An economic analysis of water use in the Scotland river basin district

The first recorded mention of the art of distilling in Scotland occurs in 1494 with an entry in the Exchequer Rolls of Scotland of "eight bolls of malt to Friar John Cor wherewith to make aqua vitae" for King James IV. Spirit distillation developed commercially over the following centuries and the main documented interest came from Parliament and the Exchequer with the imposition of various duties on spirits and attempts on occasion to restrict the amount of cereals used for production. The Excise Act of 1823 introduced the licensing of distilleries under the close control of H. M. Customs and Excise. Distilleries were established in the Highlands, the Lowlands and the Islands of Scotland and from these roots the Industry as it is today developed.

There are 87 working malt distilleries in Scotland and 7 grain distilleries. Malt distilling is a batch process using malted barley. Grain distilling is a continuous process and uses barley and other cereals. The malt distilleries produce between 140m and 150m litres of alcohol in the year depending on production requirements and the grain distilleries produce between 205m and 250m litres of alcohol. The grain distilleries also produce neutral alcohol for gin and vodka.

The distilleries are owned by a range of companies, from large international plc's to family companies owning a single malt distillery.

Certain of the distilling companies operate their own maltings in which substantial quantities of water, drawn from watercourses, boreholes and mains supplies, are used as steep water for the barley prior to germination. A substantial proportion of malted barley is also purchased from independent maltsters in Scotland, England and, on occasion, from abroad.

The Industry also has close links with the farming industry. As well as spending over £90M per year on Scottish cereals, distillers supply that industry with various forms of animal feed derived from the cereals and distillation residues and relies on it for the beneficial disposal of sludge and other effluents onto agricultural land.

There are two trade associations which represent the Industry namely, The Scotch Whisky Association based in Edinburgh (SWA) and The Malt Distillers Association of Scotland based in Elgin (MDAS). The SWA, has a wide remit for the Industry, including the protection of Scotch Whisky worldwide. The MDAS is principally involved with the production side of malt distilling, where the development of the Water Framework Directive regime is of particular relevance.

The largest concentration of distilleries is in the Speyside area of North East Scotland with another group on the Island of Islay off the South West Coast. The malt distilleries are mainly situated in rural areas and have operated in sympathy with all aspects of the environment in a sustainable way for hundreds of years.

Scotch Whisky is produced from natural ingredients, malted barley, water and yeast, and can only be distilled and matured in Scotland. The process and the definition are laid down in the Scotch Whisky Act 1988 and the Scotch Whisky Order. The spirit produced by both the malt and grain distilleries requires to be matured in oak casks for a minimum of three years. For Malt Whisky the maturation period is normally between seven and fourteen years but can be, in selected cases, substantially longer.

The Scotch Whisky Industry employs around 11,000 directly. In addition, over 40,000 jobs in Scotland are indirectly supported by the Industry and around 65,000 jobs in total across the UK. In Scotland, many of those employed are located in economically fragile rural and urban areas and the Industry's contribution is therefore significant.

The economic importance of the Industry to Scotland and the UK can be summarised as follows:-

Value Annual Exports - £2,285Bn

Excise Duty and VAT to UK Government - £800M

Wages and Salaries paid in the UK - £1,300M

Goods and Services purchased in the UK - £1,019M

Natural spring water is an essential commodity in the production process of malt whisky spirit. The malt distilleries were developed in their various locations because of the availability of the water, which is gathered from springs and burns and used for mashing in the early stages of production. This represents around 10% of the water used in malt distilling and is not significant in volume terms in any of the water catchment areas in which distilleries are situated. 90% of the water used in malt distilling is for cooling purposes - this is derived from burns and rivers. The cooling water is borrowed and returned unchanged apart from some uplift in temperature, normally to its original watercourse. On a number of watercourses, the same water may be used by several distilleries in its passage downstream. In the course of the use of the cooling water, distillery dams are often used for recycling, and heat exchange systems have frequently been developed in the interests of energy efficiency. Boreholes are also used as a source of water.

Based on the volume of spirit produced the Industry’s annual usage of water would be between 2m and 3m cubic metres. This does not have any material effect on the total volume of water in the catchments affected.

Between 30m and 40m cubic metres of water is used for cooling. This is only borrowed and returned and therefore has no effect on the catchment. On tributaries of the River Spey, where there are a series of distilleries, the same water can be used for cooling several times and returned to the same watercourse, unaltered apart from some uplift in temperature.

The Industry is a traditional one and the traditional processes are adhered to in order to maintain the quality and individual characteristics of the spirit. The Industry uses the water it requires for its production, no more, no less, and there is little scope for reducing usage. Most distilleries have implemented heat exchange systems and energy efficiency schemes. Cooling water is often recycled before being discharged. There is therefore not much scope for reduction in, or more efficient use of, water. Major capital investment would be required for the installation of cooling towers, which could not be justified either on economic or environmental grounds.

At some distillery sites where there are abundant volumes of water available, there could be some scope for reducing the amounts diverted by way of lades and artificial watercourses.

Because of the importance of the water and the control of the water resources, distilling companies acquired, often at significant cost, the land from which their production water comes or, alternatively, acquired the legal right to draw on the water. These rights are protected by Scottish Land Law and are vested in the distillery owners, and in most cases have been for over 100 years.

Figures for capital investment in water-related infrastructure and water-related running costs are not available.

In addition to acquiring the water rights the distilling companies have made significant investments in infrastructure and wayleaves to develop their water resources and pipe water to and from the distillery. These investments and the costs of maintaining the water engineering systems represent the economic cost relating to the water. The malt distillery companies do not make any payment for their production and cooling water as it is their own water. Certain grain distilleries and a few of the malt distilleries use mains water for their production. In the blending and bottling part of the process reducing water is used to reduce the alcohol content to the minimum level of 40%. Most distillery offices and visitor centres are connected to mains water and normal water rates are paid for these supplies. It is exceedingly difficult to place an economic value on the water resources belonging to the malt distillers. A distillery without water is of no value. One could therefore capitalise a value based on 20 x the gross annual profit.

Alternatively the value of the end product (NET OF Excise Duty and VAT), excluding brand value, less the cost of materials and production, interest on the capital investment and appropriate profit for the organisation, i.e. the super profit, capitalised, could be equated to the value of the water. This would of course vary from company to company.

At the present time there is no system of controlled water abstraction in Scotland. In general terms, Scotland has an abundant supply of natural water and it has never been considered necessary for such controls to be introduced. The Water Framework Directive has universal application in Europe and the Member States are required to bring in legislation to apply the terms of the Directive. In Scotland this is to be done through the Water Environment and Water Services Act 2002 and the Regulations which will follow thereon. The main concern for the Industry is the introduction of abstraction controls. This, however, will only be in areas where these are required. The legislation provides for exemptions from such controls where abstractions have no significant impact on the water body. The Industry anticipates that most of its abstractions will qualify for exemption. The Scottish Executive have indicated that the regulation of the water environment will be selective and proportionate, which will avoid unnecessary regulation and costs. The Industry takes the view that its use of water resources does not have an adverse impact on the water environment. It is not, in its water usage, introducing any pollution to the water environment and there is therefore no case for its being subjected to any form of environmental charging.

The new legislation requires that the social and economic impacts are taken into account. The social and economic benefits of the public water supply, the hydro-electric generation and the production of Scotch Whisky must outweigh any perceived detriment arising from the use of water resources.

It is accepted that once the new regime is in place SEPA, as the regulatory authority administering the regime, will require to apply charges on a cost recovery basis. There will therefore be costs which will fall on the distilling companies. These will apply at several levels and will relate to the extent of regulation required. As indicated above, many of the Industry's abstractions will fall into the exempt category and these will only require registration with SEPA. The cost of registration fees to SEPA and administrative manpower in the distilling companies should not be significant.

In some cases, the regulatory authority may consider, as a result of its assessment of the local position, that general binding rules be specified for the operation of the abstractions. The administrative cost of this, including SEPA's fees and Industry input, would be greater than would apply for simple registration but again the administrative time should be relatively small and the costs commensurate with that.

In situations where controls have to be put in place, the administrative time which would be involved on both sides could be substantial and the cost would likewise be greater. If, as part of the control regime, the distilling companies concerned were required to install monitoring equipment and maintain records, this could involve substantial capital expenditure and ongoing costs. At the present development stage of the regime it is not possible to know how many sites will be in the control category and what the actual requirements will be.

The Industry does not anticipate that there will be any additional water costs imposed. The Industry only uses the water it requires for its production. There is no way of reducing the amount of water used in the production process as this could affect the quality of the spirit, which would not be acceptable. The only variable in the volume of mashing water relates to the level of production required by the particular distillery.

The cooling water, which represents 90% of the water used by malt distilleries, is also used efficiently and in order to maintain discharge temperatures within SEPA Discharge Consent requirements it would be very difficult to reduce volumes. In any event, the cooling water is only borrowed and on a number of watercourses the same water may be used by several distilleries in its passage downstream.

If at some locations SEPA's discharge temperature requirements cannot be met on the basis of current operational arrangements, the construction of cooling towers would be the only way of improving the position. The costs of these would vary on a site by site basis but a capital investment of around £25M would be required with annual running costs of £2.5M. Such an investment might not be considered economically viable and could put the distillery at the risk of closure. In addition, this route is not environmentally desirable on account of the heavy energy use required.

The principal concern that the Industry has is the cost which might be involved at some distillery sites where the water volumes available are not large and can fluctuate seasonally. The cost of compliance with conditions may be significant and production periods may be restricted. Both of these elements could affect the viability of the particular distillery concerned and could bring about closure, with considerable local social and economic impact. It is hoped that sensible application of the regulatory regime can avoid this type of scenario. Restrictions in production which amount to an intrusion on a particular distilling company’s water rights could be a compensation issue.

The Scotch Whisky Distilling Industry is a mature one. The level of production is controlled by the current and projected levels of international sales which represent 90% of total sales. While production at the individual distilleries will vary from year to year depending on company and group requirements, there is unlikely to be a demand for a significant increase in production which might impact on the water resources available. The standard five-day production cycle can be increased to seven days and the silent season, which normally occurs over the summer period, can be lengthened or shortened. While there is always the possibility that new distilleries may be developed in the future, such developments are unlikely to be large in production terms and therefore in water usage terms. The temporary or even permanent closure of some distilleries is another possibility. It is therefore unlikely that there would be any more than a 20% increase or a 20% decrease in overall production on current levels in the medium term. There are therefore unlikely to be any major water-related investments or developments in the foreseeable future. From Scotland's point of view, we hope the Industry can maintain and build on its success.