Small-scale hydro plant and machinery review: report

Conclusion

101. As outlined in paragraph 75, the group agree that dams, intake chambers and powerhouses are all named items in the plant and machinery regulations and the assessor is therefore correctly applying the regulations with regards to those elements. The group considered that thrust blocks would be considered rateable as foundations but notes that this remains a point of contention in the ongoing LVAC case. The group also notes the debate (including at the ongoing LVAC case) around penstocks, turbines and generators but as the assessor has currently excluded those elements from the valuation calculation the group did not take a view on whether that was a correct application of the regulations.

102. Similarly, the group did not take a view on whether items excluded from the plant and machinery regulations would then be valued as part of the lands and heritages in their own right and agree that such issues are a matter for the courts to decide.

103. While aspects of non-domestic rates are unavoidably complex, including the application of receipts and expenditure methodology, the group supports the recommendations of the Barclay Review of Non-Domestic Rates that the rating system needs to be more transparent and relevant information flows between stakeholders must improve without delay.

104. By design, hydro electricity generation plant is heavily dependent on civil engineering works which are typically rateable as either plant and machinery or as lands and heritages. Comparator technologies such as wind and solar power do not require comparable levels of civil engineering infrastructure which typically results in relatively lower rateable values.

105. The group was provided with no evidence that the plant and machinery regulations, or indeed lands and heritages, for hydro had been applied in a way that was materially different to equivalent plant and machinery in other sectors even if the resulting rateable values as a proportion of turnover were higher than other renewable technologies. While the hydro sector representatives were in favour of changes to the plant and machinery regulations, the majority view of the group was that changes to the regulations specifically for small scale hydro were not justified or required.

106. However, the group does agree that the outcome of correctly applying the regulations is resulting in adverse outcomes for small scale hydro schemes supported under the FIT regime and that concerns regarding the viability of some parts of the existing hydro sector have merit. The group therefore concludes that significant elements of the existing sector will struggle, at least in the short term, without further public sector support. In addition, future investment may be undermined by the existing rates regime although, as identified in paragraph 90, there are other factors that may impact that situation.

107. These concerns do not appear to be universally applicable throughout the sector and the group notes that plant benefiting from the ROC regime are not facing the same level of difficulty as plant operating under the FIT support.

108. The nature of any ongoing public support is a matter for Scottish Government to determine but reflecting on the options considered by the review group; the group does not believe that doing nothing is a sustainable option for parts of the sector; that there is no evidence to justify a sector specific exemption (or de-rating) for the reasons set out in paragraphs 101 to 105. While a relief may be imperfect and it will be vital to provide greater certainty for investors in new plant, the majority view on the group was that a relief could represent a viable solution to deliver a more affordable rates outcome for the sector whilst maintaining fairness with other ratepayers.

109. In concluding that continued public support may be required, the group notes that there is an inherent tension between the renewable subsidy regime and the non-domestic rates valuation approach. By design the renewable subsidy regime effectively seeks to equalise returns from different low carbon technologies on the basis of the levelised cost of energy but the primary evidence used to underpin that calculation excludes any consideration of relative non-domestic rates liabilities. As such, any differential rates liabilities are not reflected in the level of subsidy support provided thereby technologies with higher non-domestic rates liabilities are essentially disadvantaged.

110. However, since the receipts and expenditure methodology explicitly considers subsidy income within the rateable value calculation, any attempts to reflect differential rates liabilities would have directly impacted rateable values. As such, had the UK Government reflected rates liabilities in the levelised cost calculation to justify a higher level of support, the result would have been an even higher rateable value.

111. This circular calculation appears to be unavoidable but the group agrees that the outcome is that hydro subjects are disadvantaged relative to other renewable technologies given the greater importance of civil engineering works (manifesting as plant and machinery) in hydro.

112. In coming to these conclusions, State Aid considerations have been a recurring and material factor. By focussing on a single sector of the economy, all options available to the group are understood to have state aid implications – which as outlined in paragraph 47 will continue irrespective of the future trading relationship with the European Union.

113. The evidence available to the group was presented on a scheme by scheme basis and anonymised to protect any commercial confidences. Therefore the group was only able to consider each scheme individually and in isolation so would not be able to identify any portfolio impacts including those associated with State Aid de minimis levels. As an example, of the 168 schemes for which evidence was provided, only seven would hit de minimis limits in isolation but it is known that multiple occupation is not uncommon and some schemes are owned or operated as portfolios. The extent of these overlaps are unknown, although the sector considers them to be significant and estimates that around 100 schemes could potentially fall foul of de minimis levels.