HC 1624 Energy and Climate Change CommitteeMemorandum submitted by RenewableUK and Scottish Renewables

Executive Summary

The United Kingdom has a global lead in the marine renewables market, drawing on an extensive skills base, developed supply chain and some of the best wave and tidal resources in the world. However, domination of this potentially global industry is an opportunity which needs to be secured and decisive action is needed to cement the UK’s position and maintain its lead over other nations developing interests in the sector.

The marine energy sector is a good example of the UK leading world innovation and it is vital that the commercial benefits are retained. Policy to date has brought forward the first pre-commercial devices and the current challenge is in advancing the industry to commercial scale, via the deployment of the first arrays. This path has been well trodden by other renewable technologies, bringing substantial economic benefits, but marine energy needs key support to grow in the medium term. The industry is at a critical stage and government support is crucial to building a thriving industry. Thus the Government needs to consider two both capital support and revenue support.

The announcement of £20 million of funding through the Department of Energy and Climate Change (DECC) Low Carbon Innovation Fund was welcomed by industry, yet it is less than half the funding previously offered through the Marine Renewables Deployment Fund (MRDF). Experience has shown that for every public sector £1 spent leverages £6 of private investment. In this sense too Government capital support is essential to develop the industry through helping access to private finance.

The new funding should be sufficient to attract enough private funds for one or potentially two 8-10MW arrays to be deployed by 2015. However that level of deployment would not create a large enough market to secure the level of competition required to drive down costs and stimulate further innovation. In addition it would risk manufacturers basing themselves overseas, thus depriving the UK of the opportunity to establish a world leading industrial base in marine energy.

RenewableUK’s early work has established the need for approximately £120-130 million of seed corn funding to stimulate a sufficiently robust UK market. While we believe that a higher allocation of DECC’s innovation funding would be justified, we believe that the bulk of this should come from alternative sources of Government backed capital, chiefly the Green Investment Bank (GIB). We believe that the GIB may offer the chance to plug any potential gap in funding beyond 2015 by providing a line of specially targeted financial products at smaller higher risk investments such as marine energy,

Consistent and sustainable revenue support is critical to the development of the industry. It is vital that the economics of marine renewable energy continue to attract investment and five ROCs at a 300MW cap is an essential element of the package needed to support the sector. Equally, consistency is required through the period of the current Comprehensive Spending Review and into the Electricity Market Reform period. Without this sustained revenue support, there is a chance that the industry will fail to attract further investment and take advantage of the generous support the UK Government has provided until this point.

There are a number of key actions the government can take. These include:

deliver continued targeted innovation and cost reduction funding;

ensure a long term, consistent and sustainable revenue support package;

encourage involvement of utilities and project management teams, which improve; investor confidence; and

apply lessons learnt in offshore wind such as enhancing the transmission grid to keep pace with technology development.

The sector offers significant economic benefits for the UK. British companies such as Pelamis, Aquamarine Power, Atlantis and Marine Current Turbines are leading the way in deploying their technologies in UK waters, with six out of the eight full scale prototypes in the world being installed here. While the full benefits of marine may not materialise for a decade or more we must invest political and financial capital now to ensure it becomes a key part of our move to a low carbon energy supply.

What are the benefits that marine renewables could bring to the UK and should Government be supporting the development of these particular technologies?

1.1 The UK’s substantial wave and tidal resources (25% of Europe’s tidal and 10% of Europe’s wave potential) present an opportunity to build a world leading industry, with significant benefits to the nation in terms of reducing carbon emissions and furthering economic development. In particular, a thriving marine energy industry would offer the potential to capitalise on the UK’s significant global lead in marine energy technologies, utilising our existing supply chains and revitalising the wealth of its maritime legacy.

1.2 A number of recent reports have concluded that the sector could deliver:

4.5GW by 2030 and up to 60GW by 2050 (Carbon Trust, 2011).

Cost parity with nuclear and onshore wind by as early as 2025 (Carbon Trust, 2011).

10,000 jobs and revenues of nearly £4 billion per year by 2020 (RenewableUK, 2010).

68,000 jobs and £76 billion revenue to the UK economy by 2050 (Carbon Trust, 2011).

1.3 The existing offshore wind and oil and gas industries have developed a supply chain that could be enhanced by the marine renewables industry. Most of the technology is home-grown and there is huge potential export value from technology sales and electricity revenue. The value of job creation would be of particular benefit for coastal communities supplementing other sources of income, some of which are declining (eg fishing).

1.4 In addition, marine energy would contribute to increasing security of supply as a significant component of a balanced energy portfolio, mitigating issues such as variability of supply. Marine energy has highly predictable and forecastable resource characteristics which complement those of other renewables such as wind, and therefore will allow maximum total penetration of renewables on our electricity system.

How effective have existing Government policies and initiatives on marine renewables been in supporting the development and deployment of these technologies?

2.1 Government support has been effective in enabling a number of leading firms to move their technologies from the drawing board and into the water as full scale prototypes. We are now entering a crucial phase where the industry needs to make the notoriously difficult transition from development and demonstration, to full commercial scale operation.

2.2 According to a presentation made to DECC’s Marine Energy Programme Board, developers Aquamarine Power, Atlantis Resources Corporation, Pelamis Wave Power and Marine Current Turbines have received collectively a total of £33 million public funding over the last 10 years which as in turn leveraged private sector investment of £189 million.

2.3 Without this support, it would have been extremely challenging for these firms to reach the point they have. For example, MCT has used its £9 million of public funding to leverage approximately £31 million from the private sector. This investment has enabled MCT to develop its tidal turbine technology to the stage that the company is generally acknowledged as world leader in this field with a commercial scale demonstration unit operational for over three years and a detailed plan developed to move forward into commercial production.

2.4 The DECC-led Marine Renewables Deployment Fund (MRDF) failed to support early projects as the selection criteria used in the process were not appropriate for the scale of the industry at the time. This is a mistake that should be learnt from and not repeated.

2.5 However, other schemes such as the Wave and Tidal Energy Support Scheme (WATES), Wave and Tidal Energy: Research, Development and Demonstration Support (WATERS), the Technology Strategy Board, the Energy Technologies Institute, and the Carbon Trust’s Marine Renewables Proving Fund (MRPF) have been extremely successful with a range of resulting technologies either in the water or about to be installed.

2.6 These initiatives, which have systematically delivered projects, have stimulated cost reduction and improved the viability of the industry. Examples of projects where Government support has been crucial to the development of the project are the Orcadian Wave Project, using Pelamis wave technology and benefitting from a £3 million WATES grant and Aquamarine Power’s recently installed Oyster 800 which utilised over £5 million support from Scottish Enterprise and MRPF funding.

2.7 Other initiatives such as the Engineering and Physical Sciences Research Council (EPSRC) and The Crown Estate’s leasing rounds have been helpful in demonstrating a route to commercialisation for those technologies which are successful at the testing stage as well as promoting the UK marine energy sector internationally.

What lessons can be learnt from experiences within the UK and from other countries to date in supporting the development and deployment of marine renewables?

3.1 The best place to learn lessons is from other similar sectors such as wind which have already gone through the commercialisation process. A study into the success of the Danish wind industry undertaken by Aquamarine Power offers a useful comparison of the approaches taken to support the nascent wind industry in the two decades from 1980.

3.2 Although both countries invested similar sums in R&D in support of early stage technologies, Denmark was much quicker in putting in place a stable and well-understood market support mechanism. This was the critical factor which enabled Denmark to create a stable market price for wind energy thereby incentivising early investment and innovation and allowing Denmark to build a global export market worth nearly €6 billion in 2008.

3.3 The lesson for the UK is that a complete support package is required for marine energy, combining capital and revenue support. The UK’s current regime of ROCs is well understood and offers a clear price signal to investors. However, the application of marine energy ROCs is applied inconsistently—in Scotland there are five ROCs per MWh for wave energy and three for tidal, whilst in the rest of the UK there are only two ROCs per MWh for each technology. It is crucial that the level of support for marine energy through the next RO banding review and that which will be brought in through Electricity Market Reform offers a consistent and long-term price signal which will incentivise investment in the sector.

3.4 Other factors that have been shown to have an impact in the development of a renewables industry are:

Funding support for testing and demonstration, ensuring that world-leading projects are built on home soil.

Institutional and policy support in areas such as planning and grid, reducing risks and cutting down timescales.

Industry led academic support from universities and research programmes to boost industrial developments and embed technology developers and manufacturers nearby.

Direct support for manufacturing including supply chain initiatives to help local companies get onto the supply chain ladder.

Maximum use of existing expertise and synergies.

Support for infrastructure development such as ports.

Is publicly provided innovation funding necessary for the development of marine technologies and if so, why?

4.1 Public funding is essential both for the growth of the sector, and in order to leverage more private funding. The RenewableUK report “Channelling the Energy” and the Carbon Trust Report “Accelerating Marine Energy” (reference in footnotes) both articulate the requirement for public sector revenue and capital support to enable marine energy to reach commercialisation.

4.2 The influx of Original Equipment Manufacturers (OEMs) into the industry over the last two years is a very positive development and a sign that the industry is maturing to the point that major industrials are viewing it as an investment opportunity. Investment in specific projects indicates that they have successfully carried out due diligence and are likely to attract further interest. However, OEMs cannot be expected to close the funding gap on their own and capital support through the current CSR period is vital to developing the industry.

4.3 The UK Government’s commitment to the sector now needs to continue in a different guise as commercial scale projects are developed. There is a rich variety of technologies available now, with most either completing or entering their demonstration phases. The fittest of these will survive but will need to be able to move seamlessly into commercial scale projects if those companies are to survive.

4.4 The particular public funding needs over the next few years are:

Market support at 5ROCs for both wave and tidal power.

Capital support at 25% of capital cost for the very first small arrays (5MW to 10MW likely to cost £40 million–£80 million).

Low cost debt – potentially from the Green Investment Bank.

Continued capital support at 40% for prototype testing, to bring forward sufficient concepts to ensure the best ideas make it through to commercialisation.

4.5 It is important to point out that this support is only needed to start the sector. Once development gets underway we expect costs to reduce due to economies of scale, advanced manufacturing techniques and risk premiums reduction.

4.6 Over time we expect the grant requirements to be replaced by private financing from the market. However, commercial scale projects require a different scale of investment from the private sector – tens of millions instead of millions. A healthy level of capital investment support is required to soften the risk profile for private sector investors. It is very clear from various discussions with project investors that Government support will make or break their corporate investment decisions.

4.7 However, the Government can, and should rely on the private sector continuing to support the sector strongly provided that the key Government policy implementation is in place and remains so. As with other technologies before, the industry will ultimately be able to stand on its own two feet once economies of scale have been achieved.

What non-financial barriers are there to the development of marine renewables?

5.1 There a number of non-financial barriers across a range of fronts and urgent action is needed to eliminate or mitigate those that are within our control.

5.2 Technical issues (installation and deployment):

5.2.1These are being addressed by technology developers with an overall focus on improving reliability and driving down cost. R&D should be focussed on industry-led research to drive down cost and improve reliability. Furthermore, this research should not require unnecessary collaboration or loss of IP which could result in unutilised funds.

5.2.2The marine environment is amongst the most inhospitable on Earth and all parties need to plan for the hostile conditions experienced. It would be beneficial if more suitable testing locations were developed, or current test centres expanded, to ensure projects can attain the required level of durability. EMEC, Narec and Wavehub have pivotal roles to play here and have advanced projects along the path to commercialisation.

5.3 Grid:

5.3.1The nature of many of the sites identified as being suitable for marine energy projects is that they are often in remote locations where the transmission network is weak. In general the capacity of the transmission network to accommodate additional large scale generation is going to be a significant issue.

5.3.2Action is required on two fronts:

Transmission upgrades to ensure the capacity is put in place by 2015-16 – particularly in the Pentland Firth and Western Isles.

Transmission charging which ensures a fair transmission charging regime which does not penalise generators on the periphery of the UK.

5.4 Consenting:

5.4.1The consenting process could prove to be one of the most significant constraints to development. At present the signs are positive as regulators and statutory consultees seem keen to work with developers to get projects consented. However, the system has not yet been properly tested and it is only when larger array projects start going through the consenting process that we will know its efficiency.

5.4.2The planning system procedures need to be efficient, transparent and easily understandable. Dialogue need to be set up to ensure that renewables can coexist with other marine users, such as the shipping and fishing industries. Public understanding of the issues needs to be enhanced as the expansion of the renewables industry needs support at both local and national levels. It would be beneficial to the industry if Marine Scotland and Scottish Natural Heritage policy is aligned with UK and Scottish renewables targets.

5.4.3Further clarity from the Crown Estate on future site releases for wave and tidal energy would also be helpful to support the strategic planning of test and development centres, and we look forward to their consultation on this subject later in the year. The completion of an SEA of English and Welsh waters, coupled with a clear indication from The Crown Estate on how they plan to develop the UK coastline over a number of rounds will, in our view, assist this strategic planning process.

5.4.4Marine Conservation Zones, Marine Protected Areas and Benthic Zones can be affected and the interactions with wildlife need to be better understood so that environmental risks can be mitigated. Regulators are being put under increasing pressure by the European Commission to ensure that sites designated in the Habitats Directive are properly protected. This could mean that the required level of environmental assessment and post construction monitoring work increases to such a level that it significantly impacts the financial viability of projects. However, scientific evidence indicates that the environmental impact has been minimal and it is to be hoped this will streamline the planning process.

To what extent is the supply chain for marine renewables based in the UK and how does Government policy affect the development of these industries?

6.1 Much of the existing supply chain is in the UK and Aquamarine Power states that more than 90% of the supply chain for its Oyster 800 device was within the UK, while Marine Current Turbines notes that 75% was sourced from UK suppliers and Atlantis Resources Corporation conclude that 77% of the spend on ther AR1000 was with UK suppliers. Some specialist components cannot currently be sourced within the UK and this represents an opportunity to support supply chain development here. The UK has significant design capabilities and all the design for MCT’s SeaGen device was carried out in the UK.

6.2 Companies involved in the early UK projects will be far better positioned to win future work here, and to export abroad, therefore a premium should be attached to early initiatives. Given the nature of the technology, it will always be the case that significant amounts of expenditure will be incurred where the devices are deployed. Assembly and testing, commissioning and operation and maintenance will always be local to the turbine site. Structures will often be more economic to manufacture locally thus avoiding transportation costs.

6.3 The next challenge will be to attract the supply chain that can deliver multiple devices to the cost and quality that customers will demand. The supply chain will be looking at the level of subsidies that will be put in place to stimulate the deployment of the first farms of tidal turbines and react accordingly.

6.4 Government policy can have a direct and strong bearing on supply chain prospects, through providing market confidence and maximising the prospects of UK supply chain involvement. The critical enabler for the growth of the UK supply chain in marine renewables lies in the success of marine energy technology. If the leading technologies do not get the support they require there will not be a UK marine energy industry. If the industry is enabled to grow, the supply chain will follow.

6.5 Maximum use should also be made of established expertise in sectors such as oil & gas and other renewable energy industries. This is not always easy given this sector is currently highly focused on its own core business needs. Government encouragement could play a key role.

What approach should Government take to supporting marine renewables in the future?

7.1 Government should continue to engage with industry through fora such as the Marine Energy Programme Board (MEPB), RenewableUK and Scottish Renewables to understand the sector’s needs. There is a strong requirement for a more joined up approach across Government to ensure that all policy areas are aligned, for example BIS, DECC and HMT should cooperate to provide a unified vision for marine energy.

7.2 The Marine Energy Park approach consists of clustering assets in a particular area, which has been shown to create efficiencies in other sectors. However, there is a danger that regionalizing assets to this extent could fragment the industry as regions are pitted against one another for potentially lucrative contracts. As all other UK government policies are implemented on a national basis, it is vital that the government takes on a coordinating role and ensures that value in the supply chain is retained and developed across the UK.

7.3 To date Government investment has supported the development and demonstration of a wide variety of ocean energy technologies. The task is now to change the focus and nature of public investment to take these technologies to commercial scale operation as the precursor to the sector establishing itself as a viable renewable energy source competing equally with the alternatives.

7.4 The costs of the first commercial scale tidal array are estimated to be in the region of £40-80 million for a 5-10MW deployment of up to 10 devices. Capital support of at least 20-25%, together with five ROCs for each MWh of generation and low coat debt, potentially from the GIB, are conditions precedent to attracting the balance of private sector investment.

7.5 Although five ROCs implies high generating costs, there is robust evidence that can confirm the costs will fall to competitive levels given the usual economies of scale and learning curve effects that follow the “roll out” of a few reasonable sized projects. It is worth noting that typical project size is small enough to ensure that ROC costs remain small but that the ROC benefits will ultimately be very high if they can kick off a major new industry.

7.6 The industry has estimated that capital support of £120 million is required build a thriving marine renewables industry. While the £20 million funding provided by the DECC Low Carbon Innovation Fund is welcome support, it is less than half the amount provided previously through the MRDF and falls well short of providing the stimulus the marine industry requires to overcome the barriers to commercialisation. A coordinated funding approach, bringing together BIS, DECC and HMT would create opportunities to leverage the private sector investment and accelerate industry growth.

7.7 It is envisaged that key financial players such as the Green Investment Bank will be able to make significant contributions beyond 2015 and broaden the pool of investors for large scale marine energy projects. The GIB could play an important role in enabling developers to access guaranteed debt for projects. To date, the GIB has not considered support for early-stage marine energy projects and it should be encouraged to develop a set of financial products aimed at higher risk projects, such as wave and tidal energy, otherwise the GIB will merely be in competition with other existing banks.

7.8 Furthermore, the committee should examine what other support could be made available from the UK Government to enable other leading developers to deploy the first pre-commercial arrays. It is vital that support is considered during the current CSR, or there is the real danger government will have funded a number of technologies, but only to the point at which they fail due to lack of further resources.

Are there any other issues relating to the future of marine renewables in the UK that you think the Committee should be aware of?

8.1 The marine energy industry is a massive opportunity to build on the maritime legacy that the UK has developed over a substantial period of time. The developed supply chain, high level of expertise and first mover status gives the UK a competitive edge that should be enhanced through positive government action.

8.2 However, the uncertainty around the sector is allowing other nations to erode the lead the UK has built up and current developments are further impacting confidence in the sector. The lower than expected capital grant and the upcoming Electricity Market Reform has reduced the feasibility of the industry. Government needs to act now to ensure that funding support given up until now is not wasted.

8.3 Time is absolutely of the essence. It is no exaggeration to say that the future of this sector is likely to be determined in the next two-three years. Unless the industry can establish a couple of commercial scale tidal array projects, it is very difficult to see how companies will be able to sustain investment. Provided that the revenue support and capital support mechanisms are activated in the next few months and efforts are made to eliminate barriers, marine energy can deliver on its potential.

September 2011

References

Carbon Trust accelerating marine energy report: http://www.carbontrust.co.uk/Publications/pages/publicationdetail.aspx?id=CTC797

RenewableUK Wave and Tidal State of the Industry report: http://www.bwea.com/pdf/publications/WandT_SoI_report.pdf

RenewableUK report Channelling the Energy: http://www.bwea.com/pdf/publications/RenewableUK_MarineReport_Channelling-the-energy.pdf

The Danish wind industry 1980-2010: lessons for the British marine energy industry: http://www.aquamarinepower.com/sites/resources/Published%20papers/2914/The%20Danish%20wind %20industry%201980%20-%202010%20Lessons%20for%20the%20British%20marine%20energy %20industry%20International%20Journal%20of%20the%20Society%20for%20Underwater%20 Technology.pdf

Prepared 15th February 2012