The Scottish Low Carbon Investment Conference

Did the first SLCI conference live up to its aim of being a transformational event for Scotland's economy?

I think it did. Over the last year, a memorandum of understanding was agreed among the North Sea countries.  The £70m Scottish Government National Renewables Infrastructure Fund was established.  The University of Strathclyde is developing a Power Network Demonstration Centre.  SSE and Iberdrola have both chosen Glasgow as the location for their offshore windfarm design and co-ordination operations.  Gamesa, Mitsubishi and Doosan have all announced investments in renewables R&D in Scotland.  And banks, such as Lloyds, have continued to increase their support for both mature and new technologies. While some of these aren’t directly attributable to the conference itself, they do relate to the growing importance of Scotland as a low carbon centre.  The SLCIC helped cement Scotland’s reputation as a country that takes renewables and the low carbon agenda seriously, and knows how to put actions behind words.

Last year, you outlined the range of financial challenges and your desire to ‘unravel’ the complex issues involved? How far have we come and what are the main challenges ahead?

Many of the challenges remain. If we look at traditional debt finance, there’s still a pre-construction funding gap.  But developers are beginning to recycle funds and that’s freeing up balance sheet capacity and finance.  At the opposite end, where we have mature, operating assets, there’s increasing interest amongst the investor community to move into this space as long as projects fit their particular investment model. Banks and financiers are becoming increasingly familiar and therefore more comfortable with low carbon financing.  Even where challenges remain, familiarity and experience help mitigate the issues of risk, time and indeed cost that I highlighted last year.  As we gain experience with one technology which may reduce the perceived risk associated with financing that technology, we create the scope to focus on new ones as well.   For example, Lloyds Banking Group has a large onshore wind portfolio, but has invested significantly in biomass as well over the last year to 18 months. 

Have we sufficiently de-risked the investment issues around renewables? Have we seen enough innovation around new and appropriate financial models?

De-risking investment takes time and experience and we’re working through it.   But we have to remember that many low carbon technologies are new and evolving.  That makes them risky propositions by nature. What we need is maturity – of the technology, of the supply chain, of the market, of the performance of the assets over time.  All of that then feeds into our financial modelling. We might also need industry standards – take onshore wind turbines which are now being deployed in very different environments offshore.  One might ask the question as to whether we should be driven by getting off-shore wind productive in the shortest possible time.  Or should we perhaps pause to determine whether offshore turbine design is optimal in terms of maintenance and durability in that very different environment.  Is there perhaps a tipping point between the two?  Finance would vary in either instance, but its not financial innovation that’s required, finance would simply relate to the relative risks. We need to be thoughtful about challenging the financiers to create new models in order to become more comfortable with renewable technology.  Financiers need to make prudent investments – some will be more able to accommodate risk then others - but all look for sound investments.  This needs to be – and is - a collaborative effort, with developers, utilities, financiers, the government and the supply chain working together.

How would you assess the current attitude of the banks to financing offshore renewables?

Appetites vary amongst the banks – some are becoming more comfortable with offshore and are providing finance, others aren’t there yet. I can’t speak for other banks, but I can speak about my own institution, Lloyds Banking Group.  We’re the UK’s biggest bank and we have a leading renewables portfolio – we’ve built up experience in over 40 projects in the UK and globally and have invested £2.5 billion of capital into renewable energy.  In Scotland, we have a dedicated Renewable Energy team who’ve supported Scottish projects generating 128MW in biomass and wind in the last 18 months.   Lloyds Banking Group knows the renewables market well and has the capability and appetite to support projects.  That appetite only comes from experience.

How important is it to deliver a substantial pipeline of offshore projects quickly?

Again, I think there is a tipping-point. Do we try to get projects moving with existing technologies, or do we wait – for new and bigger turbines, for greater development of the supply chain, and so on. Is it best to start getting the project online quickly or to wait for better design and more sophistication so that the projects perhaps deliver lower cost energy or are longer-lasting. It’s a challenging question! I think we also have to be careful that we have factored everything in – have we really thought about the long-term costs of operation and maintenance, for example? It’s not just about sticking the turbines out there, it’s about looking after them once they are out there. 

You have identified the financing and delivery of the supply chain and port infrastructure as essential to driving the renewables agenda forward. How do you assess the progress in this area in the last year?

The supply chain is a critical piece of the puzzle. As chairman of the 2020 Climate Group’s finance sub-group, I brought together many of the major Scottish engineering and technology companies, along with port and vessel operators, and asked PA Consulting to coordinate their deliberations. The group has identified a number of ways to begin tackling supply chain issues.   We hope this will build clarity and increase investor confidence.  One example is the technology route-maps they have designed to clarify where we need investment.  We hope the supply chain scales up so that Scottish companies can compete successfully with others for this work.  But, remember, we don't need to ‘own’ every aspect of the supply chain.  We do, however, need to be clever about owning those aspects where we can take a leading role internationally, and so that we can continue to lead our own renewables activity. In terms of investment itself, in addition to the activity I’ve already mentioned, the announcement of the International Technology and Renewable Energy Zone (ITREZ) is significant and a number of us are making what we believe is a compelling case for bringing the Green Investment Bank to Edinburgh.  What impresses me is the widespread clarity of focus that comes from having so many entities around the table.  We’re so much stronger when we work together in this way.

Can you describe the work the 2020 group has done on starting to find answers to the supply chain challenges?

The first and most important thing the group has done is engage and connect a large number of individuals and organisations across the supply chain in Scotland.  We’ve prompted conversations that, in themselves, have led some of the participants to look at things differently, and to identify new partners with whom they might work. Then, as I’ve said, we’re working to identify specific, practical steps to take.  We mustn’t forget the scale and complexity of the supply chains, just to take one example.  Any move forward requires clarity about what industry, utilities, government, financiers, local authorities, developers and others need to do.  By having this conversation, we’re convinced we’re helping create this clarity much faster than would otherwise happen.

Is there a disconnect between government 2020 targets and the speed at which the business community is moving on offshore renewables? Is it important to set tough targets to signal leadership and belief in the low-carbon agenda?

The targets are ambitious by any measure, but everyone who operates in and knows this industry recognises that.  I absolutely applaud the Scottish targets that were unanimously agreed by Parliament.  They are the right targets to have set if what we want to generate is ambition, leadership and a common goal.  If the targets had been smaller, I wonder whether there would be nearly as much collective will evident to build a renewables industry in Scotland.

So have we made progress since last year’s conference?

Absolutely.  Do we have all the problems and their solutions identified – absolutely not!  But I think we’ve got the right people around the table, the right structure to take these huge challenges forward, all of it underpinned by trust and belief in what we can contribute from within Scotland, and why we’re in such a strong position to attract other organisations here to work alongside us.