The Scottish Low Carbon Investment Conference

Q: How have things changed since the last conference in terms of financing large-scale offshore wind projects? Are we in a better place?

In one sense, yes. There has been some encouraging movement in other markets, with projects being financed in Belgium and Germany and that's good for the sector as a whole. Within the UK, we have seen things move rather more slowly - because of the ongoing process of electricity market reform (EMR), which has raised questions as to what the regulatory framework will look like and how people will finance their projects.

Q: What is the impact of these questions?

Basically, they make long-term investment decisions more difficult. The government has made some good and consistent statements about wishing to encourage offshore renewables as a key part of the sector – but the difficulty comes in the detail. How will you grandfather what you already have? How will you as the government ensure there is ongoing support for projects developed between now and 2017, or at least between now and when the new framework comes into place? There is a sense of a possible hiatus on investment planning now, which is obviously concerning in terms of build-out and hitting 2020 targets.

Q: How do you think the successor regime to the Renewables Obligation might look?

That is the second area of uncertainty. Whatever it looks like, there will be a period when people have to figure out how it works vis-a-vis the existing system. There will be a transitional period when people can do one or the other - under the Renewables Obligation or the new system. The first projects under the new system will need longer to get done. The more certainty that government can introduce about how they grandfather existing projects and deal with transitional arrangements, the better. The UK is one of several possible investment destinations and if we make it too hard, investors will go elsewhere.

Q: Is the UK an attractive destination to invest in offshore renewables at the moment?

Yes, although simplifying the system would increase its attractiveness to investors. Let's say you are a new incoming investor and need an explanation of the existing system and the new one, compared to the simple Feed In Tariff in Germany. It might take 30 seconds to explain the German system and five minutes to explain ours. People's response tends to be "That sounds very complicated. Can we be certain of getting the returns we expect?" There is a danger in going down this path of complexity - because the returns investors get are broadly comparable in different countries.

Q: What are the attractions – and the problems - of the UK system?

We do have a very good wind resource and very good possibilities from support services from the oil and gas industry around Aberdeen. Complexity and uncertainty are the main barriers. If you add layers of risk, some investors will take the less exciting return because there is less risk attached.

Q: What can be done to move forward?

What is clearly needed is certainty from government about what it is going to do to the existing regime. If you take away the uncertainty, you will continue to get projects being brought forward. We need direction about the way policy is going. The White Paper in July outlined the government approach to EMR and the arrangements for grandfathering under the Renewables Obligation.

Q: Do you think the new system will make a positive difference?

It depends on the level of regulatory risk and market risk, and whether that changes the balance of power in the market at the moment. Principally, you only have six big utilities writing power purchase agreements and if you cannot get an offtake contract from one of those, it's difficult to bring a project forward because you cannot get financing. The question is will the new arrangements be straightforward and will people find them attractive?

Q: What would make the new arrangements attractive?

For me, the hallmarks are if the government can show the new system is transparent, fair across all technologies, predictable and robust - and can it give confidence to investors? That means not intervening every six months. Banding reviews have been somewhat unhelpful because people are very nervous about regulatory change. When Spain started amending tariffs, the backlash was felt across many other markets. The UK has a good record of not doing things retrospectively, but we have seen a fairly quick change of direction on solar feed-in tariffs and change in North Sea oil tax law, which caused a strong reaction. That leaves people, especially those less active in the markets, more uncertain.

Q: How has the UK market compared to other European markets in the past?

Historically, it was a robust regime and through changes in government, there was an overriding sense of consistency. There is still a reasonable level of confidence, but some recent actions have left question marks in people's minds and things are different to 12 or 18 months ago. That's why the government needs to set out as soon as possible what it plans to do in a detailedway.

Q: Are things different in Scotland?

Alex Salmond and the Scottish Government have been very effective in fostering a coherent approach - but the UK as a whole has big challenges in meeting 2020 targets. We started off well behind the rest of Europe and have made good progress in some areas but the recession has had an impact and EMR has led to a slowdown. These are pretty uncertain times.

Q: Is there confidence in the investment community?

Within Europe generally, there is cautious optimism. Projects are being brought forward and financed successfully. New projects are coming forward and investment levels are rising. There is a long line of projects in the UK but not a massive level of new activity beyond the projects which have been already going for some time. The utilities are spending quite a lot in the UK but I do not sense that they are pressing forward as aggressively because there are question marks over the sector and over levels of return. EMR makes the UK a slightly more nerve-racking place to do business than say Germany or Belgium, which are not subject to such existential questions. We can regain a leading position, but only if there are quick and concrete signals from government.