TODAY’S STUDY: THE MANY BENEFITS OF OCEAN ENERGY FOR A COASTAL STATE

The Economic Impact of the Development of Marine Energy in Wales

July 2013 (Regeneris Consulting and the Welsh Economy Research Unit at Cardiff Business School)

Executive Summary

Purpose of the Report

i. Regeneris Consulting and the Welsh Economy Research Unit at Cardiff Business School were appointed by the Welsh Government to undertake an assessment of the potential economic contribution of marine energy to Wales.

ii. The primary purpose of this study is to estimate the potential economic benefits for Wales from the future development of the sector. The analysis covers wave and tidal stream energy (it excludes tidal range) and examines the economic benefits for Wales from three illustrative timeline scenarios:

• A 30MW wave installation and a 30MW tidal stream installation;

• 300MW in marine energy capacity (two 30MW wave installations and eight 30MW tidal stream installations, reflecting the relatively advanced state of tidal energy);

• 1GW of marine energy capacity (250MW of wave and 750MW of tidal energy).

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iii. For each scenario we consider the impacts arising from direct employment and expenditure, indirect expenditure via supply chain goods and services sourced within Wales and induced expenditure by employees supported through direct and indirect effects. As we explain in detail throughout the report, there is considerable uncertainty on the timing of these scenarios. As an indication, there is potential for Scenario 1 to be achieved in the next 3-4 years, scenario 2 in ten years and scenario 3 in the next two decades.

iv. The assessment has been informed by a review of existing economic impact and supply chain literature and consultations with project and device developers, policy and strategy leads in Welsh Government, and other industry experts and stakeholders (see Appendix B for a full list of organisations consulted with). We set out in more detail our approach to the economic impact assessment, along with the approach to dealing with uncertainty, in Section 2.

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Overview of Marine Energy

v. The development of renewable energy technologies is driven by the need to de-carbonise the energy system, in order for the UK to meet climate change obligations. The Welsh Government has stated its strong commitment to marine energy and sees Wales as having the potential to be a world leader in this area. This includes a commitment to provide strategic leadership, maximise economic benefits and support innovation, R&D and commercialisation in the sector.

vi. The International Energy Assocation estimates that total global installed capacity could be as high as 210 GW by 2050. The UK has the largest wave and tidal resource in Europe. The Marine Renewable Energy Strategic Framework (MRESF), found a potential of 1.5 to 6.5 GW of installed capacity in Welsh waters.

vii. The costs of marine energy will need to fall considerably for the energy source to be competitive and to become viable without public subsidy. The Carbon Trust estimates the Cost of Energy will need to reduce by 50-75% by 2025 for marine energy to be competitive. To achieve this, significant levels of innovation and economies of scale are needed. We provide further details in Section 4.

viii. The UK Government has provided capital (e.g. the Marine Energy Array Demonstrator fund) and revenue (the Renewables Obligation) support for the industry. Electricity Market Reform (EMR) will determine the future subsidy available. Current plans are to replace ROCs with a Contract for Difference with a Feed in Tariff (CfD FiT) mechanism. Precise details on the level of support to be offered have yet to be announced and this is widely seen as a risk factor to the development of the industry at present.

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Development of the Industry to Date

ix. Twelve large-scale prototype devices have been deployed in the UK at present, which is more than in the rest of the world combined. There is a great deal of uncertainty surrounding the future development pipeline however. Latest evidence suggests that there is potential for 200 MW of installed capacity in the UK by 2020. Beyond this, our consultations indicate that it is not possible to make a robust assessment of future capacity development given the range of uncertainties outlined above.

x. In Wales, there are currently a total of four pre-commercial (demonstration) projects proposed off the Pembrokeshire coast:

• Tidal Energy Ltd is in the process of installing a 1.2MW device, consisting of 3 horizontal axis tidal turbines, in Ramsey Sound, Pembrokeshire in 2013.

• E.ON in partnership with Lunar Energy Ltd also has plans to install a device in Ramsey Sound, which will consist of six turbines totalling 8MW.

• Wave Dragon Wales Ltd planned to install a temporary 7MW wave energy converter 2-3 miles off the Pembrokeshire coast to test its proprietary technology in 2011/12 with the aim of scaling up by a factor of 10 to a commercial size array; however the project has been delayed due to a lack of financing.

• Marine Energy Ltd has plans for a 10MW wave energy system. It is currently in the process of making applications and aims to install the device towards the end of 2013.

xi. In addition, Marine Current Turbines (MCT) Ltd has successfully developed and tested prototype tidal devices in Strangford Lough, Northern Ireland and aims to install its first fullscale tidal turbine array in Welsh waters by 2016.

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The Marine Energy Supply Chain

xii. There are broadly five phases in the project lifecycle, which can be summarised as follows:

• Development and Consents: design and feasibility, surveys and monitoring (e.g. environmental), planning application.

• Device manufacturing: hydrodynamic, reaction, power take off and control systems.

• Balance of plant manufacturing: foundations, mooring, cabling, electrical equipment, onshore infrastructure.

• Installation and commissioning: port services, installation of electrical systems, installation of foundations and moorings, device installation,

• Operations and maintenance: monitoring, planned and unplanned maintenance, insurance, grid charges.

xiii. In section 5 we set out a detailed mapping of the potential marine energy supply chain in Wales. Given the current sectoral strengths of the Welsh economy, our analysis suggests that device manufacture may be concentrated outside of Wales, in other parts of the UK (Scotland in particular) and Europe. The greatest opportunities for the Welsh economy could be in terms of balance of plant manufacturing, and in supporting elements of installation, local assembly of imported products and maintenance. However, given the nascent nature of the marine energy sector, there is scope to capture elements of higher value device manufacture with carefully targeted SME support.

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Potential Economic Benefits for Wales

xiv. Section 6 provides full details on the underlying assumptions for our economic impact modelling and the sources drawn upon. The results of our analysis are presented here. In addition to the uncertainties surrounding the estimates it should be noted that the realisation of these benefits is heavily dependent on continued capital and revenue support from Government and the ability of the industry to drive down costs through innovation.

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Development and Installation

xv. From the available evidence we estimate that gross spending associated with tidal installations is currently around an average of £4.2m per MW and £5m for wave energy. After accounting for expenditure that leaks out of Wales (largely on specialised services and the manufacture of devices), we estimate the likely level of spend retained in Wales from tidal to be around two thirds and a half for wave.

xvi. After accounting for indirect and induced multiplier effects and cost-savings due to learning and scale effects (for the time periods in which the different scenarios might be realised), our estimate of the cumulative impact on Welsh GVA of our three Scenarios…

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xvii. The key points to note are as follows:

• Scenario 1 of development has the potential to support over £70m of GVA across Wales, with this including on- and off-site economic activity (based on total investment in Wales of the order of £150m in 2013 prices).

• Scenario 2 (300MW, with a preponderance of tidal) delivers just over £300m of GVA for Wales, with the economic impact per megawatt declining somewhat (from £1.2m in Scenario 1 to £1m) as cost reductions come further into play (based on total investment in Wales of over £500m in 2013 prices).

• The final, very substantial roll out of 1GW in wave and tidal delivers £840m of GVA impact on Wales (based on total investment in Wales of the order of £1.5bn in 2013 prices).

xviii. By this last Scenario, the economic impact per megawatt is slightly higher from wave than tidal due to the assumed slower cost reductions (in line with DECC sector development assessments). Given the level of uncertainty, however, over technological development and local sourcing, the differences reported between wave and tidal impacts are relatively minor and should be treated as indicative only.

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xix. Employment effects are reported…

xx. For Scenario 1, we estimate a total of around 2,000 person-years of employment associated with development and installation. This rises to 8,500 person-years in Scenario 2 and for the large 1GW installation of Scenario 3 almost 24,000 person-years. It is important to note that the employment arising in Scenario 3 could be supported over a 10-20 year period, depending upon the time it takes to roll out this capacity. To put this into context, this compares to around 4,500 person years that would be generated for 1 GW of gas fired power station capacity.

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Operational Phase

xlii. We estimate a gross operational cost currently of £165,000 per MW for tidal stream and £175,000 for wave, albeit with considerable uncertainty over these estimates. Unsurprisingly, as the table below shows, the operations-related impacts of marine energy installations are more moderate than those estimated for development/installation (although they accrue in every year of operation):

• In Scenario 1, with 60MW in operation, we estimate a total of £2m in GVA and 50 FTE jobs per annum would be supported across Wales throughout the period of generation.

• Economic impacts increase with the scale of installation. For the 1GW Scenario 3, we estimate that £20m of GVA and 440 FTE jobs per annum are supported across Wales through generation activities.

• We estimate that regional operational spend per MW will, by Scenario 3, be under a third of its current estimated level for tidal stream, and around 50% its current level for wave. Hence, whilst each MW of capacity in Scenario 1 supports 0.83 FTE jobs in Wales, by Scenario 3 each MW is supporting 0.44 FTE jobs.

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Conclusions and Recommendations

xxi. Our analysis indicates the potentially significant benefits to be gained for Wales from the development of marine energy. In interpreting the results, it should be borne in mind that there are a range of uncertainties underlying them. We have therefore sought to err on the side of caution throughout, triangulating the evidence from the different sources available to us to ensure robust estimates of economic impact within Wales.

xxii. Our mapping of the capabilities of the Welsh supply chain suggests that there is an existing presence of firms that could diversify to serve the sector, and that the strongest opportunities lie in balance of plant manufacturing and in supporting elements of installation, local assembly of imported products, and on-going maintenance.

xxiii. Our review of the development of the industry in Scotland has highlighted that it is developing an advantage in marine energy, moving from R&D, deployment and testing, and on towards commercialisation. In addition to its natural resources, this has been driven by a mixture of strong political support, significant revenue incentives and additional capital funding. Consultees have also pointed towards the typical length of the consenting process for energy projects in Wales being less favourable than in Scotland. We would note that whilst on the face of it these factors have served to provide confidence and galvanise the industry in Scotland, more evidence would be needed to understand the specific contribution of Scottish Government interventions to this progress.

xxiv. Welsh Government and other stakeholders have made progress in fostering the development of the marine energy sector in Wales, including developing the evidence base through research studies, growing the research expertise in collaborations between the HE sector and industry, and providing targeted grant assistance in support for on-going development of a number of devices. Whilst the impact of this assistance is not yet clear, there is the need to ensure that this investment can be built upon in an effective and appropriate manner. It is now critically important that devices are deployed in Welsh waters.

xxv. As also stressed in our parallel work on energy employment effects, high economic impacts are not necessarily a justification for further public sector intervention. A range of other factors need to be considered in making choices on interventions, including the prospects of achieving efficiency in the technology, environmental externalities surrounding these types of investments and the overall value for money they present in economic development terms.

xxvi. In Section 8 we provide a series of high level recommendations. These focus on:

• Communicating the nature of the opportunity Wales presents to developers;

• An investment focus on one or two marine hubs which will provide a focus on testing commercial scale devices;

• Targeted supply chain development, possibly underpinned by further supply side analysis;

• The provision of commercial development and growth finance for SMEs in the sector and the associated supply chain;

• Integration of these actions with existing area-based initiatives with an energy focus; and

• The development of an investment strategy which enables Welsh Government and project sponsors to access ERDF and other suitable resources to enable the delivery of these actions.

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