| 5 Financing |
52. Marine renewables will require significantlevels of investment in order to become commercially viable. Findingways to meet these costs probably represents the biggest barrierto the development of wave and tidal energy. There are two maintypes of financial support that can help with this problem: capitalsupport (usually in the forms of grants, low-interest loans orinfrastructure investment) and revenue support, which providesa supplement to the income generated from emergent technologies.In this section we investigate the Government's approach in bothof these areas.
53. As discussed in paragraph 21, the costs andrisks associated with wave and tidal energy are currently toobig for private investors to shoulder alone. Publicly-funded capitalgrants towards the costs associated with demonstration projectscan help to share the risk between the private and public sectors.This situation is not unique to marine renewables - the TechnologyStrategy Board (TSB) pointed out that public funding is requiredfor most new energy technologies when they reach the so-called"valley of death" phase of development (where the risksand costs are the greatest).
54. The next step in the development of marinerenewables will be to test arrays of devices rather than singleprototypes. This will involve a large increase in project costs- from millions of pounds to tens of millions.The Carbon Trust has estimated that 5MW arrays are likely to requireinvestments of £30m-£50m.Marine Current Turbines (MCT) put the costs at £40m-£50mfor an 8-10MW tidal array.Industry trade association RenewableUK estimated that in total£40m-£80m of capital support for wave and tidal arrayswas needed.
55. To date, there have been many different marineenergy grant schemes in the UK, including schemes run by centralgovernment and devolved administrations as well as those offeredby other funding bodies such as the Energy Technologies Institute(ETI), TSB and Carbon Trust.
56. One of the most high profile schemes wasthe £50m Marine Renewables Deployment Fund (MRDF), whichwas established in 2006 by the then Department for Trade and Industry.The scheme was intended to support the demonstration of smallarrays of pre-commercial wave and tidal energy devices. However,the scheme did not receive any suitable applications and so wasnot able to provide any awards for demonstrations.The Department explained to us how this failure came about:
The scheme was instigated on the basis of discussionswith the sector between 2004 and 2006, which asserted that sucha support scheme was urgently required to allow the sector toprogress to commercialisation. In hindsight the industry claimswere premature as developers had found it more difficult to develop,deploy and test prototypes to full-scale than anticipated.
57. In order to help the industry advance tothe point at which it was eligible to apply for the MRDF, a newMarine Renewables Proving Fund (MRPF) was introduced. This £22mfund was designed to help the industry to progress to large scaleprototype deployment and testing. It provided a total of six grantsand all recipients but one have now deployed their devices fortesting at EMEC (the remaining device is due to be deployed in2012). The TyndallCentre told us that the MRPF had been widely praised in its recentstudy of stakeholders.
58. In March 2011, the Government ended the MRDF.This was followed by an announcement in June 2011 that up to £20mof its Low Carbon Innovation Fund would be spent on the developmentof marine devices.This scheme is expected to open in Spring 2012 and will supporttwo projects to test prototypes in array formations. While membersof the industry welcomed the decision to provide some support,many also expressed disappointment that the funding was less thanhalf of the value of the now defunct MRDF.
59. In October 2011, Scottish First MinisterAlex Salmond announced a new £18m fund to support the deploymentof the first commercial marine arrays and the scaling up of thedevices currently on test in Scottish Waters. The details of thescheme have not yet been finalised, but the Scottish Governmentplans to consult directly with industry about the nature of projectsthat will be supported.
60. The Scottish fund will go some way to makingup the funding "shortfall" that is perceived by somemembers of the industry, although this may be more through luckthan design; it is not clear to us whether DECC had any knowledgeof the Scottish Government's plans ahead of Mr Salmond's announcement.
61. Dr Edge (RenewableUK) told us that the industryhoped for a "coherent package" made up of DECC's £20mand the Scottish Government's £18m. He said "if therewere a joint pre-qualification, there would be a pool of projectsto which either set of money could be allocated. You would havea common set of hurdles that projects would then jump over toable to access either set of money".The Department told us that there was co-operation between officialsin the development of the two funds (see paragraph 49).
62. We were pleased to hear that officials areworking together to try to ensure that the DECC and Scottish Governmentschemes to support arrays are complementary. However, we do notknow which options are currently being "kicked around". The £20m funding provided by DECC to underpin a world-leadingindustry is not large, even when combined with the additionalfunding provided by the Scottish Government. DECC must ensuremaximum value for money and must avoid duplication and overlapsbetween the schemes. The Department should identify how it willachieve this. We urge DECC to try to keep the industry in mindwhen discussing options with the Scottish Government and recommendthat DECC minimises bureaucracy for applicants, for example throughrunning a joint pre-qualification process.
63. Thecombined total of £38m that is available from DECC and theScottish Government for testing arrays is still some way off thetotal sum that the industry claims is required to develop waveand tidal energy in the UK.However, it may be possible to access additional funding fromother sources.
64. One option is the European New Entrants'Reserve (NER) 300 Fund.The UK has submitted 12 applications to the fund. Of these, sevenwere for CCS projects, four were for projects on wave or tidalrenewables and one for an offshore wind turbine project. Successfulapplicants will be announced towards the end of 2012.
65. The industry told us that it was "keenfor the UK Government to work more proactively with the industryto access European streams of funding [
] such as the NewEntrants' Reserve 300 programme".Officials from DECC told us that "we are hopeful that ifwe can we would benefit from both marine and also CCS under theNER300, but it will depend on what comes out of the Commission'sdue diligence and scrutiny".
66. The industry would also like to see low-costlending to wave and tidal projects from the Green Investment Bank.The Minister told us that wave and tidal were not within the initialkey priority areas for the Bank but that he expected some of the20% of the portfolio that will be used outside of the priorityareas to go to marine renewables.He went on to tell us that large-scale marine renewable fundingopportunities were not likely to be available until "laterin this decade at least", when commercial scale projectsmight start to appear.
67. We welcome the initial supportfrom the Department for accessing other sources of funding suchas European NER 300 and Green Investment Bank. As the UK is aleader in the development of wave and tidal energy, DECC shouldactively promote the potential benefits of marine energy at theEuropean level and maximise the opportunities for UK-based marinerenewable projects to benefit from European funding schemes.
68. As discussed in paragraph 31, it is currentlymore expensive to generate electricity from wave and tidal powerthan from conventional sources. This means that some form of revenuesupport is needed to make deployment of marine renewables an economicallyviable option for energy companies. In time, as technologies matureand generation costs fall, the need for revenue support will reduce.Ultimately, technologies should become fully commercial, at whichpoint support should be removed. Revenue support schemes can providea "market signal" by giving investors confidence aboutthe level of return they can expect on investments, generallyover a timescale of one or more decades.
69. At the moment, revenue support is providedthrough the Renewables Obligation (RO), which is designed to providea supplement to renewable energy generators on top of the incomethey receive for selling electricity to the grid.
70. In England and Wales, wave and tidal streamenergy both receive 2 Renewable Obligation Certificates (ROCs)for each unit (MWh) of electricity generated. However, the ScottishRO offers more favourable rates; 5 ROCs per MWh for wave energyand 3 ROCs per MWh for tidal stream. Many witnesses argued thatthis more generous scheme, combined with the existence of theEMEC testing centre in Orkney, had led to a much greater levelof activity north of the boarder than could be found in Englandand Wales. Anoverwhelming majority of the responses we received called forDECC to raise the level of support offered in England and Walesto 5 ROCs per MWh for both wave and tidal.
71. In October 2011, DECC published a consultationon proposals to do exactly that. The document suggested that ROCsawarded in England and Wales from 2013-2017 should be increasedfor both wave and tidal energy to 5 ROCs per MWh.This proposal has been widely welcomed by industry.The consultation closed in January 2012 but at the time of writing,a final decision had not been announced.
72. We note that DECC's proposals did not includeany limit on the number of projects that would be able to benefitfrom the more generous level of support (although there was alimit on the size of each individual project). This was despitethe fact that the industry itself had proposed a 300MW limit onthe total volume of capacity supported at this level in orderto limit the total costs to the consumer.Although witnesses told us that the likelihood of there beingconsiderably more than 300MW of capacity in the water before 2017was very low, it nevertheless seems strange that DECC does notintend to apply a cap, given the recent difficulties experiencedwith feed-in tariffs for solar PV.
73. In the longer term, the Government is planningto replace the RO with a Feed-in Tariff with contract for difference(CfD). As a result, the RO will be closed to new entrants from2017. Witnesses from the industry stressed that clarity aboutwhat would happen to revenue support beyond 2017 was needed inorder to create confidence in a future market for marine energy.Rob Saunders (TSB) said:
Some continuity in terms of the view forward on revenuesupport would really help the industry to plan longer term. Withoutthat, there is [a] risk that we do the first arrays, but thenthere is a hiatus when everybody waits to see what happens withthe Contract for Difference, Feed-in Tariff or whatever comesnext.
74. The Minister told us that he was not in aposition to say what the likely costs of marine energy would bein 2017 and therefore did not know what level of support wouldbe offered beyond 2017.However, he also told us that the Government planned to providemore clarity as plans for electricity market reform were developed.He said "by 2013-14, the industry will have absolute certaintyabout what the forward long-term funding arrangements will bewellbefore we come to the end of the ROC regime".
75. The industry needs clarityabout the level of revenue support it can expect to receive beyond2017 as soon as possible. We welcome the Minister's commitmentto provide absolute certainty on this issue by 2013-14. We willmonitor whether DECC keeps to this timetable and urge the Departmentto deliver its decision in 2013 rather than 2014.
76. The industry expects the high level of supportof 5 ROCs/MWh (or equivalent under the CfD regime) to be reducedover time, but it is concerned that there may be a temptationto reduce the level suddenly when the transition from RO to CfDis made in 2017.Dr Tyler (Marine Current Turbines) said:
If we end up with five ROCs in 2017 and then we falloff a cliff, the five ROCs are pointless. We need to see thatcontinuity and have a strong signal that we will see a continuumoff the back of five ROCs. Obviously, we would expect [the levelof support] under the EMR to fall with time as we bring costsdown. But if there is a cliff edge in that, the investors willall run for cover.
77. Revenue support should bereduced over time as technologies mature and costs fall. The Governmentneeds to consider carefully how it will implement any changesto the level of revenue support in future, including the rateat which reductions are made and the criteria that are used todetermine when reductions are introduced. Government must communicateits intentions on both these points clearly to industry at thesame time as it announces the level of support that will be providedbeyond 2017. Above all, the Government must avoid a repeat ofthe situation with solar PV Feed-in Tariffs, where drastic reductionswere made at very short notice.
78. The Government has proposedincreasing the level of support to wave and tidal energy devicesthat are deployed before 2017. Since very little deployment isexpected before this date, the overall cost to the consumer willbe insignificant. However, looking beyond 2017, the Governmentwill need to balance the interests of consumers against the needsof the industry. The Government should consider capping the totalvolume of capacity that can benefit from revenue support in anyfuture support regime, perhaps at the level of any deploymenttarget.
69 Ev 78; The Commons Science and Technology Committeelaunched its inquiry "Bridging the 'valley of death': improvingthe commercialisation of research" on 15 December 2011. Back
70 Ev 53, 62, 88; Q 17 Back
71 Carbon Trust, Accelerating marine energy, July 2011 Back
72 Ev 88 Back
73 Ev 53 Back
74 Ev 42 Back
75 Ev 42 Back
76 Ev 42 Back
77 Ev w83 Back
78 Ev 42 Back
79 Ev 62, w83, w85, w107; Qq 12 [Gordon Edge], 65 Back
80 Ev w57 Back
81 Q 235 Back
82 Qq 12-13 Back
83 Q 235 Back
84 Ev 53 Back
85 Ev 42, 82, 99, w49 Back
86 Q 202 Back
87 Q12 Back
88 Q 203 Back
89 Ev62, Ev 53 Back
90 Q 204 Back
91 Q 207 Back
92 Ev 58, 91, 103 , w43, w52, w61 , w83, w91 Back
93 Ev 53, 58, 62, 88, 99,103,w24, w32, w45, w58, w61 w85, w97, w100,w111 Back
94 Q 177 Back
95 Q 26 Back
96 Ev 53, Ev 58 Back
97 Qq 32 [Dr Edge], 97 [Mr Saunders, Dr Clarke and Dr Green] Back
98 Q 59 [Mr Stevenson, Mr Pearson] Back
99 Q 98 Back
100 Qq 212 - 220 Back
101 Q 220 Back
102 Q 67 Back
103 Q 32 Back