HC 1624 Energy and Climate Change CommitteeMemorandum submitted by The Crown Estate

Summary of the Crown Estate’s Remit and Responsibilities, and Current Wave and Tidal Activities

1. The Crown Estate manages an estate worth £7.0 billion, which contains extensive marine assets including over half of the UK’s foreshore and the vast majority of the seabed out to the 12 nautical mile territorial limit. Under The Crown Estate Act 1961, The Crown Estate’s permission, in the form of a lease or licence, is required for the placement of structures or cables on the seabed. In addition to this, by virtue of the Energy Act 2004 and Energy Act 2008 it has the rights vested in it for the development of renewable energy within the Renewable Energy Zone out to 200nm; and for development of natural gas and carbon dioxide storage out to the UK Continental Shelf.

2. In carrying out its duties, under the core values of commercialism, integrity and stewardship, The Crown Estate is concerned to deliver the maximum renewable energy potential of the marine estate, in line with government policy. The Crown Estate is working with the grain of government to develop this new energy mix through several programmes of work including wave and tidal, offshore wind, CO2 storage and natural gas storage. The Crown Estate’s revenue surplus is paid to HM Treasury on an annual basis, such that the nation secures the benefit of the UK seabed being utilised for commercial purposes.

3. The Crown Estate has undertaken and continues to operate leasing activities for marine renewables. Figures 1 and 2 show projects that are currently in agreements for lease or lease. Most developments are currently focused in the Pentland Firth and Orkney waters, in which area The Crown Estate ran the first major leasing round between 2008 and 2010. This led to eleven projects with 1.6 GW potential capacity – the largest planned development of wave and tidal stream energy worldwide. One of the key objectives of the Pentland Firth and Orkney Waters leasing round was to kick-start the industry by creating a greater market pull from utilities and other developers. Lease structures have been designed so as to incentivise and facilitate delivery.

4. The Crown Estate has already awarded development rights for projects elsewhere in Scottish waters, and around the UK. We are continuing to lease demonstration projects (up to 10 MW capacity, around UK territorial waters) and projects in connection with the Scottish Government’s Saltire Prize (up to 30MW capacity, Scottish territorial waters), with six-monthly application windows. We are also preparing to run a tidal (and offshore wind) leasing round in waters off Northern Ireland.

5. The Crown Estate is actively assisting the marine renewables sector, working closely with DECC, the Devolved Administrations and the other parts of government on key challenges facing development. This includes the need to attract greater capital to technology development and manage high costs and technology risks in initial projects. The Crown Estate is investing over £5 million in Enabling Actions to accelerate and de-risk the Pentland Firth and Orkney waters projects, and undertaking other initiatives to support industry development more widely. This includes an initiative in collaboration with DECC to create a Knowledge Network for marine renewables.

6. The Crown Estate’s unique perspective on the UK offshore energy sector and programmes outlined above allows us to comment on the future of marine renewables.

Figure 1

TABLE OF PROJECTS WITH AGREEMENT FOR LEASE OR LEASE (SEPTEMBER 2011)

Type and location

Potentialcapacity(MW)

Developers

Pentland Firth and Orkney waters

Wave

Brough Head

200

Aquamarine Power Limited & SSE Renewables Holdings (UK) Limited

Costa Head

200

SSE Renewables Developments (UK) Limited

Farr Point

50

Pelamis Wave Power Limited

Marwick Head

50

ScottishPower Renewables UK Limited

West Orkney Middle South

50

E.ON Climate & Renewables UK Limited

West Orkney South

50

E.ON Climate & Renewables UK Limited

Tidal stream

Brough Ness

100

Marine Current Turbines Limited

Cantick Head

200

SSE Renewables Holdings (UK) Limited & OpenHydro Site Development Limited

Inner Sound

400

Atlantis Resources Corporation Pte Limited, Intenational Power Marine Developments Limited, Morgan Stanley Capital Group Incorporated

Ness of Duncansby

100

ScotishPower Renweables UK Limited

Westray South

200

SSE Renewables Developments Limited

Other Scottish Sites

Wave

Aegir, Shetland

10

Pelamis Wave Power Limited and Vattenfall AB

Galson

10

Aquamarine Power Limited

Moray Firth

N/A*

Ocean Power Technologies Limited

North West Lewis

30

Aquamarine Power Limited

Tidal Stream

Kyle Rhea

8

Marine Current Turbines Limited

Sound of Islay

10

ScottishPower Renewables (UK) Limited

Other UK Sites

Tidal Stream

England, Humber

0.5

Neptune Renewable Energy Limited

Wales, Ramsey Sound

1.2

Tidal Energy Limited

Northern Ireland, Strangford Lough

1.2

Marine Current Turbines Limited

Note: This is not a complete list of UK wave and tidal energy schemes. The Crown Estate has also leased areas of seabed for the test and demonstration facilities EMEC, around the Orkney Isles, and Wave Hub, off Cornwall. In addition, developers have publicised other projects. Some are existing assets where there is no contract between the developer and The Crown Estate (eg because the site is not part of The Crown Estate) while others are potential schemes which could in future be the subject of Crown Estate contracts.

*Sea trials only; not planned to be grid connected

Source: The Crown Estate. Note: This list is correct as of September 2011. The Crown Estate is continuing to lease further sites and readers are advised to visit our website for updates.

Figure 2

MAP OF PROJECTS WITH AGREEMENT FOR LEASE OR LEASE (SEPTEMBER 2011)

batch 1 folio 261.eps

Source: The Crown Estate. Note: See notes to table in Figure 1.

Response to Consultation Questions

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?

7. Wave energy and tidal energy have the potential to provide significant quantities of clean, carbon free electricity for the UK, due to the significant wave and tidal resources around the UK’s coasts. The Carbon Trust suggests that there is a technical wave and tidal resource of 79 TWh, which could meet 15-20% of national electricity demand (Carbon Trust, 2006).

8. The pace and extent to which this resource is exploited is uncertain, largely due to the fact that the generation technologies to exploit are still under development, and development in earnest (with significant industry interest) began only last decade. Consequently, scenario development is challenging, but for reference here are some indicators:

RenewableUK (2011) suggests developer appetite to deploy 2.17GW of capacity by 2020.

UKERC/ETI (2010) suggest deployment of 1-2GW by 2020 and 6-12GW by 2030.

DECC (2011) indicate a lower figure of 200-300MW by 2020, followed by significant deployment in the 2020s to reach 27GW by 2030.

9. The deployment of wave and tidal energy capacity could benefit the UK in the following ways:

Security of supply – The deployment of marine renewable capacity will improve the security of supply in the UK by reducing reliance on imported fossil fuels.

Decarbonisation—DECC (2010) has indicated that renewables could make a significant contribution to achieving the UK’s 2050 carbon reduction target under the 2008 Climate Change Act, by displacing the use of fossil fuels. The Committee on Climate Change has suggested that in order to achieve the 2050 target, the power sector will need to be largely decarbonised by 2030; and that renewables, nuclear and CCS technologies are central to the achievement of this aim.

Balancing the variability of wind—It is often thought that increasing the penetration of wind into the UK energy supply mix may be problematic due to its variability, and will require additional capacity to be kept in reserve. However, it has been argued (for example by Sinden, 2005; and BWEA, 2009) that wave and tidal power can balance against the variability of wind, as there is a relatively low correlation between the power output patterns of wind and marine energy, and a relatively strong relationship between seasonal wave power output and electricity demand. This could mean there is in a reduced requirement for backup capacity when wind, wave and tidal are combined.

Supply chain benefits—The development and deployment of wave and tidal devices in UK waters has the potential to create economic benefits, across the value chain from research to long-term operation and maintenance. In May 2011, The Crown Estate published a report indicating the potential costs and associated supply chain opportunities of developing and constructing the Pentland Firth and Orkney Waters projects. The report described a range of challenging technological, environmental, planning, economic and financial factors that will have to be overcome in order to progress these projects. £100 million could be spent on development and consenting activities for these projects by the middle of the 2010s. If statutory consents and investment are secured, and the projects progress through to installation and commissioning, then this would require £6 billion+ of capital expenditure towards the end of the decade (not including expenditure related to grid and other infrastructure upgrades) should the projects be built out completely. The forecasted pattern of expenditure is summarised in Figure 2 below:

Figure 3

FORECAST EXPENDITURE ON PENTLAND FIRTH AND ORKNEY WATERS PROJECTS

batch 1 folio 263.eps

Source: BVG Associates for The Crown Estate.

In addition to meeting domestic demand, there is potential for UK-based suppliers to export marine renewable goods and services globally; particularly if the UK can maintain its lead on technology development (as explored further in response to Question 4 below). We are engaging with the emerging supply chain as part of our supply chain events, held in various places including Scotland and Northern Ireland in the past year. This is helping to ensure that companies with the potential to enter the industry are aware of the opportunities – a programme of work we will continue to undertake.

10. Overall, this provides a strong case for government to support marine renewables.

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

11. Government support for technology development has been significant in value and very effective in helping make wave and tidal stream technologies make the transition from academic research to industrial development by start-up companies, and test and demonstrate full-scale prototype devices in the sea. This is evidenced by the progression of a number of companies, eg Pelamis Wave Power (formerly Ocean Power Delivery) and Marine Current Turbines. UK government bodies have collectively provided more support than that of any other country. As a consequence of this funding and the private investment it has catalysed, the UK has a global lead in marine renewables generation device design and testing.

12. However, government support for the industry to progress beyond this stage, towards full industrial design and manufacturing of generation devices, plus commercial project installation and operation, has been less successful to date. For example, the Marine Renewables Deployment Fund (MRDF), a scheme designed to support initial arrays of devices, was effectively unsubscribed, and the scheme’s design not fully re-evaluated when it became clear that the support on offer was not that which was essentially needed by the industry at the time, (although a sister scheme, the Marine Renewables Proving Fund, was successful in supporting the necessary prototype manufacturing and testing).

13. For a number of years, the industry has called for a long-term signal to attract the type and scale of investment necessary to progress further. A considerable amount of equity is needed to further develop technologies, and due to high initial technology risks, capital for early projects is also likely to be largely in the form of equity. For the industry to move further, it needs to have a clear sight of how technology and project investments will yield returns. For other renewables technologies (particularly renewable electricity technologies), this has and is being achieved through revenue support. Unfortunately, it is only presently in Scotland that banding of the Renewables Obligation for wave and tidal energy was undertaken in such a way that support levels were commensurate with project costs and risks; for the rest of the UK, the support has been too low. This is evidenced by industry behaviour; the vast majority of project development interest is in Scottish waters (see Figure 2).

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?

14. Concerning government support, the following insights may be suggested on reflection of the industry’s progress in the UK last decade:

The visibility and consistency of government support for marine renewables is a key determinant of investment decisions, and therefore a key driver of the rate of growth. Where support has been more visible (particularly in Scotland, with support from the First Minister), progress has been made faster.

As one amongst several types of low carbon generation to supply the UK’s future electricity needs, support for wave and tidal needs to fit in to wider and sometimes existing government policies and mechanisms (eg the Renewables Obligation). But the support must nevertheless meet the needs of marine renewables specifically, otherwise it will be ineffective (eg ROC band outside Scotland).

It is advisable to think systematically about how growth of the sector can be stimulated, to avoid situations where support of one kind is given but despite this, critical barriers hold back progress. For example, several years elapsed between test facilities (grid connections and data infrastructure) at the European Marine Energy Centre at Orkney became ready to use, and companies actually had prototype machines ready to use them; investment in the prototypes lagged investment in the infrastructure, and one without the other left the system incomplete.

15. In parallel, lessons learned in the industry include the following:

Marine renewables technology development is capital intensive; and the amount of capital necessary to successfully develop wave and tidal energy technologies, and the time necessary for development, is not necessarily a good fit with standard venture capital business models. While venture capital has had a positive effect in further development, investor perceptions are not entirely positive due to commercial requirements not being met, irrespective of technical progress.

Non-financial barriers, such as obtaining site consents, may present significant unexpected hurdles, on top of the engineering challenges inherent in technology development – and these hurdles may significantly delay development or make it more expensive – again despite success in technical progress. An example is the Marine Current Turbines SeaGen prototype at Strangford Lough. Such hurdles may be beyond the influence of any single company, and require coordination between the industry and multiple government bodies to resolve.

16. While the experience of other countries is relevant, the fact that the majority of recent work has been undertaken in the UK means there are fewer insights to reference. It is worth mentioning, however, that while the UK has significant indigenous wave and tidal resources, so do numerous other countries and there is clear potential for the industry to grow more internationally in future. Indeed, some companies (eg tidal technology developer OpenHydro) are already working across multiple jurisdictions.

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

17. Publicly provided funding for innovation (for research, development and demonstration) has been necessary in the past. It has been significant in value and effective, as described above in the answer to question two. The case for publically provided innovation funding has to date been made based on the following market failures facing the marine renewables industry:

Externalities—The current energy market and wholesale energy price does not reflect the true environmental and social cost of carbon (ie a negative externality). Measures such as the Renewables Obligation and EU Emissions Trading Scheme go some way towards penalising high carbon forms of energy and rewarding low carbon forms of energy; but not far enough to reflect the full costs of carbon. Consequently there has been an insufficient incentive to invest in low carbon forms of energy. Addressing these externalities in improved fashion partly motivates Electricity Market Reform and the Carbon Price Floor.

Risk appetite and capital availability – Linked to the above, there are significant risks associated with technology development which many types of investor are unwilling to bear (for example the lack of evidence of viability). Some forms of private equity are not well-suited to funding research and development activity as returns from R&D activity are too distant and uncertain, or funds are insufficient to deliver the amount of investment required. See the comment about venture capital funding for marine renewables technology development under question three.

The scale and duration of investment required—The capital intensive nature of development and time required for testing and demonstration (influenced by factors such as weather windows for installation) makes private investment challenging. This has implications for the scale and duration of public support. As a benchmark, it is estimated that Denmark spent £1 billion over 10 years bringing onshore wind from demonstration to full-scale deployment (BWEA, 2009); in return, however, it now enjoys an export market worth several £ billion per year (Aquamarine Power, 2010).

Knowledge spillovers—While intellectual property in generation technologies can be protected through patents, an accompanying range of knowledge and experience (eg installation methodologies) may not be protectable in practice, and information will flow to the wider sectors (competitors) or economy (eg through the supply chain or movement of personnel). The limit to what can be protected may cause investment to be lacking in some areas. Public funding, which often requires results to be published, may be necessary to meet the funding shortfall.

18. Today, some of these factors appear different to industry participants than they did several years ago. There have been significant steps forward in technology development, with technologies having developed more of a track record (eg Voith Hydro Wavegen LIMPET OWC plant now been operated for a decade). Capital availability for technology development is increasing due to the trend of recent years for large industrial equipment manufacturers to enter the market (for example Voith Hydro and Alstom, each of which has both wave and tidal technology programmes). However, from a project development perspective, technology risks appear high compared to other, more mature technologies. These factors mean the industry’s needs are shifting from a requirement for early stage innovation funding, towards a requirement for project-level demonstration funding. Yet in considering support, it is also important to recognise that:

The quantity and rate of investment which the private sector brings to marine renewables will be a reflection of the perceived market opportunity (ability to make sales).

Investment decisions will also be affected by events elsewhere in the energy industry and wider economy; a clear constraint at present is the disrupted state of global markets.

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

19. Wave and tidal energy face a number of barriers to development, some of which are common to other forms of renewable energy. They include:

Uncertainty of environmental impacts, and uncertainty caused by a lack of data on the environmental impact of marine energy devices; plus interaction with other sea users (eg shipping and military activities). This is a developing picture as further installations are made and their effects are monitored.

Consenting, including clarity of data/information requirements and the processes to manage project applications. This has changed in recent years due to the Marine and Coastal Access Act and other legislation, and the creation of new organisations including the Marine Management Organisation and Marine Scotland.

Grid access, given the geographical mismatch between areas of high wave and tidal energy and distribution/transmission network capacity to connect new generation. This is an evolving picture, partly due to grid upgrade plans and regulatory changes associated with offshore and onshore wind.

20. Supply chain capacity is sometimes cited as a barrier, but whilst this is true in other parts of the renewables industry (including offshore wind); it is not yet a major concern for marine renewables. Activities to manufacture and sell generation devices, plus work to design, install and operate generation projects, have not yet reached a scale where there is insufficient capacity; rather, it is a question of competition for interest with other business opportunities.

21. Previous experience in development of other energy technologies suggests that, while it is necessary to devote some attention to non-financial barriers, strong motives to overcome them are likely to occur only when there is a real commercial pull for projects. As such, while undoubtedly important, the barriers can be considered secondary to the issues of financial support discussed earlier; without this support, strong motives will not be present.

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?

22. Given that marine renewables is an emerging industry, the supply chain is embryonic on a global scale. The UK is leading development, with more technology companies active and projects being developed here than any other country in the world. The UK is well positioned for further industrial growth, given the country’s strengths in related sectors such as offshore oil and gas and offshore wind.

23. Historic experience, including the renewables industry (eg wind energy in Denmark), points to the importance of a strong domestic market at first for a country to develop a leading export position in future. There is no doubt that the extent of the UK’s wave and tidal resources are sufficiently large to underpin this market, and The Crown Estate’s activities in leasing sites to access these resources are helping it to grow.

24. A number of studies have been undertaken on the marine energy supply chain. For example, BIS (2011) estimated that there were 550 people employed in wave and tidal in 2009-10. Sgurr Energy & IPA (2009) considered the likely expenditure pattern and supply chain associated with future Scottish marine renewable energy projects. Based on a survey of supply chain companies, the study concluded that 53% of capital expenditure would be retained in Scotland, and a further 30% in the rest of the UK, with only 17% relating to imports; suggesting an expectation of a strong indigenous supply chain in the future.

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

25. We would make the following recommendations about future government support for marine renewables:

26. The government should make a clear long term commitment to the marine renewables industry – creating greater certainty for developers, investors and manufacturers.

27. Financial support which is truly commensurate with the costs/risks to the industry and appropriate to the industry’s needs at the time; but crucially also with foresight of how incentives today will drive investment for the future. At present there is a need for financial support to ensure the roll-out of initial arrays, but there also needs to be a commitment now to an appropriate level of support for full-scale commercial developments in the medium to long term. This is particularly important in view of the significant investments required in technology development and manufacturing.

28. There are clear interdependencies between the level of government ambition and support for a given technology; the degree of commitment and investment by industry; the level of cost reduction achieved; and the level of support required through revenue support mechanisms such as the Renewables Obligation or Feed-in Tariff. A climate of strong government support and commitment is a catalyst to industry investment, which as capacity is built out, is also likely to lead to significant cost reductions (due to economies of scale and learning). As and when such cost reductions are achieved, the need for government support will diminish. The implication is that development could be significantly aided by a commitment now to provide support in such ways and for a period of time that helps puts wave and tidal energy on a path to becoming cost competitive (reaching cost parity) with other forms of energy.

29. At present, there are clear opportunities to design and implement financial support measures that are commensurate with cost/risks, which drive investment for the future and help put marine renewables on a cost competitive path. These opportunities include:

The Renewables Obligation Banding Review, which is considering revenue support levels for the whole of the UK that would support projects in the period before feed-in tariffs are introduced.

Electricity Market Reform, with the introduction of new feed-in tariffs.

The Green Investment Bank.

Q8. Are there any other issues relating to the future of marine renewables in the UK that you think the Committee should be aware of?

30. We have no further comments to add.

September 2011

References

Aquamarine Power (2010), The Danish wind industry 1980—2010: Lessons for the British marine energy industry.

BWEA (2009), Powering a Green Economy: Wind, wave and tidal’s contribution to Britain’s industrial future.

Carbon Trust (2006), Future Marine Energy.

Carbon Trust (2011), Accelerating Marine Energy.

DECC (2010), 2050 Pathways Analysis.

RenewableUK (2011), Wave and Tidal Energy in the UK: State of the Industry Report.

Sgurr Energy & IPA Energy & Water Economics (2009), Marine Energy Supply Chain Survey.

Sinden, G (2005), Diversified renewable energy portfolios for the UK, BIEE conference paper.

The Crown Estate (2011), Wave and Tidal energy in the Pentland Firth and Orkney waters: How the projects could be built.

UKERC/ETI (2010), Marine Energy Technology Roadmap.

Prepared 15th February 2012