House of Commons - The management of the Crown Estate

The management of the Crown Estate - Treasury Contents

7 THE MARINE ESTATE

Extent of holdings

66. Legislation has expanded the UK's marine environment substantially over the last 50 years, and the activities taking place in this environment continue to increase in diversity and scale. New developments such as marine renewable energy have focused more attention on the CEC's role and the new challenges they face in fulfilling their responsibilities. Revenue from the Marine Estate rose by 18.5% to £49.7 million or 16% of the total revenue during 2008-09, and the Marine Estate accounted for £409 million or 7% of the total value of the Crown Estate. Whilst the revenue and value figures are in line with the pattern over the last ten years, the CEC consider the Marine Estate has particular potential for considerably increased income.

67. This potential stems from the fact that the CEC manage 55% of the foreshore of the UK and almost all the seabed out to the 12 nautical mile territorial limits, and have in addition the vested rights to explore and utilise natural resources of the UK continental shelf areas, which extend to the 200 nautical mile limits. These rights include the sub-soil, minerals, and substrata below the surface of seabed, but exclude the rights to oil, gas and coal. The CEC license the generation of renewable energy on the Continental shelf within the Renewable Energy Zone out to 200 nautical miles under the Energy Act 2004. They lease sites for undersea storage of gas and carbon dioxide under the Energy Act 2008.

68. By virtue of the Crown's rights, the CEC act as gatekeeper for any organisation or individual seeking to use or develop the seabed. So, in his written evidence, Mr Tom Appleby, Senior lecturer in law at the University of the West of England, Bristol, observed that:

Given the range of the CEC's interests in the marine environment, we have not attempted to provide a comprehensive analysis of all their activity. We have not, for example, looked in any depth at the CEC's role in salmon farming or offshore dredging for aggregates, though we are grateful for the informative submissions we have received on these and other subjects, which we publish with our report. In the following paragraphs we look in more detail at what is at stake in some of the most significant areas of activity both offshore and in ports and harbours, before assessing the extent to which the CEC are rising to the challenges these pose.

Offshore

RENEWABLE ENERGY

69. In the time available, we have chosen to focus on tidal and wave power, rather than offshore wind power, as the challenges in the two newer industries appear greater and more pressing. In written and oral evidence, stakeholders left us in no doubt as to their views. Mr Joe Hulm, a Marine Development Manager representing the Renewable Energy Association, told us that "what we have here is an emerging industry. The industry is required to deliver. The emergence of a new industry is at stake."[89] He also considered that this was a new industry where the UK currently has a substantial technological advantage:

And that, therefore, "the risk for the marine renewable sector is that collectively the UK loses this industry to overseas competitors."[91] In headline terms, he emphasised that renewable energy could contribute to "carbon reduction, energy security and green jobs."[92] The Renewable Energy Association provided further detail to support these assertions in their written evidence:

70. Other stakeholders also pointed out the wider socio-economic benefits that successful development of tidal and wave power could bring. When the Highland and Western Isles councils gave evidence to us, they stressed how important it was for local communities to receive some of the benefits as these new industries developed. Mr Calum Maciver, Director of Development at the Western Isles Council, told us that "we believe an area like the Outer Hebrides has got some of the richest marine resources in Europe and it will be a failure in many ways if the Crown Estate do not take best advantage of it and it will be a failure in many ways nationally and locally if we do not make that resource work for us."[94] He went on to explain that:

Similarly, in their written evidence the Highland Council stressed that "a vital concern of the Council's is that it needs to secure major local financial community benefits (in addition to employment, training and business benefits) from marine energy development around the Highlands and Islands."[96] Caithness Chamber of Commerce linked the development of renewable energy to the rundown of the Dounreay nuclear site:

GAS STORAGE

71. Renewable energy is not the only new opportunity for offshore economic development. Mr Roddy Monroe is Chairman of the Gas Storage Operators' Group, a trade association formed in May 2006 with 16 members comprising, it asserts, "almost all the active participants in the GB Gas Storage Market."[98] He told us that:

For Mr Monroe, the bottom line in terms of what is at stake in this sector was "energy security"[100] and the key issue was "will the projects go ahead or will they not, and if the projects do go ahead then we will have a sort of energy mix and infrastructure to cope with the uncertainty of future energy supplies."[101]

CARBON STORAGE

72. There is a third offshore development issue, in relation to carbon capture and storage, arising out of measures to address climate change. Dr Jeff Chapman, Chief Executive of the Carbon Capture and Storage Association, which states that "it brings together a wide range of specialist companies across the spectrum of carbon capture and storage (CCS) technology, as well as a variety of support services to the energy sector"[102], told us that:

₂

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His organisation's written evidence highlighted that "the UK is now legally committed to ambitious targets, whilst ensuring a diverse and secure energy supply portfolio. Meeting these targets, whilst ensuring a diverse and secure energy supply portfolio, represents a significant challenge."[104] Dr Jeff Chapman highlighted cost as a major challenge, telling us:

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Performance

73. The CEC are involved in important developments in harbours and offshore. By virtue of their monopoly position for licensing and leasing the use of the seabed in both domains, they have a pivotal role to play in helping to realise the ambitions recorded in the preceding paragraphs. The CEC's own assessment of their performance is characteristically upbeat. Their Chief Executive told us that:

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And went on to propose that:

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In their written evidence, the CEC observed that, in particular, "the renewable energy programme presents significant challenges to the UK" and outlines three ways in which the CEC, "by virtue of its ownership and vested rights" is responding to challenges in the marine environment:

Helping facilitate the establishment of a robust framework to provide confidence for investors and developers to participate in the next phase of the renewable energy programmes.
Helping facilitate the establishment of offshore transmission networks for electricity distribution.
Working alongside the UK Government and regulators to establish a robust licensing and leasing programme for the first Carbon Capture Storage projects.[108]

Their written evidence went on to emphasise that "in light of these new activities the marine estate has invested in appropriate systems and processes and recruited additional qualified and experienced people from relevant sectors."[109] Stakeholder assessment of CEC performance is, however, much more mixed.

Performance offshore

RENEWABLE ENERGY

74. It is striking that stakeholders in different types of offshore development have expressed similar concerns about the balance between revenue maximisation and long-term development, partnership working and the CEC's monopoly position. With regard to renewable, Mr Hulm drew a distinction between offshore wind and wave and tidal power, observing that "wave and tidal is a far less mature industry...I think the industry needs nurturing far more than that much more mature industry that is offshore wind."[110] Whilst commending the CEC "for their drive and ambition to help deliver this industry"[111] he argued for a more flexible, collaborative approach using pilot projects to demonstrate the technology before rolling out a fully fledged commercial strategy. In their joint written evidence, the British Wind Energy Association and Scottish Renewables were similarly complimentary about CECs boldness but similarly concerned that "the competitive process has put developers in competition with each other, yet at this early stage, collaboration may be more appropriate if we are to overcome the substantial common hurdles and risks, such as access to the grid. The current process could risk leading to inefficient allocation of sites and resources."[112]

75. In an echo of concerns expressed by some Crown Estate London residents and their representatives, a number of marine renewable stakeholders also urged the CEC to be more transparent, and to consult more. In its written evidence, the Renewable Energy Association stated that "some REA members have stated that it would be helpful if TCE provided more transparency regarding their future plans"[113] and Lunar Energy felt that "there was little or no consultation with industry prior to launching the Pentland Firth and Orkney waters Leasing Round for wave and tidal (PFOWLR) nor was the strategy communicated to stakeholders" and that "we do not believe that the Crown Estate tender process was transparent."[114] The two Scottish councils who gave evidence also urged greater dialogue. Councillor Dr Michael Foxley, Leader of the Highland Council, complained that, in relation to the development in the Pentland Firth:

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The Scottish councils referred to the Memorandum of Understanding that they and other councils were discussing with the CEC and which they hope will, as Mr Maciver put it, "drive them down the partnership route."[116]

76. In his evidence to us, Mr Bright acknowledged concerns around consultation and general approach, explaining that lessons had been learned from the wave and tidal bidding round:

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In sum, he acknowledged that the CEC needed to "be careful of over promising and make sure that we consult properly."[118] We welcome the CEC's recognition of the importance of greater consultation and partnership-working in order to develop the new tidal and wave power industries. We recommend that the CEC also adopt this approach with the other sectors of marine development with which they are involved.

GAS STORAGE

77. The Gas Storage Operators Group was particularly critical of the CEC's performance in the marine environment. Mr Monroe told us that "from an offshore development perspective, I believe the Crown Estate is seen as one of the biggest impediments to actually getting the projects to fruition with the level of rental charges that they are proposing, the delay that we are having in actually trying to get the lease arrangements sorted out."[119] He was forthright in his assertion that "there appears to be no real focus from the Crown Estate on the wider need for gas storage and purely focusing on revenue generation."[120] He was also very critical of the CEC's monopoly position, accusing them of including a monopoly element in its rental charges for offshore fields, and arguing that "if ever there was a case for some form of regulatory oversight this is one where it is needed."[121]

78. The Gas Storage Operators Group's written evidence further developed the argument that the CEC's charging regime for this sector puts them in breach of their statutory duties under the Crown Estate Act 1961 which, as we noted in a previous section, instructs the CEC to "exclude any element of monopoly value." To comply with the Act, the Gas Storage Operators Group asserted, "the CEC should introduce rental charges based on administrative cost plus a reasonable return for risk undertaken (if any)".[122] In response, the CEC mounted a robust defence of their record, though they subsequently had to correct their statement that they had "reached agreement with three of the four operators"[123] in this area. In supplementary evidence, they explained that "the precise position is that we have reached settled terms with two and are close to settling all but the rent with a third."[124] With respect to rent charges, the CEC advised that:

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The CEC also offered to refer the level of rents either to the Valuation Office or an alternative independent valuer and we also received further written evidence from the CEC and Gas Storage Operators Group about their discussions.

79. There appear to us to be two issues here. The first is whether the CEC are abusing their monopoly obligations under the Crown Estate Act 1961. This could potentially be decided in the Courts. The second is whether, regardless of whether it is permissible for the CEC to charge commercial rent in this context, it is in the wider public interest for it to do so. As this issue feeds into a wider debate we explore it in the final section.

CARBON STORAGE

80. The development of carbon storage is at an earlier stage than gas storage. Dr Chapman explained that he had "no problems"[126] with the CEC at the moment, and that they were being "as helpful as they possibly can."[127] The risk therefore is that there will be disputes over applicable rent charges in the future. As Dr Jeff Chapman explained, however, the context will be different because "support for carbon storage will arise out of a levy on electricity consumption, so that levy on electricity consumption will pay the operators of the carbon capture and storage chain to do their thing and some of that money will get paid to the Crown Estate."[128] He further observed that "how we determine that amount of money fairly I actually do not know at the moment, given the monopoly position, but you can see that there is the potential here for this to become regarded as a stealth tax."[129] In anticipation, perhaps, of stormy waters ahead, he urged the CEC, when they come to setting lease fees for carbon storage, to be "open, transparent and fair. Be prepared to justify the level of fee, because it will be very difficult to justify, and be prepared to be scrutinised on that. I would not like to see a propensity for regulators, but I do agree with Roddy [Mr Monroe] that this is unusual in that it is an unregulated monopoly."[130]

Ports and harbours

81. The CEC have a long-standing involvement with ports and harbours where the Crown owns the seabed and any foreshore. In its memorandum, the British Ports Association, a membership organisation representing 86 port authorities throughout the UK, told us that "the majority of BPA members will have dealings with the Crown Estate mainly in reaching agreement on leasehold negotiations, but also on joint projects to develop the marine estate."[131] In oral evidence, Mr Ted Sangster, Chief Executive of Milford Haven Port Authority, representing the British Ports Association, highlighted the challenges arising from the need to support on land new developments offshore:

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82. In his evidence to us, Mr Sangster explained that the British Ports Association would like the CEC to play a more active role in developing the infrastructure necessary to support offshore development. He asserted that "if they [CEC] adopted a more flexible point of view the long-term benefits to them and also to the ports and the communities would be increased."[133] He felt that "they are very much driven by this revenue remit", and argued that in "some circumstances, perhaps a new development or where there is a degree of regeneration" it was not always appropriate for CEC to look for "15% up front." In fact, "loading their requirements upfront can swing a potential development into either not taking place or taking place in a different way."[134] He also expressed concern about the CEC's monopoly position, explaining that:

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In sum, whilst he was at pains to stress that "the situation with ports and the Crown Estate has improved significantly over the past ten years and that is very positive" there remained a tension between "abstracting as much revenue as possible and long-term sustainability and many opportunities are perhaps not being maximised by the views taken by the Crown Estate in extracting as much as they can at the moment." His impression was that the CEC "speak and they talk about their preparedness to invest and to work in partnership [ ... ] but there have not been many instances of such delivery[ ... ]"[136]

83. Councillor Foxley expressed similar concerns more robustly. He spoke in particular of his frustrations about the "protracted negotiations"[137] with the CEC when he was a member of Maillaig Harbour authority, over the development of an outer breakwater. Recalling that "the Crown Estate were not actively involved with that development or assisting in that development,"[138] he pointed out that "Maillaig Harbour is an example that applies to the other harbour authorities and Trust Ports in Scotland. It controls the water but it does not control the seabed."[139] What he was looking for was partnership, but he felt that the CEC were only interested in "rent collection" and that "to actively work to progress the development, that is what is lacking."[140] Whereas Mr Sangster's solution was for the CEC to become more actively involved in longer term projects, Councillor Foxley went further and advocated transfer of ownership of the relevant part of the seabed to harbour authorities "to own and manage the seabeds in the best interests of the community."[141]

84. In his evidence to us, however, the CEC's Chief Executive confirmed that:

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He did stress though that "we grant long leases [ ... ] which we have never found has been an inhibition to development or the financing of development."[143]

85. Improvements in the facilities provided by ports and harbours are an essential part of being able to service the important offshore developments now required. We welcome the CEC's apparent willingness to support improvements in ports and harbours, but we also note the concerns raised with us over issues such as the CEC's approach to generating revenue and their monopoly position in the marine environment. It is clear that these issues are not restricted to ports serving offshore developments, but harbours more generally where the CEC are involved by virtue of Crown ownership of the seabed and possibly foreshore within the area covered by a statutory harbour authority.

86. We were not able to investigate further the role of the CEC within harbour authority areas due to the limited scope of our inquiry, but consider that this particular sphere of the CEC's operations warrants further consideration by the CEC. We explore the broader question about the CEC's monopoly position below.

Monopoly position

87. As the above sections reflect, there is a widespread concern about the CEC's monopoly position in the marine environment. The CEC and Treasury both confirmed to us that they recognise that the CEC is in a monopoly position and we asked Mr Bright how, as a monopoly, the CEC set a fair price for the rental of marine developments. He replied that:

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We were also concerned about how operators could appeal against a level of charging by the CEC that they considered unfair when the CEC's marine operations are an un-regulated monopoly. The British Ports Association reported that "within the BPA we have got a Memorandum of Understanding with the Crown Estate of an appeal procedure which brings in the district valuer as a means of reference for that. It has not been used often, but it is there and it is a mechanism which would appear to be appropriate."[145] Mr Monroe of the Gas Storage Operators' Group was more frustrated by his situation, observing that "at the moment we talk to the Crown Estate and we say, 'we are sorry, we cannot accept these rents. These rents will materially damage our projects', and the Crown Estate says, 'Well, go onshore'. As I explained previously, you cannot go onshore."[146] The Minister in her evidence to us on this question pointed out that "there is the option for any operator that thinks they have been a victim of a monopoly situation to approach the Office of Fair Trading on this."[147]

88. It seemed to us that the Memorandum of Understanding between the BPA and CEC provides a useful pathway for considering disputed charges in that context. We see that there could be merit in the CEC clarifying with other sectors how they will respond to appeals against charges they are setting. However, we believe there are bigger and important questions here about the CEC's monopoly position. We therefore welcome the Exchequer Secretary's view on this in her evidence to us that she thinks "there is a case for looking at it"[148] and that "this is a matter we do have to look at"[149].

89. The need to interpret the CEC's "good management" remit is particularly important in the marine environment, because of the CEC's monopoly status. We welcome, therefore, the Exchequer Secretary's commitment to us that the Government intends to review the CEC's monopoly position in the marine environment.

Marine planning and regulation

90. As a number of submissions highlighted, there is also an important further dimension to partnership working in the marine environment—the relationship between the CEC's leasing and licensing arrangements in the marine environment and the government systems for planning and regulating the use of that environment. The evidence we received directed our attention to the need for the CEC to "work with the grain of government" with respect to two new Government bodies—the Marine Management Organisation (MMO) and Marine Scotland, following the Marine and Coastal Act 2009 at Westminster and the passage of the Marine Scotland Act 2010 in the Scottish Parliament. The MMO will "deal with a range of functions (including marine planning, licensing and enforcement) that together provide a holistic approach to marine management,"[150] while Marine Scotland will fulfil a similar remit with respect to Scottish waters. DEFRA's Marine Bill White Paper noted that "the MMO will [ ... ]need to develop a close working relationship with the CEC when exercising its functions" and expressed the hope that:

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DEFRA's 'Managing our Marine Resources: The Marine Management Organisation' publication further noted that "as the MMO and The Crown Estate will need to work together on a number of activities, the need for a Memorandum of Understanding will be explored."[152]Ms Linda Rosborough, Head of Marine Planning and Policy, Scotland Government, recognised the need for a close relationship between the CEC and Marine Scotland and explained that:

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91. Several submissions drew attention to the potential for duplication and delay if the Government bodies and the CEC did not develop a suitably close relationship. The Renewable Energy Association expressed surprise that "as owners/managers of the seabed, the Crown Estate was no more involved than any other marine stakeholder or consultee in formulation of the Marine and Coastal Access Bill," and observed, with a degree of under-statement, that "it would be helpful to developers if the marine licensing system and seabed leasing arrangements for development were to be integrated."[154] The Carbon Capture and Storage Association similarly stressed that "there is a strong need to ensure that the role that TCE plays in the development of CO₂ storage is fully compatible with and complementary to other regulation" and that "whilst the role of landlord is different to that of the regulator (DECC), the two will need to work very closely together to avoid any bureaucratic duplications or complications." [155] The Scottish councils also highlighted the need for integration of the role of the CEC with the responsibilities of Marine Scotland for marine planning and licensing.

92. We put it to Sarah McCarthy-Fry MP, the Exchequer Secretary to the Treasury, that having both the Government's system of licences and fees and the CEC's system of leases and charges could create extra delays and bureaucracy compared with countries where only Government is responsible for managing the seabed. We asked whether the two-tier arrangement was under review to check that it was not getting in the way of urgent, offshore development. We were reassured by her response that "if it could be shown that it was getting in the way then, yes, it would need to be looked at."[156]

93. Given the importance of marine developments for renewable energy and other interests and the importance to this of the relationship between the CEC and the two new agencies (the Marine Management Organisation and Marine Scotland), we recommend that the CEC agree a Memorandum of Understanding with each to establish how they will work together to ensure their respective arrangements are suitably integrated.

94. Our understanding is that other European maritime states have a single body—the Government—responsible for setting the terms for offshore development. In the UK, however, there is a two tier relationship. Given the high stakes, it is imperative that the Government reviews the relationship to see if it is working as an effective system for managing marine development.

Wider benefit

95. In the marine environment, as with the urban environment, local socio-economic issues were prominent concerns raised with us. The contrast in locations between communities in housing estates in the middle of London and communities spread across the Highlands and Islands was striking. However, in both cases, the community representatives argued that the CEC should give greater weight to local social factors in their approach. In London, the issue was the need for affordable housing and stable communities in the centre of the city. In the Highlands and Islands, the issue was the need for the marine environment to contribute to local development in remote communities. In both cases, the question was the extent to which the CEC can and should recognise these factors in fulfilling its statutory remit.

96. The Scottish councils which gave evidence to us stressed the importance of the marine environment to communities in the Highlands and Islands. This is apparent from the region's location as shown on the map in the CEC's evidence of the UK's territorial sea and continental shelf areas.[157] It is also noteworthy that the six Highlands and Islands councils that produced the report on the Crown Estate in Scotland[158] have a foreshore that is nearly 30% longer than the total length for England and Wales. The councils were frustrated that local communities were not benefiting from the CEC's involvement in traditional activities such as harbours and determined that there should be major economic benefits for the region arising from its location at the centre of marine renewable energy development. As Mr Maciver, Director of Development, Western Isles, told us "the investment by the Crown Estate in our communities is fairly minimal. They will be involved in some small-scale pier work with communities but that is very, very marginal to the potential that exists in the marine resource around us."[159] Councillor Foxley, leader of the Highland Council, noted that "there is nothing in terms of pump priming to get the pilot projects going. In the vast majority of cases they are simply collecting rental without any communication and it is a fact that is so annoying."[160]

97. We noted earlier the discussions between the councils and CEC over a memorandum of understanding. This seems to us to offer scope for improvements in traditional activities such as harbours and to develop the partnership working necessary to realise the training, employment and business benefits that renewable energy development could bring the region. However, the councils believed there should be additional major financial benefits to communities from these developments. Councillor Foxley agreed with our suggestion that he was looking for some finance to be diverted from the renewable industry, in the same way as the Shetland Islands Council received funds from the offshore oil industry. Mr Maciver added that:

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98. We asked Mr Bright for his thoughts on a socioeconomic fund along the lines envisaged by the Scottish councils, he replied that:

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He was in fact very careful in his assessment of where the CEC could help to realise wider community benefit from offshore renewable energy, laying most stress on spin-offs from "economic activity in the communities."[163] To develop onshore wind farms, companies are required to put a capital sum and an annual income into a community fund. We pressed the Chief Executive on whether the CEC was prohibited from entering into such arrangements with the communities which were hosting its activities. He replied that:

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When further pressed, he made it clear that, in the CEC's view, it was for developers, rather than the CEC, to contribute to socio-economic funds.

99. We note that, as the CEC themselves pointed out, they can make some relatively small direct contributions to coastal communities as they do through their Marine Stewardship Fund, but we accept that the provisions of the Crown Estate Act essentially preclude the CEC contributing directly on any substantial scale to a socio-economic fund. We do consider, however, that the CEC should be more engaged with the councils and Scottish Government in seeing how its operations can facilitate the development of the local economy and community in the Highlands and Islands. This should include, for example, putting socio-economic benefit on the agenda in their discussions with potential developers to see how they might be able to contribute.

100. We consider that the CEC ought to be able to adopt an approach that is more sympathetic to facilitating the development of local socio-economic benefit without falling foul of their statutory duty. We accept though that it is very difficult for the CEC unilaterally to arrive at a significantly different interpretation of the balance it strikes between their duty to maintain and enhance revenue and the extent to which they can and should accommodate wider public interests as part of their regard to good management. In section 9, we explore further the degree to which the CEC have the flexibility to accommodate such wider public interests within their remit to generate revenue for the Consolidated Fund, and whether there is a role for Government to assist them to strike the most appropriate balance.

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