Blog: Max Carcas discusses the cost of developing marine renewables

“Whilst 25-30p/kWh seems quite expensive it is often forgotten that there has never been a new energy technology that has been economic ‘out of the box’.”

The Financial Times published an article last week remarking on the progress that has been made at EMEC over the last 10 years as demand for our full-scale wave and tidal test berths continues to increase. The article also looks at how marine energy technologies compete with other low carbon and traditional energy sources, and the implications that this may have for the future development of the industry.

Max Carcas, External Liaison for EMEC, recently spoke to the Financial Times’ Michael Kavanagh, and has summarised his discussions below to provide some insight into the cost of marine renewables now and in the future.

How does the cost of wave and tidal energy compare with other renewable and traditional energy sources?

“The recently established ROC banding legislation provides wave and tidal energy projects with an electricity tariff of around 25-30p/kWh.  It is generally believed that this level of support can provide an adequate return for project investors (typically the utilities) particularly as projects are expanded in scale from initial 5-10MW arrays up to tens of MW.

“Whilst this cost is relatively high compared to other low carbon options, such as onshore wind (10p/kWh), offshore wind (15-17p/kWh) and nuclear (probably somewhere in between) the cost to the consumer is likely to be virtually negligible because the tariff is limited to projects below a certain size – 30MW in England/Wales, 50MW in Scotland – which is relatively small in power generation terms.

“In providing such support the intention is to mobilise investment into the sector in order to build first projects and drive costs down as experience is gained.

“The fact that the ‘opening costs’ of marine energy are lower than many of these preceding energy technologies puts this sector in a very good position to be competitive in the longer term.”

“Whilst 25-30p/kWh seems quite expensive it is often forgotten that there has never been a new energy technology that has been economic ‘out of the box’.  Indeed marine energy is already quite competitive compared to where other energy sources were at similar stages of development.  In 1910, thirty years after the world’s first public electricity supply was established in Godalming, Surrey, the cost of electricity was around £1.50/kWh in real terms (US data converted into £).  Even at the beginning of the twenties, when electricity use was well established throughout the UK, the cost of generating electricity was more than 40p/kWh in today’s money.  That costs have fallen almost tenfold since then has been due to ever greater efficiencies in scale and technological advancements in utilising the fuel used.  Gas turbines could only be used economically for electricity generation after several decades of investment in the marine, defence and aerospace sectors.  More recently the cost of generating from wind and solar energy has fallen by around 80% since the mid-eighties.  The fact that the ‘opening costs’ of marine energy are lower than many of these preceding energy technologies puts this sector in a very good position to be competitive in the longer term.”

How will the cost per unit of marine renewable energy decrease as the industry develops?

“A common misconception is that because marine energy costs 25-30p/kWh today it might never be economic because the gap/cost reduction required to compete with other sources is too big to be crossed – but it’s not necessarily appreciated that it’s much easier to drive down the cost of something that has only been produced in prototype volumes than something that has had thousands of units deployed. In addition the cost reduction required on the headline p/kWh figure required to support investment in projects is not just down to reducing the cost of the kit  to convert the energy by the same amount, it’s a mixture of:

• machine cost falling over time with design improvements, continued innovation and volume manufacturing (take mobile phones as an example);
• energy capture efficiencies increasing with increased experience, improved reliability, better operational control and better operation and maintenance;
• economies of scale per project (2-3MW -> 10MW -> 50MW ->100MW -> 1000MW) – affecting both capital costs and operational costs – with the ‘fixed costs‘ per project becoming progressively smaller.  These fixed costs include elements such as:
  1. the submarine cable to export the electricity;
  2. transformers, switchgear and substation to connect to the grid;
  3. monitoring equipment;
  4. the costs of project development, licensing, legal work and environmental scoping;
  5. project management;
  6. the establishment of an O&M base for maintenance crews;
  7. a vessel dedicated to the project.

Whilst these costs will increase for larger projects the relationship does not scale linearly – and is part of the reason that all power stations tend to be large in order to gain these economies of scale.  Conversely building a small scale 5 or 10MW nuclear or gas fired power station (or offshore wind farm for that matter) would be hugely uneconomic for the same reason.  For marine projects the issue is magnified not only due to the fact that first projects are small in scale but also by the need to be offshore, which makes the barrier to entry higher than for land based projects.  However the good news is once this barrier is overcome the cost progression will inevitably be downwards.

• other cost reduction drivers as the technology continues to be proven by project deployment in an increasing market e.g.:
  1. cost of capital becoming cheaper over time as perceived risk falls;
  2. debt becoming available, reducing the p/kWh required to get the same equity return for an investor;
  3. Insurance costs falling due to competition and experience.”

“The difference is that this is home grown technology with significant potential to earn the UK a financial return in terms of jobs and exports.”

“In fact a 20% improvement in each of these areas can combine to halve generating costs.  As such it is not inconceivable that once the first 1000MW of marine renewables is installed (equivalent to one conventional power station) costs could be similar to that of offshore wind.  If achieved this would be quite a ‘game changer’ since there are plans in the UK alone for £100bn investment in offshore wind.  The difference is that this is home grown technology with significant potential to earn the UK a financial return in terms of jobs and exports.  The key question then becomes how quickly can this happen? This is a function of the degree and speed of investment into the sector which is itself a function of the balance of opportunity and risk.  EMEC helps reduce the risk side by providing the infrastructure such that prototype machines can be tested, proven and independently verified, helping to facilitate this investment.

“It is also worth noting that electricity generation cost figures only really make sense in the context of array scale projects (that have yet to be built) so it is too early to have definitive data.  However intuitively one can certainly see dramatic improvements in build costs, installation methods, generation performance and operations and maintenance methods which will all certainly have a significant impact on generating costs and no reason why this trend should not continue.”

What is being done to drive down the costs of marine renewable energy?

“With all of our clients there are good examples of how experience leads directly to improvements in performance and machine design, driving down cost.  In Orkney we have an increasing marine energy sector (or ‘cluster’) estimated to employ around 250 people that builds on the experience gained over the past decade in installing and operating a number of different concepts.  It’s still quite early in this sector but solid performance is being made by many of the companies here with increasing amounts of electricity generated and multimillion pound investments being made.”

What challenges face the development of the marine renewable energy industry?

“The key challenges can be summarised as technical, commercial and political:

• Technically the machines have to perform reliably and give the performance required/expected;
• Commercially wave and tidal projects compete for investment with other power generating sources.  With a need for in excess of £200bn investment in the electricity sector as a whole over the next decade or so there is already a squeeze on available capital from utilities (whose outlook is international): initial wave and tidal projects are small scale compared to other more established technologies and may struggle to get attention in the boardroom despite the longer term strategic imperatives;
• Politically the Energy Bill is currently going through parliament and until this legislation is in place there will be a significant uncertainty over the future investment horizon.  This is particularly acute in marine energy as first phase projects may be initiated under the current system but not fully built out until the new system is established. This could undermine the rationale for making first phase investments if it is not certain what level of support will be in place under the new system post 2017.”

Kavanagh’s article is available to read on the Financial Times website. Please note that you will need to register with the site to read it (for free).