The challenges facing tidal energy

UK tidal energy has seen little progress in the 20 years since the idea for the European Marine Energy Centre was conceived. A new challenge may be for it to rebrand as the UK Marine Energy Centre, as more companies move out to Canada and France.

In finance, five principles are often used to help form an investment case:  

• How big is the market?  
• How much of the market can the company/technology serve?  
• What will be the profits when the company reaches this goal?  
• How much will it cost to go on this journey?  
• How will the investor be repaid for sharing these risks?

So, how might tidal energy address these challenges?

How big is the market? Perhaps the biggest challenge is to determine the size of the market opportunity. In the past, commentators talked about 20GW of power from UK waters – about half the capacity needed by the National Grid on a peak day. Even adjusted for the tide going in and out, this would only be around a quarter of UK peak demand. However, this is not the market for tidal, and to gain access to this market, tidal energy would need to compete on cost. Currently, it does not seem likely that tidal will ever match the newly empowered onshore wind – and, of course, the technology still needs to work.

The recent UK Energy Systems Catapult ‘Innovating to Net-Zero’ report mentions tidal twice in its footnotes, demonstrating that this is simply not a technology featuring in its plans at scale much before 2050.

Surely, then, the market for tidal energy is different: smaller and more local, in places where the grid is weak or non-existent. This could include islands, as well as locations where local preferences demand extra effort to meet net-zero – those near global tech giants and their net-zero promises, for example. This market is significant and growing, but it is not 20GW. Let us accept that perhaps 200MW is as much as even the most patient investors are concerned would need to be reached within 10 years.

How much of the market can the company/technology serve?

I have disallowed large-scale tidal players. MeyGen, for example, has been in the big tidal game for 12 years and now produces 6MW at a load factor of 32% for around £50m. However, following a loss posted last year, the investor community will be more cautious. What is more, the Swansea Bay tidal lagoon has hit a cost-of-power stop.

We have seen attempts to mount tidal turbines on the sea bed (on frames above piles of rocks), as well as tethered buoys below the surface and snakes. All of these have failed – often due to a complete lack of understanding of harsh sea environments. Instead, a fleet of small, surface floating, low-cost, low-tech devices is emerging. This might sound negative, but at least these new surface devices are working!  

No other technologies are currently available to match the development made by Sustainable Marine Energy, Orbital and others, so the 200MW market is all for them.

The market for tidal energy is smaller and more local, in places where the grid is weak or non-existent

What will be the profits when the company/technology reaches this goal?

Tidal is not going to be a power margin that drives the profitability of this industry. We have seen enough of the approach and relative cost (compared to other forms of generation) to know that the niche in which it is to develop will not pay a high price for power. This niche will hopefully pay a high price for capacity, though – not only to install the turbines in the first place, but also, just as importantly, to maintain them. Tidal energy is a lifestyle choice, not a commodity product. Again, this is not so bad – lifestyle products can be very profitable! Both Canada and France are probably going after tidal for lifestyle rather than economic reasons, as they want to be leaders in the fight to reach net-zero. This way, they can be doing something about it – a sensible approach.

It would be hard to come up with a simple gross profit margin in this article, but suffice to say it would need to be enough to pay for the equipment, maintenance, overheads and some small return to investors. It seems unlikely that a premium margin will emerge for this product.

How much will it cost to go on this journey?

Timing is everything and, in that regard, investors today are benefitting from a considerable sum of money that has been invested and lost in poorly-conceived projects. The benefit, however, is that the people working in the industry are wiser, the supply chains are established at realistic price points, and the number of operating hours from early prototypes is growing.

The cost of getting from our current position to a fully established, highly available 200MW operating fleet of floating devices worldwide is manageable. Still, given the small market size and low margins, it would perhaps be unwise for there to be more than a couple of players in this market – this certainly seems to be the case now.

How will the investor be repaid for sharing these risks?

This is a challenge; the risks in tidal energy are significant and could be summarised as:  

• Market risk – will the lifestyle buyers put the money behind a fleet of tidal energy projects? Yes, for as long as subsidies are on offer, but given the wide gap in economic value between other renewables and tidal, this remains a risk  
• Construction risk – significant risk reduction can be achieved with standardisation, supply chain co-operation and design. The worst here is probably over (and it was bad)  
• Operational risk – operations at sea can be challenging due to changing weather conditions. While this is very site-specific, many have met this challenge with simple surface and easily towed designs  
• Durability – we will have to wait and see if these devices can survive significant periods of remote operation.

Despite a niche future for tidal in the transition to net-zero, a significant improvement in fortunes for current players and the future industry could be established with a small operating fleet of flexible and cheap mounted surface devices.  I wish them well as they move towards 5MW arrays, en route to a 200MW industry.

By David Casale, Director, Turquoise International

Picture Credit | Alamy