Power flows

In the current debate about the UK’s future energy supplies, much has been said about wind farms, both onshore and offshore. However it is often forgotten that hydroelectric schemes in Britain still produce more electricity than wind power, and in global terms hydropower produces one fifth of the world’s electricity.

Untapped potential

As long ago as 1890 the monks of St Benedict’s Abbey in Fort Augustus constructed an 18-kilowatt power station using the flow of a nearby stream. This provided power not only to the abbey but also to the 800 townspeople. By 1914 many similar small private schemes had been built; many were still working until after the Second World War.

These smaller “run of river” schemes continue to offer potential for development. They do not require a dam to be constructed: water is drawn from a river via an intake weir and passes through an underground pipe before entering a turbine to generate electricity.

The power that can be produced depends on the mass of the water and the height, or “head”, that the water falls. Whilst in practice some energy is lost due to friction and heat loss, a modern hydro turbine generator can convert over 90% of the energy in the available water into electricity. Add to that the longevity of hydro plant and it is not hard to see why, in environmental debates that emphasise sustainability and efficiency, there continues to be strong interest in hydroelectric development.

There are plenty of sites in Scotland still available for development. It is commonly asserted within renewable energy circles that, in Scotland alone, there is potential to develop at least a further 1,000 mega (million) watts (“MW”) of small to medium sized schemes, even taking environmental and other constraints into account.

Key regulatory issues

Two key consents are required to build a hydro scheme in Scotland. The first is a planning consent granted by either the Scottish Government under s 36 of the Electricity Act 1989 or by the local planning authority. The threshold above which application must be made to the Scottish Government is for schemes rated at 1.0 MW or higher. In contrast the threshold for other renewable technologies, including onshore wind, is 50 MW. The original rationale for setting a low threshold for hydro was protection of fishing interests. A non-departmental public body, the Fisheries Committee, must be consulted by the government in relation to any s 36 planning application. However, particularly since the advent of the CAR Regulations referred to below, the Committee is becoming involved in all hydro applications regardless of size and developers are now advised to engage with it at an early stage. There therefore is a strong argument for raising the 1 MW threshold.

The second consent required is a licence issued by SEPA under the Water Environment (Controlled Activities) (Scotland) Regulations 2005 (“CAR”), which broadly implement the EU Water Framework Directive 2000/60/EC (“WFD”). The overriding purpose of WFD is for all waters (including ground waters) in member states to achieve “good water status” by 2015. CAR therefore requires a licence to be obtained from SEPA for each abstraction and impoundment of water and also for certain engineering works (such as reinforcement of river banks).

A key challenge for potential developers is to satisfy SEPA that it should grant a CAR licence for a proposed scheme notwithstanding that all hydro development inevitably has some detrimental effect on the water environment. Before determining a CAR application, SEPA must (a) assess the potential risk to the water environment; (b) assess what steps may be taken to ensure efficient and sustainable water use; and (c) apply the requirements of the legislation specified in parts 1 and 2 of sched 4 to CAR.

In carrying out this role SEPA is guided by article 4.7 of WFD, which is primarily concerned with the achievement and maintenance of good ecological status. Article 4.7(c) sets out that there may be a permitted “derogation”, that is to say an activity may be permitted notwithstanding the fact that there will be some inevitable negative effect on water quality, where “the reasons for those modifications or alterations [to a body of surface water or groundwater] are of overriding public interest and/or the benefits to the environment and to society of achieving the [environmental] objectives set out in paragraph 1 are outweighed by the benefits of the new modifications or alterations to human heath, to the maintenance of human safety or to sustainable development”.

Environmental and other issues

Hydro developers often find that their proposals require them actively to consider and accommodate the interests of other parties who use the water that flows within the development’s boundaries.

White water canoeists take considerable interest in proposals for new hydro projects. This is because many rivers that are ideal for canoeing also have potential for generating significant hydroelectric power. It is noteworthy that the Scottish Canoe Association has a separate website dedicated to informing its members about current hydroelectric proposals (www. wheresthewater.com/hydro), as well as a renewable energy strategy (see www.canoescotland.com). In practice it may be possible for developers and canoeists to reach an agreement whereby the developer undertakes not to operate the hydro scheme for an agreed number of weekends in the year, so as to allow canoeists to enjoy their sport fully.

However developers have clashed with SEPA over the latter’s interpretation of WFD article 4.7. The developers contend that SEPA has misdirected itself by taking recreational interests, such as canoeing, into account in considering CAR applications. Developers argue that there is no mention of recreational interests in the article 4.7(c) derogation test and therefore the only proper forum for consideration of recreational interests is the planning process.

If the watercourse is passable by migratory fish, it will be important for the developer to secure the salmon fishing rights, since these can be held as a separate legal tenement. It should be particularly noted that positive prescription can operate to fortify a general and unspecified grant of fishings. The developer cannot run the risk of being unable to operate the project due to the presence of conflicting legal rights, and full enquiry is required both in relation to title and what fishing occurs in practice.

The role of the Fisheries Committee has already been noted. SEPA is currently engaged in a consultation regarding a proposed memorandum of understanding between SEPA and the Fisheries Committee.

Prospective developers must submit an environmental statement to the planning authority or, in the case of larger developments, a full environmental impact assessment. They must demonstrate that they have engaged with the relevant environmental bodies such as Scottish Natural Heritage, and made all reasonable efforts to avoid, or at least mitigate, adverse environmental impacts. Thus for example if there are rare birds that nest in the vicinity, there will require to be proper engagement with RSPB and evidence that adequate studies have been undertaken and all necessary mitigation measures considered.

Legal issues

Legal considerations should be addressed from an early point in order to protect the positions of both the landowner and the potential developer. It is normal for a developer to seek to conclude an option agreement with the landowner giving the developer exclusive rights to investigate the site and apply for planning during a given period, typically two to four years. Ideally an agreed form of lease will also be attached to the option. This means that if the developer subsequently obtains the permissions that it requires, it can serve notice on the landowner that it wishes to enter into a lease on the terms and in the form previously agreed. In this way the developer can avoid further time-consuming negotiations (and the risk of being held to ransom) when it is ready to proceed with building the project.

In some cases practitioners will receive a set of heads of terms from the parties’ land agents detailing key commercial matters including length of option periods, rent and disturbance payments, royalty payments for use of minerals and levels of indemnity insurance. However as with many legal agreements the devil is in the detail, and there is usually much work to be done by the parties’ solicitors before final agreement is reached. The following matters are worthy of particular comment:

Water rights. Running water is the fuel source of a hydroelectric project and care must be taken to ensure that all necessary water rights are secured. Agreements may need to be entered into with several landowners even though the project infrastructure may only be sited on the land of one owner. This is because each owner of part of the river bed (the alveus) has an obligation to avoid using the water so as to interfere with the flow of the river and thus infringing the rights of other riparian owners. It follows that the construction of a weir or dam always breaches the common interest of the opposite proprietor of the alveus, in the absence of agreement or exercise of the right of servitude of damhead.

The operator of a hydro scheme must also take care to ensure that the force with which diverted water is reintroduced to the river is not materially greater than it would have been had it not been diverted. Otherwise there may be a claim for breach of the common interest of downstream riparian owners. Finally it should be noted that the general law of nuisance applies to watercourses and is particularly important in relation to pollution.

Option periods. During the option period, and any extensions, the developer wants to secure exclusivity to investigate the suitability of the site for a hydro project, and to secure the requisite consents. However, the landowner does not want his or her land to be “sterilised” for unnecessarily lengthy periods of time. Thus, for example, the landowner’s solicitor may seek to insist that an extension will only be granted if the developer has already submitted a viable planning application, or alternatively can at least demonstrate substantive progress towards so doing.

The developer may also seek the ability to further extend the option period in the event that a suitable national grid connection is not yet available. Again it will be prudent for the landowner’s solicitor to stipulate that such extensions will only be granted if reasonable progress towards achieving such grid connection within a definite timescale can be demonstrated.

Termination rights. At the point where the developer enters into a lease, nothing will yet have been constructed and indeed the landowner has no control over the project timescales. The worst possible scenario for a landowner is to find himself with a 40-year lease in place but with little or no progress on the ground for several years and no income benefit.

There are two key remedies available here. The first is to stipulate that the landowner may terminate the lease in certain defined circumstances. For example, if the project has not exported electricity within five years from the lease date of entry. The second is to state that an agreed minimum rent will apply after a period of say two years from the date of entry. The rationale is that this is reasonable because, all things being equal, a competent developer should be able to construct the project within two years. The developer may counter however by stating that delays caused by force majeure should be excluded from such time periods.

Rent. There are a whole host of ways in which rent can be calculated, including (a) a fixed annual sum (index-linked of course); (b) according to electrical output (the rent being a set amount per kilowatt hour or megawatt hour of electricity produced; (c) a set percentage of the total turnover of the project; or (d) any combination of the above. In the case of a turnover rent care should be taken to ensure that “turnover” is adequately defined to include all project income, including that from renewable obligation certificates (“ROCs”) and levy exempt certificates (“LECs”). Additionally the landowner’s solicitor should ensure that a robust system is put in place for independent verification of project turnover.

Indemnity against loss or damage. Landowners will wish to be certain that any damage or loss caused to their land, crops, employees or animals will be adequately compensated by the developer and that suitable indemnities, backed up by an adequate public liability insurance policy, are obtained. The developer may however wish to limit the extent of its liability, in line with its insurance policy exclusions, and negotiations on where to draw the line, as to bearing of risk, can be prolonged.

Whilst hydroelectric development is invariably complex, with significant regulatory, environmental and legal issues to be overcome, hydro power still offers considerable potential to help meet Scotland’s green energy targets.

Nick Mackay is a partner with Wright Johnston & Mackenzie LLP, Glasgow. A specialist in renewable energy development, he is a member of the Scottish Renewables Forum Hydro Working Group and acts as legal adviser to the British Hydropower Association. e: nm@wjm.co.uk  w: www.wjm.co.uk

Other useful sites:

• The British Hydropower Association – www.british-hydro.org
• The Scottish Renewables Forum – www.scottishrenewables.com