The 1.2MW SeaGen tidal energy system in Strangford Narrows in Northern Ireland

 This feature is an abridged and updated version of research, first published in December 2007, by Estelle Lloyd, CEO and Founder of Venture Business Research (VBR): www.vbrresearch.com

Companies using the motion of the ocean to generate electricity are attracting growing interest from investors and power utilities looking for the next long-term play in renewable energy.  The UK Government has forecast that wave power could generate 35TWh per year by 2025, approximately 20% of the UK’s electricity demand.  Wave and tidal stream resources are unlimited, predictable and reliable when compared to intermittent resources like wind and solar. From an implementation perspective, the marine power industry uses similar technologies to the oil and gas industry and has access to a large pool of engineers who can apply their skills to installing marine power generators. However, the sector faces significant obstacles, including establishing grid connections to relay offshore energy to large residential hubs where there is high energy consumption. To date technologies have been tested and produced encouraging results. Will these technologies move beyond the experimental stage and feed energy into the grid on a large scale?

The Major Players

The wave and tidal projects in operation are in their early days and technologies are still being tested with no known large scale commercial installation feeding into the grid. However, various ocean, tidal and wave energy devices have undergone extensive R&D and testing throughout the world, and quasi-commercial projects in partnership with local utilities or other key stakeholders are currently operating.  VBR has identified 90 companies that, at the end of last year, had received a combined total of US$130 million of venture capital funding. One of the most advanced companies in the sector is Pelamis, a Scottish wave energy developer, with project sites under development in Portugal and Scotland. Pelamis has received the bulk of VC investment, with US$68 million raised to date.  In partnership with a consortium led by Grupo Enersis, a Portuguese renewable energy group, Pelamis has installed a 2.25MW project off the north-west coast of Portugal. Construction of the array started in January 2006, followed in March 2007 by the shipment of three Pelamis devices from the factory in Scotland to the site. Grid connection rights were agreed with Enersis and the project’s first stage was completed in October 2007, generating the planned 2.25MW of power into the grid.  Phase 2 of the project is expected to be completed by 2009 with the installation of a further 38 Pelamis devices, bringing total production capacity to 24MW. The development of the Enersis project on this particular stretch of coastline was considered favourable because of the region’s moderate climate and the deep water levels close to the shoreline which ensure that the Pelamis devices can be moored at around 1 km. This avoids problems for navigation and fishing that come into play at distances beyond 5 km. The area’s well-developed infrastructure of ports and grid connections was also an advantage. Pelamis is developing several other projects in the UK and abroad.  

Another marine energy project currently feeding energy into the grid has been developed by Wavegen, a Scottish company, which is supplying 500kW to the national grid through its device on the Scottish island of Islay.  Wavegen has submitted a planning application, in a joint venture with npower renewables, for a scheme to generate up to 4MW of electricity at the Siadar Wave Energy Project on the Isle of Lewis.
Other more experimental projects are in the pipeline. Oceanlinx, an Australian company, will shortly supply 450kW of energy to the grid in New South Wales, Australia in partnership with Integral Energy, the local electricity retailer. In the UK, the Wave Hub project off the coast of North Cornwall, which was granted planning approval by the UK Government in September 2007, expects to be feeding 20MW of electricity to the grid by 2009, enough to power 7,500 homes. The project has secured £28 million of funding and is being developed by the South West of England Regional Development Agency (RDA).  Participants include Oceanlinx, Ocean Power Technologies Limited, Fred Olsen Limited and WestWave, a consortium of E.On and Ocean Prospect Limited, using the Pelamis technology.  This project will serve as the UK’s first sea-based ‘electric socket’ to transfer marine energy to the grid.  

In Spain, Ocean Power Technologies, listed on the AIM market in the UK and on NASDAQ in the US, is developing a 1.39MW wave energy site off the north coast in partnership with Iberdrola SA, one of Spain’s largest utility companies.  And finally Bristol, UK based Marine Current Turbines, in partnership with EDF Energy, has completed the first installation phase of its 1.2MW SeaGen Tidal System into the local grid from its project in Northern Ireland’s Strangford Lough. The company raised £7.5 million from venture capitalists in June 2007 and has recently secured investment from Irish electricity company ESB, alongside existing investors including EDF Energy, BankInvest and Tridos Bank.  

Others are in the R&D, testing and permitting stage but are nonetheless significant.  For example Finavera Renewables, based in Vancouver BC, has received a preliminary permit from the Federal Energy Regulatory Commission to site a proposed 100MW wave farm in Coos County, Oregon. The company has also received a licence to build four 250kW wave energy conversion buoys at Makah Bay, off the coast of Washington State.
UK based wave energy company, ORECon Limited, recently completed a US$24 million fund raising from international VCs, which included Advent Ventures, Venrock Wellington Partners and Northzone Ventures.

In Australia, Biopower Systems has raised A$6 million from a group of investors which included Lend Lease Ventures, CVC REEF and CVC Sustainable Investments. Biopower, which is putting together a pilot programme for its bioWAVE and bioSTREAM systems in Tasmania, was also recently granted A$5 million in grant funding from the Australian Government.

Meanwhile, Lunar Energy of the UK has reached agreement on a £500 million deal for the creation of a 300-turbine field for the generation of tidal energy off the South Korean coast in conjunction with Korean Midland Power Co.

The Regulatory Environment

Public sector support has created a positive environment for marine energy technology development. In the UK the Marine Renewables Deployment Fund (MRDF), a Government programme, distributes up to £5 million in capital grants to assist UK marine technology companies. This is in addition to £100 per MWh of revenue support for a maximum of seven years after commissioning.  Total funding for each project is capped at £9 million. However, the MRDF reported in February that none of the applications so far received has satisfied the key criterion of continuous device operation for three months.

Changes to the RO scheme contained in the Energy Bill which had its report and third reading in the House of Commons on 30 April this year will provide even stronger incentives to the marine power industry in future. Currently one Renewable Obligation Certificate (ROC) represents one MWh of renewable electricity. The proposed revised scheme will assign different ROC values to different technologies.  For example, wave and tidal power producers will receive 2 ROCs, compared to 1.5 ROCs for an off-shore wind developer and only 1 ROC for an on-shore wind farm. In the proposed reform we have found no evidence that the number of ROCs allocated will be capped.

In Scotland, the Marine Supply Obligation (MSO), an equivalent scheme to the RO in the rest of the UK, requires Scottish electricity suppliers to source a small percentage of wave or tidal electricity. In addition, the Scottish Government awarded £13 million to nine marine energy companies in February 2007 to kick-start the installation of devices at the European Marine Energy Centre (EMEC) in the Orkney Islands of Scotland.    
Outside of the UK, countries have produced alternatives to the RO.  For example in the mid-nineties the United States developed the Renewables Portfolio Standard (RPS), which requires utilities to source a percentage of their electricity supply from renewable sources.  The scheme is very similar to the UK’s RO initiative. The US Government also recently authorised US$50 million grants for marine energy research over the next five years.
In the EU, 18 countries operate a feed-in tariff scheme.  Feed-in tariffs offer a long-term fixed price payment to renewable energy producers feeding into the grid.  This creates a strong incentive to invest in renewable energy projects given that the price is guaranteed over a fixed (longish) period of time.  A range of feed-in tariffs are offered depending on the technology utilised, with the less developed technologies such as wave and tidal often being given higher subsidies per kWh.  For example, Portugal has established a feed-in tariff of €0.225 per kWh for the first 5MW of installed wave power production capacity.  

Challenges

Despite the incentives provided by the public sector programmes above, the upfront installation costs for marine technologies are significant. One venture capitalist interviewed by VBR thought that any serious wave project would cost a minimum of £50 million in upfront capex before generating its first MW of power.   The recent example of the 2.25MW site built by Pelamis,was estimated (by the Scottish Government) to have cost €8 million, which implies an installed cost of €3.5 million per MW  - about 3.5 times the current cost of installed wind turbines.. Comparatively, Pelamis’ 3MW Orkney Islands site is estimated to cost €14 million (according to Iberdrola), translating into installation costs of approximately €4.6 million per MW and reflecting the way costs vary by site depending on specific issues.     

Overall, the limited data from demonstration projects results in wildly varying estimates of production cost per kWh.  The lowest-cost group of off-shore wave energy converters ranges from 12p/kWh to 44p/kWh, with central estimates in the range of 22p/kWh to 25p/kWh (according to a 2006 Carbon Trust Report).  Clearly the above figures will reduce as these projects scale up. Max Carcas, Pelamis’ Business Development Director, said the company expects to improve efficiency once the system is operating: "Typically costs fall by some 15% for each doubling in installed capacity."

Adding to the cost requirement is the lack of grid infrastructure near many wave and tidal sites.  Costs have not yet been determined for expensive sub-sea cables to take the energy to shore, and long expanses of normal overhead lines are needed to bring power from remote areas, which are often the ideal locations for wave and tidal stream project sites, to the end consumer.  A Scottish wave company conducting feasibility studies estimated that there is 2GW of potential wave energy in western Scotland, but it would require £600 million in grid infrastructure development to bring it to the end user. Clearly this is a significant amount and it remains unclear at present whether the private or the public sector is willing to undertake this investment.
Project planning and permitting requirements also present a significant hurdle and hamper the development of wave energy projects considerably.  In its Planning Reform Bill published on 27 November 2007, the UK Government announced it will seek to streamline the permitting process.  The proposed changes are expected to reduce the average time for decisions on major projects – currently more than two years for wave farm projects - to below one year.  The UK Government’s draft Marine Bill, currently in the consultation stage, addresses marine planning and consent processes, alongside their stated goal of streamlining procedures.  

Despite the string of incentives, grants and other good intentions and assuming large capital and extensive planning requirements are resolved, sceptics remain cautious, arguing that wave or tidal power systems will always remain subject to the wild and destructive nature of the sea.

VBR view

Marine technology is a risky investment as investors must identify technologies with the highest potential using limited proven data.  Despite the barriers, marine power is now on the map of most countries where there is significant wave resource.  In the UK, the first commercial wave plants will connect to the grid over the next few years.  The Pelamis 3MW project in the Orkney Islands is projected to be on-line in 2008 and is likely to be the UK’s first commercialised plant.  The Wave Hub hopes to be operational by 2010/11 and is expected to feed 20MW into the grid.

The crucial question at this stage is whether – and when – the proposed changes to the RO scheme (due to be enacted in April 2009) and the permitting process will take place. If the UK Government approves the changes, investors will see this as a clear indication that it is actively backing the development of marine power. Until the Government sends a clearer signal, many investors may prefer to sit on the sidelines rather than ride the waves of regulatory uncertainty.