Wave and tidal energy in the Pentland Firth and Orkney waters. Delivering the first phases of projects

Transcription

1 Wave and tidal energy in the Pentland Firth and Orkney waters Delivering the first phases of projects A report from The Crown Estate with input from industry September 2013

2 This report has been published by The Crown Estate as part of our enabling work to support development of the Pentland Firth and Orkney waters wave and tidal projects. This work aims to accelerate and de-risk the development process, looking at a range of key issues. Work is selected, commissioned and steered by The Crown Estate in close discussion with the project developers. The analysis and industry interviews for this review were undertaken by Arwas & Associates, Falgo and Big Blue Stuff. Supporting analysis was provided by Renewable Energy Systems, Carbon Trust and Royal HaskoningDHV. For more information on The Crown Estate s work in wave and tidal energy, see or contact waveandtidal@thecrownestate.co.uk. Disclaimer While The Crown Estate and other organisations contributing to this report have taken reasonable steps to ensure that the information is correct, they give no warranty and make no representation as to its accuracy and accept no liability for any errors or omissions. Neither The Crown Estate nor other organisations are providing investment advice in this report and readers must take their own view on the merits of, and the risks attached to, any investment decision they undertake. Readers may wish to obtain professional advice. Nothing in this publication is intended to be, or should be interpreted as, an endorsement of or recommendation for any supplier, service or product. Dissemination statement This report (excluding the logos) may be re-used free of charge in any format or medium. It may only be re-used accurately and not in a misleading context. The Crown Estate must be acknowledged as holder of the copyright of the material and use of it must give the title of the source publication. Where third party copyright material has been identified, further use of that material requires permission from the copyright holders concerned. 2 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

3 Contents Executive summary 5 1 Introduction UK wave and tidal energy 1.2 The Pentland Firth and Orkney waters projects 1.3 Objectives of this review 1.4 About this report 2 Key factors affecting development Market confidence Readiness of technologies Creation of grid infrastructure Certainty of environmental impacts and consents Connections between factors 16 3 Conclusions and recommendations

4 4 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

5 Executive Summary The UK has great potential for wave and tidal energy which various organisations in industry and government are working in earnest to exploit. Eleven commercial-scale wave and tidal current energy projects have been under active development in the Pentland Firth and Orkney waters since Each project is being developed in phases. The first phases of some of the projects were originally expected to be installed in Today, a combination of factors suggests this will occur later. This review has sought to clarify the factors which are currently impeding installation, and identify recommendations for industry and government to help resolve them. It has also evaluated the impact that the recommendations could have on timing of the first phases. We have found that the main factors which present key risks risks with potential to cause delays of two or more years are in the following areas: Market confidence Readiness of technologies Creation of grid infrastructure Certainty of environmental impacts and consents. The recommendations are as follows: Key risk factor Market confidence Readiness of technologies Creation of grid infrastructure Certainty of environmental impacts and consents Recommendations 1 Government should clearly signal long-term support for creation of the wave and tidal industry, including the period beyond that covered by current policy mechanisms. 2 Government should ensure overall financial support for project construction is sufficient, and is available at the right time, to attract private investment from major energy asset owners. 3 Industry should, as far as possible given commercial considerations, be open about the projects costs, to help government manage the risk of providing too much financial support and also to evidence the case for the projects wider economic benefits. 4 Industry and government should work together to gather evidence as it emerges that the investments which industry is making, plus the government support for these investments, are leading towards the first phases of the projects being realised, and will lead to the remainder of the portfolio being built out on a commercial basis. 5 Wave: Government should evaluate how best to provide support for wave energy technologies in a way which will help the rate of private investment in technologies to increase, and be sustained, to make the technologies commercially viable. In our view, the most credible way this could be achieved is by replicating what is happening with tidal technologies: acquisition and ongoing development by major industrials. 6 Tidal current: Government should fund technology programmes which accelerate development of project design techniques, balance of plant technologies and installation methods, prioritised on the basis of engineering problems facing the first phases; and should provide appropriate incentives to supply chain manufacturers to engage earlier than they might otherwise given their other commercial opportunities. 7 Both wave and tidal current: The Crown Estate should provide and manage seabed rights for sites which help technology developers test and demonstrate their technologies in ways appropriate for preparing for the first phases. 8 SHE Transmission, the electricity grid owner, should make its progress on the Orkney transmission upgrade transparent and submit a needs case to Ofgem, referencing the contracted capacity, in a manner timely to the project development plans for the first phases. 9 Ofgem and government should be mindful that whilst the Orkney needs case might have uncertainties, stemming from wave and tidal projects constituting a significant part of the contracted capacity and the devices being at early stages of readiness, a decision not to approve the needs case could have a circular delaying effect on development progress of both first and subsequent phases of the projects. 10 Government and Ofgem should decide upon, and implement, arrangements which ensure that the net effect of use of system charges for the projects are at a level which makes the projects financially viable. These arrangements should be enduring for the full duration of the projects first and subsequent phases. 11 Marine Scotland, The Crown Estate and others should form a technical programme which develops and publishes a route map to the first phases being consented in order to address uncertainties related to science and data collection. 12 Marine Scotland plus its advisors and Pentland Firth and Orkney waters project developers should plan ahead, in view of the developers plans and the route map, to ensure that sufficient and appropriately skilled resources are in place to manage consent applications as swiftly as possible. Given the connections between the key risk factors, an important finding from our review is that to be effective the recommendations must be implemented as a complete package. The Crown Estate is discussing with the Scottish Government and the Department of Energy and Climate Change (DECC) how best to put coordination into practice. 5

6 1 Introduction 1.1 UK wave and tidal energy The UK has wave and tidal energy resources around its coasts which equate to a total potential generation capacity of the same order of magnitude as its electricity demand 1. Previous studies have estimated that 20% of UK electricity could be generated from wave and tidal current energy 2. This potential has been of interest for several decades. Since around the turn of the millennium, various industry and government organisations have been working to prepare to exploit it. This work has included a mixture of research, development and demonstration of prototype generation devices 3, sometimes at bespoke testing centres; and development of project sites of a range of sizes and purposes, including steps such as preparing environmental impact assessments and arranging grid connections. Most sites are on the offshore seabed in UK territorial waters and have been leased by The Crown Estate. 1.2 The Pentland Firth and Orkney waters projects Between 2008 and 2010, The Crown Estate ran a leasing round in an area around the Pentland Firth and Orkney waters, off the north coast of the Scottish mainland and around the Orkney Islands. This led to the creation of eleven projects (six wave and five tidal current 4 ) with a total potential capacity of 1,600 MW. The individual capacities of the projects range between 50 MW and 400 MW 5. Each of these projects is planned to be developed and constructed in multiple phases, with each phase comprising a portion of the total potential capacity. Originally, the first phases of several projects were planned to be installed in 2014 to A combination of factors now suggests that this will occur later. It is difficult to tell exactly when, because of the complexity of these factors and inter-relationships between them. 1.3 Objectives of this review The purpose of this review was to: Clarify the factors which are impeding installation of the first phases of projects Identify recommendations for industry and government to help resolve the factors Evaluate the impact these recommendations could have on timing of the first phases if implemented collectively. The findings are likely to interest companies in the emerging industry, in evaluating the commercial opportunities presented by the Pentland Firth and Orkney waters projects; and parts of government, particularly the Scottish Government, its development agencies and Councils, which are seeking economic benefits from the projects. 1.4 About this report This report is structured as follows: Chapter 2 summarises the context, main issue(s) and recommendations for each key risk factor (see box on review approach) Chapter 3 draws together the set of recommendations, and makes suggestions about how they may be implemented in practice. Some details in this report update those presented in an earlier document, Wave and tidal energy in the Pentland Firth and Orkney waters: How the projects could be built, which The Crown Estate published in May This report provides new information about the key risk factors and timing. However, other information, including the stages of development that each project is expected to undergo and the products and services involved at each stage, remain broadly as set out in the 2011 report and readers are directed to it for such background information. Map of Pentland Firth and Orkney waters projects Projects comprising the 2010 leasing round Wave Site Tidal Site Costa Head Westray South Lashy Sound Site Name Capacity (MW) Farr Point 50 West Orkney South 50 West Orkney Middle South Marwick Head West Orkney South Brough Head EMEC (Billia Croo) Brims Tidal Array EMEC (Fall of Warness) EMEC (Shapinsay Sound) EMEC (Scapa Flow) West Orkney Middle South 50 Marwick Head 50 Brough Head 200 Costa Head 200 Westray South 200 Brims Tidal Array 200 Brough Ness Brough Ness 100 Farr Point Inner Sound Ness of Duncansby Ness of Duncansby 100 Inner Sound Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

7 Progress with project development Since the end of the leasing round, the developers of the 11 Pentland Firth and Orkney waters projects have made significant and tangible progress. Key activities and milestones include: Carrying out survey work to gather engineering and environmental data to inform project engineering designs and environmental impact assessments Issuing environmental scoping studies (9 of 11 sites to date), and submitting an initial consents application (one project) Obtaining grid connection agreements for the first phases of projects (8 of 11 sites). The total capacity covered by connection agreements is nearly 1,000 MW (over 60% of the total potential capacity of the projects) 6. In addition, a number of public bodies have been undertaking supporting work. These organisations include The Crown Estate, which through its enabling actions programme is working closely with the project developers to accelerate and de-risk the development process. Other organisations providing support include: Marine Scotland, which is carrying out environmental research work and preparing to assess consents applications Scottish Enterprise and Highlands and Islands Enterprise, which are undertaking a range of activities to promote economic growth through development of the projects, for Scotland as a whole (including through the Saltire Prize initiatives) and locally to the projects. This includes establishing the Pentland Firth and Orkney waters area as a Marine Energy Park Orkney Islands Council and The Highland Council, which are also working on various initiatives related to growing education and research, plus infrastructure provision, including upgrades to port infrastructure. These organisations and some others collectively form [or constitute] the Pentland Firth and Orkney waters Leadership Forum, which meets regularly to discuss how the activities can be coordinated and communicated. Communications activities include public information days and similar events, a number of which have been run on Orkney and in Caithness by the developers, The Crown Estate and the Leadership Forum. Review approach 1 Tens of gigawatts of generation capacity, on a theoretical basis. See The Crown Estate UK Wave and Tidal Key Resource Areas Project Summary Report, October See for example Accelerating Marine Energy, Carbon Trust, July For the most part, tidal current turbines and wave energy converters 4 All subsequent references to tidal energy and tidal projects in this report are to tidal current projects, as distinct from tidal range projects (barrages and lagoons) 5 A further 30 MW project at Lashy Sound was leased in autumn This report focuses on the eleven projects leased in Source: National Grid Transmission Entry Capacity (TEC) Register, accessed August The 2011 report, plus a range of other reports by The Crown Estate on the Pentland Firth and Orkney waters, are available to download at: energy-infrastructure/ wave-and-tidal/pentlandfirth-and-orkney-waters/ enabling-actions/ projects-and-publications The Crown Estate undertook this review as part of its enabling actions to support development of the Pentland Firth and Orkney waters wave and tidal projects. It was managed by The Crown Estate and the findings and recommendations were reviewed by the project developers. The review involved: Analysis of the development process, including the timescales, in both qualitative and quantitative ways Interviews with companies in the industry, including technology developers, project developers and other stakeholders (29 interviews in total). In order to focus the review on the most important factors affecting development, we defined a key risk as something which could delay delivery of the first phases of the projects by two years or more, and therefore could impact on financing and delivery of the projects. The definition incorporated an assessment of the likely length of delay and the number of projects that may be impacted by it. For each key risk factor, we developed hypotheses for actions that industry or government organisations could take in order to remove or reduce the risks. We tested these using the following questions: Realism: Is it conceivable the mitigating action could be undertaken? Materiality: Will the action make a significant difference to project delivery? Additionality: Will the action be additional to activities that are already underway? We then developed the hypotheses which satisfied these criteria into recommendations. Finally, we considered delivery of the first phases in relation to time, based on project management data about the development process. This enabled both the delaying effect of the risk factors, and the accelerating effect of the recommendations, to be estimated. 7

8 2 Key factors affecting development The Pentland Firth and Orkney waters projects represent the first attempt in the world to design, build and operate assets to generate electricity from wave and tidal currents on a commercial scale. This presents a range of challenges. While several public sector organisations need to make supporting contributions, meeting these challenges primarily requires industry to undertake two processes in parallel: Technology development: Development of wave and tidal devices and balance of plant technologies, plus installation techniques and operational methods Project development: Development of each site in the Pentland Firth and Orkney waters area, including evaluating the electricity generation potential, gaining all necessary consents, designing and engineering the overall project and securing a grid connection. These two processes are separate but related. They must come together so that the owners of each project can reach a final investment decision (FID) and to begin procurement and construction. Our review has found a set of significant uncertainties and risks associated with these processes, which can be considered in four groups: The long-term market for wave and tidal power Development of wave and tidal current devices and related balance of plant technologies Access to the grid, particularly for the projects to be connected to Orkney Assessment of environmental impacts and the process of consenting the projects. These factors are connected so it is also important to consider risks associated with their interaction. In the following, we discuss each category in turn and then consider the interactions. 2.1 Market confidence Several organisations need to make long-term investments in order for the first phases to come to fruition In order for the first phases of the projects to be built it will be necessary for a number of organisations to make new investments or to continue to pursue existing investment programmes. Those who need to invest to innovate or to establish new capacity include generation device manufacturers, project investors, balance of plant equipment manufacturers, electricity network infrastructure owners and the wider supply chain. In total, these investments amount to sums of the order of hundreds of millions of pounds. Those making the investments will only do so if there is a reasonable prospect of an acceptable return. The context in which such investments need to be made can be understood by considering the wave and tidal device development process and the project development process. Wave and tidal device developers will have to continue to invest heavily over a number of years in order to commercialise their products. When that stage is reached the devices can be sold in reasonable quantities and the device developers will begin to make a commercial return. We anticipate that tidal device developers could begin to make commercial sales in earnest in around four to five years time. For wave device developers this period may be longer. Wave and tidal devices are likely to have a finite product sales life 8 during which the device developers will need to make a return on their research and development expenditure and their other investments. Wave and tidal device developers will therefore have to invest heavily for a further four to five years (possibly longer for wave devices) and will rely on an active market for sales of their devices persisting for sufficiently long after that to enable them to earn a return on their investment. The project development process includes all the work needed to prepare for investment in construction and installation. An important part of this process is securing government consents 9 to construct the projects. Consenting, site characterisation and design take a number of years and the payback on investment in these activities is subject to a degree of uncertainty which 8 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

9 reduces as the work proceeds. Project development will only be progressed to the point where orders are placed for generation devices and other equipment if, amongst other considerations, project developers are confident that there will be a market for electricity produced by the first and subsequent phases of the projects. The returns on wave and tidal device sales can only be achieved if devices are purchased to be installed in projects. In order to invest at the levels necessary over the required period of time, device developers and project developers need confidence that the market for wave and tidal current electricity will exist for 15 years or more. Uncertainty about government support presents a major risk to current investment activities and to continuing commitment to necessary long-term investment Investor confidence in the market for wave and tidal current electricity for the next 15 years is not assured. The government s Electricity Market Reform package (EMR) is being designed to accommodate support for wave and tidal projects over that timescale. There are, however, a number of areas of uncertainty which affect investor confidence. The level of support accessible to a wave or tidal current project under the proposed EMR arrangements depends upon a developer s ability to obtain a Contract for Difference (CfD), the level of the strike price in such a contract and the effect of the Levy Control Framework. The Department of Energy and Climate Change envisages that, in the medium term (beyond 2018), CfDs will be allocated through technology-neutral auctions for low carbon generation. However, it seems unlikely that wave and tidal current projects will be able to compete on price against other more mature low carbon technologies until around 2025 for tidal and possibly later for wave 10. The ending of the Renewables Obligation reduces the imperative for utilities to participate in renewable energy projects, including wave and tidal projects, because of the removal of the requirement on electricity suppliers to purchase renewable energy. Investors are aware that governments change and that support available to wave and tidal projects will reflect the policy which prevails at any given time. Accordingly, consistent political support is an important means of generating and maintaining market confidence over the necessary timescales. At present, it is uncertain what amounts of electricity production from wave and tidal current projects will be supported at particular price levels over the periods in which technology developers and project developers need to invest, but it is clear there is a chance this could be constrained. It is therefore necessary to consider: The adequacy of strike prices for the first administrative period of EMR (2014 to 2018) and, crucially, how the level will evolve over time, say to 2025 The volume reserved for wave and tidal (and other emerging technologies) in the initial EMR delivery plan period and at what point wave and tidal will enter into a technology neutral pool. Prompt action is required to enhance market confidence We recommend action in several areas to ensure continued confidence on the part of device developers and project developers. Political support: The provision of clear and consistent signalling of long-term political backing for wave and tidal energy across government 11 that links continued leadership in wave and tidal with the economic benefits which will be created in order to convey a steady and unified sense of purpose 12. Financial support: The wave and tidal current industry needs steady, long-term and consistent market support which is sufficient to give the industry a reasonable chance of reaching a competitive position. This will require more than just adequate strike prices in the first phase of EMR and is likely to require in addition: A clear indication that wave and tidal current projects will be allowed a glide path of reducing strike prices over the next 10 or more years. This glide path should be defined in terms of capacity rather than elapsed time, because learning acquired from deploying certain levels of cumulative capacity is a major factor in reducing costs Arrangements which allow the strike prices to be applied to a sufficient volume of energy production from wave and tidal projects over the period of time necessary for the industry to reach a competitive position An overall package of support which is sufficient and available at the right time so as to attract investment in project construction from major energy asset owners. Clarity on costs and economic benefits: Industry should, as far as possible given commercial considerations, be open about the projects costs, to help government manage the risk of providing too much financial support and also to evidence the case for the projects wider economic benefits to justify the value of the support. Clarity on progress: Industry and government should work together to gather evidence as it emerges that the investments which industry is making, plus the government support for these investments, are leading towards the first phases of the projects being realised, and will lead to the remainder of the portfolio being built out on a commercial basis. These recommendations need to be considered reasonably urgently, since investment decisions which depend on the certainty of government support are due to be taken soon. Capital investment decisions in first array projects involving multiple generation devices, in the Pentland Firth and Orkney waters area and elsewhere, are being planned by developers in the coming months. For several of the Pentland Firth projects, the developers will need to make decisions about whether to accept increasing and material grid liabilities from around 2014 onwards. 8 Meaning the time in which a product can be sold to the market before it needs to be updated a trend seen with many industrial and consumer products. For offshore wind turbines, the sales life is around seven years (The Crown Estate, Offshore Wind Cost Reduction Pathways Study, 2012) 9 A Marine Licence (for the construction/deposit of an object in the sea) under the Marine (Scotland) Act 2010 and the UK Marine and Coastal Access Act 2009, a Section 36 consent (for generating stations with the capacity of over 1 MW) under the Electricity Act 1989 and other consents under applicable legislation 10 Source: Carbon Trust, Accelerating Marine Energy, The 2020 EU renewable energy target has been a powerful force for investor confidence in recent years. Setting a similar framework for the period to 2030 will underpin confidence in long term support 12 Policy-driven strategic energy procurement could feature in establishing a longer term route to market 9

10 2 2.2 Readiness of technologies Technologies need to be made ready in order for investments in the first phases to occur For the first phases of the Pentland Firth and Orkney waters projects to be built, the technology development process noted in the introduction to this section will need to yield generation devices that are sufficiently well advanced for the technology developers to be confident in selling them, and correspondingly for the project developers to be confident about buying them. The technology risks need to be understood and reduced to such a level that technology developers can offer reasonable guarantees or other similar performance undertakings to the organisations investing in the projects. At the same time: Techniques for reliable energy resource/ yield assessment, plus other key aspects of project design, need further development; other items of equipment to make up the balance of plant of first phases (e.g. seabed foundations and subsea cables) need to be designed or specified to work with the generation devices; and methods also need to be developed to install, operate and maintain the generation devices and balance of plant items Arrangements need to be made for procurement of the balance of plant items and installation, operation and maintenance services. All this needs to be done in such a way that the total costs (including upfront capital costs and recurring operational costs), when considered in comparison with the potential to make revenues from electricity sales (a function of the generation device characteristics and physical site characteristics), offer an investment return for the first phases that is sufficiently high given the residual project risks. This is taking into account the prevailing government policy mechanism(s) for financial support (e.g. through the Renewables Obligation or Contracts for Difference), as discussed earlier in this section 13. Looking at this series of connections, some of the essential steps needed for investments in first phases to occur include that: Generation devices need to be made ready for sale, in relation to their costs, performance and risks Balance of plant items and installation techniques need to be made ready for application. The time in which these, and other critical steps in addition to those noted above, may occur is partly a function of the rate of technology investment. While development of tidal current turbines is proceeding apace, there has been relatively little recent investment activity in wave energy converter technologies Last decade, the landscape of wave energy converter and tidal current technologies amounted to tens of different device concepts, most of which were under development by small start-up companies (some spun out of university research projects and others privately originated). The total amount of funding for research and development varied between device concepts and companies, but in some cases, was of the order of tens of million per concept. The funding came from a mix of private investors, including venture capital firms, and government sources, including through technology programmes such as those managed by the Carbon Trust. Over the last few years, this landscape has changed, due to the entrance of large industrial equipment manufacturers. A number of such manufacturers have acquired start-up companies, including as follows: Andritz Hydro s acquisition of Hammerfest Strom 10 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

11 DCNS major stake in Open Hydro Rolls Royce s acquisition of Tidal Generation Limited (TGL) and later sale of TGL to Alstom Siemens acquisition of Marine Current Turbines (MCT). In addition, major industrials have made significant investments in start-ups, such as ABB s investment in Aquamarine Power and Alstom s investment in AWS Ocean Energy; and in some cases have developed technologies as internal projects, e.g. Voith Hydro s development of a tidal current turbine. Most of the recent investment activity has been related to tidal current technologies. At present, development of tidal current turbines appears to be progressing apace, with at least five industrials making significant commitments. For example, companies such as Siemens MCT have: Significantly expanded the number of staff and other resources available for development Developed new facilities for design, manufacturing and testing of products Applied well-established internal procedures and standards for product design and quality management Further developed relationships with potential project developer customers. The resources available to each industrial, plus the fact that multiple industrials are acting in this way and in competition with each other, appear to provide a good level of technical and commercial risk diversification. However, as a consequence of there being fewer recent investments in wave technology companies, ongoing development of wave energy converters is presently less clear. Beyond strategic investments in start-ups, it appears that no major industrial has yet committed to wave energy technology in the same way as industrials have committed to tidal current technologies. A potential implication is that, over the next few years, wave energy technologies will advance less rapidly than tidal technologies, meaning that it will be possible to install the first phases of some tidal current projects sooner than the first phases of wave projects. Regarding balance of plant technologies and installation techniques, there is limited experience to date in design or specification beyond the scope needed for single prototypes. It seems likely that, for the first phase projects, project developers will to some extent need to rely on technologies and approaches (including with respect to vessel selection) which have been developed for, and are in use by, other parts of industry, including offshore oil/gas and offshore wind 14. This is because from the perspectives of balance of plant equipment manufacturers and offshore contractors, the market presented by wave and tidal current projects is too small to justify significant investment in bespoke solutions for the time being. However, a potential downside of this is that the functional specification and/or costs may be suboptimal for the first phases of the projects, e.g. a workable installation technique is identified but the vessels it requires are unaffordable by the project. In our view, this could give rise to some delays. For the time being, this risk is most relevant to tidal current projects, given the possibility that the tidal current turbines are ready to deploy in the near future but the supporting equipment and methods to deploy them are not. In addition to these points, from a practical perspective, further development of both generation devices and balance of plant items will require access to seabed sites for testing purposes. Some technology manufacturers (including some of the industrials developing tidal current turbines) do not currently have access to UK sites already leased by The Crown Estate, or if they do, it may be unclear whether the leases permit the testing that is required. In supporting wave technologies, government should focus on enabling private investment to increase; while with tidal current technologies, it should fund programmes which focus on balance of plant technologies and installation To become commercially viable in the coming years, we believe that a step-change is required in the rate of investment in wave energy converters. Sector-wide, the necessary costs of continuing to develop and manufacture devices may amount to tens of million, implying that the source of the funding must be capable of making investments of the same order of magnitude. It seems unlikely that government will see funding at this level as its role on a long-term basis. This means that, to the extent that the government is able to provide funding, this funding should be carefully targeted to result in greater private investment by industry. There are various ways this could be achieved in practice. In our view, the most credible way would be for the government to provide support which leads to the acquisition of the wave energy start-up companies by large industrials, as seen with tidal current start-ups. Noting the risk of suboptimal engineering solutions delaying the first phases of tidal current projects, we believe that in addition to providing such targeted support for wave technology development, government should consider supporting programmes which bring forward development of project design techniques, balance of plant technologies and installation methods. For maximum benefit to the Pentland Firth and Orkney waters projects, these should be focused on the specific site conditions and physical characteristics of the projects under development, implying engineering inputs from the project developers. The success of such programmes in practice is likely to be affected by the extent to which supply chain manufacturers engage in them. To ensure sufficient engagement, we think it would be sensible for government to consider providing incentives to this effect. In addition, we note a recommendation for The Crown Estate to provide and manage leases for sites which help technology developers test and demonstrate their technologies in ways appropriate for preparing for the first phases. 13 Looking beyond initial deployments such as the first phases of the Pentland Firth and Orkney waters projects, additional requirements are to clearly identify the potential for cost of energy reduction, and to progress value engineering in earnest, in order to give confidence that the technologies have potential beyond one-off deployments. This is given the need for wave and tidal technologies to compete with other electricity generation technologies 14 Having said this, some technology developers have developed bespoke approaches using bespoke vessels, e.g. Open Hydro 11

12 2 2.3 Creation of grid infrastructure Investment in new transmission capacity is required to connect the first phases of the projects For each of the projects, an important step in the development process is arranging to connect to the electricity grid. Progress on suitable connection arrangements underpins a project developer s continuing investment. Eight of the Pentland Firth and Orkney waters projects are likely to be connected to the electricity network on Orkney, and three to the network in Caithness. The arrangements for transmission system connections and for connections to the lower voltage local distribution system are different. Whilst the first phases of one or two projects are likely to connect at distribution level, the majority of projects will probably need to connect to the transmission system for their first phases and will almost certainly be transmission connected for subsequent phases. In addition, any new distribution connections which are not already under contract are likely to depend on additional transmission infrastructure. Accordingly, new transmission capacity, entailing reinforcement of the grid on the mainland and the construction of new capacity linking Caithness and Orkney, will be required in order to connect the first phases of the projects. This means that the arrangements for development of new capacity, plus arrangements for charging for this capacity, are key. Figure 1: Indicative timeline for the Orkney Link and demonstration arrays Grid SHE-T submit needs case Ofgem approve investment Grid upgrade complete Procurement and construction Year The transmission owner SHE Transmission (SHE-T) plans to build a new 180MW capacity subsea link from Orkney to the mainland (the Orkney Link) which will form part of the new infrastructure. This transmission project is a large investment and we anticipate will have a lead time of four to five years, from the time that the funding approval is sought from Ofgem through to when the connection enters service. Delivery of the new link is complex, involving a number of organisations who must act in concert (including the project developers, SHE-T and Ofgem) and its planned completion has recently been put back by two years to The Orkney Link is unusual in that wave and tidal projects constitute a significant part of the new capacity which the connection will accommodate it is therefore the focus of the analysis in this review, although other transmission work required to connect the projects may have similar characteristics. Uncertainty about when new transmission capacity will be ready, and whether the wave and tidal projects will be financially viable under the transmission charges, risks the confidence of project and device developers in making required investments Leading devices Full-scale prototypes operational Demonstration arrays installed Demonstration array operational Leading devices demonstrated in arrays SOURCE The Crown Estate Commencement of work on new transmission infrastructure is generally triggered by applications made by prospective users for new connections. The date that new transmission infrastructure will be ready is a function of when funding for its construction is approved and on how long it takes to obtain consent and then build it. The Orkney Link has not yet reached the point 12 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

13 Figure 2: Distribution of consent determination times for Scottish overhead power line projects, Number of projects Months SOURCE The Crown Estate Figure 3: Estimated total liabilities for 180MW of Orkney based transmission connection agreements by year 21 m A ributable works Wider works Year SOURCE The Crown Estate where consent has been obtained or funding for its construction has been sought. Project developers who accept connection offers from National Grid become liable for a proportion of the costs of the specific transmission works attributable to a connection and wider system upgrades that are necessary. The liabilities only materialise if the connection agreement is cancelled, not if the project operates and pays use of system charges. Nevertheless, these cancellation liabilities are of a scale such that, when considered along with the other risks associated with successful project completion, they have the potential to influence the pace of project development. The pace of development could also be influenced by expectations about the cost of using the transmission system once it is available. These factors are interrelated: the steps entailed in providing new connections are outlined and then the potential influence of cancellation liabilities and charging on the pace of development is explored. Before it can make any major transmission investment not already allowed for in its regulated income, such as the Orkney Link, SHE-T will seek approval from Ofgem for a needs case. This will enable it to recover the cost of developing the new infrastructure. Needs cases are considered under a mechanism called the Strategic Wider Works (SWW) process and each must set out a robust cost benefit analysis for the selected investment option against a range of credible scenarios. The scenarios should adequately reflect the relevant uncertainties such as the strength and certainty of user commitment 16 and when the new capacity will be needed. In order for the Orkney Link to be ready in 2018 it will be necessary for Ofgem to decide on the needs case before wave and tidal devices have been demonstrated in arrays (see Figure 1). The date when the new capacity is needed, which in part relates to the readiness of wave and tidal devices for deployment in arrays, is likely to be an important consideration for SHE-T when developing its needs case, and for Ofgem in its decision. We understand that Ofgem will consult on the needs case and in reaching its decision Ofgem will consider the value to current and future consumers 17. The funding decision could be delayed if SHE-T delayed submitting the needs case if, for example, it did not consider that it had sufficiently robust evidence to support it, or if Ofgem needed further information in order to reach a decision 18. The start of construction of the Orkney Link might be delayed by its consenting process and its associated works, and the time taken to complete it might be extended. Significant delays to transmission projects have previously been seen in Scotland because of lengthy grid consenting processes; for example both the Beauly-Denny link and the Anglo-Scottish Interconnector Overhead Line had consent determination periods of over four years. Whilst these cases are exceptional, they highlight the potential for delay (see Figure 2). SHE-T has plans for transmission upgrades across a number of projects in the north of Scotland, with a capital investment programme of around 3 billion in the period to In December SHE-T noted that, in addition to consenting, constraints in the supply chain and difficulty in obtaining access to the necessary personnel with the right skills and experience lay behind delays to planned upgrades including the Orkney Link. It is possible that these factors will give rise to further delays in future and delivery of the Orkney Link in 2018 as planned appears to be challenging. The cancellation liabilities associated with connection agreements have the potential to influence the pace of development. National Grid establishes liability profiles for which project developers must provide financial security 20. Liability and security profiles are reassessed every six months and ramp up significantly four years before completion of the transmission works. To illustrate this, we estimated the total 15 Source: SHE-T open letter published 20 December User commitment refers to the weight of evidence that the electricity generation and / or demand which the new grid infrastructure is to serve will in fact materialise at the time and to the level intended, including supporting evidence on historical rates of termination and the slippage in the timing on contracted generation connections 17 We understand Ofgem will provide guidance on its process in the near future 18 Ofgem letter: Strategic Wider Works: SHE Transmission s submission on the Western Isles proposal, 28 June Source: SHE-T open letter published 20 December Prior to obtaining consent for their project, the project developers must secure 42% of their cancellation liabilities. After consent is granted, this drops to 10%. Security is via parent company guarantees, cash in escrow or letters of credit; the transaction cost of providing security can be material for smaller companies 13

14 2 liabilities which may be faced in each year prior to the connection date by a group of project developers holding agreements totalling 180 MW of new transmission capacity to be connected on Orkney in 2018 and found these to reach 100 million 21 in 2018 (see Figure 3). Once a project developer holds a connection agreement it then faces a series of decisions to either accept increasing cancellation liabilities until their project begins operating, or alternatively to delay its connection date and so delay the date at which the cancellation liabilities ramp up. If project developers do not have sufficient confidence that their projects will proceed through construction and reach operation by their contracted connection dates for example because of progress in project consenting or on the readiness of wave or tidal current device technologies then they might be inclined to delay the connection so that the cancellation liabilities do not step up until a time when they anticipate being more certain about their project. The possibility of this occurring is something which is likely to be considered by SHE-T and Ofgem as part of the needs case, particularly in respect of the date by which wave and tidal projects will require the Orkney Link. The possibility of delay to the Orkney Link, including because of the funding decision itself, is a factor which has the potential to limit the amount which Other necessary infrastructure The potential for major risks in other areas, such as port infrastructure and device manufacturing capacity, has been examined. We believe that risks in these areas are either being adequately managed at present or that it is too early to determine. Whilst specific new measures are not recommended, it is important that existing and currently planned initiatives are successfully completed including: Continued and coordinated port development Investment by a number of wave and tidal device developers in production facilities (including blade manufacturing and turbine assembly plant). project developers and wave and tidal device developers are able to invest in making the first phases of the projects more certain, which in turn feeds into the funding decision in a circular manner. Should connection dates actually be pushed back by the project developers, then depending on the timing of that decision in relation to progress in procuring and constructing the Orkney Link, progress on it could be delayed, which in turn would delay all Orkney connected wave and tidal projects including those which might not otherwise be held up; i.e. a delay with one project could affect others. Transmission charging can also affect the pace of development. Charges which project asset owners pay for use of the transmission system vary across the UK, and are currently undergoing a change process as a result of a review by Ofgem 22. Despite this review, however, it is likely to remain more expensive for a project to be connected to the grid via one of the groups of Scottish islands (such as Orkney) than it would to connect directly to the mainland. Recent estimates of the additional costs of connection on Orkney 23 correspond to an operating cost for the asset owner of around 30 to 35 per MWh for wave, and 20 to 25 per MWh for tidal projects assuming higher capacity factors. At these levels it is possible that project developers will decide that Orkneyconnected projects are not financially viable at prevailing levels of government financial support. This too might be considered by SHE-T and Ofgem as part of the needs case and will also be a consideration when project developers and wave and tidal device developers plan the investments needed to make the projects more certain. Addressing the grid risks requires actions to improve information sharing about the Orkney Link, work towards approval of the needs case and resolve the question of transmission charging Given these issues, we believe that the following steps are needed promptly in order to increase industry confidence in delivery of the Orkney transmission works: SHE-T should make its progress on the Orkney transmission upgrade transparent. Progress could be published against key development milestones such as SWW funding, consent application, consent determination and award of key contracts. Enabling such enhanced visibility would reduce uncertainty for project developers and in turn for device developers, thus providing them with greater confidence to continue to invest. Project developers providing robust information to SHE-T on project progress (including wave and tidal device readiness) would also help to improve confidence SHE-T should submit a needs case to Ofgem, referencing the contracted capacity, in a manner timely to the project development plans for the first phases of the wave and tidal projects. The project developers and others, including The Crown Estate, could support SHE-T in developing a robust needs case to secure a positive and timely decision from Ofgem via provision of information on project build out (subject to project developer confidentiality) Ofgem and the government should be mindful that whilst the Orkney Link needs case might have uncertainties, stemming from wave and tidal projects constituting a significant part of the contracted capacity and the devices being at early stages of readiness, a decision not to approve the needs case could have a circular delaying effect on development progress of both first and subsequent phases of the projects Government and Ofgem should decide upon, and implement, arrangements which ensure that the net effect of use of system charges for the projects are at a level which makes the projects financially viable. Ideally, these arrangements should be enduring for the full duration of the projects first and subsequent phases Based on an assumed cost of the Orkney Link of 190m and a hypothetical asset reuse factor of 50%. It must be noted that this estimate is highly sensitive to input assumptions 22 Project TransmiT 23 Source: Scottish Islands Renewable Project, Baringa for DECC and the Scottish Government, May We understand that DECC and the Scottish Government are considering Scottish Islands transmission charging following publication of the Scottish Islands Renewable Project report in May Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

15 2.4 Certainty of environmental impacts and consents Consents are required to construct the wave and tidal projects and the work to secure them takes several years All wave and tidal current projects in waters off Scotland are likely to require consents from Marine Scotland 25 (part of the Scottish Government). The consents will define the way a project is built and operated in order to ensure significant impacts are avoided. The associated work which project developers need to undertake to characterise project sites and prepare for consents applications is carried out at their risk, and usually begins several years ahead of decisions on those applications. As there is presently limited knowledge about the environmental impacts of wave and tidal technologies beyond single prototypes, consents are likely, to some extent, to require monitoring of actual impacts once wave and tidal projects are in operation. The timescale and terms on which consent might be decided are subject to uncertainties It is possible that the consenting authorities 26 will be faced with a very large volume of work in the coming years as several very large offshore wind projects in Scotland progress through the consenting process in timescales which are similar to early wave and tidal array demonstration projects 27. This could cause direct delays to demonstration projects, which might be within or outside the Pentland Firth and Orkney waters area, and have a knock-on impact on the first phase projects in the Pentland Firth and Orkney waters which are likely to reach capital investment decisions after a period of satisfactory performance of demonstration arrays. While Marine Scotland has set a target of nine months to determine consents applications for wave and tidal projects, experience to date from Scotland and elsewhere in the UK indicates this could be challenging with some of the determinations reached to date taking a longer period. Whilst various organisations including Marine Scotland, their advisors, academic institutions and others are involved in a range of relevant research and other supporting activities, there is a growing recognition that the overall effort and coordination is below the level necessary to address gaps in knowledge of the impacts of wave and tidal array projects. Key issues include that: Existing prototype data are not widely shared and therefore not effectively used to inform consent decisions Array scale data are not yet available There are limited baseline data on, and there is limited understanding of, mobile species behaviour and potential interaction with operating devices or arrays There is insufficient clarity for project developers about requirements for baseline data, primary research and post construction impact knowledge gathering. Knowledge gaps might lead Marine Scotland to require projects to be built out in small 25 A Marine Licence (for the construction/deposit of an object in the sea) under the Marine (Scotland) Act 2010 and the UK Marine and Coastal Access Act 2009, a Section 36 consent (for generating stations with the capacity of over 1 MW) under the Electricity Act 1989 and other consents under applicable legislation. 26 The regulator(s) and their advisors. 27 The demand on the consenting authorities does not necessarily cease at the point at which a consent decision is reached for any project. 15

16 2 phases say 10 MW at first, followed, after a period of monitoring, by a further 10 to 20MW. This would not necessarily pose a problem for the installation of initial arrays since technical and commercial considerations also point to deployments of around 10 MW or less. However, for subsequent phases to be viable for investment, it is likely they will need to be larger. An additional concern relates to application of the precautionary approach to impact assessment, which is required under legislation for protected habitats and species. The current gaps in knowledge could lead to projects being refused even where the actual impacts if the project had been built would not have been significant. Knowledge gaps might also result in the inclusion of consent conditions which require highly sophisticated and expensive monitoring, which could also add delays or otherwise impair investor confidence. Planning, organisation and filling gaps in knowledge will be required so that consent applications can be managed swiftly and effectively We believe that the uncertainties and risks in consenting wave and tidal projects could be reduced by action in two areas. Marine Scotland, The Crown Estate and others should set up a technical programme which develops and publishes a route map to the first phases being consented in order to address uncertainties related to science and data collection There is a strategic need for a coordinated approach (across the UK) amongst those organisations with a role in consenting and advising on the potential impact of projects to ensure that the necessary knowledge is developed and the organisations are resourced so as to deliver timely consents. The technical programme 28 should publish, by June 2014, a route map to consenting first phase projects alongside an agreed implementation plan including funding and delivery responsibilities The route map should: Outline the key knowledge needs and gaps and the roles of the main players (Marine Scotland, Scottish Natural Heritage, site developers etc.) in filling them. The Crown Estate will commit resource to support these efforts Provide greater clarity for developers around data gathering and primary research related to knowledge of actual environmental impacts and post construction monitoring requirements Ensure that environmental impact knowledge is used proactively, i.e. is transferable from demonstration projects at feeder sites to determine commercial scale first phases Marine Scotland, plus its advisors and project developers should plan ahead, in view of the developers plans and the route map, to ensure that sufficient and appropriately skilled resources are in place to manage consent applications as swiftly as possible The experience gained with the five wave and tidal projects whose consent applications have so far been determined should be collated so as to understand what worked well and what drove any delays so as to explore whether any of the project developers, Marine Scotland and its advisors need additional resourcing or additional skill-sets to allow swift determinations. 28 Including for example: Department for Energy and Climate Change, The Crown Estate, Natural Environment Research Council, Marine Scotland, Marine Management Organisation, site developers, etc. 2.5 Connections between factors All parties with a stake in development of the Pentland Firth and Orkney waters projects depend critically on the willingness and success of others to invest, or otherwise support the projects; there is a significant mutual dependency The investments in infrastructure, projects and wave and tidal device technologies which are needed in order for the first phases of the Pentland Firth and Orkney waters to be built will only be made on the basis that they generate suitable returns, given the risk profiles of investment and the investors involved. In many instances, the ability of one investor to realise a return on its investment depends on others also investing and their investments being successful. In addition, the strategic rationale for government and other public bodies to support the first phases of the projects depends on a sufficient likelihood of the projects being successful in their own right and leading to further growth of the industry. The interdependence of the various parties interests means that all interdependent parties must continue to commit to the developments for them to succeed. However, loss of confidence on the part of just one or a few organisations could be sufficient to delay or attenuate progress Interactions between the key risk factors described above have the potential to amplify delays to delivery of the first phases. For example, two of the key interactions, relating to government support and to electricity grid, are outlined here. Figure 4 illustrates the key interactions between parts of government, project developers and device developers. Government is more likely to provide a supportive framework for the emerging wave and tidal industry if it has confidence that the technologies will become cost competitive with other electricity generation technologies and such costs to electricity consumers will not be unduly high. In parallel, developers of devices and balance of plant technologies are likely to invest more in technology development to reduce costs if they have confidence in the long-term future of the wave and tidal energy market. This dependency could serve 16 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

17 to accelerate progress, or cause delays, according to the circumstances. Figure 5 illustrates some of the interactions relating to grid provision. Delay to grid provision may arise because of its funding decision, its consenting and the challenges in its construction. Such delays may have direct effects on wave and tidal project development and construction and on wave and tidal device demonstration and a wider effect on the market confidence on which continued investments depend. The connections between the risk areas means that delivery needs to be properly co-ordinated Figure 4: Interactions between major risks support perspective Project developers Will continue to develop sites and then order equipment if they are confident in long term viability Government Will provide support if: Costs reduce Economic benefit materialises Device developers Will continue to invest in technology to reduce costs and in manufacturing facilities if they see a pipeline of projects An important finding from our review, given the connections between the key risk factors, is that to be effective, the recommendations must be implemented as a complete package, not each in isolation or selectively. We believe that to achieve this, the organisations to which the recommendations are addressed will need to work together effectively, and in particular, staff with responsibility for decision making will need to cooperate directly. We are discussing with the Scottish Government and the Department of Energy and Climate Change (DECC) how best to put such coordination into practice. Ideas under discussion include: A new working group being created or an existing group being enhanced, particularly to include senior level representation from both industry and government Specific group members taking responsibility for establishing and SOURCE The Crown Estate delivering the recommendations, establishing sub-groups to help with this as appropriate A clear set of performance measures being defined, related directly to the number of Pentland Firth and Orkney waters projects that are on track for construction of their first phases with respect to the developers project plans. Figure 5: Interactions between major risks grid perspective Timing and nature of project consent Market confidence and hence development investment reduces High grid charges on Orkney Technology progress slows Insufficiently diversified inherent technology risk Market confidence Developers delay/ reduce grid agreements wave Grid delivery delayed Grid delivery issues (consent, procurement, etc) Decision on funding case SOURCE The Crown Estate 17

18 3 Conclusions and recommendations COURTESY OF OPENHYDRO This review has clarified the major barriers to construction of the first phases of the Pentland Firth and Orkney waters projects, in terms of key risk factors that could cause delays of two years or more. Overall, these factors are quite significant, amounting to a set of challenges related to: Industry developing sufficiently strong investment cases, across technology development and project development Government and other public bodies providing incentives and updating regulations in ways sufficient to support the cases for these investments. The risk areas are complex so it is to some extent understandable that solutions to some of them have not already been found. However, in our view, none of the problems is insurmountable. A concerted effort by industry and government could resolve all of the key risk areas and make timely delivery of the projects much more likely. The potential effect of such a resolution is indicated in the box below. To summarise, our main recommendations from the review are as follows: 1 Government should clearly signal long-term support for creation of the wave and tidal industry, including the period beyond that covered by current policy mechanisms. 2 Government should ensure overall financial support for project construction is sufficient, and is available at the right time, to attract private investment from major energy asset owners. 3 Industry should, as far as possible given commercial considerations, be open about the projects costs, to help government manage the risk of providing too much financial support and also evidence the case for the projects wider economic benefits. 4 Industry and government should work together to gather evidence as it emerges that the investments which industry is making, plus the government support for these investments, are leading towards the first phases of the projects being realised, and will lead to the remainder of the portfolio being built out on a commercial basis. 5 Wave: Government should evaluate how best to provide support for wave energy technologies in a way which will help the rate of private investment in technologies to increase, and be sustained, to make the technologies commercially viable. In our view, the most credible way this could be achieved is by replicating what is happening with tidal technologies: acquisition and ongoing development by major industrials. 6 Tidal current: Government should fund technology programmes which accelerate development of project design techniques, balance of plant technologies and installation methods, prioritised on the basis of engineering problems facing the first phases; and should provide appropriate incentives to supply chain manufacturers to engage earlier than they might otherwise given their other commercial opportunities. 7 Both wave and tidal current: The Crown Estate should provide and manage seabed rights for sites which help technology developers test and demonstrate their technologies in ways appropriate for preparing for the first phases. 8 SHE Transmission, the electricity grid owner, should make its progress on the Orkney transmission upgrade transparent and submit a needs case to Ofgem, referencing the contracted capacity, in a manner timely to the project development plans for the first phases. 9 Ofgem and government should be mindful that whilst the Orkney needs case might have uncertainties, stemming from wave and tidal projects constituting a significant part of the contracted capacity and the devices being at early stages of readiness, a decision not to approve the needs case could have a circular delaying effect on development progress of both first and subsequent phases of the projects. 10 Government and Ofgem should decide upon, and implement, arrangements which ensure that the net effect of use of 18 Wave & tidal energy in the Pentland Firth and Orkney waters: Delivering the first phases of projects

19 COURTESY OF AQUAMARINE POWER system charges for the projects are at a level which makes the projects financially viable. These arrangements should be enduring for the full duration of the projects first and subsequent phases. 11 Marine Scotland, The Crown Estate and others should form a technical programme which develops and publishes a route map to the first phases being consented in order to address uncertainties related to science and data collection. 12 Marine Scotland plus its advisors and Pentland Firth and Orkney waters project developers should plan ahead, in view of the developers plans and the route map, to ensure that sufficient and appropriately skilled resources are in place to manage consent applications as swiftly as possible. An important finding from our review, given the connections between the key risk factors, is that to be effective the recommendations must be implemented as a complete package. The Crown Estate is discussing with the Scottish Government and the Department of Energy and Climate Change (DECC) how best to put coordination into practice. 29 Source: UK Renewable Energy Roadmap 2013, Department of Energy and Climate Change, July Source: RenewableUK, Wave and Tidal Energy in the UK: Conquering Challenges, Generating Growth, 2013 Combined impact of recommendations Based on project management data provided by the project development companies, we have developed a model to describe the time periods over which the first phases of the projects could be installed. We have used this to evaluate likely timings under: A business as usual scenario, in which one or more of the recommendations in this report are not implemented A recommendations implemented scenario. Essentially, the model indicates that the collective impact of the recommendations could be to bring forward installation of the first 100 MW worth of capacity by up to 4 years a significant accelerating effect. Installation of 100 MW or more capacity in the Pentland Firth and Orkney waters by 2020 is consistent with estimates made by other organisations of the overall capacity of UK projects installed by that year, including DECC, in the UK Renewable Energy Roadmap 29, and Renewable UK, in its 2013 industry report 30. Modelled view of when installation of first phases reaches 100 MW With recommenda ons Business as usual Es mated me window Accelera on of up to 4 years Year 19