The Scottish Low Carbon Investment Conference

PAUL BREWER insists that, while the outward signs of progress in Scottish offshore renewables are perhaps not obvious, there has been considerable progress in the last year in laying the foundations needed to secure success in the long-term.

Q: Have we resolved the financial challenges laid down last year?

There has been incremental development and lots of noise about increasing renewable generation targets but fundamentally, issues around financing and the flow of capital have not moved on to the point where we have resolved any of the significant conundrums we talked about last year. Offshore developers have significant investment plans but are constrained by their balance sheet resources and it is still fundamentally difficult to finance the construction phase of UK offshore wind generation using bank debt on terms acceptable to developers.

Pension funds and institutional funds in general will be the appropriate long-term holders of debt that finances offshore renewables, with a few exceptions. But there are no signs that the pension fund market generally is ready to invest heavily. There are not enough projects developed to the stage that they want to get their arms around and investments made outside the UK largely reflect local factors . Infrastructure funds are showing more interest and may grow into an important part of the short to medium term financing solution In terms of offshore wind, the investment waters are still muddied by EMR developments and developers are continuing in good faith on the basis that that the regulatory outcome will meet expectations - but we are heading in the right direction.

Q: Where can we see things moving in financial terms?

There is more transactional activity in mature assets, largely onshore wind. Although it is not pension funds, there are some of the bigger Far East trading houses like Samsung and Itochu showing interest in operational onshore assets. There is also some stirring from the holders of assets looking at how they can free them up to make more balance sheet capacity available for the next phase, particularly offshore wind, while keeping the right balance in their generation fleet.

There is a very substantial wad of private equity money globally looking for low carbon homes. That money is global, mobile and will flow to the best opportunities. In the last five years, solar has been a big part of that and onshore wind less so; developers have more typically funded those schemes themselves and do not provide the level of returns private equity funds are looking for. We are starting to see the infrastructure funds managed by the big PE houses move in and Blackstone's recent investment in the German Meerwind project sets a marker. The PE market will move in when the returns are right – they are not looking at the de-risked, rather unexciting yield that pension funds are interested in. They will take risks but very selectively.

There is lots of noise about sovereign wealth funds as if they are this gigantic wall of money looking for a home. They are not generic; they all have their own interests and investment criteria and are looking at opportunities globally. They have been grossly over-hyped, but under the right conditions, there is great potential. Trading houses in the Far East are showing an interest and sovereign wealth funds' time will come. They are somewhere between PE and PF but some are interested (especially in China and the Far East) in capturing know-how and will invest heavily in an area that will give them intellectual property as well as investment return.

The Basel III regulations cast a shadow over the long term debt market, upping the amount of capital that banks need to put aside for project debt. The drift is against long-term lending and these are long-term assets looking for long-term finance. Basel III makes long-term project lending relatively less attractive. Ultimately, lenders were never going to bew the optimum source of long term capital but in the short term it will make it harder tomobilise capital into these kinds of projects.

Q: What role can the Green Investment Bank play?

It is there in the background talking about providing debt instruments to help those other investors come in - and possibly providing refinancing guarantees to make it easier for bank debt to participate.

The GIB will offer capitalisation by government to provide financial intervention. At the moment, UK developers are largely funding project off balance sheets with some external capital coming in. The GIB can help in the change from second to third gear, and help ensure that when the level of activity builds up, finance is less of a constraint. People don't expect it to be transformational, but as a catalyst to secure developments. The key is where it can make the biggest difference and that is offshore wind and low carbon initiatives on an industrial scale.

It will take time for it to mobilise its way through the treacle of State Aid rules but the main issue now is more about what we can do in second gear – and that is quite a lot – and doing it better.

Q: What has been achieved in the last year that makes you optimistic for the future?

We might not have seen more developments in Scottish waters but in terms of what needs to happen to make these developments work successfully, there has been a huge amount of activity. Developers are doing a lot of good work around the supply chain. The barometer for Scotland being a global centre of development and manufacture has risen very substantially. There are those who will take a superficial view and not recognise progress until they see turbines turning in the northern North Sea, but in terms of what needs to be put in place to allow this to happen, progress has been strong.

Skills are developing well and the government and industry have a good coincidence of agenda on that. The regulatory side is still a bit fuzzy, but there is momentum. One of the things that has changed is the level of engagement of companies in the oil and gas industry. A year ago, they were happy to stay focused on the big oil and gas investment programmes and known returns. The joint oil and gas/renewables conference hosted by the First Minister was a galvanising moment. There is transactional activity too – Sea Energy Renewables changed hands in May.

Q: How do you assess the level of confidence?

The level of confidence is good and one of the attractions of Scotland is that the supply chain is becoming more coherent and clearly articulated – from R&D through development to manufacturing. If we can get a well-developed manufacturing base, aligned with solid developments and working in conjunction with the installation end of the supply chain, then we have more chance of getting the cost curve down, starting to tackle the financial challenges and developing Scotland as the global centre for offshore wind - and ultimately marine - asset development and servicing. The Scottish Government has an important role to play here and while it smells the prize there is more to be done to seize it.

We have taken big steps to achieving progress in the supply chain. For the big developers, that's more immediately important than access to finance, and from their perspective, there is a lot to be positive about. The supply chain looks very positive, with lots of new entrants, and the longer-term issue of skills is starting to be addressed. The regulatory background is a drag rather than a negative.

There is a level of confidence and momentum. We are pointing in the right direction. On a superficial level, you might not see it, but a lot of progress has been made.

Paul Brewer is a partner with PwC specialising in Corporate Finance, Infrastructure, Government and Energy.