Energy and climate change have been the focus of the world’s policy makers and opinion formers throughout 2007. Much of the ensuing debate has been at an intergovernmental level and has centred on relations between the developing world and the industrial and post-industrial Western world.
However, at a national level there have also been significant developments in both policy and market terms. The Scottish marketplace in particular has also seen more than its fair share of development – development that is likely to have an impact on the deals we will see in the Scottish marketplace in the coming months.
The Scottish position is complicated by devolution and the recent change in administration in Holyrood. Energy policy in the UK is, of course, generally a reserved matter. However, the Scottish Executive retains responsibility for: promoting energy efficiency; promoting renewable energy; land use planning; fuel poverty; and planning and environmental controls.
The energy white paper launched by the Department of Trade and Industry earlier in the year has widely been interpreted as giving the green light to nuclear development. The new Scottish administration has signalled its opposition to new nuclear development and most commentators believed that it would use its planning powers to block this in Scotland. The heat has gone out of this debate for the time being, with the UK’s favoured sites now all being conveniently located in England.
The energy white paper did, however, contain a number of proposals that are very relevant to either the Scottish market or projects being actively pursued by Scottish-based developers. In particular the commitment to renewables projects and the introduction of the Renewable Obligation Certificate (ROC) Banding to the England and Wales should give some much-needed impetus to the offshore wind sector, where successful deal-flow is needed as much as financial incentives.
The Scottish market seems to have responded well to the Scottish Executives’ promotion of marine renewables and a number of deals between utility companies and marine technology developers have been seen in the first half of this year. Wind, however, is still the main show in town and there remains a reasonable pipeline of deals that have both planning and grid consent but which have yet to secure wind turbines and financing to keep the sector going. There will come a point, however, where bottlenecks, such as the long-running Beauly-Denny transmission, and ongoing planning disputes will affect deal-flow.
It is also to be hoped that this commitment to renewables will give some further assistance to the nascent (if developing) biomass sector. A number of Scottish biomass projects are currently in development, but the sector continues to face some structural issues (such as the availability of long-term fuel supplies). So far it is the smaller end of the biomass project that has shown the greatest growth. If one of the mooted larger biomass combined heat and power (CHP) schemes were to reach fruition later this year it would prove a valuable fillip to the Scottish market.
Also promoted in the white paper is a commitment to further promotion of energy efficiency and an extension of the ‘cap and trade’ emissions regime to the commercial and retail sectors. This is likely to have a massive impact on the desire for a range of large commercial and industrial players to introduce and offer carbon-reducing schemes to the market and indirectly drive energy efficiency.
If government hype is to be believed, the potential impact of this in Scotland is even greater where the Scottish Executive is currently consulting on a Climate Change Bill, which aims to introduce a mandatory target for reduction of carbon emissions by a staggering 80 per cent by 2050.
While this ambition is to be lauded, it is not entirely clear how the mandatory target will be met. The consultation focuses on the nature of the target and its binding nature on ministers rather than on what policies will be required to deliver continual and gradual change in our energy production and use over the next 40 or so years. These same criticisms can be levied at the UK Climate Change Bill process, which the UK Government issued in March of this year, but with a 2050 target of only 50 per cent.
Westminster and the new administration at Holyrood have come to odds in one particular area – the Government’s competition for carbon sequestration projects. When it was published it resulted in BP pulling out of the proposed Peterhead project, which would have been the first of its kind in the world. There do remain other opportunities for carbon sequestration in other parts of the UK, but to a more limited extent in Scotland.
That aside, we can expect some further collaboration between the two administrations in respect of easing the process for development of offshore gas storage and liquid natural gas (LNG) reception facilities – diversity gas supply having been recognised as vital for UK plc’s security of supply.
Regardless of different legislative regimes and competing targets in Scotland and the rest of the UK, we can be sure that there will be further interesting developments to come in this sector in the coming months and years.
Provided that in one form or another there is a commitment to carbon reduction and increased energy efficiency, we can only expect overall deal-flow in the sector to continue apace. This is especially true in a market where the burgeoning infrastructure investment funds are keen to invest and there is no shortage of equity investment.
Euan McVicar is a partner at McGrigors