Written evidence submitted by Scottish National Investment Bank (NRG0048)

Scottish National Investment Bank response

introduction

1.                The Scottish National Investment Bank is Scotland’s development investment bank, wholly owned by the Scottish Ministers on behalf of the people of Scotland. We were formally established in November 2020.

2.                The Bank is an impact investor, focussed on delivering positive environmental, social and economic impacts through our investments. We have three strategic missions that guide our activity. Those missions are:

• Net zero: Address the climate crisis, through growing a fair and sustainable economy
• Innovation: Scale up innovation and technology, for a more competitive and productive economy
• Place: Transform communities, making them places where everyone thrives

3.                We operate on a fully commercial basis, and invest through long-term, patient debt and equity, as well as in external funds. We invest in viable businesses and projects that are not able to access the levels of private capital they require to grow and develop.

4.                The Scottish Government has committed to capitalising the Bank with £2 billion over our first 10 years. As the Bank’s initial investments deliver returns, we have the ambition to reinvest those funds creating a perpetual investment fund to support the Scottish economy in the long term.

5.                The Bank has now built a strong portfolio of investments that span all three of our missions and which reach across Scotland. Since our launch we have invested in 39 innovative businesses and projects, committing £682 million of our own capital, alongside investment of £1.5 billion from third parties.

6.                Our portfolio can be viewed in full on our website[1]. Example investments, pertinent to the Committee’s areas of interest, include:

      XLCC – £20 million investment in subsea cable manufacturer, alongside an £87 million commitment from the National Wealth Fund (NWF). The investment will support the company’s development of a new manufacturing facility at the brownfield site of the former Hunterston Terminal in Ayrshire.

      Port of Ardersier - £50 million debt facility to enable development of port infrastructure and new offshore wind supply chain hub, led by energy transition facilities provider Haventus. Co-investment alongside £50 million facility from NWF and supporting significant capital commitment from Quantum Energy Partners.

                                                  North Star Renewables - £50 million debt finance facility to enable the build of construction and service operations vessels to supply the offshore renewable energy sector. Our investment was part of £140 million round. North Star have subsequently raised a further £225 million with providers including ABN AMRO, AIB, NAB, and Royal Bank of Scotland.

                                                  Port of Aberdeen - £35 million debt facility to support development of new South Harbour infrastructure. Investment alongside previous European Investment Bank commitments.

      Aurora Energy Services – growth capital commitment of £20 million to support green energy supply chain company and provider of training and reskilling programmes.

                                                  Verlume – growth capital investment of £6.6 million in Aberdeen-based energy storage pioneer, focussed on offshore deployment.

      Nova Innovation – £6.4 million growth capital investment in tidal energy and floating solar manufacturer.

7.                Our investment is delivered by an experienced and skilled team, and enabled by the strategic relationships we have established across the Scottish investment ecosystem, spanning the public, private and third sectors.

8.                We recognise that we are in a distinct position, as a commercial investor located within the public sector but working closely with private investors and businesses. We are keen to share the insights we gain from that position, with a view to crowding investment into opportunities in Scotland and addressing financial and non-financial barriers to investment.

9.                Recognising the Committee’s stated areas of interest, this response outlines the Bank’s perspectives on:
1. The need for transition finance to support oil and gas supply chain companies looking to access renewables opportunities;
2. The offshore wind supply chain, and its risk and opportunities;
3. The current position of the Scottish investment ecosystem; and,
4. The Bank’s engagement with GB Energy.

1.                  The Need for Transition Finance

10.            The Scottish economy has benefitted from the development here of an internationally competitive offshore oil and gas sector and supply chain. The sector originated to address North Sea opportunities but swiftly developed the capacity and reputation to compete globally. While domestic opportunities have anchored supply chain and services companies in Scotland, significant overseas exposure has been key to the continued viability and growth of those businesses.

11.            The oil and gas sector and its supply chain has historically been associated with high levels of productivity and capital investment, strong export performance and wage levels higher than the national average. Those effects have been most evident in Aberdeen and the North East where clusters of those companies have been located.

12.            As a mature basin, however, it is well established that UK North Sea oil and gas production has been in decline from its historic peaks. Further decline in production is projected and this inevitably impacts supply chains. Supply chain spend is anticipated to decrease from around £11 billion in 2023 to around £8 billion in 2030.

13.            Reduced domestic opportunities will bring significant challenges to the sector. That diminishing anchoring factor may also lead to the relocation of supply chain operations to their overseas markets, creating an additional cliff edge.

14.            Acceleration of the decline of oil and gas production risks bringing forward reductions in capacity within the sector. As an example, the Bank has become aware of anecdotal indications of reduced operations and maintenance spending by oil and gas producers, initiated in this financial year. This places at risk a previously highly predictable source of supply chain spend.

15.            The timely development of at-scale alternative economic opportunities – principally through offshore wind but also encompassing hydrogen and CCS – is therefore essential to ensure there are contracts and jobs available to sustain the businesses and workforce currently located within the oil and gas sector.

16.            It can, however, be challenging for supply chain businesses to make investments to transition their operations in anticipation of renewables supply chain opportunities, particularly given uncertainties in the timing of those opportunities.

17.            There have been additional challenges presented by the withdrawal of finance in the market for the transition activities of oil and gas supply chain companies. This has been driven in part by investor reputational concerns regarding oil and gas exposure in their portfolios.

18.            We have therefore identified a critical role for us, as a development bank, to address transition finance requirements. We also want to evidence routes to resolve investor concerns as an essential measure in attracting necessary investment into the sector.

19.            We have subsequently concluded a number of investments to support company transition, where the companies are moving from a position of majority oil and gas revenues, towards a much greater proportion of revenues from renewable supply chain opportunities.

20.            An example of this is the Bank’s investment in North Star. Our £50 million commitment has supported the company to pivot its position as a provider of safety vessels to offshore oil and gas companies, towards being a provider of operations and maintenance and installation vessels to offshore wind projects. The company has now accessed significant further private investment, and can play an important role in addressing this critical gap in the offshore wind supply chain.

21.            We also invested £20 million in Aurora Energy Services. Aurora bring together services across construction and maintenance of energy assets. Several of these services have previously been focussed on offshore oil and gas and Aurora are now utilising their expertise and international market exposure to transition them into renewables supply chains.

22.            The Bank has set out publicly the principles that have guided our investment approach in our ‘Transition Finance’ paper[2]. Those include:

• Identifying businesses that have made a clear commitment to the transition, including public statements in their business plans, recruitment of key roles, and implementation of investment plans;
• Working with businesses with the potential to deliver sectoral impacts, such as through the ability to raise further capital, and deliver positive social and environmental impacts.
• Committing to utilise covenants where appropriate, including timelines for transitioning revenues to renewable sources, with potential incentives included for overperformance.

23.            This is complementary to the Bank’s work to support emergent new economic opportunities that utilise skills that might typically have been deployed within the oil and gas sector. Examples of these investments include rocket manufacturer Orbex, located in Moray, or robotics company Leap AI located in Aberdeen.

2.                The Offshore Wind Supply Chain Opportunity

24.            The development of a competitive and resilient offshore wind supply chain is the most significant economic opportunity in Scotland for a generation. It is driven by the growth in the pipeline of offshore wind projects following the ScotWind leasing round.

25.            That leasing round included 34GW of licences, with further pipeline coming from existing offshore wind projects and the concurrent INTOG rounds. Critically, 19GW of ScotWind projects propose to utilise floating offshore wind technology – marking the emergence of a new and significant supply chain opportunity where European and global supply chains are still to be established.

26.            Investing to support the transition of the oil and gas supply chain is important to realisation of this opportunity. There is considerable complementarity between the engineering expertise required for oil and gas deployment and for new floating offshore wind technology. A similarly international outlook will also be required from the outset in the Scottish offshore wind supply chain.

27.            In combination with experience of deploying energy projects in the challenging North Sea conditions, this presents clear opportunities for the development of a competitive and resilient offshore wind supply chain anchored in Scotland.

28.            The pipeline of offshore wind projects is also geographically concentrated on the east coast, meaning there is overlap with the clusters of oil and gas companies in the North East around Aberdeen.

29.            The Scottish National Investment Bank recognises the importance of this strategic opportunity and have been closely engaged in the market – with a focus on the critical role we, as a development bank and a deployer of commercial capital, can play.

30.            Research undertaken by the Bank has found a requirement for around £3.5 billion of investment in supply chain capacity. That level of investment has the potential to unlock a supply chain spend of £17-28 billion by developers of domestic offshore wind projects.

31.            There are critical requirements for: the development of: ports and harbours infrastructure; manufacturing capacity across key components such as blades, turbines and cables; vessel provision for installation and operations and maintenance; and for the scaling of technology that can drive efficiency and performance within the sector.

32.            The Bank has been active across each of these requirements. As a development bank we can take a different view of risk to typical private sector investors, and this supports us to engage with market risk in an informed way – taking a holistic view of the sector.

33.            It is our view that a ‘commercial-first’ approach is also essential. Given existing pressures on public finances, it is essential to maximise public sector investment on a commercial basis, whilst minimising the levels of sub-commercial finance required.

34.            Providing investment on commercial terms and demonstrating that a financial return is achievable is also the best means of crowding in the necessary private capital and proving out replicable investment models.

35.            To date we have supported the build out of new facilities at Port of Aberdeen, and Port of Ardersier. At Ardersier, the Scottish National Investment Bank and NWF each committed £50 million debt facilities. That commitment complements significant investment from Quantum Energy Partners, and supports the build out of a new strategic renewables hub and regeneration of that major industrial site, located within the Inverness and Cromarty Firth Green Freeport.

36.            Similarly, the Bank has recently announced investment in cable manufacturer XLCC. Our £20 million investment will support the development of a manufacturing facility and the regeneration of the site at Hunterston in North Ayrshire. NWF are also a co-investor in XLCC.

37.            We have also provided scale up finance to Verlume, specialists in energy storage technology for offshore deployment. There is a recognised gap in the availability of scale up finance in Scotland and elsewhere in the UK, for innovative, growing companies like Verlume.

38.            Through its innovation mission in particular the Bank has been addressing this challenge, focussing on initial investment of £3 million - £15 million with the ability to follow on. We work closely with private investors to support these opportunities and to increase the flow of scale up capital into Scotland.

3.              The Scottish Investment Ecosystem

39.            As a development bank we collaborate across the public, private and third sectors to crowd capital into investable opportunities.

40.            The Bank operates as a centre of commercial investment expertise within the public sector. While we retain complete operational independence, we engage frequently with the Scottish and UK Governments on access to capital issues and opportunities to increase investment in the economy.

41.            Where required we work closely with Scottish public sector bodies, including the Enterprise Agencies. That includes ensuring the efficient use of public capital where the deployment of Enterprise Agency grant capital is necessary alongside the Bank’s commercial capital.

42.            There will also be cases where companies or projects that have previously received support, including financial support, from the Enterprise Agencies can now be considered for potential investment from the Bank.

43.            We have established strong working relationships with UK-level bodies including the National Wealth Fund, previously the UK Infrastructure Bank, with whom we agreed an MOU early in 2024.

44.            The MOU underpins our ability to collaborate as investment institutions. Following its agreement we have announced joint investments in Port of Ardersier, in ZeroAvia – a manufacturer of hydrogen-fuelled engines for aircraft – and in XLCC.

45.            We recognise that the Scottish National Investment Bank’s position means that we have considerable expertise and knowledge of the Scottish market. We are closely connected to private investors and to the advisory community in Scotland. Those connections that strongly supports our deal flow and pipeline of potential investment, as well as our knowledge of investment counterparties.

46.            Our local knowledge can be complementary to the UK-wide perspective and scale of organisations like the National Wealth Fund and GB Energy

4.              GB Energy

47.            We have had engagement with the team developing GB Energy and with the new organisation’s leadership following the announced establishment of the new body. In our view it is essential that GB Energy play an additive role within the ecosystem, recognising the skills and expertise that already exist.

48.            It is important that unnecessary overlap and duplication is avoided between public bodies. Confusion in the market, or inefficient communication between public bodies, will also be damaging, particularly given the need to develop sectors like the offshore wind supply chain at pace. It would also be counter-productive if companies were to pause or delay their plans based on a misunderstanding of what forms of support are available.

49.            We remain keen to explore opportunities for productive collaboration with GB Energy as their plans to develop and as the Bank continues to invest in line with its missions in renewable energy deployment, ports and harbours infrastructure, and in the scaling of emergent technologies.

50.            As an impact investor we are also committed to supporting the development of the community renewable energy sector.

51.            We would anticipate that there will be opportunities to utilise our experience in the market and our investment capabilities in areas of interest for GB Energy. For example, we recognise that the development of these priority areas for investment will also require significant non-financial interventions.

52.            Grid build out, planning and consenting processes, and surety of demand or offtake for new technology producers are all critical factors. We will continue to engage with GB Energy on opportunities we see to address these.

53.            We will similarly be happy to engage with the Committee on these points, and on any of the other issues raised in this submission.

January 2025

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