
“There is definitely risk around this market. Delays in policy decisions, such as ROC banding, and perceived lack of visibility on UK government appetite for certain technology types – for instance onshore versus offshore wind, solar and tidal – have definitely affected market confidence.”
John Yeap: “There is a global requirement for a clear, consistent and fair tariff and tariff policy. The most attractive markets are those offering financing mechanisms for renewables developers and, most importantly, a transparent and consistent regulatory framework, with safe, economic, stable feed in tariffs.”
What about the opportunities presented by the export of knowledge from Scotland?
Akshai Fofaria: “This is already starting to happen. Scotland has renewables development aid provision relationships with Malawi, Tanzania, Rwanda and Zambia. There is a significant amount of planned knowledge transfer through focused projects including wind, solar and marine attempting to support communities with the provision of technical assistance, education and funds where Scottish based partners will be used to deliver. Coupled with this are recent political and trade visits to South Africa discussing the potential for further wind farm developments leveraging Scotland’s greater experience in this area.”
Euan McVicar: “Offshore wind seems such an obvious play. If we get that right, supply chain skills can be exported for years as they have been in the Oil and Gas industry. The chance to export Scottish knowledge of project finance is another key opportunity.”
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About Pinsent Masons
Energy and Natural
Resources team
The energy and natural resources sector of the 21st century presents unique challenges and opportunities. Few other industry sectors have as significant a global impact. From inventing new ways of harnessing energy to finding cleaner ways of using existing energy sources. Energy companies across the world are embracing change and challenging the way they do business against a backdrop of geopolitical change and unprecedented natural events. In a sector which is sensitive to political and macroeconomic events, it can be difficult to maintain the pace of change that is required. Our focus is on offering pragmatic advice that makes a real difference – by providing solutions, not just identifying problems. We help our clients to steer a clear path through the regulatory, legal and procurement minefields that stand between them and the development of their business.
Our energy and infrastructure, banking, M&A property, health and safety, planning, corporate, construction, and tax lawyers all have a wealth of experience within the sector and regularly draw upon the complementary and specialist skills each other offer within this field.
Our Energy and Natural Resource team has been actively involved in the renewable/alternative energy industry for many years. Our finance, energy, environment, property, planning and construction lawyers have extensive experience of advising developers, stakeholders and funders on onshore wind, offshore wind, solar, wave, tidal, landfill gas, biomass, biofuel, hydro, waste-to-energy and carbon capture and storage projects. We have been involved in transactions involving renewable energy in both the UK and a number of jurisdictions across Europe and Asia.
To find out more about how we can help you, visit www. pinsentmasons.com or contact enquiries@pinsentmasons.com. Pinsent Masons | Scotland’s Place in the Renewable Energy World
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