Energy: can Scotland still drive a renewable future?

David Bone, Partner and Head of Energy & Natural Resources, Harper Macleod LLP, is one of the UK’s leading authorities on renewable energy law. Here, he examines the impact of a turbulent year on the industry and looks to what 2015 might bring.

2014 in the Scottish renewable energy world has been a year of further progress, a year of legislative change, a year when a different referendum result could have meant considerably greater change and a year when we are already wondering what impact the results of the next UK General Election will bring. So we continue to live in interesting times.

First, the good news. According to statistics produced by the Department for Energy and Climate Change in September, it is estimated that renewables met a record-breaking 46.4% of Scottish gross electricity consumption in 2013 – up from 39.9% in 2012. And we have already seen 30% higher generation in the first half of 2014 compared with the same period last year, with over 7 giga watts (GWs) installed capacity of renewable electricity now in place, lead by 4.9 GWs of on-shore wind and 1.5 GWs of hydro.

Large projects help boost these figures and three in particular, in which my team played considerable parts, were significant – the Scottish Power developments on Forestry Commission Scotland (FCS) land at Harestanes and Whitelee 2 Extension and the Fred. Olsen Renewables development at Mid Hill.

Renewable projects can be slow burners; I started work on Mid Hill in 2004 and the FCS sites have also been long in their gestation but there are hopefully many more to follow as more FCS land is made available for wind and hydro schemes. The on-shore wind industry also received a boost during the year with a solution to the long-running Eskdalemuir seismic array issue – the Ministry of Defence had been safeguarding their position with a 50km exclusion zone but a more accurate way of calculating vibrations from turbines in areas near the seismological monitoring station now means that this could be reduced to 15km, unlocking a considerable number of potential mega watts of installed wind turbines. The Beauly-Denny is also now substantially built, and the utilities have further upgrades to the systems in the pipeline. It is also vital that grid connections to the Scottish islands are established, to unlock the considerable wind resources in the north and west. 

Meantime the smaller, Feed-in Tariff projects continue to proceed apace – degression in rates paid mean the returns are less attractive than they used to be but turbulent commodity prices mean that the farming community still seems to have strong appetite for diversification, including into smallscale wind. In Scotland in particular, we are still seeing small-scale hydro thriving but time is running out before the next rate review is due at the end of March 2015 as part of a comprehensive FiT review.

Legislation

The legislative change comes with the implementation of Electricity Market Reform under the Energy Act 2013. The current subsidy system for renewables – the Renewables Obligation (RO) – will end for most technologies on 31 March 2017 (and two years earlier for large-scale solar/pv) and the new Contracts for Difference (CFD) are already upon us with the first allocation round having started. This will bring considerable change to developers – the RO was an ‘everyone is a winner’ system (provided you obtained a planning consent and a grid connection); CFD is a winners and losers system as the UK government seeks to drive down costs to consumers while progressing towards decarbonisation and renewables targets and maintaining security of supply. That means that a project can spend considerable sums on planning and grid consents but fail to win a CFD.

How this all plays out will become clearer as the CFD process develops. Technologies are put into competing ‘pots’ so that the established technologies like on-shore wind, solar and hydro compete with each other for certain levels of funding while less established technologies like off-shore wind, wave and tidal and on-shore wind on the Scottish islands compete for other funding levels. Biomass will be in a third pot. The total amount of funding is, of course, the crux of the issue and this is limited by the UK government`s Levy Control Framework, which has to support the CFD, the RO and Feed-in Tariff. Ultimately, this is all paid for by the consumers.

As the legislation and the various regulations stemming for it progressed, there has been intense lobbying from the various interested parties. Strike prices have been much discussed, there has been disquiet that competitive auctions are likely to happen sooner than some developers thought, some solar companies sought, unsuccessfully, to have the government`s decision to close the RO early for their technology judicially reviewed, and pressure from independent generators has brought about the introduction of an Off-taker of Last Resort, to ensure they always have a route to market, albeit at a discounted price.

Despite some of the rhetoric about cutting costs and supporting renewables, CFD was also introduced by the current UK Government to support new nuclear and the early award of a contract to a foreign company to develop the proposed Hinkley C nuclear power plant in Somerset, at what many believe to be a very generous strike price, has provoked controversy.

Politics

The UK government has also expressed its interest in cheap gas, leading to encouragement for those who think that ‘fracking’ is the way to ensure our security of supply by unlocking shale gas reserves deep below our land surface. This has been very successful in the USA, who have been able to reduce energy imports dramatically as a result of the shale gas exploited.
But the UK has rather less of a land mass than the USA and the American success has not come without environmental issues.

Which leads on to the political dimension. Energy is not a devolved power, although planning and climate change are, and the result of the Scottish referendum meant that, for the moment, that remains the case. This means that while the current Scottish government doesn’t support new nuclear and can grant planning consents to all the developments they wish, the UK government can award large parts of the budget monies to nuclear and can frustrate the development of on and off-shore wind by limiting the CFDs awarded, once the RO ends in March 2017.

The UK government also lobbied hard recently to ensure there is currently no European renewable target post-2020 which is binding on individual states, even though the European Council agreed to aim for an EU–wide target of 27% of energy from renewables target by 2030. That, coupled with agreement to cut greenhouse gases by at least 40% by 2030, meant a major win for the UK, which has been leading efforts in Europe for an ambitious, but flexible, deal that cuts carbon emissions but gives each Member state the flexibility to decide how it will decarbonise at least cost to consumers.

The future

So how the renewables industry develops in Scotland is dependent on at least three key issues. First, will any more energy powers be devolved to Scotland? In the lead-up to the Independence Referendum, the Scottish Government asked the Armour Commission to report on how Energy
regulation might operate in an independent Scotland, so that work has been done.

Second, what will happen in May at the 2015 UK General Election? Large gains for the SNP in Scotland and a right-wing Conservative/UKIP coalition down south could increase pressure for more powers and another referendum, while some form of Lib/Lab coalition in Westminster is likely to be more supportive to renewables. A Conservative victory could also lead to an in/out referendum on Europe in 2017, which could materially change how our energy system operates, given the increasing influence of Europe in this area. Before that, of course, there are Holyrood elections in 2016.

And third, if all else fails, the Scottish renewable industry has to hope that England will need Scottish electricity to keep the lights on, so will have to ensure that on and off-shore wind, hydro, solar, wave, tidal and other renewable energy technologies have a regulatory environment in which they can thrive. The continuing tensions between Russia and the Ukraine are a constant reminder of the advantages of controlling our own energy supplies and future.