The Scottish Low Carbon Investment Conference

The opportunities for overseas investment in renewables: Euan McVicar, Bob Ruddiman & James Elwen, Pinsent Masons.

Q: Last year, Euan talked at the conference about the barriers to progress in offshore renewables - especially the slow pace of development and the economic backdrop. Have things changed?

EM:  To some extent, that has been or is beginning to be overcome. There is a higher degree of comfort that things are moving and that the low carbon agenda is set in stone. These projects will happen and there are positive signs relating to that. We have seen major developments, with, for example, Mitsubishi, Gamesa and Doosan all making big commitments to Scotland.

Q: Have we de-risked the investment climate enough around offshore renewables?

EM: Not yet. De-risking has not moved far enough because we are not in that phase of the project's life-cycle yet. The facilities are likely to be there, but how the cake is to be split between developers, investors, lenders, and the supply chain is still to be decided. How can we minimise and allocate risk most efficiently? There are big discussions to take place.

BR: Some de-risking has not taken place but projects are closer and look more real. As a result, some players are getting more comfortable and familiar with the environment and are more willing to commit investment. Ironically, some of the risk has been removed by the supply chain starting to fall into place.

Q: Much has been said about what lessons renewables can learn from oil and gas, but is that knowledge and skills transfer actually happening?

BR: There is a lot of discussion and the contracting principles from oil and gas are very relevant. There is more realisation of the costs involved in oil and gas and a willingness to pay for a quality job. The offshore renewables industry is starting to understand the cost of some of the very expensive pieces of equipment needed to service big offshore projects and the long-term payback.
We are also starting to see knowledge transfer and skills transfer, or perhaps more accurately, skills deployment where skills are shared between oil and gas and renewables.

Q: Where are the major investment opportunities coming from for offshore wind?

EM: A number of utilities are seeing the opportunities and getting involved, and some US private equity money is coming in to the sector – especially in projects already being developed. Private equity and investment funds have an increasing role to play in offshore wind. Third party equity will come more into play, and some of it will come from those who missed out in initial tenders; more equity funds will back existing players and get exposure to current projects. This will help to spread the risk more. There is more of an appetite to get involved, as we start to see successful projects and the sector becomes better understood.

Much of the appetite is coming from funds not domiciled here – but from the United States, the Middle East and Far East.

BR: Although our mindset is oil-dominated, there is a growing interest in stable Middle Eastern countries in taking the sustainable, longer-term view by looking at low carbon opportunities and emerging technology. They are not turning their back on hydrocarbons but have a greater desire to look at sustainability, both internally and in terms of outside investment.

EM: It is partly about getting exposure to projects and finding out how they work - and taking that back to their home jurisdiction. There is a wider interest in sustainability in places like Qatar, which, for example, is running a major food security programme. That type of enterprise requires large amounts of energy.

 

You mentioned the Middle East, where you've recently opened an office in Qatar. What has been your experience of investor appetite there so far?

A lot of these people and institutions make eye-watering sums from hydrocarbons, but they are also extremely sophisticated in how they choose to protect and grow that wealth. Renewable energy is on the agenda as an investment, but there is not the same profile or emphasis as in the UK because there are not the same climate change targets or energy security concerns. The Qatar Investment Authority (QIA) set up a £250m clean-tech fund with the UK Carbon Trust a few years ago, but since then there remains understandable caution in the market. You are probably just as likely to see investment in other assets, as the recent acquisition of a stake in French luxury handbag maker Le Tanneur recently highlighted. You really need to work hard to demonstrate what kind of return a low-carbon project can deliver, but not just in financial terms.

What would be your advice to firms trying to win financial backing from the region?

Its incredibly important that, if you as a business are looking to attract investment from the Middle East, you really need to be extremely targeted and get as much on the ground support and insight as possible. Scottish businesses will know from years of exposure to international markets through oil and gas that one of the biggest mistakes you can make is to generalise about regions - the investment objectives of individuals and organisations in the Middle East are going to be just as varied and diverse as those of different European or African states. The business environment and priorities in Qatar are very different to those of the UAE, Saudi Arabia, Bahrain and Kuwait for instance. Looking beyond the state level, you also have a huge variance in priorities among the different sovereign wealth funds, private companies and high net worth individuals across the region.

Q: Coming back to the global outlook, is private equity looking for new outlets?

BR: Yes, there are global PE firms out there with massive sums to invest and, notionally, not a lot of places they want to put it.
We might see, as a result, some private equity companies lowering their expectations of return – and also see more joint working between trade and private equity. It is unlikely that private equity will look to invest in demonstrator-type technology. The approach is all about gathering knowledge and intellectual capital.

Q: Are different types of offshore project attractive to different investors?

EM: Yes. The classic private equity investment over three-five years is starting to look more attractive to some sponsors but still has risks associated with it. For investors there is now the prospect of scalability.  There is now some scale there, and opportunities to deploy learning from an initial investment to subsequent investments.
Pension funds are showing an increasing interest over the longer term, looking at revenue over 20 or 30 years, driven to an extent by government policy.
Also, there are larger institutional investors, major global finance houses that are privately-owned. They are looking at very long-term wealth creation over a number of generations, and a number of entities like that are coming into the low carbon space. Energy in all forms is becoming increasingly important and having some exposure to renewables is sensible in protecting investment in the long term. Low carbon is starting to look like a very sensible and significant element in a diversified long-term investment portfolio.

Q: How significant is the offshore renewables market in Scotland in global terms?

EM: It is very significant. It is the biggest single offshore wind market and there are massive opportunities for further development. In addition, marine is still struggling to raise funds, but has huge potential and Scotland has a stated commitment to be world leader in Carbon Capture and Storage and export the expertise all over the world. There is some real forward thinking and in terms of the low carbon agenda, the government has done some brave things. The Renewables Obligation was challenged at first but has proved successful in delivering investment, while the current government has set a carbon floor price much higher than it might have done. It is a brave decision in these times. These are important signals for those looking to connect with the low carbon space.

BR: From the perspective of overseas investors, Scotland has a track record with oil and gas of creating a new industry and giving it an environment in which it can develop. We need to remember that we created a whole new industry and we perhaps have a tendency to play that down.  Areas like Westhill, in Aberdeen are world leaders – in that case, in sub-sea capability. It is a global centre of excellence and has taken a long time to develop, but this is powerful, international-quality intellectual capital that is resident in Scotland.

Q: Why are marine technologies not moving as quickly as many would have liked?

BR: It is still relatively early days. Man has learned to treat the ocean with utmost respect and must continue to do so. There might be a frustration about the pace of change, but these things don't happen overnight.

EM: There are still technological risks, and not as much Venture Capital going in as there might be. Investors want to see management teams with a good track record, and they want to see the technological risks minimised – we are getting closer but are not quite there yet. Some novel technologies are doing well on the demand side – for example, the Smart Metering Group.

Q: What can we do better to attract inward investment to offshore renewables?

EM: The Scottish Government has shown repeated commitment to this space and has been very successful in raising the profile of renewables and that has had an impact. SDI has been particularly active in drumming up investment overseas. For example, it is looking at what is attractive to Middle Eastern investors, and flying the flag, which is very welcome.

BR: The United States has done much more around the low carbon agenda than popular perception might suggest. Texas has colossal onshore wind farms and big solar developments. The home of capitalism is always looking to invest and make money and we will see more of the United States in offshore renewables, right up at the top of game and capable of moving quickly.

There are opportunities in the Middle East, but not a mad rush of countries. We will see some Middle East investors looking at existing, stable operating assets, with a low risk and low return approach, which will be helpful in freeing up capital for indigenous developers.

JE: Particularly in Qatar, relationships are culturally very important and investors generally won't be interested in people who appear to want to take the money and run. People are more prepared to do business with those who are willing to put something in, so there is an element of give and take. That means not just providing a decent return on investment, but contributing to the knowledge and skillsbase within the local economy and taking a long-term view. The market may be substantially based on rich gas reserves, but there is an extremely strong focus on sustainability. The Qataris are determined to create a state which has the infrastructure and knowhow to remain prosperous long after the hydrocarbons have gone, so you need to be able to show what part you can play in meeting that agenda.

BR: There is a category of riskier investor wanting to invest in new technology and get an early leader position, while others are interested in the supply chain because they see the start of a global industry. It is similar in a way to oil and gas opportunities. If you can be at the start, there are massive opportunities. We are seeing this kind of supply chain interest from China and Korea.

There are many options; some consortia and joint ventures are likely, while some solo players might take their own capital out and operate developments with investment from others. 

Q: How did last year’s event stimulate conversations necessary to really kick-start offshore wind developments? Who are the most important players in this space?

EM: Last year's event brought together key players and concentrated minds on both the size of the opportunity and the scale of the challenge.

The utilities - like Iberdrola and RWE - have a big role to play. There is a strong interface there; utilities can speak to large manufacturers, like Siemens and Gamesa. SSE and EON have done a lot of good work too. The government has a vital role to play but the utilities are really driving it forward and stepping up to the mark by using long-established connections.

Q: Where else might investment go?

BR: Central and South America are attracting lots of investment in energy of all sorts. Brazil is having a hydrocarbons bonanza. Closer to home, Germany and Denmark have massive potential to attract investment in offshore wind. Projects off Scotland could easily be serviced from places like Bremerhaven or Rotterdam. 
The success of Germany and Denmark is actually good for Scotland – because it is good to have competition and good to have examples of countries that have done well and got on with it.

Q: Are you optimistic about the future?

EM: I am cautiously optimistic. Progress has been made on the supply chain side and lots of offshore projects are now in advanced stages - but continued work is required and continued co-operation. If Scotland plc is to attract inward investment, we have to recognise that capital could go elsewhere and demonstrate that these are well thought-through opportunities. The emerging offshore renewables industry presents a once-in-a-lifetime chance.

BR: I am very optimistic and borderline hyper-sensitive about the dangers of complacency and managing expectations. I am ambitious but realistic.

Euan McVicar is a Partner in the Energy &Infrastructure team at Pinsent Masons. Bob Ruddiman is the firm’s Head of Energy and James Elwen heads up the firm's Doha office. Pinsent Masons will host a session on overseas investment at the conference.