Tidal lagoon review says UK should set up a Tidal Power Authority

Swansea Bay Tidal Lagoon project should begin as soon as possible as a “pathfinder project,” says the Hendry Review

But negotiations continue over the ‘green subsidy’ and the environmental impact

January 25th 2017

In March 2015, we published an article on a company’s plans to build a series of six tidal lagoons in the UK. At the time, the company (Tidal Lagoon Power) was awaiting a decision from the Planning Inspectorate regarding planning consent for the first in the series, Swansea Bay Tidal Lagoon. The planning application was then in the final stages of the National Infrastructure Process, according to which the relevant Secretary of State is the ultimate decision maker on all national infrastructure applications for development consent. The Swansea Bay project was approved by the Planning Inspectorate on March 10th 2015 and its recommendations were passed on to the then Energy Secretary Ed Davey, who had three months to reach a decision whether the project should go ahead. [1]

Tidal lagoons have been in the news again recently with a debate in Parliament in December and this month’s publication of an independent report on the feasibility and practicality of tidal lagoons as a strategic choice for UK energy policy. So, almost two years on from the Planning Inspectorate’s decision, what has been happening to the plans?

Planning permission is granted…

As we entered May 2015, Ed Davey had yet to reach a decision on the Swansea Bay Tidal Lagoon project, at which point the decision was taken out of his hands following a general election and a Cabinet reshuffle. Amber Rudd was appointed as the new Secretary of State for Energy and Climate Change and gave the project her approval on 9th June 2015, just within the three-month deadline. The news was welcomed by the Welsh Government, Swansea Council, environmentalists including Friends of the Earth (Cymru), and the CEO of Tidal Lagoon Power, Mark Shorrock.

But negotiations continue over the ‘green subsidy’

However, a number of problems were still to be resolved. Firstly, the question of funding. As we reported in March 2015, the project had been successful in gaining funding commitments from a number of investors for the construction work, but “the government must also agree a price for the power generated by the lagoon before work can start, and negotiations are still ongoing.” The negotiations concerned the amount of funding provided by the Government under its ‘Contract for Difference’ arrangement, whereby the Government guarantees a certain amount (commonly known as the ‘strike price’) that the power generator will receive for its electricity; and consequently, the amount it is prepared to pay (the ‘green subsidy’) for the energy generated by the lagoon. [2]

It was widely reported in the press that Tidal Lagoon Power’s starting position in these negotiations was a ‘strike price’ of £168 per megawatt hour over a period of 35 years. To quote one source, this was Sion Barry in June 2015, following the Energy Secretary’s decision to award planning consent: “It’s far from being a done deal yet. It will require an estimated green subsidy (known as a strike price or contract for difference) of £168 per megawatt hour. That’s more expensive than for offshore wind and nuclear.” The Citizens Advice Bureau (the statutory consumer body for energy proposals) had registered its discontent with the likely cost, but Tidal Lagoon Power said subsequent lagoons, such as the larger lagoon off the coast of Cardiff, the second in its plans, will be able to produce electricity much more cheaply. [3]

The funding argument

Gavin Miller, Policy Manager for the Institution of Civil Engineers, discussed these funding arrangements in a blog post in July 2015. He said the Citizens Advice Bureau (CAB), “alongside other media commentators,” had branded the lagoon funding proposals as “appalling value for money” for a “relatively mature technology.” He went on to provide a counter-argument to these two points. Firstly, he said that the CAB judgement was based on a comparison with other recent Contract for Difference agreements: “For example, the planned nuclear power station at Hinkley Point in Somerset recently secured £92.5 per MWh, large-scale solar PV receives around £100 per MWh, and new offshore wind averages £140 per MWh.” However, a strike price is meant to reflect the cost of investing in a particular low carbon technology, and Gavin Miller argued that, though individual bits of the technology may not be new (such as breakwater walls, sluices and hydro turbines), the project as a whole is the first of its kind. He also compared tidal lagoons with nuclear power and with wind and solar energy and said that nuclear power is relatively inflexible whilst other renewable energy sources such as wind and solar, though clean and efficient, are also variable and unpredictable. In contrast, tidal lagoons are both predictable and flexible, he said: “This predictability has the obvious advantage of allowing the long-term grid-balancing calculations not possible with other renewables.” He also reiterated the point that future lagoons would be able to produce electricity much more cheaply. The implication here is that, in the long-term, tidal lagoons do provide ‘value for money.’ [4]

However, the negotiations over subsidies continued, whilst the company was also involved in another set of negotiations. These were concerned with the potential environmental impact of the Swansea Bay project.

Environmental Impact

Writing for Wales Online in June 2015, Robin Turner explained that, although the project had been awarded planning consent, Tidal Lagoon Power still needed a marine license from Natural Resources Wales before any construction work could start. Concerns had been expressed over the potential impact on marine creatures, including fish and porpoises, and on the migration of sand and silt, he said. The Angling Trust, Fish Legal, and the Porthcawl Environment Trust were all cited as expressing these concerns.

On the potential impact on fish, Mark Lloyd, CEO of the Angling Trust, “said there was a lot of uncertainty about the impact of generating power from tidal lagoons on fish. He said there could be significant damage to local and regional populations of fish already under threat like bass, flounder, cod, eels, lamprey, shad, salmon and sea trout.” And on the potential impact on porpoises, Brian Saunders of the Porthcawl Environment Trust said the group would formally complain to the EU if the developer was granted a marine licence without also getting a European Marine Species licence and “ensuring that piling work would not harm harbour porpoises in Swansea Bay.”

Tidal Lagoon Power responded to both these points. On the first, the company said it had worked for several years with independent experts on the environmental impact of the lagoon and concluded that the impact on migrating fish would be “manageable and minimal.” And on the second, the company said it had carried out a shadow Habitats Regulation Assessment for harbour porpoise, “despite this not being a legal requirement as Swansea Bay is not designated under the Habitats Directive for harbour porpoise.”

It was also reported that Friends of the Earth (Cymru) were concerned about the source of the rocks to be used in the project, whilst Gavin Miller of ICE remarked that the company still had to negotiate an agreement for a foreshore lease from the Crown Estate. An article in Western Morning News explained that Shire Oak Energy, a shareholder of Tidal Lagoon Power, had bought a quarry in Cornwall with a view to extracting rock for the project, but the quarry location has AONB and SSSI status and is also important for marine life. The local community is waging a campaign against the re-opening of the quarry, situated in St Keverne on the Lizard peninsula.

Expectations and Delays

In that blog post written in July 2015, Gavin Miller summarised the company’s expectations. Tidal Lagoon Power expected the Contract for Difference negotiations to be completed in the autumn of 2015, he said, with pre-construction work starting in 2016. “If all goes according to plan,” he continued, Swansea Bay Tidal Lagoon “should be able to connect to the National Grid in 2019.”

However, by October 2015, an agreement over the ‘green subsidy’ had still not been reached, and the company announced that the start of construction work on the Swansea Bay project would be delayed for a year owing to a stalemate in its negotiations with the Government. In January 2016, Tidal Energy Today reported that an agreement “was on the horizon,” with Tidal Lagoon Power reportedly seeking a Contract for Difference agreement that would last 90 years.

However, it appears that this horizon was still a distant one because in February 2016 the Government announced it would be conducting “an independent review into the feasibility and practicality of tidal lagoon energy in the UK.” In a news story, the Government said: “Tidal lagoons have the potential to provide the country with clean and secure energy. Whilst progress has been made to understand this technology, more work needs to be done to determine whether they present value for money. In recognition of this, we have commissioned a review of the technology to improve our understanding of how tidal lagoons could contribute to the future of the UK’s energy mix in the most cost effective way. The review will commence this spring and it will help establish an evidence base to ensure all decisions made regarding tidal lagoon energy are in the best interest of the UK. We expect that Tidal Lagoon Power, the proposed developers of Swansea Bay Tidal Lagoon, and other industry stakeholders will take part in the review while discussions about Swansea Bay Tidal Lagoon continue.”

The news story quoted Energy Minister Nicholas Bourne, who said: “Tidal Lagoons on this scale are an exciting, but as yet an untested technology. I want to better understand whether tidal lagoons can be cost effective, and what their impact on bills will be – both today and in the longer term.” In March 2016, the issue was debated in Parliament, and Energy Minister Andrea Leadsom said: “The simple truth is that the developer’s current proposal for a 35-year contract is too expensive for consumers to support.” [5]

Charles Hendry, former Energy Minister and President of the British Institute of Energy Economics, was appointed in May 2016 to carry out the review. In his call for evidence, he referred to the review’s terms of reference, saying: “My review is not targeted at any particular project but, in considering these issues, I am mindful that Tidal Lagoon Power Ltd, the proposed developers of Swansea Bay Tidal Lagoon, are in ongoing discussions with government about the terms of a potential Contract for Difference that might support the financing of the project. However, I nonetheless wish to receive evidence from both Tidal Lagoon Power Ltd and others about the costs, benefits and opportunities of tidal lagoons. I am also seeking evidence of other potential sites, developers and opportunities, and the feasibility and practicalities of a wider UK tidal lagoon programme including, but not limited to, environmental and grid issues, navigation and ports impacts, supply chain and export opportunities and financing arrangements.”

The review was expected to be complete by the autumn of 2016. However, on December 6th 2016, there was a debate in Parliament on ‘Tidal lagoons and UK energy strategy,’ called by Stephen Crabb, formerly Secretary of State for Wales. The briefing paper said the review had yet to report, but it was expected by the end of 2016. [6] In fact, Tidal Energy Today reported that the review was submitted to the Department for Business, Energy and Industrial Strategy on the 6th December, the day of the debate.

Meanwhile, by the end of the year, Tidal Lagoon Power had announced a further delay. A news story by Tidal Energy Today said that on-site construction, scheduled to begin in the spring of 2017, had been postponed to the new start date of 2018 at the earliest. The news story turned to an item in the Telegraph for an explanation, which said that the Government had yet to make a decision on the ‘green subsidy’ and it would take at least a year from reaching an agreement to starting construction work; further delays could be expected should no decision be made on the subsidy in early 2017.

However, there were also further reasons for a delay. Earlier in December, Natural Resources Wales said that the construction work could have an adverse effect on fish in the area. Its figures of potential fish deaths were disputed by Tidal Lagoon Power, who described them as “unrealistic and grossly misleading.” As mentioned above, the developer will need a marine license from Natural Resources Wales before starting any marine works.

For the UK Government, it was the Contract for Difference issue that was the main problem. Speaking during the parliamentary debate on December 6th, Energy Minister Jesse Norman said that the most recent proposal put forward by Tidal Lagoon Power would be a very significant deviation from current government policy. He was unable to comment on details of the negotiations due to “commercial sensitivity” but said that the company’s proposal, though not impossible, would require careful consideration: “We have always been clear that we will consider the findings of the independent review of tidal lagoons and all other relevant factors in deciding whether to proceed with negotiating a Contract for Difference on this project. The developer is aware of that. The issue of value for money quite properly remains at the forefront.”

At the beginning of 2017 then, all interested parties were waiting for the Charles Hendry Review.

The Charles Hendry Review

Charles Hendry’s final report and recommendations were published on January 12th 2017. In summary, the review has concluded that “tidal lagoons can play a cost effective role in the UK’s energy mix.” The report makes over 30 recommendations but the one that has attracted the most attention is the recommendation for a “pathfinder project” to begin as soon as possible. He states the reasons for such a recommendation as follows: “A programme of tidal lagoons that could deliver the goal of providing constant power, or as near as possible to constant power, would be an absolutely huge undertaking, requiring tidal lagoons around much of the country. It is my belief that this is too ambitious a goal to be set at this time, before even one has been built, and could only be considered properly when more progress has been made on building a number of tidal lagoons.” Charles Hendry says the term ‘pathfinder project’ rather than ‘first of a kind’ is a better description of the Swansea Bay project: “It better reflects the value that a smaller first lagoon could bring: it will establish the technology and prepare the supply chain to reap later benefits; yet follow-on projects will be different – in particular bigger – and therefore will face challenges of a different nature.”

In his summary, Charles Hendry said: “I conclude that tidal lagoons would help deliver security of supply; they would assist in delivering our decarbonisation commitments; and they would bring real and substantial opportunities for the UK supply chain. Most importantly, it is clear that tidal lagoons at scale could deliver low carbon power in a way that is very competitive with other low carbon sources… Tidal lagoons can be an important and exciting new industry for the UK. We are blessed with some of the best resources in the world, which puts us in a unique position to be world leaders.”

And on the pathfinder project, he said: “I believe there is considerable value in a small (less than 500 MW) pathfinder project. The aim now is that we should move to secure the pathfinder project as swiftly as possible, so the learning opportunities it offers can be maximised. I have, however, also concluded that the smaller pathfinder project needs to be operational before we move to larger scale projects. This means that a clear long-term Government strategy in favour of tidal lagoons will be required if the full supply chain and cost reduction opportunities are to be realised. The costs of a pathfinder project would be about 30p per household per year over the first 30 years. A large scale project would be less than 50p over the first 60 years. The benefits of that investment could be huge, especially in South Wales, but also in many other parts of the country. Having looked at all the evidence, spoken to many of the key players, on both sides of this debate, it is my view that we should seize the opportunity to move this technology forward now.”

Among the recommendations, the review suggests that the Government set up an independent “arms-length” Tidal Power Authority to oversee a UK Tidal Lagoon Programme. Charles Hendry also recommends that the Authority should undertake some of the environmental assessment work for the lagoon locations, “or incentivise the Crown Estate to do this on a commercial basis, and seek to recover these costs at financial close within the strike price. The results of these environmental assessments should be made available to those bidding in the tender process, rather than requiring each developer to do this work themselves and individually.” On the potential environmental impact, he says that “the Government should require a high level of on-going monitoring of environmental impacts to ensure that mitigation can be put in place where impacts are judged to require it.” He also recommends that developers should be required to demonstrate, “as part of the planning and consenting process, that they have taken full account of potential deposition rates.”

The review also makes favourable comments on the ‘value for money’ issue. On the Contract for Difference (CFD) arrangement, he concludes “that the potential impact on consumer bills of large-scale tidal lagoons appears attractive, particularly when compared to nuclear projects over a long time period; and that a measure of CFD cost per MWh over project lifetimes indicates that a tidal lagoon programme has potential to be very valuable and competitive.”

The review has been welcomed by Tidal Lagoon Power CEO Mark Shorrock, who described it as a “watershed moment for British energy, British manufacturing, British productivity and our coastal communities.” Its publication meant there is now a “peak consensus,” he said: “Communities and investors, conservationists and industrialists, politicians of all persuasions and now an independent government review, are all singing from the same hymn sheet.”

According to Adam Vaughan, however, writing in the Guardian, conservationists are divided over the environmental impact of the Swansea Bay project. On the one hand, the World Wildlife Fund (UK) said tidal power had “considerable potential for generating clean electricity” and Greenpeace said the Swansea project was “an opportunity to lead in generating clean power from Britain’s tides.” On the other hand, Wildlife Trusts Wales and the RSPB have expressed concerns about the potential ecological impact of the proposed Swansea and Cardiff lagoons. In response, Charles Hendry said that the Swansea Bay lagoon could be operational by 2022, after which there should be a pause of up to two years before the five bigger lagoons were approved, and any environmental problems could be assessed then. BBC News reports that Natural Resources Wales will be looking at the impact on flooding, fish, birds and marine habitats before it awards a marine licence.

Business and Energy Secretary Greg Clark welcomed the review and said the UK Government’s energy planning was focused on ensuring affordable, secure, low-carbon energy. Quoted by the BBC, he said the Government will now consider the report’s recommendations “and determine what decision is in the best interests of the UK energy in the long term.”

How long will the Government take to respond? Will it follow the recommendations of the Hendry Review? The saga continues – but many are hoping that we are witnessing the start of a new chapter.

Notes

[1] See our article “World’s first energy-generating tidal lagoons planned for UK”.

[2] The UK Government’s explanation of a ‘Contract for Difference’ arrangement is as follows: “A Contract for Difference (CFD) is a private law contract between a low carbon electricity generator and the Low Carbon Contracts Company (LCCC), a government-owned company. A generator party to a CFD is paid the difference between the ‘strike price’ – a price for electricity reflecting the cost of investing in a particular low carbon technology – and the ‘reference price’ – a measure of the average market price for electricity in the GB market. It gives greater certainty and stability of revenues to electricity generators by reducing their exposure to volatile wholesale prices, whilst protecting consumers from paying for higher support costs when electricity prices are high.” It is important to note here that the ‘green subsidy’ refers, not to the ‘strike price,’ but to the difference between the ‘strike price’ and the ‘reference price’. See the policy paper by the Department for Business, Energy and Industrial Strategy, last updated on 9th November 2016.

[3] Tidal Lagoon Power plans to build a “fleet” of six tidal lagoons off the coast of the UK. The proposed locations are Swansea Bay (the first), Cardiff Bay, Newport (South Wales), Colwyn Bay (North Wales), Bridgwater (Somerset) and Workington (Cumbria). The company claims its Cardiff lagoon would be large enough to generate enough electricity for all homes in Wales. The Swansea Bay project would involve the construction of a U-shaped breakwater across the bay and using the incoming and outgoing tides to turn a bank of 16 hydro turbines along the breakwater to generate enough electricity for 150,000 homes. Adam Vaughan in the Guardian, cited above, says that the company has already spent £35m on the Swansea project. The total cost is estimated at £1.3 billion. For an “all you need to know” guide to the Swansea Bay project, see Chris Kelsey’s article for Wales Online, written in June 2015.

[4] The article “Swansea tidal lagoon: What is a fair price?” by Gavin Miller appeared on the Institution of Civil Engineers infrastructure blog on July 28th 2015.

[5] See the House of Commons debate pack ‘Tidal lagoons and UK energy strategy’ (CDP 2016/0236) which is available as a PDF document from the UK Parliament website.

[6] Ibid (as note 5).

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