New wave, will the UK miss the renewable revolution?

What is it about this island that makes us great at inventing things and so pitifully bad at exploiting them? The catalogue of British inventions that have made fortunes for other countries makes grim reading. In the renewables field we did it with wind turbines. Government blindness let slip the moment when Britain could have grabbed first mover advantage in wind turbines. Instead, we gave it to the Danes, who now have 50% of an $8bn (£4.6bn) market that is growing at the rate of 20% year on year.

Today, the Danish wind turbine market employs 25,000 people and, as Europe starts to roll out offshore wind farms of 500 megawatts and upwards, that market is going to get a tremendous kick forward.

But all is not lost. British inventiveness has once again come up trumps and once again we look well placed to lead the field with emerging technologies in the field of marine power, where we have competing wave and tidal technologies. In both these areas, British companies are arguably ahead of the chasing pack. But will they get the support they need this time round? The answer is: perhaps. But whether the support will be sufficient to kick start a billion- dollar marine power generation market remains to be seen. Scotland, for example, has announced its intention to introduce an additional element to the Renewables Obligation Certificate (ROC) market to back marine renewables, though it has not yet said what form this will take.

UK-wide, though, we have designed a market in ‘green’ power that is technology blind. The ROC system favours any renewable energy generation technology that is first to market with quantities of ‘green’ power.

This means, of course, that the UK system is wonderful for supporting onshore wind generation, which is now a proven technology. However, it badly underfunds offshore wind projects, never mind marine projects.

Offshore wind, however, is gaining some benefits from the success of onshore wind, in that the capital markets and venture capitalists have a good deal of history here to look at, as far as turbine generation and power delivery is concerned.

What makes offshore wind so difficult, though, is that it has much higher capital expenditure costs than onshore wind. The reason is that the initial investment required for sub-sea infrastructure, transmission lines and hard moorings for any offshore site is huge. The good news is that, once the initial infrastructure costs have been absorbed, these installations scale extremely well.

New units can be added to the array, pushing up the output of the farm. Moreover, since many offshore wind farms will be sited out of the line of sight of land, much of the heat goes out of the planning debate (though environmental impact studies are still a requisite part of the process).

Going back to marine power, the ROC is woeful as a support mechanism for untried and high risk projects, where the costs are much higher than onshore wind. Without a clear present mechanism to reward investment, venture capitalists find this very difficult terrain.

As Fintan Whelan, corporate finance manager at onshore and offshore wind specialist Airtricity, observes, it is simply a fact of life that an early-stage technology needs government support if it is to flourish in the teeth of competition from existing technologies.

Nevertheless, Whelan says that Airtricity has been able to find a way of investing in at least one major offshore project. But marine generation, he says, still has far too many unknowns in the equation at present.

“Anyone investing in offshore wind today has to be taking a bold view of the future of offshore wind. We don’t have the appropriate level of support right now for offshore wind to provide a reasonable return on capital deployed. This is part of the debate that is going on between the industry and the government,” he says.

That said, Airtricity has a major 500 megawatt scheme underway in the Thames Estuary. This has been possible because it has managed to get its construction partner in the project to join it in a 50-50 joint venture.

The US heavy engineering and projects company Fluor Daniels has been able to justify its participation on a range of fronts, in terms of the likely improvements in future profitability, and in the experience it is gaining in offshore farm construction techniques. The advantages for Airtricity are manifest.

“Your capital programme costs on a project like this are a huge variable. As a 50% stakeholder, Fluor Daniel has good motivation to deliver an effective capital cost to the project,” comments Whelan.

This is not an unusual structure with onshore projects, where the wind turbine supplier often takes a stake in the project. At present, with offshore, turbine manufacturers have refused to participate, mainly because there are still too many unknowns in the offshore equation and because the cost ratios relating to their share of the project are much lower.

Onshore, the turbine part of the contract can amount to as much as 75% of the total cap ex. Offshore, however, the proportion drops to around 40% because of the cost of the cable and the sub-sea infrastructure.

Another thing the developer can do to enhance the project’s chances of success, says Whelan, is to accumulate as much information as possible on all the relevant aspects of the build. “We’re working to understand all the conditions about the site that could impact on its installation. Having your contractor with you in this process is a huge help,” he says.

Keith Anderson, renewable and major projects director at Scottish Power, and John Heasley, financial controller and head of strategy and investment, argue that, despite the lack of support for emerging renewables technologies, the UK Government’s ROC system has actually operated superbly. It is functioning exactly as was intended, and has created a huge appetite in the UK for investment in onshore wind, they say.

“The rationale for making ROC technology blind was that it would ensure that the technologies that were more economically viable would come through first and fastest,” they say. This is simply good, healthy economics.

However, they argue that the stage has now been reached where government and the Scottish Executive need to look at finding ways of adding in extra support for the next round of emerging technologies.

“The issue with renewables in the UK is not a lack of investment appetite if the business models are right. Scottish Power will be investing £1bn in renewables to 2010, when we expect to be generating more than 1,000 megawatts of renewable energy. This will be 10% of our total capacity and will put us in line with the government’s national target of 10% by 2010,” Heasley says.

Scottish Power has two offshore sites, one it acquired during the Round One site auction process, and the other acquired during Round Two. However, developing those sites requires some resolution of the dilemma of who pays for the transmission grid upgrades. These upgrades are required to take the power from the offshore platforms to areas where the power is required. Clearly, where the grid has been extended to cover a few Scottish crofting cottages in a remote rural area, that link will not be capable of taking the output of a one gigawatt offshore or marine energy farm. The upgrade required nationally to support the new projects runs to tens of billions of pounds.

“What the industry is telling government right now is that given the country’s desire to have offshore renewable generation, and given the work that is needed on the infrastructure and on upgrading the grid, that cost should be shared among all users, not just borne by the developer,” Heasely argues.

In its October 2004 report to the Scottish Executive, the Forum for Renewable Energy Development (FRED) in Scotland argued for this point, particularly for marine energy.

“The Scottish Executive and the UK Government should consider supporting early commercial development of marine energy by underwriting grid connection for first and second generation projects,” it said. To date, however, no such announcement has been made and this is a source of concern for wave and tidal generation players.

Max Carcas, business development director at the wave power specialist, Ocean Power Delivery (OPD), for example, argues that it is very short-sighted of government not to back this sector as heavily as it can.

“The potential is there for the countries that put in the investment first. The Danish Government backed the Danish wind turbine industry and it is now doing exceptionally well. If you look at the wind turbine export business in Denmark today, it is the country’s highest value engineering export.” Carcas points out that it need not cost vast amounts of money to give the industry a start. “If you base assistance on an output model, like ROC, then government does not pay unless we produce electricity, and it doesn’t pay much until we produce it in large quantities,” he points out.

Just what can be achieved with government sponsorship was shown recently when OPD won its first order. This was for three of its Pelaris wave generation machines and the buyer was a Portuguese consortium led by Enersis, Portugal’s biggest operator and owner of renewable generation assets. The Portuguese could buy into an early stage wave generation project precisely because the Portuguese Government has a very well thought through support structure for wave power projects.

This support comes in the form of a feed-in tarriff for wave power. For every kilowatt hour of wave energy, up to the first 20 megawatts of installed capacity, the government will pay €23.50. OPD says its installed operating cost per kilowatt hour will come in close to the feed-in tarriff in the pilot phase.

Enersis and its partners have signed a letter of intent with OPD for a further 20 megawatts of generating capacity if the pilot installation of three machines, each producing around 750 kilowatts of power, proves successful.

As Carcas explains, one of the features of wave energy is that the sub-sea infrastructure costs tend to be much the same for three units or three hundred units. “It costs around £1m to put the sub-sea infrastructure in place. When you install large numbers of units, the cost per megawatt drops dramatically, so wave power is especially well suited to large scale production,” he says.

Carcas believes that by the time ODP is at the 20 megawatt level, it would expect to be generating electricity for 16 pence a kilowatt hour. This will reduce dramatically as demand increases and it starts to enjoy economies of scale in its manufacturing process.

“Today, a good wind turbine can generate electricity at less than three pence a kilowatt hour, and the generator gets about six pence. This creates a reasonable margin. But they haven’t got there in one bound,” he notes.

The wind turbine manufacturing industry has managed to reduce its manufacturing costs by 80% in 20 years. Wave power today is where wind was 20 years ago, with small production runs and a supply chain that is not fully coherent. “We need a significant market and as the Portuguese have demonstrated, government has a role to play in helping that market to get off the ground,” he says.

To be fair, the Scottish Executive did play a hand in OPD’s success, by funding the establishment of a marine test centre for marine generation devices in the Orkneys.

“The Portuguese were able to see that the device had been tested in a real environment and that gave them a lot of confidence,” he comments.

The message to the politicians is simple. Back British efforts in marine generation today and you will have a billion-pound industry tomorrow. Sit on your hands and we’ll be buying our equipment from the Portuguese two years from now.