Energy and Climate Change Committee - Draft Energy Bill: Pre-legislitive ScrutinyWritten evidence submitted by Aquamarine Power
Summary
We welcome the Bill’s intention to provide clarity by mid-2013 around the FIT strike price for marine energy—in line with the Energy and Climate Change Committee’s report on the future of marine renewables in the UK.
However it is the strike price for marine energy after 2017 which is critical for the growth of the marine energy industry. We remain concerned that early-stage investors will find it hard to make an investment case for early arrays without clear sight of the market towards 2020 and beyond.
It would be welcome if the proposed Final Investment Decision (FID) facility, where DECC will give comfort to an investor of future strike price, is available to investors in marine energy projects.
If DECC is not able to give clarity regarding strike prices and operation of the CfD by mid-2013, we suggest the UK and Scottish governments consider extending the current RO/RO (Scotland) to 2020.
We remain committed to working with DECC to ensure a stable long-term market for marine energy in the UK and will work with others in the industry to give DECC evidence on strike price and expected build out scenarios up to 2020.
Competitive price setting. We still have fundamental concerns regarding how this will operate in practice. Previous attempts to do this in the UK through the Non Fossil Fuel Obligation in the 1990s were a failure—and were a major contributor to the UK losing its early technology lead in wind energy. Competitive price setting is an academic exercise which does not work in practice.
We do not agree that the CfD mechanism will inevitably lead to a lower cost of capital. The mechanism is untried and will therefore be viewed as more risky, which may initially lead to a higher cost of capital (and therefore impact on consumers).
Contracts should be set at 20 years in order to maintain a reasonable return, otherwise investors will discount last five years. A 20 year contract length is in line with current contracts under the RO and the design lifetime on renewable energy technologies.
The majority of the UK’s marine energy development sites are in Scotland. The Scottish Government retains powers to set the Renewables Obligation in Scotland. It is crucial therefore the Scottish and UK governments work closely together to ensure a coherent, effective and seamless package of reforms will be delivered, fully aligning the respective powers of the Scottish and the UK parliaments. The proposals should ensure the Scottish Government has a statutory role in the EMR and CfD institutional framework, a statutory ongoing role in the governance of National Grid and a statutory role for Scottish Ministers in formulating the Strategy and Policy Statement for Ofgem to better align the work of the regulator with the policy aims of government.
Comments
1. The next ten years will be critical to the success of the UK’s world-leading marine energy industry. The support of the UK and Scottish governments is vital. Making energy from the oceans is a major challenge—both technologically and economically. In order to reach the point where marine energy is competitive with other forms of energy, clear and consistent support is required
2. The swift, clear and successful implementation of Electricity Market Reform is the single most important determinant of whether the industry will succeed in the UK, or develop elsewhere.
3. Investment certainty in the early years is critical, and investors require commercial certainty to outweigh technology risks and uncertainty. It is essential that the well-earned momentum in the industry is not lost. The UK will not get another opportunity to build a marine energy industry. We now know that a minimum investment of £100 million per technology is required, not including the cost of projects. This level of investment required to commercialise a technology would make another start prohibitive. Unless the relatively advanced technologies get over the line this will be the end of the industry.
4. We welcome the support of the UK and Scottish governments to date. It is through this support that the UK has succeeded in taking a global leadership position in a number of technologies. It is worth re-iterating that every £1 of grant support to leading marine energy developers has leveraged £6 of inward investment. Companies such as ABB, SSE, Siemens, Rolls Royce, Vattenfall and Alstom have all invested in marine energy in the UK. If Britain is seeking a growth agenda, marine energy offers the prospect of economic growth, inward investment and high value, skilled green collar jobs.
5. We are grateful for the introduction of supportive grant schemes, including the UK Marine Energy Array Demonstrator fund and the Scottish Marine Renewables Commercialisation Fund, and the intent to introduce five ROCs for wave and tidal technology across the UK.
6. But in order to scale up the investment required, clear market signals for 2017 onwards are required.
7. What incentive is there for companies to invest the £10s of millions required to support the first marine energy arrays in the run up to 2017, without a clear idea there will be a clear and consistent market for these technologies in the decades ahead?
8. There are at present a number of developers pulling together equity for the MEAD and MRCF projects. Whilst these will fall before 2017 they will be part of larger projects and therefore for the schemes to work and give best chance of equity coming through clarity is essential in 2013.
9. It is therefore crucial the EMR process not only gives a very clear signal on how the mechanism will work up to 2017, but offers clarity as early as possible on the operation of the market thereafter. If DECC is not able to give clarity regarding strike prices and operation of the CfD by mid-2013, we suggest the UK and Scottish government considers extending the current RO to 2020.
10. The RO is an effective and proven mechanism which has succeeded in delivering significant renewables investment and growth in the UK. Extension of the RO would be considered a very positive signal by the industry and would incentivise investment decisions in the medium term.
11. The implementation of auctions or competitive price setting may have attractions from a theoretical economic standpoint but there is scant evidence to suggest they work in practice. There is a genuine risk the implementation of competitive price setting will result in significant under-deployment and the UK failing to meet its renewable aspirations and the economic benefit to business and consumers which will result.
12. The evidence of the UK Non Fossil Fuel Obligation is testament to this. Auctions incentivise low bids which subsequently do not get built. There were five NFFO tranches offered between 1990 and 1998. Over the five NFFO rounds, contracts for 2,680MW of wind power capacity were awarded; by 2000 only 395MW were operational (DTI, 2001). Why will a policy instrument which failed so spectacularly in the past somehow succeed in the future?
Auctions are Fundamentally Flawed as a Price Discovery Mechanism
13. The auction structures mentioned in the EMR will not lead to reliable price discovery. In competitive market segments there will be a tendency to bid over-enthusiastically, impairing project delivery whilst in uncompetitive markets there is the potential to abuse market power. In pre-commercial market segments, such as marine renewables, there will be a small number of competing firms and a number of other non-financial barriers to be overcome prior to power production—including planning, and project technology. Under such a scenario, a single developer would have the potential to skew the price offered and block the market to all other early-stage developers. It will become a “race to the bottom.”
14. As a medium term ambition the Government has proposed to enter all low carbon technologies into a single auction and hints at penalties for non-delivery. Neither of these options works. The single auction approach overlooks the fundamentally different financing, operational and investment characteristics of different technologies, at different stages of development, whilst the penalty for non-delivery is not suited to the UK’s protracted planning and grid development regimes and significantly increases the risk adjusted development cost as well as acting as a barrier to entry to new market players.
15. It is instructive to examine the experience of using the Non Fossil Fuel Obligation in the UK. The introduction of the NFFO in the 1990s provided a price support mechanism for renewable energy developers to compete for premium priced energy contracts. The NFFO scheme was implemented in 1990s and was originally intended to support nuclear energy as part of a move to privatise the industry. In total there were five NFFO funding tranches during the decade which attracted bids from renewable and nuclear project developers. Bidders competed primarily on price; the lowest prices received government allocated capacity first. The development of the wind energy sector in the UK is illustrated in Figure 1.
16. Due to the competitive nature of the NFFO scheme, the average price of wind energy reduced from 11p to 2.9p/kWh over the decade (Department of Trade and Industry (DTI), 2001).
17. While the NFFO funding rounds assisted in advancing the competitiveness of renewable energy with fossil fuels, contracts awarded under NFFO 1 and 2 expired in 1998 and therefore developers had a fixed period of time to maximise energy production under premium prices.
18. This restriction put a strain on existing manufacturing facilities, forcing developers to import turbines that could be rapidly installed and commissioned. At the same time, a focus on oil and gas exploration diverted UK attention away from developing a wind energy sector.
19. Foreign wind turbine manufacturers were also reluctant to establish a UK presence due to the inconsistency in allocated wind energy capacity in each NFFO funding round. This insecurity was compounded further by an average three-year consenting period, which reduced the amount of time available during which energy could be produced under contracted premium prices. Over the five NFFO rounds, contracts for 2,680MW of wind power capacity were awarded; by 2000 only 395MW were operational (DTI, 2001)
20. We do not see how an auction system can be effectively implemented, and an ineffective auction system will seriously undermine the ability to deliver the Government’s carbon and renewable objectives
About Aquamarine Power
21. Aquamarine Power is a wave energy company, headquartered in Edinburgh.
22. The company is currently installing its second full-scale device—the 800kW Oyster 800 at the European Marine Energy Centre (EMEC), Orkney. The array will comprise three Oyster wave power devices, with two further devices to be installed in 2012 and 2013.
23. The project is being supported through a groundbreaking £3.4 million loan with Barclays Corporate—the first time a UK marine energy project has succeeded in securing bank debt finance. The loan will be repaid over five years from revenue generated by the scheme.
24. The company previously installed a single full-scale 315kW Oyster 1 device at Billia Croo in 2009.
25. Aquamarine Power’s Oyster wave power technology captures energy in nearshore waves and converts it into clean sustainable electricity. In simple terms, Oyster is a wave-powered pump which pushes high pressure water to drive a conventional onshore hydro-electric turbine.
26. Aquamarine Power has raised over £70 million of private and public funding to date including £15 million investment by global power and automation company ABB. Aquamarine Power’s investors also include SSE (Scottish and Southern Energy plc), the UK’s leading generator of renewable energy, Scottish Enterprise and the Environmental Energies Fund managed by Scottish Equity Partners.
27. The company has a clear route to market for its Oyster device. In 2009, Aquamarine Power signed a development agreement with SSE Renewables to develop up to 1GW of Oyster wave farms. In 2010, Aquamarine Power was awarded a 200MW lease option in partnership with SSE Renewables as part of world’s first seabed leasing round for wave and tidal projects. The company also has a 40MW lease option for a proposed wave energy site on the Isle of Lewis.
28. The company’s Chief Executive Officer Martin McAdam and Chief Finance Officer Richard Round would both welcome the opportunity to meet with members of the Select Committee and give evidence if required.
June 2012