Background and Challenge
The Crown Estate manages a diverse portfolio of assets on behalf of the United Kingdom, with all profits going directly to The Treasury. It works closely with many companies in the private sector and various parts of central and local government, and its work is guided by an act of Parliament.
The Crown Estate’s marine assets include 55% of the foreshore and almost all the seabed in UK territorial waters. It derives its marine income from providing leases and investments in the creation of assets for commercial aggregate extraction, pipeline and cable projects, fish farms and offshore energy. While offshore wind is the fastest growing part of the energy and infrastructure business, The Crown Estate is also engaged in wave and tidal energy, carbon capture and storage and natural gas storage, and is looking at the potential for marine biomass.
In 2010, The Crown Estate completed its first major leasing round for wave and tidal energy, awarding rights to eight companies for 11 projects which in aggregate have the potential to deliver 1.6 GW of installed capacity. While the leasing process was successful, it was known that wave and tidal project developers were facing a number of other barriers, both technical and commercial, that were containing their ability and desire to invest at scale in the construction of generation capacity. In this context, The Crown Estate was considering whether it could do more to assist industry development and support the government’s renewable energy and carbon reduction targets.
L.E.K. Consulting was engaged to support The Crown Estate in the development of a five year Wave and Tidal Programme Forward Plan. Specifically, we were asked to:
- Characterize the wave and tidal industry and the development challenges that it faces
- Establish what role the client, and other industry stakeholders, should take in industry development
- Develop the foundation for a coherent and robust strategy for a wave and tidal program
Approach and Recommendations
The wave and tidal industry is still in its infancy with an array of products and technologies still vying to be economic on a commercial scale. After an initial assessment, We focused on wave and tidal stream energy given its long-term growth potential and the ability of The Crown Estate to influence development. Tidal range power was also examined separately at a higher level in relation to a current live opportunity.
Over the course of the project, we engaged extensively with technology developers, utilities, government and financial investors to assess development issues within the industry. Current and future barriers for development were identified and categorized as technology, site, financing, supply chain and industry structure.
To assess the potential financial implications for the client in terms of lease revenues, significant modeling was undertaken to forecast potential industry development paths, including:
- Wave and tidal stream project economics to assess the current funding shortfall and level of returns achievable given the current estimated costs and revenues, including subsidies
- Industry development, incorporating a probabilistic approach to account for the high degree of uncertainty associated with technology progression; the level of likely support from utilities and the government; and an estimation of funding gaps at each development stage. This enabled the client to evaluate the potential impact of any intervention on industry development, and the likely returns
- Generic technology development economics, assessing the size of the opportunity, appropriate discounting and investment funding gaps. We assessed the risks and rewards relating to an investment in a technology developer and the attractiveness of such investment versus alternatives for venture capital providers
From this analysis, we identified a number of potential initiatives that could advance the industry. These were refined and tested with industry participants to prioritize them according to both their potential impact and The Crown Estate’s ability to support them. The initiatives were grouped into five strategic options (blocks of complementary activities), with high-level action plans, individual work steps and the required investment detailed for each initiative.
As a result of the work, The Crown Estate gained a deeper understanding of the wave and tidal industry and its ability to derive value from the sector. It also had a clear strategic plan, including a set of prioritized initiatives with the potential to deliver significant long-term value for the industry and actively help the sector to grow in the short term.