Wednesday 8 May 2013

Sleepwalking into an energy crunch

Featured talk from IET 'Wave and tidal: towards commercialisation' seminar.

Speaker: Martin Wright - Managing Director Aurora ventures Ltd, Chairman of Mojo Maritime and the Renewable Energy Association, a past Chairman of the Ocean Energy Group, and one of the founders of Marine Current Turbines Limited.

The talks in the IET seminar were all very good, but this one in particular left the audience stunned. Apart from the shock of hearing a venture capitalist tell us that venture capital was unsuitable for funding wave and tidal, he presented the audience with a compelling argument for future economic mayhem in Britain if marine renewables are not funded now, and then went on to explain why the funding was not forthcoming. 'All is not rosy' was a running theme. His claim that we are 'sleepwalking into an energy crunch', although bleak and somewhat apocalyptic, was based on solid arguments. The principle one being:

Those making the decisions about the UK's future energy mix do not shoulder the risk of hydrocarbon price volatility.

Basically, what this means is that building new fossil fuel generation is a low risk investment. This is mainly because future increases in fuel price, which are inevitable due to inelastic supply and demand, are not born by the investors, but are passed on to customers. In contrast, the risks inherent in marine renewables, such as fluctuating resource and the costs of bringing the technology to maturity, are borne by the developer.

Other factors that encourage investment in fossil fuel generation rather than marine renewables.

Consenting and grid: The risks and costs associated with consenting and grid connection for renewables are not a problem for new gas build.
Weight of capital: investors are drawn by the prospect of being able to put to work lots of money. The scale of marine renewables deployment is presently not sufficient to attract interest.
Political support: the gas lobby ensures favourable support. The principal advisor to George Osborne is the chairman of ROC. The Renewables lobby is weaker; ROCs are trading at the buy-out price. The Electricity Market Reform, which Martin Wright said was a 'mechanism to subsidise nuclear', is a 'slow motion train smash' (i.e. not good) with regards to marine renewables.
Competition for capital: a deflationary economy discourages investment. The recession has resulted in a Zeitgeist where cost is everything and concern about climate change has receded into the background. There is a very limited investment pool for new power generation; renewables are competing with shale gas, new nuclear, and coal with carbon capture and storage.
Discount rate: Our society's method for assessing the economic viability of projects undervalues future costs. Renewables have high up-front costs, whereas gas has a high proportion of future costs (fuel). Note that most of the costs for nuclear are also up-front. Likewise, reopening British coal mines would take a substantial up-front investment.

The dependence on imported fossil fuels is a threat to the British economy


The investment options for new power plant that appear the most attractive due to discounted future project costs, are those that involve importing fossil fuels. The risks of hydrocarbon price volatility are externalised, so do not impact the investment decisions.

Unless we invest now to decouple the UK from hydrocarbon price volatility, we risk a large trade deficit and currency collapse. Our economy is predicated on growth, and does not take into account natural capital and energy, which are assumed infinite. Like a Ponzi scheme, this breaks down as soon as growth breaks down, or demand for energy outruns supply. The government does not recognise our reliance on depletion economics; Martin Wright goes as far to say that 'the government dare not recognise the situation'.

Potential investors for Marine Renewables


Noting that venture capitalists seek a 50% -70% return on their capital, with a 3 year exit and payback, Martin Wright pointed out that venture capital and private equity were not suitable funding mechanisms for development of wave and tidal technologies. He warned developers that utilities were not in a position to make the necessary investments; these would impact the short-term gains of shareholders. Only the elephants of the engineering world can 'go for a long time without a drink'; Martin's advice to developers was: 'get major corporates in now'. This advice was followed by a warning about 'hummingbirds and elephants': with such a size difference the hummingbirds risk getting stomped on.

Martin Wright's advice for attracting investment:

  • The economy's centre of gravity is moving abroad, so the weight of money needs to come from abroad.
  • To attract investment, concentrate on risk. 'Those that are best able to manage the risk must take it'. Get warranties from suppliers and contractors. 'Insurers are starting to drive the conversation', so work with them.
  • 'If the margins are so small, you have to design around reliability.' 'Operations and Maintenance are crucial'; 'there is too much focus on the bits that whirr around'. It is important to 'operate in the widest possible range of conditions.' To keep up availability, design around accessibility.
  • 'Concentrate on what is different' from competitors.
  • Standardisation is critical, so only use specialist equipment when it is absolutely crucial.

Image credit
'Return route'; Copyright Adam Phillips.

Related posts:
IET Towards Commercialisation seminar 
The importance of big industry in wave power  


  1. Most useful points. The only issued I'd debate is "building new fossil fuel generation is a low risk investment." That is true, were it not for us. We can spoil all that by coming up with winning technologies that result in there gas-guzzling plants only being used as back up (or not at all). That would really hurt their ROI and that is why they are fighting us and the concept of AGW so fiercely.

    1. Hmmm, I think gas would still do very well in an energy mix with a lot of unfirm renewables: this would increase the need for thermal plant that can come online quickly. Of course, capacity payments would need to go up to keep profits rolling. I have full confidence that the gas lobby will take care of this! ;¬)

  2. Interesting, and mostly good points. I take issue with the idea that discounting is hard on nuclear power - while it's true that nuclear has huge up-front costs, it also benefits from discounting when it comes to decommissioning. With the 50-60 year lifespan of a nuclear plant, plus the inevitable 20 year "life extension", decommissioning costs are so far in the future that discounting leads us to ignore them totally.

    The lesson from the past on this, of course, is the seldom-reported fact that ~85% of DECC's budget is spent on nuclear waste and decommissioning.

    Having said that, discounting policies certainly make gas attractive, since they not only reduce the apparent cost but (since fuel costs are the unknown) the apparent risk.

  3. Thanks for this reporting on the IET conference. I can not make it to all of the conferences and a well written summary such as yours is really useful.
    Please keep up as you seem to spot well the key elements from the speakers presentation.
    Jerome Cuny
    Open Ocean



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