There has been a reluctance to put concerns about systemic barriers to wave energy into writing. Even the most bold writing on this topic, by Jochem Weber, Richard Yemm, Andrew Garrad, and the ORE Catapult, has been guarded, under-emphasising any actions of device developers and investors which could have hindered the development progress. I believe that what is holding back an open discussion of what has gone wrong with wave energy in the last decade, is a concern about 'poisoning the waters'. In particular, there are concerns about blame, a negative impact on the industry by chipping away at the collective confidence required to get a critical mass of support, and a negative impact on individual device developers who depend on this collective confidence.
This post sets out my opinions about the systemic barriers that have hampered wave energy. I have decided to break with the tradition of under-emphasising key problems because I believe the concerns about poisoning the waters are misplaced: I hope to show that the waters are already poisoned, and the source was a poisoned chalice.
The recent en masse withdrawal of support from 3 leading UK marine energy developers is a good indication that collective confidence has faltered. The very problems that are under-emphasised in writing are those being widely discussed, but in closed circles. It is inevitable that this will result in polarised viewpoints, particularly about blame. Underplaying known problems in the face of already strong opinion could fuel blame by inferring that there is something to hide. More importantly, avoiding these conversations deprives us of the opportunity to examine underlying systemic problems. I hope that sharing my opinions and observations will signal an openness for others to contribute to this discussion, and that new funding initiatives and future technology development will benefit strategically from this wider discourse.
The central argument I would like to put forward is that the present funding structure incentives over-promise and under-performance. This post first suggests mechanisms for these problems. These mechanisms imply blame, so I will follow with an explicit discussion of blame: What does blame imply? How does ones view of where the blame lies impact future provisions for the wave energy industry?
The reason why collective confidence has faltered
This was nicely summarised in a recent article in 'The Journal' :
‘One major criticism of the industry is that in a bid to attract scarce finance, marine developers repeatedly over-promise and under-deliver. Each time they go back to the money markets the investment community becomes a little more wary, which in turn fuels the drive to oversell the sector’s promise.’
These observations about over-promise are not new; they were brought up at an IET seminar in 2013; Richard Yemm (Pelamis) has described how market pressures lead to disappointments with the Portuguese prototypes.
The goals of key investors determine development routes
Broadly speaking, there have been four sources of funding for marine renewables development in the UK: government (EU, UK, and Scottish), utilities, venture capital (VC) and multinational original equipment manufacturers (OEMs). The aims of each type of funder can be summarised as follows:
- VCs: a big return on investment in a 2-5 years
- Multinational OEMs: a low risk route to a large share of a large market in the medium term
- Utilities: in the medium term, derisk their energy portfolio; in the short term, buy equipment with a favourable pay-back time.
- Government: a low-carbon world-leading industry to stimulate and derisk the economy
The industry desired by VCs is one which will result in a profitable and timely return on their capital. The most visible and incentivised market has been the one desired by government and big industry: utility-scale electricity generation. With this market in mind, the VC route to getting a return on investment is to sell the startup to a large engineering multinational.
The route to market is not compatible with the goals of investors
The route to this market is commonly described by the Technology Readiness Levels (TRLs). These are nine development steps, and for each increase in TRL, the project costs increase. There is also a widely held assumption that the risk decreases at higher TRLs. VCs can tolerate high risk investments because of the promise of high return, while multinationals require a low risk profile. Here is how the goals and requirements of investors match with different technology readiness levels:
TRL 1-4 (small scale testing): The risks, development costs and timescales suit VCs. Too risky for multinational OEMs.
TRL 5-8:(large scale testing): Too slow and expensive for VCs. Too risky for multinationals.
TRL 9: (demonstration array): The perceived risks, costs and timescales suit multinational OEMs.
Commercial: The market plan is for multinationals to sell wave farms to utilities, who survive initial high costs of energy with a government supported production tariff such as the Cfd.
The first point of note is the inter-dependence of the utilities and multinational OEMs. VCs cannot fund development at TRL 8 (a full-scale prototype) with utility (customer) support only, because utilities are understandably reluctant to buy novel equipment that costs more than the value of the firm selling it. Utilities need the financial guarantee provided by a multinational OEM. Multinational OEMs need customers (utilities) lined up before they will consider buying into a startup.
This leads onto the second point of note: there is no investor that is naturally suited to funding development at TRL 5-8. This funding gap has been plugged by multinational OEMs, often in partnership with utilities, and with matched government funding. This type of early R&D work has multinationals operating out of their comfort zone in terms of risk profile. Meanwhile, the ideal situation for VCs, which would be to progress to TRL 8 (prototype testing) in 5 years and then be rewarded with a large return on capital, has not materialised.
The development route has caused investor tensions and over-promise
- Early investors were attracted by wind's success, the high oil price, and inventors who saw the large UK wave power program suddenly pulled in the 1980s.
- Early estimations of the timescales and funding levels required were unrealistic, and in many cases there was a need to attract additional VC. Managing multiple investors can be disruptive for a startup. Andrew Scott (Pelamis) has described the problem of 'stakeholder fatigue and destructive engagement'.
- Accumulation of disappointed VC investors: if VCs begin to see the startup as a potential loss, they will engage more risky strategies, as is human nature. Impatient investors do not make for an atmosphere where mistakes can be admitted.
A pivotal event in the development path is the investment by a multinational OEM. This event results in tensions between the goals of the multinational and VC:
- The multinational has a much stronger bargaining position than the VC. The sale determines the profits of the VC and survival of the startup. The penalty the multinational faces for investing in an unsuccessful startup is small compared to the penalty for missing an early entry to a new market. There are many startups and few multinationals.
- Judging a startup's value by the TRL alone is misleading. The value of the startup to the VC relates to sunk investment. The value to the multinational relates to future investment to bring the technology to market. A technology could appear to be at TRL 8-9, but if major redesigns are required to improve performance, then the required future investment would still be high. Jochem Weber suggests the use of a readiness-performance matrix [Weber 2012] as an indicator of a startup's value.
- The business goals of VCs and multinationals are in direct conflict. VCs want a fast increase in the value of the technology under development. As the value is determined by the perceived rather than actual readiness and performance, it is in the VC's interests to prioritise development effort into targets that convince the multinational of readiness and performance. However, this effort may not achieve the actual readiness and performance that the multinationals desire.
- The asymmetry of information favours the VCs: they know more about the true performance and readiness of their concept. The situation is less extreme for tidal, as the technology is a closer cousin to the kit manufactured by the multinational OEMs.
- Hence VC sponsored wave developers seeking multinational investment have both the opportunity and the motivation (profit for VCs and survival of the startup) for over-promising performance and overstating readiness.
The funding gap at TRL 5-8 causes herding behaviour: a chicken-and-egg situation arises because investment requires a critical mass of supply chain, utility and multinational OEM involvement.
- Multinationals need a route to market to justify sponsoring sea trials, so they need utilities to commit to buying first arrays. The utilities need successful sea trials before they will sign up.
- This impasse results in herding behaviour: multinationals delay investments until there is sufficient consensus on the viability of the sector, scrambling to invest once others have committed, and disinvesting as a group.
- Utilities have recently withdrawn support for wave projects due to disappointing sea trials, and pressure from under-performance in other areas of their operations (see pg. 11 of Catapult report). Uncertainty about changes to government support mechanisms for renewable generation has caused further erosion of confidence.
- Expert opinions on the size of the future market can be disproportionately influential. Awareness of the herding behaviour of multinationals generates concern that expert opinions about the future prospects of wave could be self-fulfilling: optimistic reports will mobilise the critical mass of investment, whereas reports that clearly state the risks and unknowns will not. Hence there is a strong incentive for over-optimism in government sponsored reports and academic discourse.
The development route impedes information sharing
- The value of the startup is tied up in intellectual property (IP) and the knowledge of its staff. This discourages co-operation between startups. It can prevent startups from collaborating with academic specialists who may have valuable information about their concept. Andrew Garrad believes protection of IP has slowed development [Garrad 2012].
- Startups owned by VCs are reluctant to share information about failures and problems. Such a disclosure could impact future investment: both the sale price and whether the investment happens at all. Furthermore, sharing information that has come at a cost to the company could be viewed as giving competitors an edge.
- The need for a large market size encourages multinational OEMs and utilities to co-operate and share information, particularly information about problems.
- The situation where startups withhold information about failures and under-performance, whereas multinationals and utilities share such information, results in a polarisation of opinion, and can invite blame and mistrust.
Investor tensions encourage dysfunctional technology development
The latest Catapult report mentions that chasing funding can impede engineering robustness [Catapult 2013, pg. 17]. If we are to learn from our mistakes, we need to investigate how systemic problems influence technology barriers. It is for this reason that I have used stronger language; I would go so far as to say that the investment environment has incentivised 'dysfunctional development'. Some of the problems have been noted in the Catapult report:
- There has been duplication of effort as the competitive nature of VC startups prevents collaboration on enabling technology or sharing of problems.
- The work flow follows the funding; inefficiently. Intermittent and themed public funding can cause start-stop and zigzagging development. Likewise, the goal of attracting investment can result in an inefficient development path.
- Some government funding or site leases have fixed deadlines, which can lead to projects falling through or being rushed.
- Many startups prioritise demonstrating high TRLs (large scale sea trials), often omitting the steps and milestones of earlier TRLs. It is clear why this is attractive to VCs: it is the cheapest, fastest route to the demonstration of readiness required to attract a multinational OEM investor.
- A rush to sea-trials will result in shortcuts, and it is inevitable that these that these will compromise the project, either in the performance of the prototype, the quality of the data collected, the costs and timescales of installation and maintenance, or survivability.
Other problems that can be added to this list are:
- The perceived value of intellectual property can lead to patents being hoarded and used only as bargaining chips, or to rigid technology development where an initial early concept is retained. Patenting an entire class of concept can stifle healthy competition.
- Skipping earlier TRL steps can lead to gaps in knowledge. Having this knowledge increases the chances of developing cost-effective design tools, getting useful answers out of expensive experimental tests, uncovering show-stopper design flaws prior to expensive trials, and ultimately making good design choices.
- Within startups the people making promises (VCs) are not the people tasked with keeping them (engineers). This could cause managers to take decisions against the advice of their own staff. Managers seeking to maintain their own confidence in their promises could avoid doubt-inducing information: this could prevent valuable knowledge from permeating upwards from in-house specialists to decision makers.
- If development is viewed as a one-way progression along the TRL track, then startups can be discouraged from exploiting cost-effective tools such as small experimental models, in case it is seen as ‘backtracking’ (the size of models is associated with readiness).
- Likewise, fundamental flaws in a given technology are rarely addressed with a radical rethink of the root causes, and subsequent redesign. Admission of mistakes is difficult if shareholder relations have deteriorated, and could also have a negative impact on the eventual sale to a multinational. Jochem Weber’s work on the performance-readiness matrix highlights this problem of rigid development trajectories.
- Skipping earlier TRL steps can lead to development projects with an official goal associated with a high TRL, and an unofficial goal to fill in the unknowns typically investigated at lower TRLs. Tension arising from such diverse goals does not benefit the achievement of these goals.
- A startup's development goals and the technology development goals may be in conflict. Some projects have both technical and marketing goals. Once the marketing goals have been achieved, there may be no incentive to continue with the technical aspect of the project, leading to inefficient spend of development budget, and further knowledge gaps.
- A rush to sea trials leads to higher cumulative development costs. An example of inefficiency due to running projects in parallel was given by Richard Yemm, who said in his Peaks and Troughs talk that the P2 devices for Portugal had not incorporated the learning from the P1 prototype in Orkney.
- Over-rated prototypes: as prototype scale is associated with readiness, and as we don’t yet know what the most cost-effective nameplate rating might be, a larger rating appears to be more technically mature. Furthermore, for a large global market, we will need to tap into energetic sites. High balance of plant costs in the marine environment favour larger individual units. Unfortunately, one way to have a high nameplate rating is to operate at low capacity factors. Very low capacity factors are uneconomic: they result in ineffective use of capital; and generators have very low efficiency when running at part load. For example, the capacity factor of Pelamis's P2 was undesirably low; a fact that was acknowledged by the larger hydrodynamic working surfaces of the new P2e design, which had the same name-plate rating for each joint.
The present route to market results in under-performance in sea trials
The main reason for the recent withdrawal of support from several wave power companies over the last couple of years appears to be disappointment about under-performance (in terms of cost-effectiveness: taking into account availability, power capture, delays, and project costs). Cost-effectiveness is crucial for customers (utilities), and customers are crucial for investors. Wave energy is no doubt a technical challenge, but some of the causes of under-performance can be linked to the investment environment:
- Over-promise: by setting expectations too high, there is a greater chance of disappointment.
- Lack of information sharing and co-operation: duplication of development of bespoke components, and repetition of mistakes leading to equipment failure, e.g. high incidence of failures in moorings, power take off equipment and installation.
- Over-rating PTO equipment (low capacity factors) can lead to higher capital costs and lower energy capture.
- Large prototypes: there's more stuff that can go wrong on a big device; it's more expensive to fix when it does.
- Dysfunctional technology development, as described above.
- Rush to sea-trials: shortcuts during sea-trials can compromise performance. Over-optimistic expectations of availability can leave a project with an inadequate repair budget, leading to disappointing availability (i.e. faults which hinder power capture). Such over-optimism can also lead to there being no contingency plans for repair, which can lead to higher operational costs than necessary.
It is useful to discuss blame in the light of market pressures
Rationally, in order to lay blame, there must have been a choice in decisions, and it must have been clear at the time which decision was the 'wrong one'. This is tricky, because the narrow social context could consider one decision to be right, while the broader context might consider the same decision wrong. I believe that the way in which the recent development of wave power was funded resulted in a situation where at every step along the way, everyone involved was making the 'right choice' from the narrow context of their organisational goals. Yet the outcome was not at all what anyone hoped for. This is the reason for my claim that the funding route offered to wave energy was a poisoned chalice. Several marine energy companies have attempted to progress in this harsh environment, and have encountered similar pitfalls. When faced with this repeated pattern, I find it unlikely that the problems can be attributed to a freak storm, a particular under-performing team, or a particular ill-conceived concept.
While my own belief is that the incentives provided by the investment environment underpin the problems facing wave energy, I also understand that many would not be satisfied in blaming something so intangible. The human brain seems to have a cathartic need to lay blame when we have suffered personal loss. The concerted push for wave energy over the last decade has had broad support, and the disappointment is likewise broadly felt. It is to be expected that there is a loss of trust, and perhaps even blame.
The discussion of blame informs future development of wave technology
It is essential to acknowledge that this erosion of trust has altered the funding landscape: a decade ago there was more confidence in developer claims of performance and readiness, institutional studies giving estimated installed capacity and cost of energy, utility involvement, and government commitment to long-term support. Any further progress in technology development must take this into account. As Luis Vega of the Hawaii National Marine Renewable Energy Center puts it: "Embellishment leads to negative consequences creating credibility barriers for others"
One thing that is required to rebuild trust is an open discussion about what went wrong, and why. This will make it less likely that mistakes are repeated, or that the wrong conclusions are drawn because we are blaming the symptoms rather than the cause. For example, it is possible that for some it is absolutely clear that the blame lies with a particularly unlucky storm, particular under-performing teams, or particular ill-conceived concepts. Whatever the truth of individual cases, I think there is value in muddying this clarity by considering how the funding environment has contributed to the problem. The reason being that solutions suggested by this line of blame; 'better luck next time', 'change the team', or 'change the concept'; are unlikely to be successful unless we also change what is incentivising the development route.
Another area where it could be helpful to acknowledge uncertainty is in cost of energy estimates. In Tom Thorpe's 'A Brief Review of Wave Energy' [Thorpe 1999] he described how cost of energy estimates oscillate during the early development process. This happens because development both exposes unforeseen problems, and accumulates learning about cost efficiencies. Fig 9.2 of this report, reproduced here, suggests that the field trials of concepts such as Pelamis and Oyster would place us at a peak in cost estimates. The oscillation of estimated viability suggests that what is needed is a cyclical development process, and a way of ensuring that problems uncovered during development feed back into the design cycle.
The main lever of the present development route is the focus on big prototypes with big nameplate ratings, which are required if we are aiming for a big market in the near future. The wind industry also attempted government funded, OEM built, megawatt scale, prototypes while the technology was immature, resulting in technical and commercial failure. I cannot call to mind a power-generation technology that was successfully developed using the market route we have applied to wave power. This might be an uncomfortable thought if we hold the view that this development route is the only one available. However, it is already clear that there are other options. This is a very important discussion for our community and will be the topic of the next post.
I am grateful for the discussions within our community that have shaped this article, and in particular the advice of Tom Thorpe.
'Atmoasphere' by John Perriment:
Fig 9.2 reproduced with kind permission, from Thorpe T (1999) A Brief Review of Wave Energy, ETSU report R-120, May 1999
Yemm R, Pizer D, Retzler C, Henderson R (2012) Pelamis: Experience from concept to connection,
Phil. Trans. R. Soc. A, volume 370, issue 1959, pp. 365–380 (Audio presentation of paper also available)
Garrad A (2012) The lessons learned from the development of the wind energy industry that might be applied to marine industry renewables, Phil. Trans. R. Soc. A, volume 370, issue 1959, pp. 451-471 (Audio presentation of paper also available)
Weber (2012), 'WEC Technology Readiness and Performance Matrix - finding the best research technology development strategy', 4th International Conference on Ocean Energy, 17 October, Dublin. (See also a more recent presentation on the topic)
ORE Catapult (2014) 'Financing solutions for the wave and tidal industry'
Thorpe T (1999) A Brief Review of Wave Energy, ETSU report R-120