The Scottish Low Carbon Investment Conference

How do you think Scotland’s renewable energy policy is viewed around the world?

I think our policy is seen in a positive light and indeed considered quite forward-looking. I saw that in Santiago where I was asked to speak at their national renewables conference this spring. The Chilean Government were drawn to our SLCI conference because they were looking for examples of leading approaches to renewables in other countries.

Seeing video clips of the 2011 conference, they got in touch through the Scottish Government. They asked me to speak because I knew something about financing renewables through my day job with Lloyds Banking Group, something about energy through my non-exec directorship with SSE, and about the wider Scottish picture through the 2020 Climate Group.

They were aware of Scotland’s aspirations in this area, its aggressive carbon reduction targets, its policy framework and its focus on financial solutions for renewables. With 4,000 miles of coastline, they’re really interested as well in our pioneering work in marine generation.

I think what we do in Scotland captured the imagination in Chile – that a country of our size can reach so high and do so much; it’s not always the big mega-powers that shape these things.

Is Scotland’s holistic approach to renewables understood and respected?

It certainly was in Chile.  At the conference, I shared a session with representatives from the OECD and the International Energy Agency.  I was absolutely swamped after the session with people wanting to talk and find out more – and make contact for the future. And some have followed that through.

There’s particular interest in why Scotland as a smaller country is doing so well. Chile is much bigger geographically, and has a somewhat larger population (17 million), but there are similarities – it has an enormous coastline (the fifth largest in the world), as well as a lot of hydro schemes.  And it has familiar issues involving, for instance, the grid, and energy security.  They need to move on from their current situation because they can’t continue importing oil and gas forever – and they had gas supply problems in the past when a neighbouring country, which supplied much of Chile’s needs, had to retreat. They also have a growing focus and a new, well thought out policy around wind energy.

How might interest from other countries benefit Scotland?

I was amazed to meet quite a number of Chileans who had studied in Scotland – some had been on Carbon Masters programmes at Edinburgh University, for example – and who were looking at the prospect of returning because of the opportunities here in renewables.  The previous Chilean Energy Minister has been over here looking at Scotland’s work in marine energy and there was thought about the new minister coming over too.  Scotland clearly has a reputation as the country to visit - because of our policy, our educational strength in low carbon matters and our engineering and technology activity.

What have you discerned from your work about how global investors are viewing renewables at the moment?

I spoke at an event in Australia, a master class for some ASX 100 non-execs.  The focus was on ESG (Environmental Social Governance) metrics for investing in and valuing companies.  Given legal requirements for businesses to reduce carbon emissions, the companies within a sector can be compared, for instance, in terms of how much ‘carbon risk’ they will have in say three years time.  Those that have invested to reduce emissions now will have a lower carbon risk in the future.

That relative risk can then be monetised and influence investors’ decisions today.  What companies are doing, for instance, about environmental matters may start to carry greater weight in financial and investment decisions – positive environmental policies will be about business and not just on the ‘nice to do’ list.

At last year’s SLCI conference, you said big challenges remained but the conversation had moved on. Has it moved on in the last 12 months?

Absolutely, and it has moved on in a different ways; our focus has become more diversified, we are having a more complicated conversation.  The ‘scope’ has broadened to some extent.

There is much more discussion about energy efficiency, not just renewables – The 2020 Finance Group I chair held an all-day session this spring on energy efficiency - from public and private, and rural and urban perspectives.

We hadn’t spent much time on this area before.  So that’s moved on.  And there are new sources of finance.  There are more conversations about the Green Deal, and how to move households on with this; does the golden rule for payback really work?  The Green Investment Bank will focus on offshore, non-domestic energy efficiency and waste.  Even more important is that the bank’s presence in a transaction will reduce the perception of funding risk and hopefully leverage other funders’ money.

Large private equity and institutional investors are becoming more involved.  Biomass and waste, as well as small-scale projects, are attracting more interest.

Overall, the debate is far more textured than even a year ago. Experience across a range of types of finance, and within a growing number of institutions, is broadening and deepening.

How do you see the pace of offshore wind – and the financing of offshore wind – in particular?

Offshore generation is now beginning to deliver, and companies are gaining knowledge and experience all the time.  My own company, Lloyds, funded two projects at the construction phase last year, so we’re going in earlier.  Pre-construction finance can still be an issue, but with more funds available and more experience all round, the concept at least is a bit more proven.  More banks are willing to put money into offshore as future returns appear more tangible.

However, there are still challenges.  For instance, Basel III regulations will prompt banks to think in 10-year and not the 20-year money cycles of today.  The big question is who might fill that gap.  Asset managers?  Other investors?  Things are changing all the time.  But the key point is that offshore wind is happening, it’s as simple as that – it’s beginning to take off.

What about onshore wind?

There are fewer ‘good sites’ remaining, which may be in part why the focus has moved to offshore.  Many of the best onshore sites have already been consented and have wind farms on them.  But, there is potential to extend these sites and other good sites still do remain.  Some onshore wind costs are coming down, but others are rising and this technology continues to need support.

How is the political dimension affecting people’s approach to development?

What investors want above all is stability in the approach to policy and to subsidies.  Building renewables is a long-term prospect and companies want reassurance that today’s business case will hold up over time.  Energy companies which have thrown themselves into renewables are concerned about the prospect of renewables becoming more expensive.  Once new plant is up and running, it becomes easier but, at the moment, political uncertainty is certainly an issue.

What about the political backdrop in Scotland?

There’s growing debate in the media, within trade bodies, and companies themselves around the independence referendum – and debate is a good thing.  In business terms, SSE was the first large company to say that, while it was headquartered in Scotland and would stay here, any uncertainty for investors would have to be factored in to the business case for as long as that uncertainty remains.  At the same time, we recently saw that, in 2011, there was greater inward investment into Scotland than ever before – and much of that is renewables-related.

At the 2011 SLCI conference, you spoke about a ‘tipping point’ in the move towards large-scale offshore renewables; are we closer to that point?

If you compare points in time, we have definitely moved forward – revenue streams from renewables have been growing better and wave and tidal is moving to a more scalable size. The problem is that there are also headwinds – such as the potential change in the subsidy regime, other political risks and the general financial environment, as well as the uncertainty over nuclear and the Basel III rules.  I think we’ve taken two steps forward but a bit of a step back.  But that’s always the case and, overall, the momentum is, if anything, increasing.

In the round, given the challenges, is the situation in Scotland broadly positive?

Yes, we’re seeing plans become realities.  In 2011, electricity generation from renewables in Scotland was 44 per cent higher than the previous year.  I think there are great opportunities as well, as our international profile increases, for sharing knowledge and policy approaches with other countries – and also opportunities to work across borders to build new partnerships and find solutions together.  Collaboration is key, in tandem with technological development.  Scotland is ambitious, it has aspirations, it has momentum.  It’s all very exciting.