To paraphrase the gung-ho motto of Scottish ‘forty-niners’ prospecting in 19th Century California – “there’s gold in them thar mills”. When First Minister Alex Salmond tells us Scotland is ‘the Saudi Arabia of renewables’ he’s not spouting hot air
To paraphrase the gung-ho motto of Scottish ‘forty-niners’ prospecting in 19th Century California – “there’s gold in them thar mills”.
When First Minister Alex Salmond tells us Scotland is ‘the Saudi Arabia of renewables’ he’s not spouting hot air. With 25 per cent of Europe’s tidal power, 10 per cent of its wave power, plus regular batterings from ‘sou-westerly’ gales, Scotland has tremendous potential for delivering renewable energy.
Already, onshore wind power has overtaken hydro as Scotland’s most common form of renewable energy. From Glasgow city centre, citizens looking southward can see the windmills birling briskly at Whitelee, Europe’s largest onshore wind farm.
The latest statistics produced by Scottish Renewables, the energy trade association, reveal that while many traditional companies and industries are struggling, Scotland’s renewables sector is bucking the trend – having delivered almost £3bn in capital investment since the beginning of 2009.
Niall Stuart, Scottish Renewables’ chief executive, says: “During the downturn, our industry has delivered some £2.8bn of much needed capital investment in our economy. This has helped to grow the supply chain, secure the future of many companies and support more than 11,000 jobs.”
At a time of sluggish growth in other sectors, the renewables sector is expanding by more than 10 per cent a year. It now generates the equivalent of 35 per cent of Scotland’s annual demand. Onshore wind is the main driver of investment, with offshore wind the next biggest target for investors.
The last year has seen a surge in interest in onshore wind energy from large-scale investors, renewables companies and small communities, all seeking a share of the action.
Scotland’s first community-owned, grid-connected wind farm comprises three second-hand windmills on the island of Gigha, generating a maximum of 675KW – enough to supply two-thirds of the island’s electricity requirements. Having paid for themselves by March 2009, the three ‘dancing ladies’, as the island’s children call the windmills, now finance the Gigha Heritage Trust.
At the other end of the scale Whitelee, on the Renfrewshire moorlands above Eaglesham, comprises 140 turbines, which can generate 322MW of electricity, enough to power 180,000 homes.
Meanwhile, the £600m Clyde Wind Farm, which at 456MW will be even larger than Whitelee, is under construction at Abington in South Lanarkshire. Power giant SSE is developing the 152-turbine project, which has the capacity to power 200,000 homes.
Given the tough local opposition to the majority of wind farm proposals, why are investors so keen to keen to get into the onshore wind business?
Danny Lee, corporate finance partner with legal firm Shepherd & Wedderburn, argues that underperforming asset classes such as the stock exchange are encouraging investors to seek out better returns in new sectors, such as renewables. “As well as interest from domestic private wealth and private equity, there is interest from overseas – we have a Singapore-based fund looking at UK hydro.”
“However, at this stage, such investors are not keen on taking the planning risk, so they tend to emerge once consent is in place and funding is required to build out the project.We expect to see the emergence of pension/infrastructure funds.”
Being easier to install, maintain and connect to the grid, onshore activity is attracting a lot of attention, with active trading of ‘oven ready’ consented projects of up to 30MW.
Andy Drane, partner in the environmental, waste and renewables team of legal firm Davidson Chalmers, says: “Demand is coming from renewables investment funds, which have been established to invest in renewable energy projects and have committed to invest a minimum level within a short timescale. They’re looking for schemes to invest in but finding it challenging to find enough. Also, recent European entrants into the UK renewables sector are trying to buy market share.”
Drane believes the sector is facing some key challenges. In terms of funding he says: “The Co-op Bank is pretty much the only show in town for non-recourse funding of projects below 20MW. They are inundated with funding requests and must be questioning whether they are over-exposed to the sector.”
Grid connection is also problematic: “It continues to be a very major issue. It is all very well having 25 per cent of Europe’s renewables resource, but unless the infrastructure to export renewable energy from Scotland to the rest of the UK and Europe is in place the resource will be wasted.”
Changes to the regulatory regime are also something of a sticking point: “These will continue to be a major headache, impacting negatively on investment as returns become less certain,” says Drane.
When it comes to offshore energy, Scotland is a major player, boasting 40 per cent of the UK’s fixed offshore wind resource. The Northern Isles offer great potential for wind farms. While the average Scottish wind turbine operates at 34 per cent load factor, Shetland’s scythe the air at 54 per cent.
The Highlands and Islands claim to be the ‘world leader in offshore renewables’, as home to the European Marine Energy Centre (EMEC), the world’s first grid-connected, UK-accredited, full-scale wave and tidal energy test facility. Orkney’s EMEC is already advising South Korean engineers on building a tidal testing centre for Incheon Metropolitan City.
Wave energy developer Seatricity is also using EMEC to launch its patented Oceanus device, which aims to deliver a megawatt at a cost of less than £1.6m in equipment and installation costs, and with an estimated lifecycle of 20 years.
At the Sound of Islay, ScottishPower Renewables is preparing to install the world’s first 10MW tidal turbine array, using technology currently being tested at EMEC, to capture tidal energy between the islands of Islay and Jura.
Scotland’s northern waters are also home to Beatrice, the world’s first deepwater offshore wind demonstrator project.
Highlands & Islands Enterprise (HIE), along with its partners, developed the National Renewables Infrastructure Plan for offshore wind in 2010. Of the 12 key sites identified, five are in the Highlands and Islands. Three of the five – Nigg, Arnish and Machrihanish – are already playing a significant part in offshore energy developments. Two others – Ardersier and Kishorn – are in prime locations with attractive criteria for the offshore wind sector.
These facilities are likely to gain substantial work in the manufacture and assembly of offshore windmills and marine devices, as well as becoming operational and maintenance hubs. They could also face competition from mainland facilities such as Dundee, Rosyth, Inverclyde and Fife Energy Park, each of which has extensive shoreside land with adjacent deep water.
The dearth of long-term debt funding, which has traditionally underpinned UK infrastructure projects, means offshore wind developers have to build-out their projects phase by phase from their own balance sheets. When the project is operational they then seek to refinance.
David Cruickshank, head of renewables with legal firm Maclay Murray & Spens, queries whether this model is sufficient to allow the speed of development required to achieve the UK’s 2020 renewable targets. “With little recent innovation in the finance sector it’s time to explore ways to unlock construction risk financing. We need to re-examine the allocation of risk among participants and attract new players – such as pension funds – into the market, to allow the recycling of developer capital.”
He is keen to see whether the Green Investment Bank’s (GIB) involvement in the offshore wind sector, on purely commercial terms, will be sufficient to attract the additional private sector investment required to finance these projects within the government’s 2020 timeframe. The GIB will be launched with £3bn capital and has ambitions to leverage a further £15bn of private sector investment.
Cruickshank says: “The industry is also seeking clarification on the timing of the ability of the GIB to borrow in the capital markets. This would allow it to raise further funds and potentially leverage an additional £75bn-plus in private investment, potentially making a massive contribution to the financing of UK offshore wind projects.”
Despite the UK government’s tinkering with the feed-in tariff (FiT), which pays householders, farmers, businesses and investors who pump renewable power into the grid, there is optimism that solar power can still provide a ray of financial sunshine.
To cope with growing demand, Glasgow-based Absolute Solar & Wind is expanding its footprint by opening new premises in Inverness and Aberdeen. The company specialises in solar photo voltaic panels, micro-wind turbines and solar thermal systems.
While enjoying the boom in demand, Absolute’s sales and marketing director Terry Doherty is frustrated by the UK Government’s inconsistency regarding FiT. “It has been a rollercoaster year for the solar industry. Two cuts to the FiT rate at short notice have seen further cycles of boom-and-bust in the industry. The cuts created widespread uncertainty, as companies and clients don’t know if, or when, the goalposts might be moved again.
“The latest guidance suggests the government will now review the tariff every three months – making it extremely difficult for businesses to budget and plan, or for customers to know what deal will be available.”
However, with returns ranging from six to 12 per cent per annum, Doherty argues that solar panel returns outperform “even the best ISAs on the market, underlining why we believe there are still excellent growth opportunities in the sector”.
The Solar Trade Association also takes a sunny view of solar power’s future. The trade body calculates that, for a family installing a large 4kW system costing £8000, using 50 per cent of their power in the home and exporting 50 per cent to the grid, the system will have paid for itself within 10 years. The family will gain returns of 9.2 per cent over the 20 year life of the feed-in tariff. The solar power system itself is likely to last around 40 years, providing decades of household savings.
Paul Barwell, CEO of the Solar Trade Association, says: “Our figures show solar is a no-brainer investment. Compared to the returns you get these days in banks and many other investments, solar provides a very solid, attractive return. Especially when energy bills are rising faster than anyone expected.
“Investors in solar are also helping us to drive an exciting energy revolution, putting power in the hands of everyday people, while saving the planet.”
IN FOCUS: IBM Smarter Buildings
Offices and other non-domestic buildings generate 18 per cent of the UK’s carbon emissions. With businesses facing increasing pressure to run their properties in a greener and more efficient way, many companies are opting to fit small windmills or solar panels onto their roofs.
Not only does the occupier save costs in terms of heating and lighting, they also gain brownie points for using renewable energy – a badge of honour which clients increasingly demand from their suppliers of goods or services.
IBM’s Smarter Buildings concept aims to make buildings and property portfolios more sustainable, more cost effective and better maintained.
The strategy is to gain improved understanding of buildings and their behaviour by making them more instrumented, more interconnected and more intelligent.
With high-tech plant monitoring systems producing huge amounts of data, the Smarter Buildings tool crunches data from a wide range of devices, including meters, weather stations and security systems.
Using building data in this way is driving a sustainable shift in the way buildings are managed. Combined with the control systems, data and analytics, it offers a new approach, enabling building operators to address sustainability and efficiency issues in an actionable, timely way.
A FINANCING FIRST
Having concluded two significant recent deals, Barclays Corporate is playing an increasingly active role in the renewables sector.
An important milestone transaction for investment in the marine energy sector saw Barclays agree a £3.4m loan with wave energy pioneer Aquamarine Power – the first time a UK marine energy project has secured bank debt finance.
Aquamarine Power’s Oyster wave power technology captures energy in nearshore waves, converting it into clean sustainable electricity. The five-year loan provides Aquamarine with the funding to complete a 2.4MW Oyster array at the European Marine Energy Centre, Orkney.
Describing the deal as “transformational”, Jan Love, director of project finance for Barclays Corporate Scotland, says: “This demonstrates our confidence in the business model and provides a blueprint of how visionary companies can achieve their commercial aims with the right support.”
And in April Barclays provided financing via a long-term loan of £22.8m to AES Wind Generation for the 28.6MW Drone Hill Wind Farm in the Scottish Borders.