HC 1624 Energy and Climate Change CommitteeMemorandum submitted by MeyGen

(I) About MeyGen Ltd

MeyGen Limited is a joint venture between Morgan Stanley (45%), independent power generator International Power GDF SUEZ (45%) and tidal technology provider Atlantis Resources Corporation (10%), formed to develop the Inner Sound tidal site allocated through The Crown Estate Pentland Firth and Orkney Waters leasing programme.

MeyGen is solely dedicated to the engineering, development, and execution of a tidal energy project with an in-house team of specialists. All three shareholders have previous experience within the tidal energy sector and the consortium has the expertise, financial strength, commitment and ability to develop the Inner Sound project in a manner that provides the marine energy industry with a benchmark that will assist in taking it from its current nascent stage to commercial reality.

The Inner Sound project is the largest tidal stream energy project in the world, and is considered by many as the “Crown Jewel” site in the Pentland Firth, with tidal flows that offer some of the best commercial potential in Europe. The project has been developed over past four years by a dedicated UK team, with financial backing from Meygen’s shareholders.

MeyGen’s first milestone is to install a 20MW array as a proof of commercial concept and ultimately build out 398MW of capacity.

(II) Summary

The growing marine energy industry is strongly represented by a range of Government working groups (eg Marine Energy Programme Board) trade associations (eg European Ocean Energy Association, Renewable UK, Scottish Renewables) and industry collaborations (eg The Crown Estates Developers Forum). A number of reports have been written which examine the opportunities and threats to the industry as well as attempting to quantify the scale of the potential market and the barriers to making this market commercially viable.

We welcome the enquiry by the Energy & Climate Change Committee into the Future of Marine Renewables in the UK and believe that it is well timed to consolidate and enhance the debate ahead of key policy decisions such as RO Banding due this year and the beginning of next year.

Strong political leadership and commitment, as demonstrated by a robust policy framework, is an essential “green light” for private sector investors to continue their commitment to the sector. The continuation of these clear, positive market signals should ensure significant capital will continue to be drawn into the sector.

We do not intend to reiterate elements of the debate that have been made historically but instead focus on specific policy measures and decisions which the UK government might consider appropriate to take in the short term. If implemented, we believe these will have a materially positive impact on the ability of the utilities and OEM’s of marine technology equipment to deliver the first commercial proof-of-concept projects, building on the earlier successes of prototype testing and development. By making the transition from prototype to commercial proof of concept, the industry will have achieved a key milestone, comparable to that which the offshore wind sector achieved in the 1990’s which led directly to that sector’s successes today. These specific recommendations are:

Provide 5 ROCs/MWh for marine renewable projects across the UK.

With respect to the New Entrants Reserve fund (NER300), provide Member State guarantee to European Investment Bank in the event of a successful UK marine energy project.

Ensure pre construction allocation of £20 million Low Carbon Innovation funding to projects of the right size to serve as representative proof of commercial concept (minimum 5 units).

Provide clear mandate to the Green Investment Bank (GIB) in relation to marine projects in line with Coalition Agreement commitment.

Explore tax relief for activities relating to marine energy project delivery.

(III) Detailed Answers to the Inquiry Questions

Question 1: What are the potential benefits that marine renewable could bring to the UK and should Government be supporting the development of these particular technologies?

1. The UK has established a technology lead in this sector with facilities at the European Marine Energy Centre (EMEC), the National Renewable Energy Centre (NaREC) and Wavehub that are capable of supporting global marine project pipelines in the same way as the Danish and German wind sector now supports offshore wind assets.

2. The UK has a national asset which, if appropriately exploited, could materially reduce the need for reliance on energy imports. The tidal energy sector specifically could deliver 5-10% of UK electricity demand from a reliable, predictable and domestic source which is decoupled from fossil fuel price.

3. The sector could draw inward investment and long term economic benefits to peripheral regions of UK through ongoing operations & maintenance facilities and professional services.

4. The sector has a number of distinctive characteristics which enable it to compliment other renewable sources in the generation mix and ensure maximum penetration of renewable electricity. Tidal stream energy in particular:

5. Is close to shore (thereby minimising offshore infrastructure costs):

(a)has a compact footprint (thereby limiting the areas of seabed that are used for development);

(b)has high energy density (thereby limiting the quantities of raw materials used in production); and

(c)is reliable and predictable (thereby creating a range of commercial and technical benefits).

Question 2: How effective have existing Government policies and initiatives on marine renewables been in supporting the development and deployment of these technologies?

6. We recognise and appreciate the many years of support that successive governments have given to the marine renewable energy sector. We welcome the Coalition’s commitment to “introduce measures to encourage marine energy” [1] and we were encouraged by Minister of State Greg Barker’s speech to the Renewable UK Wave and Tidal Conference [2] where he reiterated that the “development of the sector is explicitly written into the fabric of the Coalition Agreement”. Strong political leadership and commitment, as demonstrated by a robust policy framework, is an essential “green light” for private sector investors to continue their commitment to the sector. The continuation of these clear, positive market signals should ensure significant capital will continue to be drawn into the sector.

7. Early public sector funding for EMEC established a facility which has reduced prototyping costs and schedules through the provision of power off-take infrastructure, background planning permission and implementation services.

8. Funding from TSB, Carbon Trust and ETI has leveraged private sector investment in prototypes and produced scalable proof of concept units suitable for investment and mass production by large OEM’s.

9. Renewable energy and CO2 reduction targets have guaranteed a future market across all renewable technologies, although there remains lack of clarity about the size of the role Government expects marine energy to play. There is also a risk that too little ambition for the sector will not provide the longer term certainty that today’s significant investments require.

Question 3: 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?

10. The UK is currently at the forefront of marine renewable development and therefore other countries are looking to learn from our experiences and incorporate these into their marine energy programmes.

11. A close parallel to the likely growth of the marine renewable sector is the offshore wind sector (of which the UK has the largest installed capacity in the world) and a study of its heritage will serve to highlight the key steps that a successful UK based marine energy industry is likely to require.

12. Today’s leading offshore wind technology suppliers have charted a similar course with each securing early multi turbine demonstration projects (eg Vindeby, Utgrunden, Beatrice, Tunø Knob) supported by Government capital grants[3] , a medium term project pipeline (eg North Hoyle, Nysted), and backed up by longer term market pull (eg Round 2/3). With this track record and background, investments are currently being made for UK based manufacturing facilities catering for Round 3.

13. Offshore wind has enjoyed a stable support mechanism and Government has been responsive to rising cost bases over time by increasing the ROC banding. This approach has led to the successful deployment of over 1000MW capacity.

14. The UK offshore Oil and Gas industry has strong parallels with the pioneering of innovative technology and engineering achievements that continue to this day from which both equipment and intellectual “know how” is exported on a massive scale around the world. The knowledge base that the UK has accumulated in both this sector and offshore wind can only enhance the development of the marine renewables sector as it looks to make the next step into commercialization.

Question 4: Is publicly provided innovation funding necessary for the development of marine technologies and if so, why?

15. The industry is now delivering on previous years’ developments: the lessons learned through unit monitoring and the demonstration of multiple deployment methods are now being built into the design of future deployments. With political support, technology tests, sites, grid connections and planning work, nearly all the pieces are now in place for a proof of commercial concept: the final piece is to bridge the technology gap from single unit test to multiple unit deployment.

16. However, without proven reliability, availability or performance it is difficult to quantify the risks of pilot projects to the level that is required for many conventional investment processes. Therefore public innovation funding is essential as match funding to reduce the amount of “at-risk” equity investment and increase the probability of marine renewable projects securing capital from investors.

17. We welcome funding announcements from the EU (NER300) and UK Government (Low Carbon Innovation Fund). Up-front funding helps to mitigate the one off First of a Kind (FOAK) costs that are inevitable as new products & processes are designed from the bottom up.

Question 5: What non-financial barriers are there to the development of marine renewable?

18. Grid. It is well understood that the timing of planned upgrades and cost of access to the transmission system has been a constraint to renewable energy development in peripheral areas of the UK, particularly with grid capacity not being available in some cases until beyond the 2020 horizon. We are encouraged that this issue is being addressed through NGETs “connect and manage”, Ofgem’s Project Transmit and DECC’s Transmission Charge Adjustment consultation (under Section 185 of the Energy Act 2004). We await the proposals on the following issues:

(a)Transmission charging remains high in peripheral areas where marine renewable energy development is taking place, when in other areas generation receives a payment for being connected.

(b)Efficient coordination of upgrade programmes carried out by the network owners as a result of applications made and the interaction with the OFTO tendering periods. This is required to maximise the early delivery of capacity and minimise the underwriting exposure to individual projects.

19. Planning. Good progress has been made on Marine Spatial Planning and monitoring guidance in areas where marine renewable development is taking place. The establishment of the MMO and Marine Scotland means there are now dedicated organisations responsible for marine planning. The industry would benefit from clarity on the likely pre- and post-construction planning conditions and monitoring requirements that will be needed for early marine renewable developments and especially any circumstances under which shutdowns are being considered as a mitigant.

20. Technology testing. Project investors require “hours on the clock” testing prior to being able to sanction large capital costs for arrays. Good progress is being made with EMEC but technology companies and development companies alike need to see that there is a future market in order to be able to bolster these crucial early single unit technology years.

Question 6: 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?

21. The UK has a strong heritage in Oil and Gas fabrication, retrofitting and servicing, which means that there are a number of existing yards capable of manufacturing the key components of marine energy systems, for example foundations.

22. Due to the compactness of marine energy systems in comparison with offshore wind, fewer modifications should be required to yards to accommodate the units.

23. There are likely to be a number of factors which mean the assembly, test, load out and O&M facilities may be located in close proximity to project sites within the UK. This would mean locally based repair & maintenance crews, operations and support personnel would be required. These facilities would greatly assist the development of remote communities such as those in the North of Scotland who are currently witnessing a downturn in young population retention (brain drain) due to the lack of opportunity in the region. It is strongly believed that skills and job generation in such an exciting sector will help rectify this.

24. To date, all marine renewable energy equipment has been fabricated/manufactured in the UK. The supply chain is prepared to meet the challenge of scaling up on the basis that the support mechanisms are in place to demonstrate a future market.

Question 7: What approach should Government take to supporting marine renewables in the future?

25. The industry stands at a critical juncture where short term and specific Government action will greatly reduce the risk that the momentum which has been built up over the past few years is lost. Specific measures are:

26. Provide 5ROC/MWh across the UK for marine renewables. As funds are only allocated on commissioning of plant, the RO can be seen to reward success and does not create a liability for UK Government during the development phase.

27. NER300:

(a)The European Investment Bank has indicated that NER300 funding can be supplied at pre-construction stage if underwritten by Member States. Should UK Government agree to provide this underwriting (as DECC are considering for CCS projects [4]), this would greatly de-risk projects.

(b)The Government has submitted 7 CCS projects and 4 marine renewable projects under NER300, but will only get support for a maximum of 3 projects. In this competitive landscape we welcome DECC’s undertaking “priority is being given to the ocean category as a reflection of national priority” in the NER300 programme[5]

28. Low Carbon Innovation Fund

(a)Projects should be of sufficient scale to act as meaningful commercial proof of concepts (minimum 5 units)

(b)Funding should be disbursed as a pre-construction CAPEX

(c)Clear permission should be given to allow fund to combine with other funds up to the EU State Aid limits, and no artificial restraints should be imposed.

(d)Projects should remain eligible for enhanced ROCs in whichever jurisdiction they are located

29.Other measures:

(a)Provide clear mandate to GIB in relation to marine projects in line with Coalition Agreement commitment to introduce measures to support marine energy

(b)Consider tax relief for activities associated with marine energy development.

30. The Industry needs clear signals to justify continued investment therefore continuity and stability through RO to EMR transition is essential. The Industry needs to understand a range of specifics arising from EMR such as the level of FIT for marine renewable, eligibility of tidal energy for capacity payments and route to market under FIT CFD and how this will affect investment decisions.

Question 8: Are there any other issues relating to the future of marine renewables in the UK that you think the Committee should be aware of?

31. It is essential that several commercial proof of concept or demonstrator arrays are established in the next 2-3 years and we believe Government policy and support should focus on this goal. Experience from the offshore wind industry shows that these projects act as a springboard for the medium term 50-100MW projects. The industry has managed to develop from an embryonic technology innovation “experiment” to an industry that has major institutional investors on the cusp of investing substantial funds in order to develop the market. The opportunity to convert this periphery interest from external funding is now upon us.

32. The industry should not be categorized purely as a way to assist reduces CO2 targets by 2020. There is significant potential for development into a significant growth and export industry for UK plc over the next 10–20 years. The industry requires the government to continue its faith in the industry and build upon the knowledge and expertise that has already been developed.

References:

1 http://www.cabinetoffice.gov.uk/sites/default/files/resources/coalition_programme_for_government.pdf

2 http://www.decc.gov.uk/en/content/cms/news/gb_rukspeech/gb_rukspeech.aspx

3 http://www.beatricewind.co.uk/press/viewitem.asp?id=15

4 http://webarchive.nationalarchives.gov.uk/+/http://www.berr.gov.uk/files/file47340.pdf http://www.decc.gov.uk/assets/decc/What%20we%20do/UK%20energy%20supply/Energy%20mix/Carbon%20capture%20and%20storage/1015-guidance-eu-funding-mechanism-ner300.pdf

5 http://www.decc.gov.uk/assets/decc/what%20we%20do/uk%20energy%20supply/energy%20mix/renewable%20energy/ored/1084-decc-guidance-ner300.pdf

September 2011

Prepared 15th February 2012