Steve Carden and Paul Johnson, PA Consulting
December 26, 2012 | 4 Comments
As global energy demand continues to increase, renewables are clearly becoming a much more important part of the energy mix. Of the various renewable energy options, marine energy (wave and tidal) is particularly interesting as it is relatively new but offers significant opportunities for growth. Vast resources are being spent to design and build marine energy systems that are scalable and provide energy at a reasonable cost, and significant testing is now underway.
R&D Needs Capital
There are no extensively proven, deployed marine energy systems but dozens of development projects are now active. The nature of marine deployment - a harsh environment, with difficult access and no existing support infrastructure - means that development projects necessarily have a high capital outlay. Typically, tens of millions of dollars are necessary to get an idea to a proven technology base, followed by further tens of millions of dollars to create an appropriately scaled array that generates electricity.
The challenge is that most countries and companies are in a state of ‘zombie’ investment, where investors are unable or unwilling to free up the capital required to make a gamble that will only pay back over many decades. Within this investment environment, it is important to be selective about which projects to support. With a broad base of marine renewable energy projects to choose from, which are at relatively modest levels of maturity and have payback times longer than current investment lifecycles, investors are finding it hard to determine which projects are most likely to succeed.
Which Technologies Will Meet Business Needs?
Picking winners is always difficult and in many cases a winner will not have followed the traditional trajectory of development and then market acceptance. The most dramatic example of this is Apple’s iPhone, which appeared to emerge fully formed and rapidly overtook all other mobile phones, forcing Nokia into retreat. However, within the marine renewable energy field, the long-term and visible nature of the developments makes it possible to identify some trends and explore which technologies might have a greater chance of getting through to the finish line, and where others may need to spend more time to maximise their chances. Using this approach, an analysis was made of the potential success of different wave and tidal devices.
Business Cases and the Case for Business
The developments most likely to come to fruition and deliver value are those which have the best business case. Therefore we need to look at the upside, the downside and what risks are involved.
For marine renewable energy devices, the key benefit is clearly the ability to produce reliable clean electricity (all current development projects have an end-goal of generating electricity that is connected to the national grid network). Publicly quoted figures for the levelised cost of electricity (LCOE) are difficult to obtain for all marine energy devices so there is no way of distinguishing between technologies on this basis. It is assumed that a lower LCOE will be more competitive and therefore more likely to succeed, but this is by no means certain at this point in the development of marine renewable devices. LCOE was discounted in the analysis because of this uncertainty and lack of consistent public information for marine renewable devices.
Figure 1: Wave power
In addition to LCOE, another important upside is the potential addressable market (the revenue opportunity available for a product or service). In simple terms, the more access to marine energy, the more devices can be sold and the more energy can be generated. In this case, the potential addressable market is a combination of the area of water in which the device can be used and the potential energy that can be generated. If a device can only access a small area of water (for example, near offshore), but that area is extremely active and will generate significant energy, then this may be more attractive than a device that can activate across large but less energetic areas of the ocean. For this category, we are not particularly concerned with the complexities or cost of the devices that address this market; instead commercial success will be driven by the number of devices sold and the amount of energy that can be generated.
In our study, public information was used to compare the addressable market in these terms. Wave energy technology that can be used in shallow water and deeper water (for example, the North Sea) and deep ocean has the most addressable market and therefore scores highly in Figure 1. For tidal devices we use a slightly different logic, as the addressable market is driven by the usable water currents, flood and ebb tidal flow and water depth range. Analysis of tidal devices is shown in Figure 2.
The Voith Hydro Wavegen and Wave Dragon both stand out as examples that are both portable and able to work in the greatest addressable market, whilst strong tidal devices are from Alstom Hydro, Andritz Hammerfest Strom, Atlantis Resources and Scotrenewables.
The Downside - Costs To Get to The Finishing Line
The next issue to consider is the cost. In the case of marine renewable energy, the cost is split into a number of categories - the capital cost of development; the capital cost of the unit (the ‘unit cost’) when at scale; the installation cost; and the likely maintenance cost. Again, many of these costs are not publicly available as they are commercially sensitive, so this analysis uses the best available information.
Capital cost of development and unit cost are relatively straightforward to establish. The first represents the amount of capital spend that is required to take the technology from where it is today to full-scale production and steady-state delivery. This is likely to be a combination of research and development and sales and marketing, but predominantly research and development. For the purposes of this analysis, the technology maturity curve was used to come to a subjective determination. The unit cost is the anticipated unit cost of the device, when at scale. A relatively simple approximation of the size and complexity of the device was used to come to a conclusion about the likely eventual cost. No view has been taken as to the likelihood of reaching these target costs, apart from reflecting on the technology’s maturity.
Installation and operations and maintenance costs are likely to be major drivers for the ongoing success of devices. Current estimates suggest that about 50%-80% of the cost of commissioning a device relates to installation, and the total cost of ownership is dominated by operations and maintenance. As none of these devices is currently in full-scale operation, actual costs are not available. Engineering experience has been used to take a view on the attractiveness of the device designs with regard to installation, operations and maintenance. In this case, for example, floating devices with relatively little requirement for connection are easier to install than devices that require an extensive fixed-point connection to the seabed - and devices that require connection in deeper waters are harder still. Similarly, for operations and maintenance, near-shore devices are easier to maintain, and devices with fewer moving parts are also more likely to be stable and require less maintenance.
Figure 1 summarises the analysis of costs (a black circle represents low cost whilst an empty, white circle represents a high cost). From this high-level analysis, for wave energy devices, Pelamis and Voith Hydro Wavegen score moderately, while a similar analysis for tidal devices reveals that only OpenHydro, Pulse Tidal and Tidal Generation have any strong claims. It is clear that costs are high across the board and significant work needs to be done to bring costs down.
The Risks: How Likely Are We To Reach The Finish Line?
None of these devices are proven - they all require significant development to get to the next level of maturity. The scale-up from proof-of-principle to production is one of the trickiest challenges to overcome as companies need to secure investor confidence, prove reliability, show financial stability, cost reduction and customer acquisition and create an effective supply chain. For the purposes of examining current technologies, there are three key characteristics: funding stability, local support and technology risk.
Funding stability reflects the confidence that investors have already shown and are indicating for the future. This means they will be willing to fund the entire development cycle. This will need to be a long-term commitment, dependent on progress against milestones. It is absolutely critical because companies that spend all their time conducting funding rounds struggle to focus on the core business - building devices that generate electricity reliably and at a cost customers are willing to bear. Funding stability can be achieved through a combination of cash in the bank, shareholdings by large multi-nationals and orders already taken or government backing.
Figure 2: Tidal power
Local political and popular support is also important, particularly in the current economic climate. Companies with local backing are more likely to attract the commercial sponsorship, as well as subsidised research and development, which can be the difference between success and failure. In this case, the level of local support was judged by combining subsidies, political statements and supportive actions, a local infrastructure (for example, testing sites such as the European Marine Energy Centre) and the existence - or not - of a mature local supply chain. Using these categories, developments in Scotland, as might be expected, come out particularly strongly, as political support has led to investment. This is being treated as a static view of today, but does need to be counterbalanced with the risk of political support being withdrawn, which would also result in reduction in subsidies and consequent threat to the business case.
The third factor is technological risk, which is significant as many of these technologies are unproven. It is not just the technology required to generate electricity that needs to be proven, but also the technology that can make that device work reliably for many years in one of the world’s most energetic and corrosive environments. The yardstick used for technology risk is the technology’s position on the European Marine Energy Centre’s Technology Readiness Level (TRL) scale. Typically, technological maturity goes from concept through small-scale replica testing to full-scale testing, then prototype and array trials. Technologies which are deployed as arrays are likely to be significantly more de-risked than technologies that are still in the wave tank. The study took a view on the length of time technologies take to progress through TRL levels. Technologies that have taken years are likely to be inherently riskier than those that have accelerated relatively rapidly through the process.
Which Wave Devices Are Most Likely to Succeed?
This analysis is not intended to choose a particular winning technology, nor is it intended to be definitive. This is an evolving market with constant change in design and funding support. A single key conclusion can be drawn from the crude analysis: cost reduction is the single most important element for success for each of these technologies. Reducing the cost of development, manufacture, installation and maintenance will be the determining factor for whether marine energy has the potential to take off or not. As yet, no technology offers a foolproof solution to this challenge.
Cost reduction comes from a number of sources including improved design, better control of the supply chain, economy of scale and a general overall improvement over time. The recommendation is to put significant effort into cost reduction. All four of these areas can contribute to cost savings but the radical reductions required are most likely to come from design and supply chain first. There are areas of commonality which are not competitive and could drive significant costs out, as the oil and gas industry discovered when both were forced to innovate to reduce costs. The marine renewables industry must invest in collaboration as well as competition.
The marine renewables world is vibrant, full of exciting technologies and companies working towards deployment of devices that may transform the global energy supply chain. However, with the current challenges surrounding capital investment, investors are being particularly careful about backing new technologies. The business case for these investments therefore needs to be very clear about the upside (the LCOE that will be generated), the downside (development cost, unit cost and operational cost) and the risks involved in getting there.
Steven Carden is an energy innovation specialist and Paul Johnson is an energy technology specialist at PA Consulting Group.
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