Written evidence submitted by the Crown
Estate Commissioners
THE NATURE
OF THE
CROWN ESTATE'S
RELATIONSHIP WITH
THE TREASURY
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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