4. Next Steps
4.1. Overcoming financial barriers
Our engagement with Energy Intensive Industries (EII) has identified that the principal and most commonly cited barriers are the long payback periods on commercial investment and a lack of access to innovative finance mechanisms – resulting in investment being diverted elsewhere. Without overcoming these obstacles, transformational change amongst Scotland's EII, to reach emissions reductions targets, is unlikely to materialise.
The typically long payback periods that discourage commercial investment could be remedied in part by industry having access to loans that adopt a patient approach to capital repayment. This would provide industry with the necessary finance to undertake investments to lower emissions whilst improving economic performance. It would give them an alternative source of finance with less aggressive terms.
Mechanisms currently exist for encouraging the directing of private finance towards energy efficiency and decarbonisation. A good example of an innovative mechanism is PF4EE which draws on Horizon 2020 funding. The programme aims to make lending for energy efficiency more sustainable across the EU and increase the availability of debt financing by providing:
- A loan framework from the European Investment Bank (EIB) which, as a non-commercial lender, supports beneficiaries through lower pricings and longer maturity than commercial providers.
- A risk sharing facility in which the financial intermediary creates a loan portfolio of all energy efficiency loans. The EIB pays a collateral sum of 16% of the value of the total portfolio, which is designed to mitigate the risk of projects defaulting on loan payments.
Losing access to EIB funding as a result of EU Exit, would, however, put such financing support mechanisms at risk.
The financing required to progress opportunities will come from many sources including EII company reserves. Securing investment will require persuasion, often within multinationals who are driven by commercial imperatives. However, where public sector support and economic plans align with environmental aims, boardrooms may change the threshold for strategic investment decisions.
4.2. Promoting project progression
To better identify both the number and scope of viable opportunities (and capacity to progress them to investment grade business cases), the Scottish Government proposes to co-ordinate knowledge of project opportunities across EII in Scotland. To structure this gathering of evidence, investment potential will be differentiated by common factors such as:
- Readiness: investor-ready projects and those more complex.
- Scale: large emitters with fairly unique needs versus more comparable requirements.
- Sub-Sector: between the different sub-sectors of EII which may have specific needs.
- Types of technology: between innovative and more mature or established approaches.
- Geographic clustering: site-level and place-specific approaches.
The findings from proposed evidence gathering could be used to:
a) Map a Scottish site-based viable 'prospect list' or pipeline.
b) Enhance understanding of what each project owner considers an acceptable payback period (within company defined thresholds).
c) Develop a risk profile to stimulate finance interest.
d) Influence cost-benefit analysis of programme design stages, with a likely focus on IHR.
e) Enable more advantageous project positioning for UK/global funding or financing.
f) Assist in identifying skills/capacity/innovation gaps.
g) Inform conversations to overcome barriers to infrastructural change.
4.3. A Support Framework Built from Collaboration with Scottish Industry
The Scottish Government proposes to intensify its working relationship with EII. Subject to agreement, we will convene a Scottish EII Forum to develop from a 'partnership approach' into an action-oriented group that spans the public and private sectors. Members would buy in to the long-term policy approach to industrial decarbonisation as well as a culture of collaboration.
The Forum would fulfil an advocacy role to engage with a range of linked initiatives, including international ones, with the intention of aligning activities to mutually support decarbonisation. It would connect with other leadership groups without duplicating effort, and shape common viewpoints to strengthen the position of Scottish EII to influence infrastructure development.
In addition to the above, industry leaders could assist in data gathering amongst membership organisations to help define sub-sector decarbonisation pathways. Industry can advise the public sector on how advice and support for industry is perceived by users and on tiered approaches. For example: bilateral mechanisms for the largest companies, design-based process engineering studies or business case development support for mid-sized firms.
Alongside the proposed Forum, the following actions will be carried out with our agency partners who deliver aspects of support:
- Continue engagement to ensure industry is clearly directed to support.
- Consider who might be best placed to deliver parts of a more joined-up, redesigned support landscape, deploying appropriate tools as required.
- Forge connections between EII and potential investment in innovative or advanced manufacturing.
- Promote consistency in quantification and appraisal: primary process energy efficiency and carbon emitted; heat recovery opportunities; other options to decarbonise.
- Ensure that enterprise agencies raise the profile of energy efficiency and decarbonisation policy as relationships are built with businesses.
- Consider which EII sites are also SME, and therefore potentially eligible for more assistance.
- Develop case studies where cost, energy and carbon savings have resulted from investment, or where benefits have stemmed from 'green branding' of industrial manufactured products.
- Explore options to research energy use in industrial processes, compared with premises.
4.4. Looking ahead
Feedback on the questions and next steps will allow us to prioritise actions before a Scottish EII Forum comes together, later in 2019. During the year ahead, we can forge links with other initiatives to progress matters that will encourage deeper decarbonisation.
Our strategic policies set a vision to decarbonise whilst enhancing economic output. Investing in industrial decarbonisation could provide a more sustainable future for manufacturing and, with the right infrastructure, and support from government, could attract new industries to Scotland. Securing investment to realise this opportunity has the potential to significantly boost local economies, supply chains and the overall competitiveness of Scotland's EII in their respective global markets.
Our vision – where Scottish industry has met its emissions reduction obligations whilst growing economic capacity – is ambitious. It is only by working in collaboration, over time, that we will build a support framework, then a detailed plan, to deliver this.