Troubled waters for renewables industry

AS ALEX Salmond strolled around shaking hands at the SECC in Glasgow on Tuesday, he was in his element. The First Minister had travelled to the West Coast for trade body RenewableUK's annual conference and he basked in the opportunity to meet investors and green energy firms from around the globe.

With the renewables agenda at the forefront of the SNP's policies, Salmond felt as though he was finally receiving some credit for his pro-renewables stance which has taken him to far-flung corners of the world this year as he tries to persuade investors to back projects in Scottish waters.

As he took his place at the rostrum in the main hall, Salmond could barely mask his excitement as he prepared to announce a 70 million fund to provide vital infrastructure for the industry - silencing one of the main gripes from developers about how projects in remote areas would be connected to the grid.

For years, potential investors have warned that unanswered questions about infrastructure have been a barrier to piling more cash into Scottish offshore wind farms and tidal projects.

But as soon as the First Minister put paid to one potential problem, another reared its ugly head.

Just as RenewableUK's three-day conference was getting into full-swing, several industry leaders expressed concerns through the press about clauses in some of the more recent Crown Estate licences, which effectively give priority to the oil and gas industry if companies from both sectors are interested in exploiting a certain area.

The clause could in theory see a wind farm operator lose its lease without compensation if an oil or gas firm wanted to use the seabed for drilling or pipelines.

Mark Petterson, a director at Warwick Energy, the firm behind the UK's largest offshore windfarm at Thanet near Kent, was among the first to ring the alarm bells, warning that the clauses could potentially provoke clashes between the two industries.

"As wind farms get bigger, the potential for them to come into conflict with oil companies increases," he cautioned. "Obviously the powers that be felt that oil and gas should be given priority."

The claims immediately sparked heckles from the green energy lobby that the clauses, included by the Crown Estate at the behest of the government, flew in the face of rhetoric from both Westminster and Holyrood about nurturing a green economy.

Meanwhile, rumours emerged that the oil and gas industry was preparing to make a bullish defence of its position and would even be prepared take legal action to protect its offshore interests - claims that the industry's representative body Oil & Gas UK stringently denied.

Although Malcolm Webb, chief executive of Oil & Gas UK, acknowledged that the "potential for conflict does of course exist", he insisted: "It is furthest from our minds. The UK will have to exploit all sources of energy production to meet its future energy needs and so it is hugely important that the two sectors - offshore hydrocarbons and wind - work together closely," Webb said.

"Strong co-operation between the two industries will be especially required for those areas offshore which have been licensed for many years for oil and gas exploration and production and which, more recently, have seen permissions for wind farm development."

Oil & Gas UK and RenewableUK recently staged a meeting between leaders from both industries to improve communication between the sectors, Webb said.

Although both sides flatly deny any animosity, renewable energy experts warn that the potential for clashes in future is likely to add to the many risks already preying on the minds of investors in Britain's - and in particular Scotland's - offshore industry.

As Dr Richard Dixon, head of WWF Scotland, says: "It's not really the reality of conflict that's the problem, it's the potential. If you're a big energy company, why would you spend billions on developing an offshore wind farm in Scotland when that could be removed at any moment if an oil company wants to do some drilling there?"

Dixon warns that the bias towards oil and gas in the Crown Estate licences risks stalling Scotland's offshore wind industry "before it really gets going".

Chris Gotts, a partner specialising in energy and renewables at the law firm Burness, agrees.

He says the clause merely adds to a sizeable list of uncertainties that could potentially dissuade developers from pouring their money into projects off British shores. With a number of countries all vying for a slice of the highly lucrative renewables pie, it's another shady area that the British industry can ill afford.

"One concern is obviously for wind farm developers who have been granted these licences - in the absence of clarity this is another risk which potentially makes the raising of funds tougher when already the funding landscape is very difficult. It's something the government needs to focus on and very quickly."

With organisations such as Scottish Renewables estimating that the offshore wind industry alone could generate 28,000 jobs and attract 7.1 billion of investment to Scotland over the next ten years, the clauses are a problem that Salmond's administration is clearly keen to nip in the bud.

The First Minister also used his platform at the RenewableUK conference last week to announce a summit in Aberdeen that will bring together the titans of both industries. Chaired by oil industry heavyweight Ian Marchant, head of Scottish & Southern Energy, it is hoped the conference next month will put to bed any bones of contention.

Although industry bodies are talking up the good relations between both industries, analysts are less convinced.

They warn that the UK Government, which reserves the power to sanction the removal or alteration of the clauses, should deal with them now before they become a source of dispute.

Jennifer Ballantyne, head of the energy real estate team at law firm McGrigors, says developers have been aware of the situation for at least seven years but are only just beginning to understand the risks they pose.

"It has been a clause that has been in these leases since 2003/2004 but as wind farms get bigger and further out to sea then the potential for conflict increases."

She warns that the latest round of development licences granted by the Crown Estate - Round III - highlights the potential for dispute as they are within areas also earmarked for oil and gas exploration. "Within a number of those [Round III] zones, there are areas where there are licensed oil and gas quadrants," Ballantyne says.

"You either wait for a test case [to go through the courts] or the government, rather than leaving it up in the air, puts in place a framework as to the compensation that would be payable."

"It's a question of either waiting for the conflict to arise or address how it would be dealt with and give certainty to all parties. It's already a risky business developing out at sea."

McGrigors suggests that the forthcoming UK Energy Bill would present an ideal opportunity to set out what would happen if a battle between the two industries were ever to break out.

But reaching agreement over the most suitable solution may be easier said than done, experts say, with various parties backing different solutions.

Dixon of WWF Scotland argues that all new Crown Estate licences should be issued without the clauses. But for the existing contracts, which renewable energy firms are likely to begin construction on in the next 3-4 years, it's more problematic, he says.

"For the existing ones ... clearly we have got ourselves into a mess," says Dixon. "If you take the clauses away, it will increase the business risks for oil and gas companies and the government will have to compensate them for that. I'm not for giving the oil and gas industry money."

Dixon hopes that industry bodies which say they are working in the spirit of cooperation will back up their rhetoric by staging serious discussions about how to avoid any legal disputes.

"It that's the case then let's come to the table with the government and have a chat about these clauses and about how do we set up a system for if there is a conflict."

Gotts of Burness says if each party is honest and upfront, the issue could be resolved quickly and easily - although he argues compensation is not the desirable route.

"Compensation is a remedy of sorts but we are potentially talking about very significant sums of money that would have to be paid," he says. "I don't believe a structured compensation package is what people would want."

Gotts' solution is far simpler: "Once the licences have been granted they are effectively untouchable," he suggests.