Simon De Pietro Managing Director of DP Energy

The ocean energy sector needs the first precommercial projects in the water, and your organization has a leading role worldwide, could you give some information of your short to medium term plans given the actual conditions?

Simon De Pietro: It is critical firstly that the early arrays demonstrate performance in respect of both yield, and environmental compliance but secondly that there is a clear pathway beyond these deployments to significant cost reduction and increased reliability and operability. Both stages are critical to gaining investor confidence in the short to medium term. On their own, project sizes sub 10 MW are really not an attractive proposition to a major industrial, utility or pension fund. The deployed capital is simply not sufficient to warrant the attention and due diligence. For these small projects perceived risks are high and, even if theoretically bankable IRRs can be generated by high feed in tariffs and/or other support structures, getting investment is still difficult and to date debt from commercial lenders doubly difficult.

DP Energy is working on delivery of early stage small scale projects utilising competent technology supported by solid OEMs, and in parallel delivery of longer term larger utility or industrial scale projects (100-200 MW+) which are de-risked (grid contract, consented etc) ready for conventional financing structures. The intent is that by supporting both, and planning the timing of delivery of these two project streams DP can help the sector make a relatively smooth transition to commercialisation. The objective being to give confidence to investors that tidal is a workable and valuable proposition and to provide certainty to the OEMs that there is sufficient market to warrant expenditure on R&D and cost reduction programmes.

DPs demonstration projects, which cover a range of technologies and OEMs, are planned for deployment in the 2017/2018 time frame – including the Fair Head project in Northern Ireland, and FORCE in Nova Scotia. Its lead industrial scale projects – including the build out of Fair Head, West Islay and Westray in Scotland are scheduled for 2020 - 2022 subject to grid and technology performance demonstration and a stable and supportive energy policy environment for investors.

Project development involves a wide variety of risks, including technical, regulatory and financial, could you describe which are the most critical ones you have encountered/are encountering and how could they be overcome?

Simon De Pietro:

The Fundamental Risk and Challenge
It is perhaps worth noting that DP Energy is an all round renewable, technology neutral, business and has interests in wind (where it started some 20 years ago), solar (PV in particular), and storage as well as in tidal energy. The first fundamental risk then for any sector is that the technology cannot achieve a competitive Cost of Energy (i.e. kWh price). Ultimately, as a renewable site developer, where the kWh comes from does not matter and the fall of costs for more mature renewable Wind and Solar PV in particular is a challenge for any new renewable technology. This challenge is compounded for Ocean Energy by the need to exist and operate in a harsh and energetic environment but of course that is also a mark of its great potential and why it is worth pursuing.

Technology Maturation/Commercialisation
Across the spread of Ocean Technologies, and whilst recognising the substantial potential in some of the other areas (Wave in particular), DPs view is that closest to maturity is the Tidal Energy Sector and as a commercial developer has chosen to focus its resources for the time being at least in this area. The maturity of the sector is also illustrated by the acquisition of the small innovative companies (MCT, TGL etc) by some large industrials. It needs these large industrials to substantially reduce costs and apply the rigours of value engineering that is a mark of their production background. The recent decision by Siemens to divest of MCT is clearly a concern for the sector but this is more likely a recognition of the potential size of the tidal sector which, whilst substantial, is more limited than for example the worldwide wave resource.

In order to achieve an acceptable Cost of Energy the sector needs to expand, savings need to be made not just on turbines and foundations, but also on installation and maintenance cost, and balance of plant (e.g. electrical marshalling). This requires ocean deployment and real sea experience not just tank testing and modeling and that is expensive. In order to facilitate these deployments then developers need to (and are) investing significant amounts of money and resources in putting projects in place based on the technology delivery plans in order to be ready for deployment in the first pre-commercial and commercial arrays.

As it does with its wind projects, DP Energy approaches development as a technology neutral Commercial developer and approaches sites from a “project comes first” not technology first perspective. However, National and EU funds such as NER 300 are very often linked to specific technologies and, if these change or fail to progress, the public investment in the sector is threatened and the development pathway is also compromised. The structure of the funds is sometimes also a challenge – funds based on generation including the NER300, which effectively supplement an enhanced Feed in Tariff still leave the entire technology risk with the site developer or the OEM if they are prepared to accept any risk. Additional and ring fenced public support for the tidal energy industry recognizing the technology risks (and likely ability of the sector players to take those risks), coupled with a stable energy policy environment, would encourage continued investment in the sector.

Public/Private Finance – De-Risk Early Arrays
Whilst support from public funding is clearly recognized, and obviously welcomed, a significant amount of money has been invested by private companies in the industry, both in site and in technology development. However finance remains one of the a major challenges to drive the sector forward. Until confidence is developed within the investor community and commercial debt is available to the sector this will remain the case, and that requires ocean deployment of early arrays.
 

While most of the leading markets are providing, or plan to provide reasonable revenue incentives, it will also be necessary for member states and the European Commission to provide direct capital support and/or underwrite the risk elements to encourage private debt and equity partners to engage at this early stage. Possible options which may be considered in this situation are co-investment and risk sharing including ‘super-funds’ and government backed guarantees to underwrite risk.

Linked to this is the need for cost reduction from technology providers, marine contractors and the wider supply chain. This cost reduction trajectory is likely to happen organically to some extent, but the projects will never reach a competitive levelised cost of energy (LCOE) unless there are significant cost reductions at all levels. Cost reductions traditionally occur through knowledge sharing, collaboration and joint ventures and this must happen in this sector to drive down costs.

Grid Issues
Like all renewable technologies, the resource is where the resource is, and particularly for Tidal energy the currently commercially exploitable resource is largely remote from the principal demand (e.g. Orkney and Pentland Firth, Bay of Fundy, Antrim Coast). Commercialisation of the technology through larger projects therefore requires close access to grid and potentially significant transmission reinforcement to facilitate dispatch of that energy to where it is needed.

As a site project developer, grid issues largely falls to DP to deliver and this is no different whether a wind, solar or tidal project. However, what is different is that commitment to grid securities and providing guarantees for potentially expensive grid solutions is significantly easier when the generation project is readily fundable (and bankable). For a tidal project the connections inevitably involve expensive offshore works and landfalls and long transmission upgrades. When this additional grid issue is combined with project financing challenges it becomes a significant hurdle.

In order for OEMs to make positive investment decisions in relation to the sector and delivery of technology they need to be convinced that there is a viable pipeline of projects. As a site developer the extreme time delays and capital costs associated with developing new infrastructure is a major deterrent and is an issue, which can be dealt with at least in part by energy policy makers.
 

Historically grid infrastructure was managed nationally and was not part of the initial capex of individual electricity generation projects. DP is supportive of deregulation and privatisation of the electricity sector as this has created opportunities for renewable energy developments and increased competition in general. It has however led to more of the costs associated with grid development and reinforcement being borne by individual generation projects, as opposed to being socialised, potentially making tidal energy projects unviable in many key site.

Grid infrastructure is an area where project developers and support organisations should work actively and vigorously together to lobby governments for change.Infrastructure is a national resource and it is therefore theoretically easier for public funding to be used for this purpose as it becomes a national asset rather than an asset of any individual project or promoter. There are many linked issues including the need to promote EU grid extensions and interconnection between countries and regions and to integrate tidal energy into short and medium term grid planning at EU and member state level.

If support measures are put in place in order to overcome those barriers, can you identify the responsible stakeholders for delivering solutions, such as, governments, supply chain, research sector, etc and what would be the expected improvement in terms of your project pipeline and cost reduction that could be achieved?

Simon De Pietro:

Technology – ultimately it is the responsibility of the OEMs to develop their technology in a way that is profitable in the long term and undertake whatever research is necessary to support that aspiration. In order to do that the OEMs need to concentrate on key technology challenges including energy yield/performance, installation methodology, reliability and ability to maintain the devices at a reasonable cost. However, in order to build a new industry to enable the exploitation of a new energy resource it is necessary for the member states and the EU to provide R&D support for the OEMs directly or via the research sector to enable them to develop their devices to a stage that they are commercially ready for deployment and able to compete with more mature forms of renewable energy.

Finance – At this early stage it is critical that significant public funding remain available in the form of capital grants and risk sharing to enable the technology to be tested in real sea environments at a meaningful scale in arrays. Once confidence is established within the mainstream investment community that the technology works in these arrays, it will effectively de-risk future investments and will open the sector up to conventional finance mechanisms and private debt and equity deals.

Grid – Whilst DP is exploring a number of private wire solutions for its own projects, and in collaboration with others for multiple projects, at present the unlocking of grid infrastructure will require support from national governments and regulators. Provision of grid infrastructure is an area where public investment could be used in support of a large number of renewable projects.

Expected Improvements – The Billion Euro question. DP’s objective is to see tidal competitive with other forms of renewable energy and in fact other generation based on direct cost of energy which is heading toward offshore wind (perhaps below), and its value of energy by virtue of its predictability. National and EU support should enable the industry to achieve this within a 2020-2025 timeframe 

How do you see that international collaboration could accelerate ocean energy growth and what, specifically, is the role that you would like OES to play in supporting the development of ocean energy?

Simon De Pietro: DP Energy is a technology neutral renewable energy developer and operates internationally throughout these sectors. As such we have links with the majority of the main OEMs, utilities and a substantial number of the supply chain companies. This is useful in that it provides opportunities to learn from other regions in a number of areas - approaches to legislation, environment and other challenges. Cross-border collaboration and cooperation are important as is competition. It is important to not lose sight of development activities, research and field experiences (good and bad) across both Europe and the rest of the World. There appear to be some parallel research activities being undertaken independently and some better coordination to avoid duplication would be beneficial. This requires a multi-jurisdictional body to facilitate. Organisations like the OES have a key role in disseminating information and in working with national governments to provide timely and accurate information in relation to the industry. 

We are keen to see learning captured and shared for the benefit of the industry in the early stages of its development. Investor confidence is not country based.