The Scottish Low Carbon Investment Conference

Q: In terms of financing large scale offshore wind projects, are we in a better position than we were at last year's conference?

It's been a mixed bag. On the downside, we continue to have a weak economy, some banks face ongoing funding challenges, and the eurozone situation has made things much harder.

On the positive side, I think there is still very good interest in the sector and those banks still active in the sector want to have exposure to offshore wind. Despite the uncertainty, we have seen deals reaching financial close and moving forward - the Lincs offshore project in the UK, as well as a number in Germany. There are also some new kinds of technology and some less traditional sponsors (non-utilities) getting involved. If we are to hit the level of market penetration some countries want to achieve, the range of developers needs to be broadened.

There are a number of credible independent generators and entities like pension funds starting to invest, which is very healthy for the sector.

Overall, the sector is definitely moving forward, but it remains quite a difficult market in which to get anything done.

Q: What are the barriers to getting things done?

Predominantly the economic situation and the difficulty with liquidity in banking markets. Many European banks have problems in their own markets and their ability to fund overseas projects is therefore reduced or cut off. Some banks have cut back fairly dramatically - so there is a more restricted pool of money available. However, good deals still have success and support from banks and that's encouraging.

Q: What impact is the UK's regulatory regime having on the offshore wind market?

There is still nervousness about electricity market reform (EMR) and concerns about the extent of the changes and the impact they will have on the markets. From a banking perspective, regulatory change is usually difficult because it creates uncertainty.

Q: What makes a good regulatory regime?

For me, the three things to look at with any new regime in any jurisdiction are transparency, predictability and durability. EMR has a lot of excellent aims and objectives which are difficult to argue with - decarbonisation, security of supply and the lowest possible cost for consumers. Yet how you achieve that in practice is quite different – there are a number of aspects where we see positive intent, but where a lot of detail remains to be worked out.

We recognise as a bank, and as an industry, the direction of travel - but the specifics of how it works in practice in such a complex market is very, very hard to assess. We need a further level of detail to work out how it will pan out overall.

We have been very closely engaged with DECC to give as much frank feedback as we possibly can on the package of changes and how they might impact the availability of funding.

Q: How do you assess the level of risk in the market at the moment?

I have a degree of nervousness about unintended consequences. With the best intent in the world, it is possible that one aspect of policy triggers behaviour that undermines other aspects of the same policy - because different players in the market have different perspectives and different agendas. We have to look at the total package.

RBS finances projects across the market across all proven technologies and with a wide range of sponsors. We want the entire system to work as well as possible.

Q: What is the danger of moving too slowly?

A particular risk of EMR remains the risk of investment hiatus, which we have seen in a number of sectors. This is a particular danger for larger projects with longer lead times - it's difficult to take an investment decision through to a board for a decision if you do not have a lot of the information. For example, a developer involved in a round 3 wind farm doesn't yet know what the offtake contract will look like and what the CfD price will be. That's two very large elements of a project that are unknown. Also, because you cannot calculate returns, that makes it very hard to know whether the risk is properly priced. So a number of major details remain unclear.

Q: Is the UK disadvantaged by this lack of clarity?

Developers who have international options will always assess prudently whether they get a better blend of risk and return in one country than another. If you have to make a case to a board in Asia and spend 15 minutes explaining the regulatory regime compared to one minute explaining the regime in another country (say, Germany), it is a more difficult place to start - but if other aspects are supportive, you can probably still attract investment. All regimes have different pluses and minuses - and you assess the risk and decide if you are being adequately compensated for that risk.

Q: What positive signs do you see?

I think both the Green Investment Bank and the Offshore Wind Cost Reduction Task Force are important. We are delighted the GIB is formally moving forward and very pleased to see the headquarters going into Edinburgh, which has a very well-developed financial community. Also, the GIB has hired very good people with highly relevant experience. We have had very positive dialogue on a number of projects and although there are aspects to clarify and the GIB is still finding its feet, it is moving in the right direction.

The problem has been finding enough banks willing to fund projects and so bringing in another entity with extra liquidity will probably be transformational for a number of transactions, whether the deals are niche and not followed by many banks - or they are large projects where there is insufficient liquidity in the market to fund them. It is very encouraging. Clearly the GIB has a limited pot of money but if it can establish some early successes to show that it is really adding extra value - and proving to government that it can make a difference - perhaps that opens the way to more funding being available.

Q: What about the Offshore Wind Cost Reduction Task Force?

It shows that the offshore wind industry is working as a whole to bring costs down. If you talk to the vast majority of people in the industry, they do not want to rely on subsidy; they want to be cost-competitive. There is lots of intellectual property being developed to bring costs down - and bringing costs down through the task force is very positive group learning and happens more quickly than if it is individual companies doing it. Where industry shares a goal, that is very positive.

The theme of cost reduction also feeds through into discussions on ROC banding. DECC was abe to reduce the ROC for onshore wind from 1 to 0.9/MWh, based on the evidence of reduced costs. The cost path remains downward and there is an expectation that the sector can be more competitive still. If you can get to a place where more technologies exist without the need for subsidy, it makes discussions around regulatory support much easier if the sector can compete on its own merits.

Q: Have some of the comments about wind power from within the Treasury been unhelpful?

There is a recognition that the whole debate is happening at a time of fiscal challenge. Every cost across the economy should be challenged and I think that's healthy. What it comes back to for me is creating a regulatory regime that is transparent, predictable and durable.

There was a nervousness created during the ROC banding review. There was a particular pathway, based on an evidence-based approach and market data, that was expecting a decision at 0.9 ROCs for onshore wind. If the final decision had landed anywhere else, it would have sent out a very difficult message. However, the decision at 0.9 sent out a signal that there is a drive to reduce costs - the industry accepts that and accepts there will be an ongoing challenge on costs. This is fine as long as it is driven by facts and absolute numbers. If it is driven by something more politicised, that is a more difficult situation for the market.

Q: So how would you assess the current level of investor confidence?

I would say that confidence is OK, but fragile. Confidence is probably there for the more established projects, but people are aware that there is a very active ongoing debate between Treasury and other parts of government, including DECC.

DECC is aware of the situation and is doing its best to manage the process. On ROC banding, the decision was the right one based on evidence and on the way previous banding reviews have run. DECC, and government generally, have to continue working hard with industry and ensure that the messages sent out are consistent so that industry does not feel it is entering into a politicised arena. If that happens and there is not underlying confidence, investment decisions become very different and very difficult. That's the calculus a lot of investors are weighing up at the moment.

Q: Did the policy shift (and subsidy cut) with regard to solar PV damage confidence in low-carbon investment generally?

The change in the solar FIT was certainly unexpected to many in the market. From a bank perspective, we were not directly impacted since we require the solar projects we fund to have their FIT level confirmed ("accredited") prior to our final lending. However, other developers had invested a lot of time and money in developing projects through the various planning and construction phases, and will have seen their expected return levels reduce significantly. This demonstrates clearly, I think, why it is important that the various regulatory systems to incentivise renewables act in a transparent and predictable way – there is usually a long (and expensive) lead time in development. I think it is difficult to expect an investor to commit significant time and capital to a project without being sure that the expected support will indeed be granted when the project has been built.