Administration and expenditure of the Chancellor's departments, 2008-09 - Treasury Contents

Written evidence submitted by the Crown Estate Commissioners


  In accordance with The Crown Estate Act 1961, The Crown Estate provides the Treasury with all the information about the Estate's activities which the Treasury requires. In practice, the Treasury is kept regularly informed of the Estate's business and any significant initiatives so as to enable the Treasury to satisfy itself that the Estate is performing its duties. There are two formal annual meetings; in the spring on the corporate plan and revenue targets; and in the autumn on the investment strategy. There are also less formal meetings and other collaborative contacts through the year as the flow of business requires. The Crown Estate Act also confers on the Treasury and the Secretary of State for Scotland, a power of direction over the discharge of the Estate's functions but this has never been exercised because of the arrangements described above.

1.  Can you go into more detail about your business strategy, business partners, and the proactive role The Crown Estate intends to play in these new initiatives [in the development of renewable energy]?

Our Business Strategy

  Our business strategy is to facilitate and participate in the development of the commercial opportunities in renewable energy on the Marine Estate, to play our part in helping the UK meet its renewable energy targets and to work in close conjunction with our stakeholders. As custodians of vitally important national assets, we have a clear responsibility to safeguard those assets and to manage them sustainably.

Our Proactive Role

    — There is an opportunity to establish a considerable industrial sector within the UK to meet the investment needed for the development of offshore renewables in the UK. In order to help stimulate UK investment in this supply chain, we have invested in the development of wind turbine technology to be manufactured in the UK. We are currently investigating the potential to invest further in ports and logistics to support offshore construction, operations and maintenance over the next five years.

    — We have committed capital funds of over £120 million—on, for example, scientific assessment, technical evaluation and project development—to help industry accelerate the deployment of offshore wind farms and wave and tidal technology.

    — We are investing in the collection of data with a management information system tool (MaRS—Marine Resource System) to process this data to provide detailed knowledge of the physical, scientific and technical characteristics of the UK's coast, sea bed and seas. This highly advanced system is recognised as probably unique across the world's maritime nations. The Scottish Government and UK Marine Management Organisation are considering using it to assist with their marine spatial planning obligations.

    — We have recruited and continue to recruit people with appropriate skills and experience.

Our Business Partners and Stakeholders

    — Our business partners are commercial enterprises who are currently operating offshore renewable energy projects (including RWE, E.ON, Centrica, EDF, Dong, Scottish and Southern Energy, ScottishPower, Vattenfall) and those who have expressed an interest in doing so in the future.

    — The Crown Estate has established strong relationships with the UK Government, the devolved administrations in Scotland, Wales and Northern Ireland, coastal communities, statutory bodies with marine interests, NGOs and other commercial sectors who have parallel commercial activities to The Crown Estate's.

    — We work closely in conjunction with stakeholders with marine interests such as environmental interests, shipping, aviation, fishing, aquaculture, ports, harbours and marinas.

2.  Last year renewable energy brought in revenue of £1.8 million. What figure do you project to earn by 2020?

  Revenue rental income forecasts are based on three scenarios of energy generation and the projected revenue rental income is expressed in current energy prices. After defraying costs the surplus from this activity will of course be paid over to the Treasury for the benefit of the UK tax payer.

    — Scenario 1—total operating capacity 14 GW: potential revenue rental income £66 million for the year 2019-20.

    — Scenario 2—total operating capacity 28 GW: potential revenue rental income £143 million for the year 2019-20.

    — Scenario 3—total operating capacity 42 GW: potential revenue rental income £221 million for the year 2019-20

3.  Are you now confident you have got sufficient expertise to ensure the successful development of the renewable energy sector?

  Yes. We have significantly increased the specialized expertise in our Marine Estate by recruiting some of the most qualified and experienced individuals from companies such as Merrill Lynch, RWE, NPower, BP, Royal Dutch Shell, E.ON, AGIP and British Aerospace and from consultancies such as Ove Arup and RPS. We have also recruited from other organisations such as the Met Office, Natural England, the Environment Agency and Greenpeace and from Glasgow, Newcastle and Southampton Universities. Contractors and consultants provide technical expertise and support to complement the knowledge, skills and abilities of our employees at various planned stages of projects. We also use professional advisors on commercial, legal and financial matters. Because of our expertise, we have been approached by the US and several European countries who want to know more about our initiatives in offshore renewable energy.

4.  Who is on the Offshore Energy Supervisory Committee and how will it benefit the Crown Estate?

  The Offshore Energy Supervisory Committee (OESC) was established in order to provide the Crown Estate Board with specialist advice on energy-related matters including wind, wave and tidal power together with CO2 and natural gas storage. The OESC is chaired by Roger Bright, the Chief Executive of The Crown Estate. The other members are:

    — John Burnham—formerly MD and Head of Infrastructure for Citigroup Global Markets Ltd.

    — Matts Lundgren—currently the Managing Director of Allianz Capital Partners, a private equity company based in Germany.

    — Dipesh J. Shah—formerly the Chairman of Viridian Group Plc and of Hg Capital Renewable Power Partners Llp; formerly Chief Economist of BP and Chief Executive of UKAEA; he is a non-executive director on several Boards, including Lloyd's of London Franchise Board, Thames Water, Babcock International Group Plc and JKX Oil and Gas Plc.

    — Chris Geoghegan—formerly Chief Operating Officer of BAESystems, now Chairman of Hampson Industries Plc; he also holds several non-executive director posts including Kier Group Plc and Volex Plc.

    — David Fursdon, Crown Estate Board member.

  The members of the OESC draw on their experience and expertise in energy generation and transmission, economics and regulation, infrastructure investment and the energy supply chain.

5.  What is the reason for the delay in concluding the leasing stage of your plan [for wave and tidal power in the Pentland Firth]?

  We recognise that we should have made it clear in our September 2008 press release that the date of summer 2009 was indicative. We should have spelt out more clearly the uncertainties: that this is the first programme of its type in the world and highly complex and that the statutory and regulatory process was at that stage still being developed. In addition, there was an unexpectedly high level of interest expressed by the market and a number of challenges to the competition process. Nevertheless, we should emphasise that preparatory work is well underway and delivery of the target of 700 MW of installed capacity by 2020 remains on schedule.

6.  Are you confident that you have the expertise required to keep the UK at the forefront of the tidal power generation industry?

  In order to keep the UK at the forefront of this industry, there are essential roles not only for The Crown Estate but also for the UK Government, the devolved administrations, the investor community and the wider industry, with all of whom we are working closely. For our part we have recruited individuals into the Marine Estate who are recognised as being at the forefront of their fields. They are specialists with expertise in areas including: environmental management; renewable energy and transmission technology; commercial management of development projects; and project management. As the industry develops we will seek to recruit further suitably qualified individuals.

7.  What criteria do you take into account when setting rent levels for off shore wind farms?

  The objectives laid down by Parliament require The Crown Estate to earn a surplus which goes to the Treasury for the benefit of the UK taxpayer and to enhance the value of the estates we manage without exploiting any monopoly position. These considerations contribute to the determination of the appropriate rent levels for offshore wind farms.

  The Crown Estate charges rent at 2% of the value of the electricity generated by a wind farm. Market rates for onshore wind farms are typically in the range of 4% to 10%, and in producing a rate for offshore wind farms these onshore rates have been discounted to take account of the additional capital cost, construction and operating risk of offshore wind farms and the additional complexity of working in an offshore environment.

  Rental levels for Rounds 1 and 2 leases are linked to the Retail Price Index. Rental levels for Round 3 projects will be linked to a basket of indices, (some of which are recently established), which are more aligned to those specifically relating to renewable energy.

8.  How confident are you that leases for nine new offshore schemes will be awarded by the end of the year?

  The leases are currently on schedule to be signed by The Crown Estate and nine zone development partners by the end of December 2009. The preferred bidders were released from confidentiality to engage with third parties to take their projects forward and meet their target of 25 GW of installed capacity by 2020. Conclusion of this process is subject to negotiation with the preferred bidders and subject to compliance with statutory requirements for appropriate assessment.

9.  How does "The Business Deal" benefit your tenants?

10.  How has it been implemented across the whole Crown Estate?

  "The Business Deal" is a Rural Estate initiative which we have developed with our tenants in order to enhance landlord:tenant partnerships.

  Tenants will benefit from:

    — improved clarity and transparency in the relationship;

    — improved business efficiency;

    — enhanced communications; and

    — direct access to capital for new business opportunities, including the promotion and marketing of high quality products and services.

  We have already found that this has created mutually beneficial business opportunities.

  As a key component of our "Customer Focus Project", our Marine and Urban Estate teams are considering whether the Business Deal—in a suitably tailored form—has the potential to add value to their relationships with their tenants.

11.  What lessons have your learned from the financial crisis as regards property investment? Have you changed your approach to investing in property?

  The Crown Estate pursues a long term investment strategy with a view to weathering the vagaries of the market. While our portfolio has of course been affected by the financial crisis, it has been considerably more resilient than the market average as measured against recognised industry benchmarks. This has confirmed the robustness of our business model: a diverse property portfolio; high quality assets; active management of our assets; and measuring financial performance not just year on year but also over the long-term.

  Our diverse portfolio includes central London offices and retail, residential, major retail schemes, business parks and industrial estates, rural land and marine holdings. With the advantage of being able to take a long term view, this diversity helps us withstand the vicissitudes of the property market.

  So recent events have not caused us to change our overall approach. We will continue to focus on our core sectors. At the same time we aim to take tactical opportunities to trade between sectors and so to manage our scarce capital effectively to generate durable returns.

12.  Why did you not record progress against the Going for Gold targets?

13.  What is your current progress against these targets?

  Our view was that readers of our 2009 Annual Report would find it more useful if we illustrated our progress against the Going for Gold targets through the achievements and case studies reported throughout the report. However, we do report progress during the year to our Management Board and Main Board. Our Going for Gold targets are designed to distil the essence of our corporate objectives into an easily understandable format. A summary of progress against each Going for Gold target is attached in the annex.

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