Tretton Review Group minutes: June 2018

Attendees and apologies

Attendees

Membership

• David Tretton, Meeting Chair
• Kenny Hunter,  Hunter Hydro
• Alastair Kirkwood, Scottish Assessors Association
• Fiona Grant, Heriot-Watt University

Secretariat

• Ian Storrie, Scottish Government
• James Messis, Scottish Government

Also in attendance

• Stephen Hutt, Green Highland
• Frank Finlayson, Scottish Assessors Association
• Bill Gillies, Scottish Assessors Association

Items and actions

1. Previous minutes

The group welcome Frank and Bill to the third meeting.

The group agreed that secretariat would disseminate minutes from previous meetings and circulate minutes for this meeting ahead of the next meeting.

2. Hydro valuations – treatment of buildings

The group looked through the practice note for valuation of Hydro Generators provided by the SAA.

The group discussed the definition of Land and Heritages and what is included in the valuation. They discussed how ‘vacant to let’ is the ownership of the Landlord.

The group agree that changes to the treatment of Plant and Machinery (P&M) would not exempt the land.

The group agreed to continue to look beyond the P&M regulation and to formally comment on a number of different options - each potential recommendation would need to be considered in terms of why it would apply specifically to Hydro.

The group discussed the potential for changes to P&M regulations to effect valuations elsewhere. 

The group discussed the fact that ‘De-rating’ would likely require primary legislation.

The group agreed that a case would be required to be made in order to provide a robust support for the use of primary legislation.

The group also agreed that making a case for Hydro, or any proposal, requires an assessment of the other sectors that would be impacted by the change.

3. Basic principles of renewable generation

The group considered a presentation on the economics of renewable generation. The presentation provided context of the economics of renewables (the varying Capital costs and marginal costs, Levelised costs, Load Factor etc..) the history of subsidies and their progression. 

Following the presentation the group discussed the appropriateness of the Receipts and Expenditure Method in Hydro.

The Hydro representatives presented their costs sheet which showed how repayment costs impact profitability, particularly in the first 5 years, and how after 5 years there is a better return.

4. Economics of Hydro

The group looked at the ‘summary valuation’ document which sets out the Valuation and divisible balance and amounts apportioned for the tenant’s share and the landlord’s share.

Hydro representatives provided evidence to suggest that hydro schemes are not profitable in the early years (first five years and are most profitable in the last five years of the subsidy regime.

The group discuss whether onshore wind would be comparable. For wind more of it is named in P&M regulations list and therefore is not rateable (Tenant Chattel).

The group agreed that even if the P&M were exempt for hydro, there would still be a substantial RV for occupiers of Hydro schemes.

The group discussed that if machinery is a part of the structure of the building then it is beyond the P&M regulations and would potentially be captured under “lands and heritages”.

The group noted that because Hydro is capturing a physical product (water) it requires technology that is rateable.

5. Hydro Practice note

The group discussed the Hydro Practice note.

The group noted that the ‘practice note would be based on what costs they could get from generators. They highlighted that part of the issues are the way that Feed in Tariffs (FIT)are dealt with for valuation.

The group discussed whether a change in level or nature of FIT support would constitute as a material change in circumstance (MCC).

The group noted that when assessors have no information on a specific Hydro scheme then it is compared with others on the tone list.

The group then discussed the application of the practice note in a number of anonymised cases. 

The group agreed that, in terms of arithmetic and calculation, the practice note is being applied correctly.

The group discussed and revisited the prospect of excluding certain machinery from valuation and the scope to exclude penstocks/pipelines as being tenant’s chattel.

Action: The group questioned if they could compare with a practice note from the wind assessors for Hydro for a similar size scheme.

The group discussed what sectors and industries may be more comparable.

The group noted that the civil engineering for hydro is not similar to solar and wind and questioned whether wave and tidal may be a potential comparator as it has a large concrete base in the sea.

The group acknowledged the four potential options are likely to be no action, applying a relief to the sector, providing an exemption and de-rating. 

It was noted that reliefs may not be the most favoured choice from the perspective of Hydro operators and investors.

The group discussed the importance of understanding the impact that any exemption of Micro and Small Hydro might have on Large Hydro and other sectors.

The group looked at the paper provided by the Hydro representatives and discussed the four specific scenarios presented and the divisible balance split in each.

The group discussed the extent to which adjusting the assumptions around P&M application can viably fix the problems.

The group discussed whether certain aspects of the Plant and Machinery are part of the building.

The group discussed the distinction between a permanent or temporary structure.

The group considered the definition of penstock, that if the concrete under the pipe were exempt then the scope for exemption of other P&M would invariably be expanded – it was highlighted even if the purpose is to merely hold up the turbine, it would be deemed to be part of the structure,. 

The group discussed potential business impact if P&M was not exempted. 

The group discussed the issues associated with each of the potential options.

The group discussed potential state aid concerns associated with each option. They discussed the potential wider impact de-rating and exemption could have on the broader P&M review.

Action: Hydro representatives to further develop their views on why Hydro would merit a different treatment regarding  the application of rates.

Action: The group to read paper by VOA, Colin Brook – legal argument prima facie whether they are land and heritages.

Action: The Group agreed to consider options around reliefs at a later meeting.

Action: Hydro representatives to produce a profitability impact for Hydro 

Action: Hydro representatives to show additional evidence with up to date data-deriving the levelised costs

Action: Secretariat to circulate the renewables presentation with the group

Action: Assessors to seek advice from legal counsel on the distinction between ‘lands and heritages’ and ‘plant and machinery’.  

The group agreed to two more meetings. One in the second week of August and the other at the end of August.