The generation game

By 2020, 80% of Scotland’s energy should come from renewable sources. If this Scottish Government target is to be met – and the ultimate vision is 100% renewables provision – all available sources, and the necessary infrastructure, will have to be developed. With its natural resources, and levels of activity, marking Scotland as a world leader in the field, some innovative legal solutions are required to underpin the work. Many of our firms are rising to the challenge.

Wind and hydro power are by now familiar, and readily understood concepts. But what of anaerobic digestion, or biomass, or EFW?

First, however, some perspective. As David Bone of Harper Macleod points out, wind farms are far from passé. “To achieve 2020 targets at least 16GW of renewables will be needed. Of these, 13 will come from wind, on and offshore, possibly one from wave/tidal, one from hydro, and one from all the rest.” But, he adds, there is enormous potential in wave/tidal, and the Government through the feed-in tariff (FIT) scheme has helped promote other sources.

Also on wind power, it should be realised that Scotland has barely begun to develop an offshore potential that could dwarf what is now being generated on land. Most current activity is in the shallower North Sea, but a substantial project is also planned off Tiree.

“Scottish waters are generally deeper than off the English coast, so more expensive to develop”, comments Gavin Thain of Anderson Strathern, “but the technology is developing such that it’s becoming more viable to develop there.” Chris Towner of Bond Pearce in Aberdeen says the oil and gas industry service companies are spotting an opportunity to transfer their skills to offshore wind, and “there is a lot of intellectual capital to be exploited”. That includes legal work, adapting documentation developed for the oil industry.

Across the board

To what extent does each form of renewables require its own documentation? “The issues can be similar”, says Richard Cockburn of Maclay Murray & Spens, “but one big concern at the moment is that unlike say oil and gas, we don’t yet have standard documentation. There are moves to address that, on standards for health and safety, technical compliance and contracts, but it’s early days. It can make it more challenging for the lawyer, though if you’re doing more of the work, you’re likely to have styles that you can adapt.”

Some are well placed to advance the cause: Brodies acts for the Anaerobic Digestion and Biogas Association, which is trying to develop standardised due diligence documents; and Anderson Strathern for the Crown Estate has developed forms of seabed leases for wave and tidal projects.

As Towner observes, another essential is grid infrastructure, the issue which has given rise to the controversial Beauly-Denny transmission line.

Sea fever

Harnessing the power of the sea poses the biggest challenges in mastering the forces of nature: the greater the potential, the more hostile the conditions. The technology is mostly still at experimental stage, and the consensus is that commercial returns are five to 10 years away, which can make funding difficult to obtain, but as Derek McCulloch of Gillespie MacAndrew notes, ministers have raised the financial incentives by awarding additional ROCs (renewable obligation certificates) per megawatt hour for wave/tidal power. Essentially, ROCs are issued to and traded by electricity generators who are bound to achieve a set percentage of output from renewable sources.

Hurdles to be overcome, McCulloch explains, are getting a licence to carry out production, a design that will persuade a funder to back your project, then a connection to the grid, the construction and environmental consents, then the (costly) construction phase, and finally the operation and maintenance. Much contract work is required along the way.

The UK, Canada and the USA, in that order, are world leaders: 64 tidal devices will be installed in UK waters by 2015, says Brodies’ Neil Collar, mostly by smaller developers, though Scottish Power now has consent to put in 10 turbines on Islay. Collar adds that the new consenting regime (the offshore equivalent of planning permission, confusingly also called licensing) in force since April, can throw up numerous conflicting interests: fishing, navigation, yachting and environmental concerns can all obstruct a project.

The jury is still out on commercial viability, McCulloch warns: although the Pentland Firth has more water passing through than anywhere else in the world bar Canada’s Bay of Fundy, the sheer power of the current has made it almost impossible to anchor equipment there. The funding gap is that significant research is needed on this before the certainty of returns can be evaluated fully.

Gavin Thain, who acts for the Crown Estate in granting leases in Scottish territorial waters, says there have been agreements for leases in the firth for the first commercial projects. “There are still considerable barriers including the high capital cost of projects, and whether the infrastructure is in place to deliver the energy ultimately generated.” But the Scottish Government is very keen on wave and tidal potential, which in the long term could be a more consistent energy source than wind.

Grow your own

Back on dry land, aside from wind and hydro, the developments to watch are mainly taking place under the broad umbrella heading of bio-energy.

Here a number of sometimes overlapping terms are in use. Biomass is one such. It counts as renewable because although it burns carbon, generally wood, it is harvested as part of a constantly replenished crop through new planting – making a “closed carbon cycle”. And it often makes use of waste, such as crop residues. David Bone was involved in the first large project in Scotland four years ago, fuelled by woodchip from Forestry Commission land undergoing wind and hydro developments. To ensure future supply, there has to be a compensatory planting scheme.

Bruce Farquhar, head of renewables at Anderson Strathern, acts in one “flagship” proposed district heat and power scheme, a joint venture between a local authority and a housing association to supply up to 1,000 residents. Such schemes generate power but also make use of the heat thereby created. This is a “major construction-related project”, he says, requiring a heat centre plus pipe network, and involving a full service team to cover all the legal angles. “Typically these projects have been thought to be too complicated, with too many different parties, barriers to the sale of power involving local authorities, and the incentives haven’t been there. But most of these issues have been addressed and there is much more focus on the potential.”

Waste not, want not

Anaerobic digestion (“AD”) is also becoming common, partly through its potential for the farming community, singly or in co-operation. AD uses bacteria to convert plant and animal material by digestion inside sealed tanks, releasing methane to provide clean energy. The liquid residue, rich in nutrients, can be used as fertilizer, making the process doubly attractive to farmers.

As Keith Patterson of Brodies explains, there are basically two types of plant, one using purpose-grown crops, and the other energy from waste (EFW).

The latter covers a range of fuels, and of plant output, most being smaller scale – though physically sizeable as they use a lot of fuel in relation to output. Raw materials can range from farm waste, to commercial food waste, to sewage sludge.

“The extent to which lawyers get involved tends to depend on the funding sources”, says Patterson. “There are a lot of contracts involved: civil works, process works, grid connection and possibly power purchase arrangements. Also potentially feedstock arrangements: these will need to be clear and that bit can be quite tricky.” And, of course, planning and environmental consents.

There is a huge range of technologies, and as a biological process it isn’t as straightforward as some other renewables, so funding constraints can be an issue. But Patterson believes it has potential: “It’s putting what would otherwise be waste to use, and it’s also a more reliable baseload energy.”

Farquhar adds that it’s seen as “a holy grail that’s worth pursuing” for landowners or farmers to be able to produce energy from their own land, with security of supply and also certainty of economic cost.

Burning issue

The term “energy from waste” (“EFW”) is one that can arouse great public suspicion, if not opposition, being associated with incineration. Brodies are involved in a large scheme in Coatbridge using the somewhat different process of pyrolysis (the generation of heat from a closed vessel system), but still the local authority is appealing to the Court of Session against the grant of planning permission following an inquiry. “The industry will point to Denmark, where the exact same technology is on sites right next to houses”, says Neil Collar. “The Scottish Government advice talks of buffer zones of 200 or 250 metres, but according to the providers that’s just for the reassurance of the public.” Objectors, however, are not impressed by buffer zones.

In its favour, EFW links through to the Scottish Government waste policy of promoting recycling and cutting landfill, which is supportive of EFW “in the right place”. Bond Pearce’s Towner reports involvement in EFW projects including burning waste wood, and various treatments of municipal and other waste.

Landowner perspectives

With many land based projects, the nature of the agreement between the landowner and developer is important. A recent Journal article (Whittle and others, April, 55) argued that joint venture rather than leasing arrangements are more tax efficient. Michael Yellowlees, head of rural property at Lindsays, however says that some clients remain wary, in the current climate, of schemes where they feel they are taking on more risk, preferring the familiarity of the landlord-tenant relationship. “Some are enterprising enough to do it themselves”, he adds. “If it’s a hydro scheme, they get out the digger. The FIT scheme makes it a bit more feasible.”

Yellowlees also makes the point that all the proposed offshore schemes will need a landfall somewhere, presenting opportunities to coastal proprietors and their advisers.

Scotland for the sun

And what of solar power? While it is daylight rather than sunshine that defines its potential, some, such as Towner, believe that given the wealth of other resources at Scotland’s disposal, the potential returns from solar are limited in comparison.

As always, however, much depends on the incentives available, and the FIT regime introduced in April 2010 has encouraged some large scale commercial activity. As David Bone describes, a developer will now offer to lease the roof of domestic or commercial premises and install the panels, providing the proprietor with free electricity in return for the right to the FIT payments for the surplus put into the grid. The developer’s costs can be paid off over four to six years, and profit made over the rest of the 20+ years of the average lease. Legally that can raise lender issues (over letting part of your building), and further funding and security work, as well as dealings with Ofgem. The complications are greater if it’s a housing association whose tenants may exercise a right to buy.

Doing things with rules

Some of the issues to be faced are daunting, but David Cruickshank and Richard Cockburn at Maclay Murray & Spens – another firm with a large cross-disciplinary renewables team – paint a picture of opportunity for Scottish businesses, and their advisers. “It’s Scottish companies generally who are taking a leading role”, says Cockburn, “and that translates into opportunities for Scottish law firms. You can demonstrate you’re ahead of the game because you have renewables expertise, and the legal issues are much the same even in other jurisdictions.”

Both emphasise the regulatory aspect, Cruickshank observing that “One of the first things in advising clients is timing.” For example, the FIT was cut on 1 August for solar power, which effectively served to apply a brake to large scale solar in the UK, “and we have to ensure our clients are aware of such changes, or of forthcoming consultations, such as the white paper on the electricity market that is looking at overhauling the way the ROCs/FIT system works.

Cockburn predicts the internationalisation of renewables networks, with the next decade seeing a European initiative to create a grid under the North Sea linking much of northern Europe, providing an outlet if Scotland becomes a net exporter. That in turn could fuel growth in offshore wind, and marine energy generally, “because it will be a big resource and it will be close to this network”.

At the same time, he adds, we’ll see a big increase in local generation, with Government support and incentives, because it’s “easier and cheaper to have energy caught and used locally”.

Some suggest there is one further variable: the oil price may fall to a level that acts as a brake on development of other energy sources. But who would bet on that in the longer term?

Hydrogen Office shows potential

It may be very well having all these sources of energy, but can we match supply and demand? The Scottish Government has supported the development of a project in Methil, Fife, next to the Fife Energy Park, to demonstrate the potential for storing surplus renewable energy through the use of hydrogen. “It’s a key aim at Government level not only to have energy produced but mechanisms for it to be transmitted and stored”, says Bruce Farquhar, whose firm Anderson Strathern acted for the Hydrogen Office company.

Wind powers community gains

Wind farms of all sizes have become an established feature of the Scottish landscape over the last 15 years, but a more recent development is the community wind farm. Generally set up through a community development trust with a trading subsidiary, it has the potential to transform the fortunes especially of remoter island communities.

“Establishing a community benefit fund for the local area is a much used and effective way of garnering community support, which ultimately can help with the success of a planning application”, observes Gillian Gibbons, associate at Pagan Osborne. “The profits generated can be used to increase the environmental, economic and social potential of a community.”

But funding can be challenging, and grid connection problems can prevent a project ever getting off the ground. Then there are issues of site acquisition and development, access to land and laying of cables, and the planning process in which local conservation and environmental considerations will come into play, Gibbons adds, making proper advice essential.

This work is not however the exclusive preserve of the bigger firms. With Westray (Orkney) hosting one of the first projects, Lows of Kirkwall found themselves pitching successfully to work for the community trust.

“It was quite a sharp learning curve for myself and the firm”, comments partner David Fairnie. “But you pick up certain skills as a rural generalist, and while it would probably daunt a sole practitioner, there was nothing that was beyond the collective experience of our six principals” – aided by a “very collaborative” bto for the bank.

Such enterprises have their unique funding issues, generally being entirely dependent on money from outside. The Co-op and Trooidos are among the few banks willing to lend, and having a mix of lottery and commercial funding such as Westray secured, poses its own problems.

But the turbine, now fully operational, has been a “conspicuous success”, says Fairnie: “We have a staggering amount of wind in Orkney, and every time they send figures to Ofgem of what they’re generating, they get someone calling back saying this can’t be right.

“They are already making substantial amounts of income for the community, and once the borrowing is paid down, this could rise to the high tens of thousands each year.”

As for Lows, they have since successfully pitched for three out of five other Orkney schemes, and are now keeping close tabs on local offshore wind and tidal projects.