Wave and Tidal Energy Market Deployment Strategy for Europe. June Co-funded by the Intelligent Energy Europe Programme of the European Union

Transcription

1 Wave and Tidal Energy Market Deployment Strategy for Europe June 2014 Co-funded by the Intelligent Energy Europe Programme of the European Union

2 Project partners jrc.ec.europa.eu Special thanks to: Alstom, Andritz Hydro Hammerfest, Aquatera, Atlantis Resources Ltd, Bluewater, DCNS, E.ON, EDF, EMEC, ENTSO-E - GRID, ESB International, European Investment Bank, EVE, Eversheds, Flumill, Fred Olsen, Fugro, GDF Suez, Green Offshore, INORE, MRIA, Nautricity, Ocean Harvesting Technologies, Ocean Power Technologies, Pelamis Wave Power, Pure Marine, REN, Renewable Risk Advisers, Royal Haskoning DHV, Scottish Renewables, ScottishPower Renewables, Siemens MCT, Tecnalia (IEA), Tidal Energy Ltd, University College Cork, Vattenfall, Xero Energy and everyone who participated in the workshops, webinars and seminars throughout the consultation process. Revision: 1 st edition June 2014 Design and co-ordination: Giselinde Van de Velde ( and Abbie Badcock-Broe Cover photos: (From top left to bottom right) Alstom, Wello, Pelamis Wave Power, Aquamarine Power, DCNS Openhydro, Andritz Hydro Hammerfest, Voith, Siemens MCT, Atlantis Resources Ltd and Flumill

3 Wave and Tidal Energy Market Deployment Strategy for Europe June 2014 SI Ocean is supported by Intelligent Energy Europe Co-funded by the Intelligent Energy Europe Programme of the European Union The sole responsibility for the content of this report lies with the authors. It does not necessarily reflect the opinion of the European Union. Neither the EACI nor the European Commission is responsible for any use that may be made of the information contained herein.

4 Table of Contents Foreword... 7 Executive Summary... 9 Overview of SI Ocean and the Market Deployment Strategy Chapter I - Europe s Wave & Tidal Market Deployment Strategy Realising Europe s 2050 Wave & Tidal Energy Potential Chapter II - Finance and Markets Today s Finance Challenges Mission Critical: De-risk Early Array Finance Market Push and Pull: Capital and Revenue Support De-risking Technology: Stimulating Investment in Innovation and Development Key Finance Recommendations Chapter III - Delivering Reliable and Affordable Technology The Status of Wave and Tidal Energy Technology Cost Reduction: Focusing on Survivability, Availability and Moving Towards Pilot Arrays Reducing Costs for Commercial Arrays through Increased Deployment and Improved O&M Supply Chain Innovation Providing Reliability and Affordability Key Technology Recommendations Chapter IV - Regulations and Consenting Regimes for Project Development Current Member State Consenting Practices Strategic and Environmental Planning Programme Streamlining Consenting and Environmental Procedures Key Consenting Recommendations Chapter V - Removing Grid Barriers to Wave and Tidal Energy Projects Grid Issues and the Viability of the Wave and Tidal Energy Industry Short-term Interim Solutions for Small/Early Wave and Tidal Demonstration Projects Reducing Project Grid Costs Collaboration and Public Support Overcoming Longer-Term Grid Limitations for Wave and Tidal Energy Projects Key Grid Recommendations SI Ocean Strategic Initiative for Ocean Energy 5

5 List of figures Figure 1 The SI Ocean work packages and deliverables Figure 2 LCOE Predictions for 10MW arrays, after 10MW has already been installed (Source: SI Ocean Cost of Energy Report, 2013) Figure 3 Early array costs (Source: SI Ocean Cost of Energy Report, 2013) Figure 4 Wave and tidal energy market pull and technology push programmes to date across the Atlantic Arc Figure 5 Components of LCOE of wave and tidal energy devices (Source: SI OCEAN Strategic Technology Agenda) Figure 6 Synergies between wave and tidal energy and offshore wind (Source: JRC 2014) Figure 7 Consenting processes across the Atlantic Arc (Source: Adapted from ORECCA and SOWFIA project) Figure 8 Grid issue comparison between Atlantic Arc countries Glossary AEP CAPEX CCS DG ENER DG MARE DG RTD DNO DSO EC Annual Energy Production Capital Expenditure Carbon Capture and Storage Directorate-General for Energy Directorate-General for Maritime Affairs and Fisheries Directorate-General for Research and Innovation Distribution Network Operator Distribution Systems Operator European Commission EERA Ocean European Energy Research Alliance Energy JP Joint programme for Ocean Energy EIA EMEC EMP ENTSO-E ESBI ETS EU FiT GIS GWhs IRR JRC Environmental Impact Assessment European Marine Energy Centre Environmental Monitoring Programme European Network of Transmission Systems Operators for Electricity Electricity Supply Board (Irish Utility) Emissions Trading Scheme European Union Feed-in Tariff Geographic Information Systems Gigawatt Hours Internal Rate of Return European Union Joint Research Centre kw LCOE MCT MW O&M OEM OPEX ORECCA PTO R&D RD&I ROCs RTE SEA SHEPD SOWFIA TP Ocean TRLs TSO TWh WEC Kilowatt Levelised Cost of Energy Marine Current Turbines Megawatt Operations and Maintenance Original Equipment Manufacturers Operational Expenditure Off-shore Renewable Energy Conversion platforms Coordination Plan Power Take Off Research and Development Research, Development and Innovation Renewables Obligation Certificates Réseau de Transport d Électricité (Electricity Transmission Network) Strategic Environmental Assessment Scottish Hydro Electric Power Distribution Streamlining of Ocean Wave Farms Impact Assessment Technology and Innovation Platform Technology Readiness Levels Transmission Systems Operator Terawatt hours Wave Energy Converter 6 Wave and Tidal Market Deployment Strategy

6 Foreword Pelamis & Scottish Power Renewables machine operating in Orkney Despite an investment crisis brought on by the biggest economic recession Europe has seen since the Second World War, the EU is on track to fulfil its ambitious 2020 renewable energy targets. In 2012, Europe s renewable energy industry employed 1.2 million people and generated 130 billion of economic activity 1, the vast majority of which did not exist just one decade ago. The reasons for this are straightforward. Targets at the EU level have provided long-term regulatory stability, matched with EU funding, which reduces risk by advancing technologies along readiness levels. Nationallevel targets in every Member State have resulted in governments putting in place capital and revenue support mechanisms, creating a vibrant market for renewable energy and generating volume production which has driven remarkable cost reduction across the most mature renewable energy technologies. Although it has now taken the first generation of renewable energy technologies to competitive levels, Europe still needs to diversify its electricity supply further if it is to meet its 2050 policy objective of reducing greenhouse gas emissions to 80 95% below 1990 levels 2. Increased energy generation from renewable sources has been identified by the European Commission as a no-regrets option for meeting these objectives 3. Wave and tidal energy are the next generation of renewable energy technologies, and they will be needed if Europe is to meet its decarbonisation targets. These technologies can also support better grid integration for all renewables. Wave and tidal projects can, for example, be developed in areas of low solar or wind resource. Electricity generation from wave and tidal is also out of sync with other renewable technologies, and will provide further balancing effects for European transmission systems. However, binding renewable energy targets for the post-2020 period are necessary in order to provide clarity for investors. In a tough economic climate, and without binding targets, the incentive to shift from the status quo will be significantly weakened. Wave and tidal energy technologies must now find a route to market in more uncertain times than their predecessors. 1 EurObservER: The State of Renewable Energies in Europe, 2013 Edition 2 European Commission Communication: Energy Roadmap 2050/* COM/2011/0885 final */ 3 European Commission: A Roadmap for moving to a competitive low-carbon economy in 2050 SI Ocean Strategic Initiative for Ocean Energy 7

7 Foreword At present, the appetite amongst Member States for long-term renewables support has decreased. Uncertainty surrounding revenue support for renewables has meant that today s utilities have become more risk-averse and less inclined to fund demonstration projects for new technologies from their balance sheets. Some tidal energy technologies have reached the stage where Original Equipment Manufacturers (OEMs) and utilities are trying to secure finance for the first pilot array demonstration projects. Wave energy technology development is a little less advanced. For all developers in these sectors, however, the challenge of raising capital to invest in technology innovation and demonstration has slowed progress, and in many cases the learning curve has been far steeper and longer than originally anticipated. In the medium-term, the industry faces other barriers, in the form of infrastructure. Across Europe, the wave and tidal energy resource is often strongest in areas where grid, port and harbour infrastructures are weakest. However, this physical challenge is not unique to wave and tidal renewable energy, and the solutions developed in the build-out of more mature renewable energy technologies over the last two decades should be adapted for wave and tidal energy. Despite all these challenges, wave and tidal energy provides excellent long-term potential for economic growth, energy security and job creation, and policy makers at EU and Member State level are seeking innovative ways to accelerate commercialisation. Agreeing a common plan and putting in place appropriate support will be essential steps towards industrialising these sectors and putting Europe on track to secure 100GW of installed capacity by Funded by the Intelligent Energy Europe programme, the SI Ocean project s Market Deployment Strategy makes several high-level recommendations for commercialising the emerging wave and tidal energy sectors. The industry looks forward to taking these recommendations forward through the Ocean Energy Forum and working with decision-makers to produce a Strategic Roadmap, which we hope will lead to a European Industrial Initiative for wave and tidal energy. Sian George CEO Ocean Energy Europe 4 Ocean Energy Europe: Industry Vision Paper Wave and Tidal Market Deployment Strategy

8 EXECUTIVE SUMMARY Openhydro turbine during transport and installation, DCNS

9 Executive Summary Executive Summary The potential for economic growth, energy security, job creation and global export inherent in wave and tidal energy technologies is considerable. Even in their pre-commercial state, wave and tidal technologies already draw on supply chain companies from almost all European Member States. In addition to Europe s competitive global position in the offshore wind, oil and gas sectors, it is also the global leader when it comes to technology innovation and invention in this new industry. If managed correctly, this advantage will ensure Europe s front-runner position abroad and will result in the production of significant amounts of renewable energy at home, along with the security, growth and employment benefits that this will bring, Furthermore, wave and tidal energy technologies have certain advantages over other energy sources. For example, they provide an opportunity to generate energy at a wide range of locations throughout Europe. Additionally, wave and tidal power produce energy at different times, and more consistently, than other renewable energy sources, such as wind and solar. This will add to the overall stability of Europe s energy networks. These new technologies also offer an attractive alternative in areas where the visual impact of electricity generation sources is a concern. Lastly, they can leverage extra value by exploiting synergies with sectors such as offshore oil, gas and offshore wind. Opportunities include using common components and sharing expertise on project development challenges. However, significant risk on four main fronts is currently impeding development. 1. Financial risk there is a shortfall in upfront capital investment for technology development and pilot array demonstration, which is compounded by the current lack of long-term clarity on revenue supports. 2. Technology risk uncertainties relating to survivability, reliability and cost reduction potential are inherent in all new energy generation technologies, but particularly in those designed for offshore operations in harsh conditions. 3. Project consenting risk unknown interactions between devices and marine environments make it challenging for regulators and developers to assess and mitigate potential impacts. 4. Grid-related risk the best and most economical resources are frequently not located near accessible grid infrastructure, creating grave uncertainty over connection dates in key areas. Over the coming decade, Europe s ability to reduce these risks will be the deciding factor when it comes to commercialising the wave and tidal energy sectors. For these sectors, it is clear that installing the first pilot tidal arrays will be a critical milestone. The EU, its Member States and industry will need to act in a coordinated manner to ensure that a shortfall of capital and revenue support does not stall the industry s progress by delaying financial close on these first-of-a-kind demonstrations. These first pilot arrays consisting of three or more devices with a maximum installed capacity of 10MW will be the cornerstones of a successful market deployment strategy for Europe. They will, for the first time, prove the viability of generating electricity from more than one device, and in doing so they will generate vital lessons which will help developers target future innovations in array performance, reliability and cost reduction. Successful demonstrations will not only pinpoint where further improvements are required; they will also build investor confidence. This will stimulate investment into all stages of technology development, and will help to engage the supply chain. Successful electricity generation from the first arrays will also galvanise planning for future grid connection and the development of efficient regulatory regimes. Agreeing a common plan to de-risk wave and tidal technology development will be an essential step towards creating a new industrial sector in Europe. This plan or road map should give a clear account of the exact nature and level of support that will be required for the wave and tidal energy sectors to 10 Wave and Tidal Market Deployment Strategy

10 Summary of Industry Priorities and Goals SI Ocean Market Deployment Strategy Priorities and Goals Milestone Priorities Goals By 2020 Innovation TRL progress Demonstration and testing By 2030 Continued innovation Supply chain engagement Accelerating cost reduction: standardisation and scaling up By 2050 Rapid cost reduction volume production Mass market roll-out Financial close on up to ten pilot arrays Technology innovation: reduce costs, increase reliability, increase yields Commercial array installations (30MW+) Supply up to 100GW of clean energy fulfil its potential of hitting an installed capacity of up to 100GW by Such a road map should set out clear and specific milestones for 2020, 2030 and As well as indicating the level of market push and market pull that will be needed to hit key milestones, it should set clear priorities for technology innovation aimed at delivering cost-effective, high-yield and reliable devices to the marketplace as quickly as possible. The SI Ocean project s Market Deployment Strategy provides recommendations to tackle risk head on. De-Risking Finance Financing innovation and technology development at all technology readiness levels (TRL) is a key priority, with the goal of advancing several of the most promising early-stage technologies. This will deliver the next pilot arrays for demonstration and ensure that the industry has no shortage of game-changers and second-generation solutions. Wave and tidal energy companies need a suitably large and consistent pipeline of future projects to justify continued investment. They must see sustained commitment from the EU and Member States to long-term stable mechanisms to support wave and tidal energy technologies, including technology push (capital grants) and market pull (market incentives, such as revenue support). Current experience of trying to get the first tidal pilot arrays in the UK to financial close demonstrates that available support packages fall short of leveraging the upfront capital needed to build these projects. These pilot arrays should not be viewed as commercial projects, as they are a necessary R&D step following on from the demonstration of full-scale prototypes. Therefore, large capital grants, project equity loan guarantees or soft loans will need to be combined with available revenue support mechanisms to get these pilot arrays over the line. Deployment of the first pilot arrays will provide a clear view of wave and tidal energy s route to market. With practical experience and performance data under its belt, the industry can start to understand, quantify and manage risk. These pilot arrays will stimulate appetite for investment in the whole sector, and will provide utilities with clear evidence that there is a market for wave and tidal energy. While revenue support mechanisms should be guaranteed for the lifetime of individual projects, they will need to be capped and time-bound to give Member States a clear view on the duration and likely cost of the overall schemes. Increasing the volume of R&D capital available is one part of the solution, but these sectors also need to make smarter use of the available funding by setting out a clear agenda for technology and innovation. Coordination between stakeholders seeking R&D funding needs to be improved. Competition for funding is important, but so is collective learning through collaborative research projects. 5 Ocean Energy Europe: Industry Vision Paper, 2013 SI Ocean Strategic Initiative for Ocean Energy 11

11 Executive Summary De-Risking Technology Significant technology innovation is still required to deliver cost-effective, reliable and high-performance solutions for wave and tidal energy generation. The SI Ocean Strategic Technology Agenda identifies key challenges and prioritises technology development topics for the short term. Technology risk can be minimised by improving reliability and by reducing the Levelised Cost of Energy (LCOE). LCOE can be reduced via a combination of cutting capital costs and improving yield, firstly at the level of the single device, then in array formation. The Strategic Technology Agenda identifies that this will require technology push, in the form of grants and capital investment in technology development, and market pull, in the form of revenue support for scaling up deployments. Capital support is required for continued technology development at the research and design stage and for onshore and offshore testing and real-sea deployment of prototypes and pilot arrays. This twin-track develop-and-deploy approach will drive both innovation and early economies of scale. Continued public sector support for research, innovation and demonstration coupled with commitment from industry will create a virtuous circle, in which increased reliability and cost reductions trigger further investment. This will ensure that Europe retains its current position as the global scientific and engineering hub for wave and tidal energy technology development. In the medium term, cost reduction will mean moving to standardised devices and components, integrating the supply chain and mass-producing devices at volume. However, this depends on a market being created. While the first pilot arrays will need large capital grants combined with revenue support, the industry will require clear and stable revenue support schemes to help it achieve significant economies of scale. Overall, closer cooperation between the public and private sectors will foster a common understanding of the most promising technologies and the highest priorities for innovation. This will automatically reduce risk and improve the strategic impact of public and private investments in wave and tidal energy technology innovation. The Technology and Innovation Platform for Ocean Energy (TP Ocean), which has just been set up by Ocean Energy Europe, is expected to provide good support in this area. De-Risking Project Consenting Wave and tidal energy s first-of-a-kind nature makes it challenging to evaluate the potential impacts that devices and arrays of devices could have on the marine environment. As a result, the planning and consenting process can be excessively expensive and time consuming, adding new layers of risk and uncertainty to wave and tidal energy projects. Disseminating best practice is the best way to mitigate this risk in the short term. Applying processes that have worked in one country to other areas seems an obvious win win, but can be difficult to implement without the necessary political will. Scotland and the UK have taken the lead in tackling consenting barriers for the nascent wave and tidal sectors by adopting a series of pragmatic actions: simplifying their procedures, such as Marine Planning, conducting a Strategic Environmental Assessment (SEA) and developing a one-stop-shop for consenting. Ireland is also now putting appropriate measures in place to support the sector s development. Sharing and disseminating experiences will ensure that regulators across Europe can learn from each other. Agencies in Ireland, France, Portugal or Spain can benefit from the programmes developed in Scotland and the rest of the UK by applying best practices to their own programmes in terms of simplifying consenting and environmental monitoring processes while still taking into account local concerns. Streamlining planning and consenting processes will work best in a context of high-quality interactions between the regulator and wave and tidal energy developers. Regulators need to thoroughly examine the evidence base regarding consenting issues, including relevant evidence from other industries (e.g. the impacts from the laying and operation of power export cables from offshore wind farms), and revise 12 Wave and Tidal Market Deployment Strategy

12 consenting advice accordingly. Developers need to provide feedback to regulators on the impacts of the planned processes and procedures. The newly formed Ocean Energy Forum is ideally placed to help disseminate Europe-wide guidance between regulators and project developers. De-Risking Grid The crux of the sector s grid issue is that Europe s high wave and tidal energy resource areas are in locations where the grid infrastructure is severely lacking. Regulators are hesitant to facilitate sizable grid connections until it is certain that projects will connect and fully exploit them. While some companies are pursuing small-scale off-grid solutions, for several others grid connection is causing substantial uncertainty, and will become an increasing concern as the industry moves past pilot arrays. Grid planning and investment will require commitment and support from policy makers to ensure that key milestones for commercialising the entire sector are not held up by grid-connection problems. Options such as combining Horizon 2020 funding for demonstration projects with structural funding for grid connection upgrades, which is currently being explored by the Commission s DG ENER, could present a novel solution to pilot array barriers. Further financial assistance for national grid developments and reinforcements could also be made available from funding sources such as the EIB (the Connecting Europe Facility and the Structured Finance Facility), where the strategic benefit to the industry and to Europe is clear. Policy makers can also support these sectors by ensuring that regulators incorporate wave and tidal energy projects into future grid development plans, such as ENTSO-E s 10-year plan. Coordinated offshore grid planning between wave and tidal energy projects and offshore wind projects could also help alleviate the costs of major sub-sea interconnections in areas where both resources are strong. The following chapters set out the key barriers to market deployment for wave and tidal energy technologies, focusing on the major risk areas of finance; technology development; consents and regulations; and grid. Each chapter concludes with a list of goals, with detailed recommendations that industry and policy makers can take forward in order to achieve them. Summary of Goals Markets & Finance Goals Technology Innovation & Development Goals Consents & Regulations Goals Grid Goals Introduce market push and pull support to ensure that up to ten pilot arrays of three devices or more can reach financial close by 2020 across Europe Develop clear and flexible European Commission State Aid checks for financing up to ten pilot arrays in Europe by 2020 Continue to push game-changers, challengers and frontrunners up the Technology Readiness Levels (TRL1 8) Encourage early investment in innovation for materials, supply chain components and services, enabling innovation, standardisation and cost reduction along the supply chain Accelerate technology innovation aimed at reducing costs, improving reliability and increasing yield, via research and design as well as deployment Deliver medium-term cost reduction through economies of scale, by investing in development, innovation and demonstration of pilot arrays today Involve the supply chain and incentivise its innovation potential Allow for integration of wave and tidal energy into long-term planning and with existing ocean users Streamline and accelerate the consenting processes by removing excessive administrative and cost burdens Explore innovative ways to reduce prohibitive costs and delays for connecting earlystage projects Extend the grid to reach the wave and tidal energy resource rather than constraining ocean projects to grid-connected areas SI Ocean Strategic Initiative for Ocean Energy 13

13 Executive Summary The Strategic Initiative for Ocean Energy (SI Ocean) The SI Ocean project s goal is to deliver a common strategy for ensuring maximal wave and tidal installed capacity by 2020, paving the way for exponential market growth in the 2030 and 2050 timeframes. The project consortium has seven members: Ocean Energy Europe (Belgium); European Commission Joint Research Centre (JRC); RenewableUK, Carbon Trust, and University of Edinburgh (UK); WavEC (Portugal); and DHI (Denmark). The consortium has held four workshops and four webinars reaching 455 participants over the last two years, and has communicated with a network of 800+ contacts. Each workshop focused on one of the key project deliverables: 1. Resource assessment; 2. Policy analysis; 3. Technology gaps and barriers; and 4. The market deployment strategy. Extensive industry engagement included interviews, panel discussions, and webinars which provided feedback on foundation documents, recommendations and industry data. The project benefitted from strategic validation provided by an Advisory Board consisting of 26 industry experts and three European Commission observers. The Market Deployment Strategy engaged with three advisory sub-groups on finance, consenting and infrastructure. SI Ocean focused geographically on the Atlantic Arc: Denmark, France, Ireland, Portugal, Spain and the United Kingdom. Although SI Ocean focuses on six EU Member States, the environmental and economic benefits of accelerating wave and tidal energy deployment will benefit the whole of Europe. Installation of Lifesaver, Fred Olsen 14 Wave and Tidal Market Deployment Strategy

14 SI Ocean Project Deliverables Resource assessment modelling: The main objective was to fully understand the potential contribution of wave and tidal energy to EU energy needs. Technology Assessment: The main objective was to assess current technology development priorities and develop a Strategic Technology Agenda as the basis for justifying the inclusion of ocean energy in the SET Plan. The recommendations developed here will be used as a basis for a technology road map by the newly formed TP Ocean. Market Deployment Strategy: To identify current policy and market barriers to the deployment and commercialisation of wave and tidal energy. The main objective was to engage with key stakeholders and develop a robust consensus on the swiftest route to commercialisation. For copies of the SI Ocean reports, visit: Figure 1 - The SI Ocean work packages and deliverables WP2: Resource Assessment Wave & Tidal Energy Resource Interface Atlantic Arc Resource Potential WP3: Technology Assessment Priorities/ gaps/ barriers Cost of energy assessment Strategic Technology Agenda WP4: Policy Analysis & Market Deployment Policy review/ Market Deployment Strategy Policy recommendations 2020/ 2030/ 2050 SI Ocean Strategic Initiative for Ocean Energy 15

15 Construction of Oyster 800, Aquamarine Power CHAPTER I Europe s Wave & Tidal Market Deployment Strategy

16 CHAPTER I - Europe s Wave & Tidal Market Deployment Strategy 1.1. Realising Europe s 2050 Wave & Tidal Energy Potential By 2050, Europe could have up to 100GW 6 of wave and tidal energy installed capacity delivering 260 terawatt hours (TWh) of clean, affordable and reliable electricity enough to power 66 million European homes. With up to 337GW 7 installed around the world, wave and tidal energy could be a multi-billion-euro international industry with significant exports to markets in Asia and across South and North America. Ocean Energy Europe, 2014 European companies currently hold a global lead in developing wave and tidal technologies, supported by cutting-edge academic research and testing facilities. If this advantage is preserved through innovation, it will enable Europe to dominate the world market. As the wave and tidal energy supply chain is pan-european, economic returns will flow to several EU Member States, and not only to those with ports, wave and tidal energy resources or a traditional maritime industrial base. This Market Deployment Strategy identifies the major milestones the industry will need to reach in order to fulfil its potential of delivering 100GW by This report draws on the previous work of the SI Ocean consortium, and identifies recommendations for policy makers which will help to create a European market for wave and tidal energy. These recommendations are intended to be taken forward by the Ocean Energy Forum, a stakeholder platform which was first announced in the European Commission s Communication on Ocean Energy 8 The Forum will build on the recommendations for wave and tidal energy support in the course of its work to deliver a road map for accelerating commercial development across the whole wave and tidal energy industry. This report provides high-level recommendations and approaches for stakeholders to take forward in order to deliver a road map for accelerating development. These recommendations are based on extensive consultation with industry, the research community, Member States and European Commission Directorates General. This report presents their vision of success for the wave and tidal energy sectors, and sets out the next steps the industry should take. 6 Figure published in agreement with Ocean Energy Europe association members, April 2014, as part of the Industry Vision Paper 7 Ocean Energy Systems: Annual Report European Commission: Blue Energy: Action needed to deliver on the potential of ocean energy in European seas and oceans by 2020 and beyond, January 2014 SI Ocean Strategic Initiative for Ocean Energy 17

17 Andritz Hydro CHAPTER II Finance and Markets

18 CHAPTER II - Finance and Markets 2.1. Today s Finance Challenges Wave and tidal energy, like established generation sources, has traditionally relied on government support, with some involvement from venture capital and private equity investors. The frontrunners in these sectors have started to emerge from the R&D phase, and private financing activity has picked up in response. In the last decade, a number of OEMs, utilities and privately owned developers have acquired or invested in the leading SME technology developers. In total, over 700m in private investment has flowed into the industry in the last eight to ten years 9. This has yielded good results, and market leaders are now close to securing finance for the first small pilot arrays of tidal turbines. Other, predominantly wave power, companies have chosen to minimise early technology risk by focusing on developing smaller-scale demonstrations for niche and/or intermediate markets, such as providing off-grid power to military installations, met masts and navigational buoys. As a result of this progress, machines deployed in the last five years have generated over 10GWh 10 of electricity to the grid, and several other technologies have completed proof-of-concept with scale models in test tanks and ocean test sites across Europe. Assuming a good balance of capital grants and revenue support is made available, this industry could feasibly achieve financial close and approval for construction on up to ten pilot arrays by At present, it is likely these will be predominantly tidal arrays, and that there will be between three and five located in the UK and France, as well as one pilot array in Ireland. Demonstrating technologies in pilot arrays will be a critical milestone for the whole industry. Regardless of technology type, array demonstration will maintain momentum and trigger further investment across all stages of development. However, securing that investment is proving to be a major barrier to reaching financial close for the first pilot arrays. The reasons for this are manifold. Early R&D activity in the wave and tidal energy sectors ten or twelve years ago relied on significant private investment, with some grant support from EU institutions and Member States. The expectation was that as test devices eventually emerged out of R&D and built up a track record for reliability, traditional sources of project finance would play a more prominent role, attracted by enhanced revenue support programmes and driven by long-term EU decarbonisation commitments. To a certain extent, this has happened, in the form of acquisitions and investments in leading SME technologies by ABB, Siemens, Andritz, Alstom and DCNS. However, the 2008 economic crisis changed the funding landscape. With the diminished availability of private capital and bank credit, finance has become more difficult to secure, particularly for high-risk ventures such as wave and tidal energy. In parallel, decreased energy consumption and lower profit margins have meant that some of Europe s biggest utilities are now trading at up to 50% below their 2007 value 11. In addition, since the economic crisis, Member State governments have focused closely on the value for money and needs case for renewable technologies. The general thrust of EU-level policy today is still towards decarbonising the power sector and mitigating climate change. Policy makers have recognised that the wave and tidal energy sectors can be a major player in meeting EU decarbonisation targets and delivering energy security and jobs. Ocean energy has a significant potential to enhance the security of supply. Developing a wide portfolio of renewable energy sources including ocean energy also facilitates their integration in the European energy system. European Commissioner for Energy Gunther Oettinger 9 Ocean Energy: Europe Vision Paper, RenewableUK: Maximising the Value of Marine Energy to the United Kingdom, February publications/reports.cfm/maximising-the-value-of-marine-energy-to-the-uk 11 SI Ocean Strategic Initiative for Ocean Energy 19

19 CHAPTER II - Finance and Markets 2030 Climate and Energy Goals for a Competitive, Secure and Low-carbon EU Economy 40% reduction in domestic greenhouse gas emissions below 1990 levels Increase renewable energy market share to at least 27% Continued improvements in energy efficiency Reform EU Emissions Trading Scheme (ETS) 2.2. Mission Critical: De-risk Early Array Finance Deploying the first pilot arrays will show that ocean energy technology has a route to market. The priority is to get the first arrays in the water as soon as possible. With more practical experience and further performance data under its belt, the industry can start to better understand, quantify and manage risk. These pilot arrays, together with a reliable regulatory and support regime, will stimulate appetite for investment in the entire industry, and will give utilities clear evidence that there is a market for ocean energy. Kai Kölmel, Vice President of Hydro & Ocean Power, Siemens AG In a sense, the wave and tidal energy sectors are caught in a perfect storm : the aftershocks of the economic crisis have focused attention on other maturing renewable technologies, such as offshore wind, which are competing in the same space for policy and financial support. The wave and tidal energy industry has delivered a number of viable solutions for generating energy from waves and tides. Today s challenge is financing the next step on the road to market, and getting the first pilot arrays in the water. Accessing finance for any emerging energy technology project is challenging. The LCOE of firstof-a-kind prototypes is inevitably high. High capital costs, lower revenue projections and high scores on project risk audits make it difficult to underwrite risk or to attract private equity. Banks will typically not consider lending money to such projects due to high technology risks and a lack of certainty over revenues. Likewise, traditional venture capital or private equity investors are not attracted to high-risk demonstration projects, whose primary benefit lies in learning and experience rather than financial returns. SeaGen installation at Strangford Lough, Siemens MCT

20 Figure 2 LCOE Predictions for 10MW arrays, after 10MW has already been installed (Source: SI Ocean Cost of Energy Report, 2013) LCOE (c/kwh) ,02 0,06 0,2 0, Cumulative deployment GW Tidal Tidal - Good Resources Tidal - Poor Resources Wave Wave - Good Resources Wave - Poor Resources For the first wave and tidal energy arrays, the finance challenge is compounded by the higher initial capital costs associated with new offshore technologies, combined with lower revenues predicted for pilot technologies. The SI Ocean project calculated that the LCOE for a 10MW array to be installed after the first pilot 10MW array will range from 0.35/kWh to 0.52/ kwh 12, depending on final costs and resource levels. This is a promising starting point for an early technology which can credibly assume a 12% learning rate 13, based on the SI Ocean cost reduction calculations. However, the industry lacks the scale of capital needed to finance demonstration projects approximately million for each of the first 10MW arrays 14. When it comes to performing due diligence on wave and tidal energy investments, a lack of operational experience drives up insurance premiums, limits the coverage available, and makes it difficult for potential backers to assess technology risk. Developers can provide design certifications for equipment and processes, but the prohibitive cost of extensive seabed surveys and rock core sampling, to verify seabed conditions for foundations for example, makes the unknown unknowns even harder to insure. Figure 3 Early array costs (Source: SI Ocean Cost of Energy Report, 2013) 70 LCOE (c/kwh) Highest cost is high capital estimate and capacity factor for medium resource Base capital cost, medium resource site Base capital cost, high resource site 10 0 Lowest cost is low capital estimate and capacity factor for high resource Tidal Wave 12 SI Ocean 2013 Cost Reduction Report 13 SI Ocean Cost of Energy Assessment Report: 14 Ibid SI Ocean Strategic Initiative for Ocean Energy 21