Craig Dalzell – 24th March 2022
Earlier this year, the Scottish Government – via its devolved control of Crown Estate Scotland – embarked on the largest privatisation of Scottish renewable assets our country has yet seen. 7,343km2 of Scottish seabed has been optioned off to consortia of private and foreign state-owned companies who have placed bids to install just under 25GW of wind power capacity. This is more than double the combined capacity of all renewable power sources currently installed in Scotland.
However, our investigation into the ScotWind auction has found that the planners have severely underestimated the value of Scotland’s renewable assets. The initial auction this year granted the winners the right to develop a formal planning application within the next ten years and if they fail to do so, choose to withdraw or if the formal application fails to meet some basic standards the next highest bidder on the list will be granted the right to try instead. Just £700 million was raised by this auction as every winning bidder won their options based on a capped ceiling price of £100,000 per km2 of seabed. Contrast this with a recent similar auction in New York and New Jersey where an auction of 30 GW of offshore wind capacity raised $4.37 billion – almost three times as much as the authorities expected to raise and with the highest bidder paying the equivalent of £1.6 million per km2. ScotWind will continue to raise some revenue from the assets once they are established via a rent on energy production but our estimates suggest that this will amount to only about £50 to £90 million per year where the operators collectively stand to earn billions per year.
The immediate response to our analysis was that this was the only way to manage these assets given that Scotland did not have a national energy company (NEC) set up in time to do so – the Scottish Government having abandoned such plans despite overwhelming support from political party members. We have called for those plans to be re-established and expanded beyond previous Government commitments so that the next round of renewable asset development need not be sold off for the same song as ScotWind. Such is the importance of this energy company that the rest of this article shall assume that an NEC will be set up and scaled up to the point that it is capable of managing the ScotWind assets.
However, it remains that there may still be work that can be done to ensure that the maximum benefits of ScotWind are retained by Scotland and that includes its eventual return to public ownership. We are not privy to – indeed, legally not allowed to be privy to – the ongoing negotiations between the Crown Estate and the current ScotWind winners but if the Government does decide to change its current tack and push for public ownership there may be scope for it to do so.
Equity, not Subsidies
Energy is a profitable business but it is even more profitable if many of the costs – especially in the startup phase or the decommissioning phase – can be paid by someone else. Usually that someone else is either taxpayers via public subsidies or energy consumers via levies on our bills. Either way, it’s us.
Rather than throwing subsidies at ScotWind, the Scottish Government should consider buying an equity stake in the projects specifically or in the companies involved (possibly via the Scottish National Investment Bank). State aid rules may well make this proposal more complicated than it initially sounds but given the potential profit margins involved it would not take much of an equity stake in the project before the returns on that equity would exceed the projected revenue from the rent charged by the Crown Estate. This is, in some ways, the inverse of the proposal I made at the time of the announcements where I called for the NEC to be the main vehicle for developing Scotland but suggesting that it could sell some equity in the project in order to raise capital or to allow for the NEC to draw upon skills and materials required to bootstrap both the project and the energy company itself up to scale (this is essentially how Norway was able to retain control of its own oil assets). Of course, the downside of this proposal compared to the “Norway plan” is that the Government would essentially be a silent or indirect partner in ScotWind rather than an active participant so there would be less scope to use this to strategically building up the skills and infrastructure that the NEC will require for the successors to ScotWind.
Strict Term Limits
The terms of the eventual leases on the ScotWind seabeds are not yet known and possibly have not yet been negotiated. These kinds of developments require a lot of upfront capital investment followed by a more steady revenue generation phase mediated by ongoing maintenance and repair costs. Many of these projects will “pay back” that initial investment across five, ten or fifteen years of operations but the leases granted to operators can be longer – often twenty or twenty-five years. Operators also know that – unlike oil – the wind will never “run out” so that even after the first generation of wind turbines wear out these areas of land or sea are often prime development areas for a reason and so it makes sense to replace the old turbines with new ones – perhaps larger or more efficient given advances in technology in the intervening years. It is therefore in the interest of operators to try to negotiate leases to be as long as possible – 99 years or even perpetual leases are not unknown.
This, however, should be resisted by a Scottish Government that aims to bring these assets back into public ownership. If the goal is public ownership as soon as possible then it follows that the term limits on the lease should be as short as can be negotiated. Ideally, from our perspective, this could be substantially below the rated operating time of the current turbines so as to avoid a situation where the first thing the NEC has to do is decommission and replace clapped out generators and can enjoy at least a few years of profit to generate the revenue required for the subsequent replacement. It should go without saying that extensions to any defined term limits should be considered very carefully in light of circumstances at the time and the intial presumption should be to reject them.
Active Break Clauses
In 2019, after several years of operational underperformance and of active political lobbying (including, in my own small way, by myself), the Scottish Government decided to prematurely end Abelio’s contract as operator of ScotRail and to bring Scotland’s trains into public ownership. It was able to do this because of a strict “break clause” written into the tender contract. A similar break clause could be written into the operational leases of the ScotWind projects at the point where they are being negotiated (i.e. now). This break clause could include something similar to the case of onshore wind where if turbines are replaced with new, larger and more efficient turbines that exceed the rated capacity initially negotiated for the site then this “repowering” could trigger a new contract negotiation and could result in the NEC taking ownership of the site.
Another trigger might be deployed in the case of the operator failing to meet its promises and commitments especially around developing supply chain jobs in Scotland. Right now, the public documents from the Crown Estate indicate that supply chain promises played at least some role in the initial option bids (though apparently not one that could be used as a deciding factor). The winning operators will now have to develop and propose a formal planning bid based on those previous commitments and if the formal bid falls short then the operator can be fined or can be blocked from requesting a final lease. However, the bar for losing the lease is set such that the final planning application need only provide 26% of the previously “committed” supply chain jobs and the fine for coming in at that bare minimum bar is only a maximum of £250,000 – pretty much a rounding error in the accounts of BP, Shell and the other multinational operators involved. There is therefore a strong incentive for operators to deliver only the bare minimum of what they’ve promised – regardless of statements made to the contrary by Government Ministers.
I don’t think anything can be done about those commitments at this stage but negotiations certainly could look at inserting break clauses based on the final planning application and developments subsequent to that. Any company that bases its application on creating a certain number of jobs but then fails to deliver by a certain point should face losing their licence to operate with the NEC (and National Infrastructure Company) standing ready to step in and take over. Ministers should be ruthless about enforcing this – we cannot risk a repeat of the last time they took the eye off this ball.
I’m sure there will be other ways that the Scottish Government could explore returning this project to public ownership so I welcome suggestions from readers if you have them. Certainly, there should be a focus on getting an NEC off the ground as soon as possible so as to avoid this happening again either in offshore wind or in any of the other renewable energy sectors that we know we’ll need to build up in the future. We must always remember though that we’re in this position now not by accident but by design – years and decades of both UK and Scottish Governments accepting practically as writ that privatisation of national assets and “foreign direct investment” were the only metrics of success – even if it meant that investment was being done by any country’s national energy company other than our own.
The transition to a Green New Deal means changing virtually every aspect of our current economy and it’s going to mean a lot of work by a lot of countries to do it. The least we should expect from our own is that we roll up our sleeves and start doing that work too rather than pawning off the right to do it to us to others or, worse, to the very oil baronswho caused the climate emergency in the first place.