Cleantech Investor

First published in Cleantech Infocus: Offshore Renewable Energy in the Isle of Man, May 2012. Copyright Cleantech Investor Ltd

Chair - Ken Milne

During two sessions on 20 April 2012, delegates discussed what factors need to be in place for the successful deployment of offshore wind projects and to what extent these features are in place in the Isle of Man. They aimed to highlight the Isle of Man's strengths and weaknesses relative to other jurisdictions. The goal was also to determine best practices for the Isle of Man to adopt as it rolls out an offshore wind business and to identify areas on which the Isle of Man Government can focus, in order to enhance the attractiveness of the island for offshore wind projects.

Summary Conclusions – Session 1 (by Nigel Hawkins)

During the first session, the fundamental question of what drives the planned Isle of Man energy policy was posed: the strategy was justified on the basis of generating exports, raising revenues and creating jobs locally.

• At a general level, it was openly recognised that there were many attendant risks, particularly on the political and financial fronts.

• Not surprisingly, the discussion highlighted certain specific risks relating to the Isle of Man; these encompassed, inter alia, such issues as fishing rights and any overlapping with oil/gas development offshore.

• The issue of turbine efficiency was raised. Whilst offshore wind utilisation levels are generally higher - with larger turbines being used - the latest evidence suggests that England’s east coast (the North Sea) offers better prospects. It was noted that research is currently being undertaken locally using anemometers to determine the best wind generation locations.

• Whilst offshore wind development should give rise to lower environmental concerns locally, it is not expected to lead to lower electricity prices – an issue that undoubtedly concerns many island residents. Furthermore, the discussion group highlighted several key issues relating to project consent and commercial bidding.

• More than one speaker emphasised the need for a relatively short consultation period so that the process does not drag out unduly.

• Fears were also expressed that judicial reviews could delay consent approval and make it harder to raise the necessary investment funds – the contentious Barrow consent controversy was cited as a worrying precedent.

• In terms of the bidding structure, several views were expressed. Crucially, the Isle of Man Government fully recognises the benefits of leasing its sea bed; it envisages a joint venture approach with an offshore wind developer or operator.

• It was pointed out that there had been material changes to the Isle of Man’s competitive tendering regulations so that price is no longer the over-riding criterion.  As such, there is now scope to design a more wide-ranging tender mechanism that can address other issues, such as investment in the proposed O&M onshore facility. Consequently, considerable flexibility remains to prescribe the optimum structure.

• The size and number of individual offshore wind development zones was discussed. Currently, the Isle of Man Government remains open-minded on this issue and seems likely to be influenced by the proposals of potential bidders, such as Centrica, before setting the relevant parameters.

• More specifically, there is an opportunity to make the 60MW subsea electricity cable link to Bispham, near Blackpool, more efficient: export volumes of power from the Isle of Man are currently quite modest.

• It was acknowledged that, even when key consent and bidding decisions are made, the issue of finance is bound to remain critical, especially given the high capital cost per MW of offshore wind power. To date, most offshore wind power in the EU has been developed by companies which are predominantly state-owned, notably Sweden’s Vattenfall and Denmark’s Dong Energy. To stimulate private investment, there will need to be a clear – and long term – financing regime. The potential for this regime to be be based on the existing UK Renewables Obligation Certificates (ROCs) system was discussed.  It was noted, however, that investors anticipate a fall in capital costs as offshore wind technology advances. If the £100 per MWh Department of Energy and Climate Change target (for the cost of offshore wind) can be met – the current figure is far higher – investors should respond positively.

• The Isle of Man’s highly attractive tax regime was regarded as beneficial in attracting investors in offshore wind – a scenario that has already been replicated in other sectors.

• In the long term, the plans for an offshore transmission link – connecting various offshore wind generating plants in the Irish Sea – are undoubtedly ambitious. Hence, leasing the 12 nautical mile Isle of Man sea bed to develop offshore wind power has various attractions, as the discussion panel recognised - albeit with reservations on several fronts.

• It was agreed by the panel that if the Isle of Man Government can handle the process efficiently and meet the appropriate political, financial, consent and bidding criteria, there is a real chance that high quality and long term investors will emerge.

Summary Conclusions – Session 2 (by Anne McIvor)

• In terms of licensing the rights to exploit wind energy resources off its shores, the opinion was expressed that the Isle of Man needs to ensure it doesn’t replicate the English system, which was described as “not conducive to getting things done”. The original Irish system was mentioned by one delegate as preferable in the sense that it was a “one stop shop” – a centralised system. The Irish Marine Licensing Committee system was described as having worked well on one project (Arklow). However, problems with the Irish system were described on subsequent projects – specifically relating to the time line. It was suggested that, were the Isle of Man to adopt a similar system to that in Ireland, it would also need to adopt an enforced time line. The Scottish Government’s system was praised for its commitment to time frames.

• One participant noted that a feature often cited by the Isle of Man as a strength – the fast decision making process involving simple ministerial approval – could also be construed as a weakness in some aspects. The point was made that “a minister doesn’t like to be fettered” – so there is a risk that a minister can change his mind. It was suggested that the Isle of Man needs to put in place a permitting process which takes that risk off the table, since suing for legitimacy against a government is not a prospect which any investor would relish.

• Since no bank loans are available for the development of offshore wind at an early stage/during the consenting process, the risk for an early stage prospective investor is high (it is a pure equity investment at this point). Given this situation, it was suggested that, were the Manx Government to take the risk of securing an interconnector link for the island, it would take a major uncertainty off the table. An appeal was made to the Isle of Man Government to “connect and manage” – in order to avoid scenarios such as that in Ireland where there is a ‘last on, first off’ situation, preventing suppliers from gaining access to the interconnector.

• It was concluded that any interconnector for a large offshore wind energy project would need to be offshore, rather than on the island. It was also noted that, going forward, any large interconnector will fall under the banner of UK/EU projects.

• It was observed that the MEA already acts as a ‘clearing house’ for electricity, knows what an interconnector can achieve and has the skill sets to play a balancing market to the UK. The question was raised as to whether the MEA could play this role on a larger scale. 

• The Kingdom of Lesotho was cited as a case study of a country which is building a major business in exporting wind energy (to its neighbour, South Africa). It was suggested that this might serve as an example for the Isle of Man (albeit acknowledging that the land-locked Lesotho case study – involving a massive 6GW of wind energy – relates to onshore wind).

• Planned changes to the UK ROCs system, which will allow the UK to permit the import of energy from third parties, were discussed. It was noted that the UK is starting to change legislation to allow for third parties to import/export into the EU. However, it was emphasised that the Isle of Man will only ever be eligible to receive incentives on ‘joint projects’. The Isle of Man representatives confirmed that the island is in discussions regarding joint projects for up to 3,000MW of capacity for offshore wind (and up to 100MW of capacity for tidal).

• Given the prospect of joint projects, it was noted that anything done now, in terms of the development of offshore wind on the Isle of Man (ahead of the legislation change in the UK), is clearly at the risk of the developer until the joint projects have been defined. It was noted that it is currently likely premature to take a risk – but that the opportunity is close, although it was recognised that gauging just how close is difficult.

• It was acknowledged that the target set by the Isle of Man of 15% electricity from renewable sources by 2015 may be difficult to achieve from offshore wind energy (despite the fact that it is just a fraction of that 3,000MW of joint projects capacity being applied for). The Isle of Man representatives observed that the 15% target is a commitment and that the will is there – but that the time frame is not certain. It was noted that the key focus must be on taking the right decision for the longer term.

• The prospect of major bottlenecks in terms of grid connection was emphasised – underlining the high level need for an HVDC link across the UK and beyond, to avoid financial disaster in the offshore wind sector. It was stated that getting the massive volumes of wind energy capacity in the Irish Sea safely out and integrated into the European grid needs “a different level of thinking”. The necessity for more interconnections to ease the load was emphasised (e.g. Pembroke/Fishguard to France, or SE Ireland to France).

• The Isle of Man was encouraged to take on board lessons from Ireland, in terms of grid capacity bottlenecks – and also to bear in mind the capacity which its neighbours are planning to bring on stream. 

• With regard to bottlenecks, it was also noted that there is not just a power flow bottleneck, but also a bottleneck in terms of the other systems – with Ireland (regularly running on 50% renewables, but prevented from running at the 65% level which it could potentially achieve because its system has ‘inertia deficit’) cited as an example again.