OES Annual Report 2012 - Ocean Energy Systems

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As such Figure 1 is only an indicative cost trajectory based on particular assumptions of capacity factor and
Opex expected for a wave energy technology. To describe acceptable cost constraints more generally, ESB
has devised cost and performance envelopes.
Phase 1 Cost & Performance Envelopes:
Phase 1 projects will be required to establish the reliability and predictability of plant cost and performance
in advance of larger project investments upon which economies of scale can be built. In order to understand
the investment case in such activity, one must consider:
1. The internal rate of return (IRR) demanded by a commercial investor: For such early projects, investors
may be willing to accept a reduced IRR where there is strategic value to being involved in an early project,
especially where it would provide access to subsequent investment opportunities. An IRR of 7% is selected
for this analysis to determine realistic phase 1 project financing costs, though this will vary depending on
the project and the investor appetite. An IRR of 7% is probably optimistic as it is not risk-adjusted to the
uncertainty involved in the deployment of hardware in the marine environment without a proven track
record of reliability. However, it is assumed that all safety critical risks can be managed satisfactorily at this
stage.
2. The revenue stream for the project: ESB considers that tariffs of circa €300/MWh are expected to be
available in some jurisdictions (e.g. 5 ROCs in the UK market) to undertake these early projects of limited scale.
3. The lifetime of the project: ESB considers that a reduced project economic life of 10-12 years is
appropriate for Phase 1 projects as early technology is likely to become obsolete and be replaced at a date
earlier than the design life.
Based on the above, an affordable Capex per MW can be established. In order to represent technology
variability, the affordable investment cost is presented in Table 1(a) and is calculated for varying capacity
factor and annual Opex (as a percentage of Capex). Table 1(a) is the case where it is assumed that no
additional grant aid is available for the project. This table provides an “affordable cost envelope” for private
project financing of early stage projects.
The influence of capacity factor and Opex on these affordable costs is considerable. For example, for a
tidal stream generation plant rated at 1MW, a Capex in excess of €7m is affordable where capacity factors
of 45% can be achieved but this reduces to only €4.75m where capacity factors are limited to 30% (for
the case of Opex is 4% of Capex). Similar variation is apparent for wave energy technology, where there
is ambiguity about how such converters are rated and consequently about what capacity factors can be
expected. This highlights the need for caution in how developers rate energy conversion machines and for
how investors compare the cost of technology using the crude metric of €/MW installed. There will also be
variability in terms of Opex depending on reliability, accessibility and the cost of maintenance operations,
such that the affordable investment costs can also vary considerably depending on these attributes. This
highlights the need for project investors to undertake detailed technical due diligence to establish realistic
expectations of energy production, reliability, availability and operational costs.
Affordable Capex falls within the range of €3-8m for the range of capacity factors and Opex considered
in Table 1(a). ESB anticipates that such early projects are more likely to fall in the range of €6-10m per
MW. As such, it is likely there will be a shortfall between the required €6-10m and what can be justified
as a commercial investment alone, especially where Opex is likely to be high and reliability low for phase
1 projects. As such, these projects are termed “pre-commercial” by ESB and require additional sources of
funding.
Additional Phase 1 project funding:
Grant aid is likely to be essential to establishing this vital bridging market of phase 1 ocean energy projects.
Funding supports are already available through schemes such as the EU’s NER300 and the UK’s Marine
ANNUAL
REPORT 2012