11 FEBRUARY 2004

Mr Alan Moore, Mr Chris Shears, Mr Rob Hastings and Mr Alan Mortimer

  Q200  Lord Young of Graffham: In addition to the problem of sight, of course, a real obstacle to achieving a ten per cent, let alone a 20 per cent market is finance, finding institutions which are prepared to invest or help to fund the investment. Have you noticed any change in the attitude of institutions, in  particular the 2015 target for Renewable Obligations, has that helped?

  Mr Moore: Yes. Perhaps I could take that one. As I said in my first answer, I think the 2015 Obligation was extremely useful, not only as a signal in terms of the Government's intentions. Whether I am talking to my in-house investors or outside banks and equity players, political risk is always the one risk that is quite difficult to mitigate. The 2015 target was a powerful signal about political intent but also, as I was explaining earlier, it gives us the ability to do our economic spread sheets over a period where we can make our own predictions about Renewables Obligations Certificate values. Whilst we were looking at a short period that was not so easy. I think it is fair to say, and I am not being in any way rude, it takes finance houses a couple of years after any major change to get comfortable with the risks that are involved. I am told, although I was not involved at the time, that was the case when the old fashioned NFFO contracts came into place in the early 1990s. I think we have seen that in the last couple of years since the RO was first announced. What I can say is my own company announced only last week the closure of a £400 million financing deal involving private equity and a consortium of 13 banks. I think that is a very good sign that the finance houses in the city are getting comfortable with the risks. Inevitably there will be tension between who takes the risk on the off-take contract, on the long term contract for the electricity and the Renewables Obligation Certificates. There are some pretty interesting negotiations going on between the electricity supply companies, who have the Obligation, and the finance houses about who takes that long term risk. I think that is a debate which is going on right now and I think there will be a compromise somewhere in the middle with both sides taking some of that risk. Very powerful signs are that in only the last few weeks things are moving on that front.

  Q201  Lord Young of Graffham: Obviously your company has made progress but are you aware of other potential investors who cannot get finance or will be looking to finance?

  Mr Moore: Certainly if you went and talked to some of our colleagues in the industry they would say they have been having problems, but equally I am aware that what I would like to think of as a bit of a pioneering deal that we have done, I already know that others are riding on the wave of that.

  Q202  Lord Tombs: Could you give us a ballpark figure of the capital cost of six gigawatts of wind power?

  Mr Moore: If you take onshore and offshore as a mixture—

  Q203  Lord Tombs: 50/50 you said.

  Mr Moore: It is around £900 a kilowatt at today's prices.

  Q204  Lord Tombs: £900?

  Mr Moore: Yes, £900 a kilowatt, £900,000 a megawatt.

  Q205  Lord Tombs: That is rather a lot of money, is it not?

  Mr Moore: It is quite a lot of money but the running costs are very low once you have built it.

  Q206  Lord Tombs: I am thinking about capital resources. It makes your £400 million deal look quite small.

  Mr Moore: Yes, it will deliver something like approximately 400 megawatts and a lot of money has to be raised.

  Q207  Lord Tombs: I have two questions on your press release which I found very interesting. It is to finance your existing 13 wind farms and new development. What is the split between that?

  Mr Moore: There are about 150 megawatts of existing wind farms.

  Q208  Lord Tombs: How much of the £400 million is taken up financing those?

  Mr Moore: That is commercially confidential, if you do not mind me not answering that.

  Q209  Lord Tombs: I can do my sums.

  Mr Moore: There are about 150 megawatts of existing wind farms and the total fund will be for about 430 megawatts.

  Q210  Lord Tombs: You said in that same statement that the principal aim was to get the existing wind farms off your balance sheet to allow breathing space. I can understand that. Is that a situation widely existing in the industry? You are a big operator.

  Mr Hastings: Maybe I could come in? The way in which financing is approached in the projects is it is maybe driven in some cases by a corporate target. We have a return on equity investment hurdles to reach. It can be that you can structure a capital investment with financing which can improve some of your returns on equity and so it really depends on what sort of corporate targets we have. Yes, going for structured project finance which may be non recourse and, therefore, off balance sheet, can be beneficial to the economic performance of the project when it is consolidated within the corporate targets.

  Q211  Lord Tombs: It is a bit of a problem essentially because of the size of operators?

  Mr Hastings: Yes.

  Q212  Chairman: If we turn to the specifics of offshore briefly at the moment. What do you see as the main risks associated with offshore development? There are questions of health and safety associated with the maintenance of offshore turbines. There is the question of reliability of turbines working for long periods in very hostile environments. There is the question of appropriate foundation structures to stop these things falling over. The first one which falls over will be quite a blow for the confidence in the industry. Comments, please?

  Mr Hastings: If we are taking risks in general of course you have to get the project in the first case so there is a consenting risk. There is a process you have to get it through in terms of converting an idea into something which is operating so that is one part of it. Of course there is a lot of work going on at that stage to identify what is appropriate and that is appropriate in the sense of the environment it is working in and that can be an extended period of time, typically something in the region of maybe three years. There is an awful lot of work going into   identifying what the actual environmental considerations are and the issues like we mentioned in terms of the suitability of the foundation designed for the location would be worked through extensively and effectively what will be delivered will work in terms of the engineers' design. There are other risks. There is the financial risk of making this thing perform financially and return for the investors and there are other risks like making sure you have a distribution system which is going to operate. If I may pick up specifically on the points you raised which are the safety related risks. Is the asset going to be safe? Once we have constructed it will it stay there, will it operate and will it function as it was intended to function? I think inevitably as you go through the process of making a decision to invest, for example, £500 million in building an offshore wind farm, clearly there is a rigorous process of investigation which goes on to determine whether it is an appropriate design and whether it will operate appropriately for its application. If you look at who is doing this work I think typically these are large household name engineering type companies who are doing the design. For example, if you take specifically foundation design, there is a wealth of experience in terms of constructing offshore foundations and that largely comes from the oil and gas industry.

  Q213  Chairman: Can you tell me what industry has experience of building structures in situ in which wind farms are placed because I believe very little of the oil and gas industry experience is relevant?

  Mr Hastings: I am not sure that is the case. I think there is a lot of work that has gone on in marine engineering, marine structural engineering, if you   like, which is applicable. For example, the environmental loading conditions which are encountered in these locations are quite similar. There are slightly different parameters you may have, because of the shallower water conditions there may be slightly different parameters that they have to design to. Effectively the engineering models that are used, the design concepts which are used and applied, for example piled foundations, are in effect very similar to what you find in an offshore area.

  Q214  Lord Flowers: At first sight an oil rig is one thing, a wind turbine is a very different proposition.

  Mr Hastings: It is relatively easy to design for a wind turbine compared with an offshore oil and gas structure. If you imagine the difference in scale, offshore oil and gas structure could weigh something in the region of 10,000 tonnes. A wind turbine could weigh something like maybe 200 tonnes, a large offshore wind turbine. It is an order of magnitude of difference in terms of weight. The dynamic loadings are probably different but, again, in terms of relative loadings a wind turbine, even a large wind turbine, maybe a three or four megawatt wind turbine, which would be applied offshore, still does not approach anything like the kind of loadings you would encounter on an oil and gas structure.

  Q215  Chairman: Has anybody, for example, modelled the effects of the vibrations—which we have been discussing already—associated with the operation of the turbine and unconsolidated sound? These vibrations would be transmitted down the structure.

  Mr Hastings: There has been quite a lot of research done on this already. Probably going back over the last maybe five or six years, there was a lot of research undertaken by, strangely, the Danish engineering organisations and universities and, in fact, some of the Germans have been doing that as well.

  Q216  Lord Sutherland of Houndwood: May I ask an additional question? This is on the ScottishPower piece. I was looking particularly at the paragraphs dealing with the predicted price rises to end users and then you have a very significant paragraph seven in which you say there is a real concern when Government actually come to face these they will be tempted to—meddle is the word I would use—intervene is the word you use. Have you drawn this very clearly to the attention of the relevant departments and has it registered? This will clearly have an impact on the long term planning?

  Mr Mortimer: In terms of prices?

  Q217  Lord Sutherland of Houndwood: Yes. Is Government aware that these are your predictions and are they nonetheless giving you encouraging noises to go ahead?

  Mr Mortimer: Yes, I think they are. We have made it clear, certainly in our responses to various consultations, that there will be implications for consumer prices and that it is in our interest to be up front and honest about what they are and recognise that is the cost of a lower carbon economy.

  Q218  Baroness Platt of Writtle: I am struck by the difference in David Milborrow's papers, on intermittency from Scottish Power's views. Has he seen the paper that we have had from ScottishPower which is very much more doubtful about the practicality of their being able to operate in a sensible, efficient, economic, secure way? We have had this paper and ScottishPower seems extremely doubtful.

  Mr Mortimer: Certainly we are flagging up some issues which do need to be tackled in the early term. There are some particularly Scottish issues as well which are maybe driving that concern.

  Q219  Baroness Platt of Writtle: Yes, but that is going to be a major source, is it not?

  Mr Mortimer: It could be and it should be. It should be a substantial contribution towards the national targets. We can see, for example, that the grid could become a significant constraint. It is already a constraint, I know, to areas, for example the North West of Scotland and South West Scotland where there just is not any grid capacity at the moment. That has been recognised and studies have been done to show how it can be expanded to deliver the capacity but that will take time. To take new grid infrastructure through the planning process and invest in it and construct it will take time and our experience, for example, with the Northern Ireland interconnector was that it took seven years to go through that process. Now when you bear in mind that by 2010 the achievement of targets could start to be compromised by lack of grid then really we need to be acting now. Work is underway on environmental aspects, environmental assessment of new grid lines in Scotland, and that is good, but as yet there is no agreement on a funding mechanism which will allow investment in this grid infrastructure to go ahead. That is very urgently required and Ofgem are working on it but it is not in place yet.