Maximizing the commercial success of marine energy will be based on the choices that governments make and their ambition to exploit this new and predictable source of energy, said Ton Fijen, Technical Director at Tidal Lagoon Power, regarding the conditions for commercial success of marine renewable energy.
In an interview for Tidal Energy Today, conducted as part of Marine Energy Event, which was held on October 11, 2017, as part of Offshore Energy Exhibition & Conference (OEEC) 2017, Fijen talked about the financing of tidal lagoons and other factors affecting the development of tidal energy projects.
Tidal Lagoon Power is the company behind the Swansea Bay tidal lagoon proposal – often called the ‘pathfinder’ project for tidal lagoon industry in the UK – which is still awaiting subsidy agreement with the UK government as a final go-ahead for the project delivery.
Mr Fijen, as the topic for this year’s Marine Energy Event is focused on conditions for commercial success of marine energy projects, could you please tell us more about the challenges Tidal Lagoon Power faced when it comes to the financing of the pathfinder Swansea Bay tidal lagoon project?
While Swansea Bay is a first of a kind tidal lagoon, we have a precedence of 60 years of tidal range generation in La Rance, France. The long term, proven performance of this plant, coupled with a variety of innovative modifications, facilitated by improvements in turbine and generator technology, mean the stage is now set for a new class of tidal range power stations.
Developing a pathfinder is not without its challenges: tidal lagoons are engineering to last for longer than other power stations. This requires a financial structure that is reflective of that lifetime. We have focused a huge amount of effort on the interaction between Swansea Bay and the environment in order to fully understand this relationship and to be sure we actively and acutely monitor that relationship going forward. No pathfinder project is without its challenges but the strong underlying principles behind tidal range energy generation have proven strong drivers in overcoming those challenges.
To date, Tidal Lagoon Swansea Bay (TLSB) has been largely privately funded (with the exception of a £1.25 million loan from the Welsh government). We have raised £35 million through five fund raises, including a Community Share Offer to local people in Swansea and the wider south Wales region. Consequently, we have a broad investor base which comprises a number of corporate and institutional investors as well as more than 360 private investors.
Our institutional investors are Infracapital (part of Prudential) and InfraRed. Our initial challenge was that the project was largely unknown. However, as our profile has risen over time, so too has the interest in investing.
We were aided with our fundraising initially because we were able to secure tax reliefs (known as Enterprise Investment Scheme reliefs) from the UK government. Sadly, this tax relief scheme is no longer available to future projects. Being a pathfinder project means that there is no recognized approval process or timetable and that is proving challenging: a lack of feedback from UK Government to the Hendry Review published in January 2017, means the approval process is dragging on and thus impacting upon our cash resources.
How difficult it is to attract private funding and what does it take to convince investors to fund big projects like Swansea Bay tidal lagoon?
Tidal lagoon power has been privately financed to date without any UK government support. Private investors have funded the development of the project based on the strong underlying rationale behind tidal range power stations in the UK: a world-leading renewable resource (the UK has 48% of all the tidal range potential in Europe), conventional construction techniques, mechanical and electrical equipment with a 60 year plus track record, predictable generation cycles and a long asset life.
The power of that narrative has meant we are financed through a wide range of investor types, from individual local shareholders in Swansea Bay itself, to large institutional infrastructure investors. Our investors tell us that they have invested in TLSB not just for the potential return on their investment, or the tax advantages of the EIS Schemes, but to support a local initiative, and diversify their investment portfolio as renewables and infrastructure projects offer attractive long term returns.
Others have done it to protect the planet for their children’s future, or because they believe in the energy generating potential of the tidal range. Some are attracted by a technologically innovative project whilst some of our suppliers have sought a strategic investment seeking longer term commercial benefit.
What role can governments play when it comes to providing confidence for the private investors when it comes to financing marine renewable energy projects?
A clear, long term government support program coupled with an achievable cost reduction curve and supply chain can facilitate significant savings in the cost of new renewable energy projects. Take offshore wind in the UK as an example – after 17 years of clear and unfettered government support, and £7 billin in subsidy, we’ve seen unit costs come down to almost a third of where they started.
Under a financial structure reflective of asset life, tidal lagoons are able to compete with current offshore wind costs in the UK on only the second project. With the right signals from government, driving sufficient investment, renewable energy can complete with any other form of power generation, thermal or otherwise.
The government should also reinstate tax advantageous investment schemes to encourage private individuals to invest in future energy projects. Such investment in early stage development is crucial if we are to see accelerated innovation.
Could you share with us some details about the financing plans Tidal Lagoon Power is developing for future, larger tidal lagoon projects?
We are seeking an agreement with UK government to bring forward the pathfinder tidal lagoon at Swansea Bay under a structure that will leverage the long asset life, predictable generation profile and low-risk technology to kick-start a new industry, improve diversity in the UK’s and eventually Europe’s energy mix for the cost of 18p per year to each UK household.
We are looking to use these unique attributes alongside a new supply chain and pure physics of large tidal lagoons to deliver the cheapest power to the UK system through our first full scale project between Cardiff and Newport. We have just secured a 3GW grid connection for this project. We have a share offer open to high net worth individuals and are seeking institutional investment via our Advisors Investec, once TLSB receives government support.
In your opinion, what are the most important conditions for commercial success of marine energy project?
Tidal lagoons generate renewable energy predictably, removing some of the intermittency costs associated with other sources of energy. Alongside the wider energy transition to a more flexible, smart network, this can represent a new opportunity to optimize the energy mix we choose to build, because the generation cycles of tidal lagoons and the required utilization of flexible capacity is known in advance thus removing some of the risks around asset utilization and associated premium applied to the capital structures of these developments.
Maximizing the commercial success of marine energy will be based on the choices that governments make and their ambition to exploit this new and predictable source of energy. As we have seen with offshore wind, a strong commitment over a suitable period of time can transform the economics of a technology. Tidal lagoons can achieve such transformations on just the second project.
Interview prepared by Amir Garanovic