HC 1624 Energy and Climate Change CommitteeMemorandum submitted by E.ON

The UK has extensive energy resources offshore, including marine energy. If the UK is able to develop and optimise use of these resources, while also preserving the marine environment, they could provide a valuable contribution toward meeting the UK Government’s aims of delivering secure, affordable and low carbon energy.

Marine technologies, such as wave and tidal, remain in the early stages of development and need to be deployed through commercial scale projects in order to be successful. E.ON, like many developers, is evaluating a number of specific projects. We have been investing in the commercialisation of marine technologies since 2001 and were the first energy company to deploy a commercial wave device in UK waters in 2010.

Wave and tidal deployment at full commercial scale presents a number of challenges given the relatively immature nature of these technologies. This includes the ability to manage the risks and costs of R&D and securing early investment from the capital markets, which is required for commercial deployment. In addition to this, developing a strong supply chain infrastructure within the UK and securing consents with relatively limited information remain obstacles for this fledgling sector to overcome. In light of these challenges we believe that it is unlikely that wave and tidal technologies will be commercially viable at a large scale before 2020, especially given the high costs and long lead times for construction.

We hope that some of these challenges can be overcome through industry and Government collaboration. Effort should be focused on reducing project and product development risk, as well as stimulating cost reduction. Without this, wave and tidal generation will lose momentum and will not catch up with wind and other established low carbon technologies, which could result in a missed opportunity for the UK, both in terms of creating an industrial marine capability and in terms of exploitation of a potentially valuable energy resource.

We urge the Government to continue to support the development of wave and tidal technologies and believe that if a revenue support level of five ROCs (or equivalent) were provided for both wave and tidal technologies, with a 300 MW limit on the total volume of capacity supported at this level, this would drive both cost reduction in this sector, and support the roll-out of the proposed Marine Energy Park concept of geographically clustering marine energy sector capabilities in other areas of the UK.

Q1. What are the potential benefits that marine renewables could bring to the UK and should Government be supporting the development of these particular technologies?

1. By encouraging innovation in the marine renewables sector through wave and tidal technologies, a useful contribution could be made towards meeting the UK’s energy and climate change goals. However, enabling this potential contribution to be realised will require improvements in the reliability of wave and tidal technologies coupled with reductions in the costs associated with construction and deployment. Furthermore, it is worth noting that the National Renewable Energy Action Plan includes investment in 1.3 GW of wave and tidal stream technologies by 2020, which is likely to be very stretching, given current low levels of deployment (around 2 MW).

2. The Committee on Climate Change has reinforced the view that UK has significant potential for wave, tidal stream and tidal range generation. They consider the practical potential for wave energy to be 40 TWh/year and tidal range exploitation around the UK (including the Severn) is also estimated at around 40 TWh/year. Unlocking this potential will require the creation of a sustained partnership between Government and industry. As such the Committee on Climate Change has concluded there is merit in the UK supporting demonstration and deployment of marine technologies, based on:

their assessment of costs which suggests that, by 2040, tidal stream and possibly wave could offer a cost-effective alternative to offshore wind;

Pöyry’s intermittency analysis which suggests that marine energy could usefully add diversity to the generation mix; and

the Committee’s 2010 innovation review which found that the UK has an important role to play in developing marine technologies for both domestic and global markets.

3. We support the Committee on Climate Change view that further support should be provided through the ROC regime or under the new electricity market arrangements. Further R&D funding should also be considered in the context of the next spending review, given the early stage of marine technologies.

Q2. How effective have existing Government policies and initiatives on marine renewables been in supporting the development and deployment of these technologies?

4. The previous Marine Renewables Proving Fund (MRPF) was a step in the right direction. It was managed systematically and swiftly and as a result six projects have now been “fast-tracked”. However, it was understood to be a one-off fund and continued support is necessary in the short to medium term to nurture this sector and take it to commercialisation. We believe that future support should focus on reducing risk and stimulating cost reduction.

5. We welcome the Government’s continued commitment to the marine energy sector, with £20 million of new money being allocated. However, we feel that a mix of solutions is needed in order to support the continued development and deployment of wave and tidal technologies. This mix is likely to need to include Government led revenue and capital support, private equity support and project sponsor equity.

6. We recognise that industry must also have a role. This is why we believe that it is essential that technology developers should begin to work more closely with major industrial companies in order to generate a momentum which will move the sector towards consolidation of design, as seen in the wind industry with three bladed turbines. The Government could have an important role to play in motivating this group to engage more closely and partner with technology manufacturers, perhaps through tax based incentives accessible as a result of partnering (subject to compliance with EU State Aid rules).

7. The Crown Estate’s leasing round for the world’s first commercial wave and tidal arrays, across ten sites in Scotland’s Pentland Firth and Orkney waters, has had a positive impact through stimulating the industry and promoting the UK internationally. This leasing round was made possible following the completion of a Strategic Environmental Assessment (SEA) for Scottish waters. We urge Government to ensure that a SEA for English and Welsh waters is completed in as short a timeframe as possible in order to enable additional UK based opportunities to be opened up. Furthermore, an update on when Government expect to complete the SEA2 in England would be welcomed by industry.

8. We welcomed the introduction of the Marine and Coastal Access Act 2009, which was in part designed to streamline the offshore planning regime. The introduction of the Marine Management Organisation (MMO) and the implementation of a new marine planning system, if administered correctly, have the potential to avoid delays which can be very costly to developers.

9. The ROC mechanism provides bankable support, which encourages investment in UK energy projects. The favourable ROC regime in Scotland which awards five ROCs to wave technologies and three ROCs to tidal has stimulated a high level of activity north of the border and, coupled with the presence of the European Marine Energy Centre (EMEC), Scotland is already viewed as an emerging world centre of excellence for marine energy.

10. In order to ensure that the rest of the UK does not fall behind, parity should be established with the Scottish ROC regime, which may move towards five ROCs for both wave and tidal technologies, given that the technologies require similar levels of support. Therefore, we call on Government to apply a level of five ROCs for both wave and tidal technologies with a 300 MW limit on the total volume of capacity supported at this level to cap total support costs. This level of support would be key to driving further cost reduction, maintaining investor confidence, and would support the roll-out of the proposed Marine Energy Park concept of geographically clustering marine energy sector capabilities in other areas of the UK. Once the new contract for difference based regime for supporting new low carbon generation is introduced as part of UK electricity market reform, equivalent levels of support should be provided through this mechanism.

Q3. 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?

Long term stable framework

11. It is essential that a long term view can be taken by technology companies, and their partners, where there is confidence in both the consistency and longevity of the framework for operating in the UK. Where there is inconsistency or unexpected changes in levels of support (as seen with the FiT review’s impact on the UK solar industry), confidence may be eroded in the sector which slows both development and growth.

Adapting to change

12. The ability of funding bodies to change and adapt to the needs of an emerging sector as their situation changes is critical. However, it is not just the responsibility of funding bodies to adapt to the needs of an emerging sector, there also needs to be open and honest two-way communication. An example of where this approach could have been better executed is the case of the Marine Renewables Deployment Fund (MRDF).

13. Following industry consultation the MRDF was intended to provide capital support for commercial scale arrays. However, much of this funding went unspent as the sector was not able to adequately meet the requirements that had been set. Therefore, a key lesson for the sector is the need to be realistic about what is achievable and over what timeframe.

Lessons from Danish wind industry development

14. There are important lessons to be learnt by comparing the development of the UK and Danish wind energy industries including the need for a long-term position on support, which thereafter needs to be consistently applied to provide a market push at the early prototype stage and complemented by a revenue pull.

15. A number of these lessons have been learnt for offshore wind in the UK, notably by providing a large long term market opportunity through Round 3, the ability for investors to earn a fair return commensurate with the risks, and funding to upgrade logistical assets (eg ports) to attract tier one manufacturers to the UK. The same measured approach should be adopted by the UK Government with the marine sector in order to ensure we can take the lead and develop a sustainable industry.

Q4. Is publicly provided innovation funding necessary for the development of marine technologies and if so, why?

16. If the UK economy is to extract real value from this sector, the Government needs to continue to demonstrate a clear commitment to supporting the early stages of its growth in order to foster investor confidence in its long term industrial significance.

17. Continued capital support is needed to ensure a healthy market of competitive technology options if the investment risk is to be spread across an appropriate portfolio.

Q5. What non-financial barriers are there to the development of marine renewables?

The lack of a UK wide Strategic Environmental Assessment (SEA)

18. Further clarity from The Crown Estate on future site releases for wave and tidal energy would help 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.

Access to Grid Connections

19. The grid transmission infrastructure must receive adequate investment to connect regions with high resource potential. It is important that Ofgem and other key stakeholders support strategic investment in the grid where the potential for projects being deployed is high.

20. One particular hurdle that we have encountered in relation to our activities in the Pentland Firth and Orkney Waters, is the fact that we are required to accept the full liabilities for the cost of building the additional capacity in the event that a generating asset is not connected to the transmission network. Given the nascent and unproven nature of commercial wave and tidal arrays, accepting this level of risk is incredibly challenging for project developers and their investors. Therefore, we would flag this as a critical area where perhaps creative risk sharing initiatives could be employed which may involve Government playing a role. There may also be a role for Active Grid Management solutions here which may represent a relevant area for Ofgem’s Low Carbon Network Fund to fund projects which could reduce the need for full capacity upgrades.

Planning and Consenting

21. Environmental monitoring of early stage projects presents a hurdle to developers that may discourage investment decisions and thus growth of the sector. The 2010 joint Government and Industry Marine Energy Action Plan (MEAP) identified a number of ways in which the disproportionate cost burden associated with the precautionary principle can be avoided. There is a need to develop the sector whilst understanding the practical effects of marine energy devices on the environment. This can best be achieved through a “deploy and monitor” approach.

22. Government should apply appropriate and co-ordinated requirements that do not demand unnecessary continued monitoring if initial results demonstrate a negligible environmental impact. Proactive early engagement from developers and utilities coupled with openness from statutory consultees is critical.

23. The absence of comprehensive life-cycle data concerning the environmental impact of wave and tidal technologies makes judging risks more uncertain for executive agencies such as Marine Scotland and the MMO. In light of this we feel that it is important that such agencies take a measured approach in weighing up evidence and managing uncertainty around knowledge gaps. Nonetheless, we welcome the MEAP recommendation to form a UK-wide strategic coordination group to develop a planning and consenting roadmap for all types of marine renewables. We believe that such a group is vital in order to ensure consistency and proportionality.

The need for a more integrated approach to utilisation of port infrastructure

24. With the support of both the UK and Scottish Governments, the UK boasts some of the best test facilities in the world, namely EMEC, NaRec and Wave Hub. To truly maximise the UK’s potential, a more tightly co-ordinated approach to deploying and using infrastructure is required, taking into account the characteristics of a particular environment. For a marine energy industry to flourish, there should be more focus on upgrading key port and harbour facilities specifically to benefit renewable energy scheme deployment. This includes both marine energy and offshore wind. We welcome the announcement in the 2010 spending review that up to £60 million would be available for the establishment of offshore wind manufacturing at ports in assisted areas of England.

25. We also welcome the MEAP recommendation for Government, Devolved Administrations and other relevant stakeholders in the sector that they should capitalise on opportunities for marine energy by learning from and building on synergies related to the skills and supply chain for offshore wind. There is an important role here for the recently established Marine Energy Programme Board (MEPB), chaired by the Minister of State for Climate Change, to draw together cross sector expertise to identify both risks and opportunities and act as a Government/industry partnership.

Q6. 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?

26. Participants in the marine energy supply chain have begun to cluster around areas of rich marine energy resource and testing facilities in the UK.

27. However, the area where there is currently the greatest concentration of supply chain participants is in the Orkney Islands. This is driven by the presence of EMEC, an attractive revenue incentive regime (ie multiple ROCs for marine energy) and a completed Strategic Environmental Assessment and Licensing round.

28. This outcome illustrates the key ingredients which can foster the clustering of the marine energy supply chain in the UK:

proximity to accessible marine energy resource;

attractive level of revenue support (with long term certainty);

SEA completed and licenses made available; and

world class testing sites and academic institutions operating nearby.

Q7. What approach should Government take to supporting marine renewables in the future?

29. There are three key funding challenges that exist in the UK’s support framework, which relate to the stages of industry development as outlined in RenewableUK’s October 2010 report: Channelling the Energy—A Way Forward for the UK Wave & Tidal Industry Towards 2020. A stable financial framework which provides parity across Great Britain from a ROC level perspective, underpinned by the following mixture of capital and revenue support could contribute to ensuring that the UK remains ahead of the rest of the world. This requires a coordinated approach across Government (DECC, BIS and HMT) to establish a unified vision for the future of the marine energy sector in the UK and closely co-ordinate policy action. E.ON would advocate the following approach to supporting marine renewables in the future:

30. Provide continued capital support for first and next generation prototypes. At the current stage of marine industry development, the greatest need is for capital grants that create a market push. Capital support is vital as devices require continued support through the R&D stage; particularly when devices are ready for open ocean deployment, at which point capital needs to rise rapidly. At this point the initial risk exposure is high, and therefore developers require capital support to de-risk investment in technology development. Whilst the capital support recently announced by the Government is welcome, it will need to be sustained in the medium term as the sector moves towards technology consolidation, as experienced previously in the wind energy industry.

31. Blending both capital and revenue support to enable the first wave/tidal farms. At this stage both a technology push and market pull are required. The availability of revenue incentives will play an important part in making these first arrays economically viable. However, because electricity production from the first arrays will be unpredictable, making revenue incentives alone insufficient, capital grants will also still be required to help reduce the amount of developer capital at risk. Continued Government support will help to make marine projects more attractive investments and comparable with other renewable energy generation options.

32. Sustained level of revenue support to provide confidence in second farms and beyond. By this point we would anticipate the sector to be mature enough to work on a market pull alone and projects could start to move towards attracting debt finance. In turn this will deliver associated cost reductions that would reduce the level of revenue support required. We would like to see a revenue support review at this point. With this integrated support package the UK will be able to build a successful, well developed and sustainable marine sector, for both domestic use and export.

September 2011

Prepared 15th February 2012