CHAPTER 4 - Input from IPA Consultants
48. This final report from HEG was preceded by an interim presentation to the FREDS group in May 2005. This provided four short-term recommendations which are still retained and discussed in chapter 5.
49. Discussion with FREDS at this stage highlighted gaps in the groups ability to quantify and justify some arguments for investment in hydrogen and fuel cells, particularly in relation to grant support. Subsequently, work was commissioned from IPA Consultants to assist the group finalise their report.
50. Three main reports have now been delivered as follows:
- "Interim Report - The potential for Hydrogen and Fuel Cell Development in Scotland", published in August, 2005. The main topic in this report is a review of sources of funding.
- "Hydrogen Technology Systems" published in November, 2005. The main topics in this report are a technology review of energy storage devices and an island renewable system model.
- "Final Report - The potential for Hydrogen and Fuel Cell Development in Scotland", published in December 2005. The main focus in this report is proposed mechanisms to support HEG's recommendations.
51. All three reports are on the FREDS website www.scotland.gov.uk/enterprise/energy
HEG Response to IPA Interim Report: The Potential for Hydrogen and Fuel Cell Development in Scotland
52. The main focus of the IPA report centres on "Assessment of Existing Support Schemes". This is a thorough piece of desk research on the diverse sources of grant, loan and equity that may be accessed by players in the hydrogen and fuel cell sector. The diagram attached as Appendix No. 4 is a graphical summary of their findings. However, HEG is aware of anecdotal evidence that the seemingly unlimited promise of financial support outlined in the report is in reality much more difficult to access. The following has been accumulated from currently active Scottish hydrogen and fuel cell organisations from the public and private sector.
Competitive bidding, transparency and time
53. For competitive bids submitted for financial support the chances of success are rarely better than 1 in 4, often less than 1 in 10. The reality is that the resources needed to complete application forms and prepare fully justified business plans is a significant barrier for SMEs. Many of the processes which applicants must go through when applying for funding can be exhausting with agencies asking for more and more information. Whilst large companies can stay this pace, SMEs tend to fail. It is accepted that there has to be due diligence and public accountability, but several bad experiences for a busy SME executive are likely to deter them from attempting to make future application for public funds.
54. Funding body transparency is important. One Scottish fund recently encouraged an application, completed the structuring of the grant, offered an indication that everything was in place for a straightforward sign-off, only to state two months later that there was no funding left available for investment.
55. Time taken to secure funding from the public sector is also a factor and most SMEs cannot endure the delay. Such problems are particularly serious for new technologies offering high potential returns in the longer term. Such investment returns are typical for renewable and clean energy technologies and the risk/reward perception by public and private sector investors leads to protracted analysis of opportunities.
HEG recommends that the Scottish Executive considers setting up a funding applications unit for the area of renewable energies. The purpose of the unit would be both to search for funding opportunities that match the capability of Scottish private and public sector bodies and to support applications for these funds. Professionals would be employed to gather together suitable partners, at home and abroad if appropriate, formulate applications according to bid criteria, create the necessary documentation and make submissions. Past experience in the Republic of Ireland shows that this type of approach encourages companies and universities to participate with a cost of no more than 10% of grant award but a greatly enhanced strike rate. Appendix 4 demonstrates the complexity of the funding opportunities available.
Provision of balance of funding when grants are awarded
56. A quite separate issue is the attitude of Scotland's financial community to hydrogen and fuel cell investment which influences the provision of balance of funding when grants are awarded. Private sector funds for long-term, high-risk investment are almost non-existent in the UK. Most innovative companies are initially very small with highly qualified and dedicated people struggling to exist. Even when they are successful in gaining public funding grants, they often fail to find sufficient balance of funding.
HEG recommends that the Scottish Executive considers introducing "Proof of Concept and Commercialisation" funding for SMEs that can prove they have innovative technology. The mechanism for SMART & SPUR has shown itself to be robust and should be extended to allow 75% cash support for follow up projects. The Scottish Executive might also consider repayable Innovation Loans of up to £250,000 directed towards emerging strategic industries that could have a major impact on the Scottish Economy.
Public procurement direction
57. A third group of concerns involves the lack of public procurement direction to secure early utilisation of new technologies. Local and national government in other EU countries, especially in the US close market failure gaps and stimulate commercialisation using public procurement. There is, as yet no apparent equivalent in Scotland or the UK. When compared to other EU countries, the UK seems to fail to interpret EU funding rules in as generous a way. These areas of public policy are not only barriers to economic development in Scotland but also discourage SMEs from trying to access EU funds.
58. HEG recognises that in considering any new support, government must weigh the balance of emerging technology risk against the public sector duty to minimise risk. Emerging technologies by their very nature carry higher levels of risk than established technologies.
59. However, if emerging technologies are to break into the commercial market they need
publicly-funded transitional bridges. Scotland needs to be proactive in putting in place the necessary requirements that would enable public funding in projects to be increased to the higher limits of intervention currently legislated for within the European Union (re state aid) under environmental exclusion.
HEG recommends that the Scottish Executive encourage local and national public sector procurement in order to drive the development of regional low carbon emission applications. Although these procurements would have to conform to all EU procurement rules, local requirements with proximity to service and repair facilities would favour employment and deployment in Scotland.
100% cost recovery
60. In some community-led project applications it may be appropriate to consider the creation of community-owned companies that would be, not for profit, limited by guarantee organisations, whose memorandum and articles of association would be designed to qualify for charitable status. The business model pioneered by the PURE project in Unst can, in principle, access 100% funding from the public sector for any development project. This is a route which could be used to establish further demonstration projects.
HEG response to IPA Report: Hydrogen Technology Systems
61. Whilst the first IPA Report considered funding sources, to support fulfilment of the four recommendations put forward by the HEG, the second report reviews technology capable of storing renewable energy and reusing it in a hydrogen economy.
62. This is particularly important in relation to HEG's first main recommendation, which proposes extra financial support for demonstration projects involving hydrogen use in remote or "off-grid" communities in Scotland.
63. The report makes a compelling, albeit high-level case, for bringing together a group of technologies including wind generation, batteries, electrolysers, hydrogen storage, fuel cells, gas-turbine generation and hydrogen-powered transport, to demonstrate how a large island economy could be completely self supporting in energy terms using only renewable sources. The model takes account of intermittency issues that are often seen as the Achilles heel of wind and wave-based solutions for remote locations.
64. Given the wealth of renewable resource in Scotland's island communities, the concept of fulfilling this vision could be undertaken as a pan-European "Lighthouse" project aimed at providing a Scottish-based exemplar, funded in large part from EU sources, ultimately for wider exploitation throughout the world.
65. Moreover, IPA suggests that with current gas-oil prices of around $600/t, an island requirement similar to that of Shetland (50MW electrical demand) could be economic. Other attractive features are that ITI Energy are already investing £9.3 million in advanced battery systems which the concept requires, and a successful community-based funding mechanism has already been demonstrated for the smaller Unst based " PURE" hydrogen and fuel cell demonstration scheme.
66. To quote from IPA's paper, "These demonstration projects have the potential to provide added value to Scotland's economy in terms of skills development, job creation, technology innovation, reducing reliance on imported fossil fuels as well as the associated environmental improvements that could result."
HEG recommends that funding be provided to develop the island renewable model in greater depth and to bring forward a fully justified investment proposal.
HEG Response to IPA Final Report: The potential for Hydrogen and Fuel Cell Development in Scotland
67. Continued dialogue and iteration between HEG and IPA has created a consultant's report that is truly reflective and encompasses all of the diverse interests represented by the membership of HEG. Hydrogen and fuel cells is so different from other single industry renewable groups that have reported to FREDS; it is an emerging group of technologies that are in the very early stage of development; its applications range from transport to static and include everything from hydrogen production through storage, distribution, and end with a myriad of applications.
68. The four proposals that were formulated by HEG in its interim report to FREDS have now been refined and are restated in the next chapter of the report incorporating the guidance and added value provided by the IPA report.