Windfarm boom off Scotland must not be at expense of consumers

ScotWind is the first offshore licensing round covering acreage off Scotland for a decade. When it was launched in June last year Crown Estate Scotland talked about it paving the way to around 10 new commercial windfarms being developed off Scotland and unlocking as much as £8 billion investment.

Given that the round was launched as the scale of the likely fallout from the coronavirus crisis became clear, those claims may have seemed fanciful.

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However, moves made by corporations in recent months amid the rollout of coronavirus vaccines suggest the Crown Estate Scotland forecast may not be unreasonable.

In February the results of the latest round covering acreage off England, Wales and Northern Ireland made clear that hard-headed energy giants saw huge value in the areas concerned .

The mighty BP teamed up with Germany’s Energie Baden-Wuerttemberg (EnBW) to make a successful bid for leases covering an area between the Isle of Man and Liverpool. The partners agreed to pay the Crown Estate around £1.8 billion in fees over the first four years in total, with the prospect of them investing much more if they decided to develop any windfarms.

BP’s chief executive Bernard Looney said at the time: “We are fully confident that these highly advantaged resources will deliver – at a minimum – the 8-10 per cent returns we demand of our renewables investments.”

BP chief executive Bernard Looney Picture: BP

Scottish Hydroelectric owner SSE noted that it had been unsuccessful in the “highly competitive” round, which it said signalled the attractiveness of UK offshore development. The company said it would seek out further opportunities.

Crown Estate Scotland then decided to extend the ScotWind exercise in the hope of ensuring bids were in line with the UK Crown Estate round.

The Scottish organisation came under fire at the time from the renewables lobby for keeping firms in the supply chain waiting for valuable work.

However, the decision to delay the closing of the round now looks to have been an entirely sensible one.

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While one might expect corporations to keep their cards close to their chests when it comes to competitive auctions, a range of giants have made clear that they will be enthusiastic participants in the ScotWind round.

In November SSE said it was teaming up with Japanese industrial giant Marubeni and the Copenhagen Infrastructure Partners investment firm to compete in the round.

In May SSE’s chief executive Alistair Phillips-Davies said it planned to bid in a number of areas with floating windfarms set to feature in its plans.

The same month BP confirmed that it was planning to participate in ScotWind with EnBW.

Last week French oil and gas major TotalEnergies said it would compete for acreage as part of a consortium with Australian investment bank Macquarie and the Renewable Infrastructure Development Group, a wind specialist based in Scotland.

At a time when corporations are eager to burnish their environmental, social and governance credentials, all three of the teams have laid out plans to ensure that any windfarm projects they complete will benefit the supply chain.

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But sceptics will note that when ScotWind was launched last year Crown Estate Scotland said applicants would have to submit a Supply Chain Development Statement “outlining how they plan to engage with and utilise supply chain to successfully develop their projects”.

In April Crown Estate Scotland beefed up the supply chain development requirement.

When the final bids are assessed, it must ensure that supply chain commitments appear to be robust and supported by detailed plans rather than being merely aspirational.

The plans must also support the development of technologies that will help to make the biggest contribution to the net zero drive.

Experts have noted that there is an opportunity for Scotland to become a leader in the development of floating windfarms.

Equinor chose to develop the world’s first floating windfarm off Scotland, in the form of the Hywind facility off Peterhead.

Success in the floating windfarm market may provide some compensation for the fact that the growth of the offshore wind industry in Scotland to date has not provided the big boost to employment that was expected.

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It is a concern that US giant GE has decided to develop a turbine blade manufacturing plant on Teesside, which is expected to create about 750 jobs directly and support many more in the supply chain. The plant will be used for the manufacture of blades for the giant Dogger Bank windfarm that SSE is developing off North East England.

Hopes that major windfarm equipment operations would be developed at Burntisland Fabrications (BiFab) in Fife and CS Wind in Argyll have been disappointed.

The Scottish Government claimed its ability to provide support for BiFab was limited by rules on state aid set by the EU.

When assessing the ScotWind bids Crown Estate Scotland should ensure that they provide an opportunity for the giants concerned to generate a reasonable return on their investments but no more.

Talk of private sector firms taking on huge risks to develop complex projects should be regarded with caution given the advances that have already been made in the offshore wind sector.

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SSE is applying learning from the giant Beatrice windfarm which it brought into operation off Caithness in 2019 to the Seagreen development off the Angus Coast. TotalEnergies bought a majority stake in Seagreen in a deal worth up to £130m in June last year, when it was known as plain Total.

In December SSE sold a 10% stake in Dogger Bank to Italy’s Eni in a £200m deal the Perth-based firm said showed how it had been able to generate value for shareholders by investing in renewables.

That deal underlined how corporations have been able to generate good returns by taking early positions in windfarm projects.

Successful ScotWind bidders should be required to pay the taxpayer a fair share of any gains they make on the sale of stakes in licences they acquire in the round.

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Both SSE and BP have made much of their plans to maintain generous payouts to shareholders at a time when most savers are earning less than one per cent on deposits.

With that in mind, Ofgem must try to ensure that giants that win licences are not then subsidised by consumers through their power bills under the Contracts for Difference regime.