Financial information regarding the hydro plant and aluminium smelter at Lochaber: FOI Appeal

Information requested

I. the size of the total gross liability of the Scottish Government under the 25-year financial guarantee relating to the hydro plant and aluminium smelter at Lochaber entered into in December 2016;
II. the methodology that was used to value the asset at the time of the agreement in 2016/17;
III. documents and correspondence including, but not limited to, slides, research and emails that were drawn up or sent as part of the Scottish Government's due diligence before entering into this guarantee.

Response

I am writing in connection with the Scottish Information Commissioner’s decision of 29 September 2021 in relation to your Freedom of Information request of 19 February 2020.

The Commissioner (Decision Notice 144/2021) did not accept that the Scottish Ministers were entitled to withhold the particular information sought – ‘the size of the total gross liability of the Scottish Government under the 25-year financial guarantee relating to the hydro plant and aluminium smelter at Lochaber, entered into in December 2016’ – and has required them to disclose it to you.

In December 2016, following the approval of the Finance and Constitution Committee of the Scottish Parliament, the Scottish Government agreed to guarantee a portion of the electrical power purchase obligations of the aluminium smelter at Fort William in order to secure the survival of the plant and to underpin additional investment.

Under the power purchase agreement guaranteed by the Scottish Government, the primary obligation falls on the smelter (Liberty Aluminium Lochaber LTD) to pay SIMEC Lochaber Hydropower Limited. Liberty’s annual payment obligations vary between £14 million and £32 million per annum over the 25 year life of the power purchase agreement (PPA), and the total nominal value of the guaranteed revenue stream at the commencement of the guarantee in 2016 was £586 million.

From next month (December 2021) there will be 20 years remaining of the original power purchase agreement. Using the discount rates set by HM Treasury, as published in Public Expenditure System (PES) Papers, the net present value of the remaining Purchase Power Agreement revenue stream totals £285.9 million as at 01/11/2021.

In return for the guarantee, Liberty pays the Scottish Government a commercial fee. Since 2016, Liberty Aluminium has fulfilled all its power purchase and guarantee fee obligations, and there has been no call – and therefore no resulting public expenditure – against the Scottish Government guarantee.

To protect its position, the Scottish Government has taken first ranking securities over certain assets of the GFG Alliance at Lochaber including the aluminum smelter, the Fort William hydro-electric power station, and substantial land holdings. The audited accounts, published on Companies House, of Liberty Aluminium Lochaber LTD (for the year ended 31 March 2019) and SIMEC Lochaber Hydropower 2 Limited (for the year ended 30 November 2019) record the value of the assets at Fort William as £438,459,176. In addition, the Scottish Government holds cross-guarantees from other Group companies to protect its position in the event that it is required to make any payment under the guarantee. If such a scenario were to arise, the Scottish Government would have a range of options including asset sales to recover any amounts it had required to pay (that is, the expected value of the total security package held by the Scottish Ministers would be expected to meet or exceed any liabilities that might accrue to Ministers).

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