OES Annual Report 2012 - Ocean Energy Systems

119
05 / DEVELOPMENT OF THE INTERNATIONAL
OCEAN ENERGY INDUSTRY: PERFORMANCE
IMPROVEMENTS AND COST REDUCTIONS
Energy Array Demonstration Fund (MEAD). Table 1(b) below repeats the calculation for phase 1 projects,
but considers the case where a €3m/MW grant is made available to the project. Note that this grant aid is
further limited to half of the total investment cost up to a maximum of €3m (as in many cases it is difficult
to grant fund projects by over 50%). The resulting project costs that can be funded in this way then fall into
the Capex range of €6-10m and ESB consider these as acceptable project costs for phase 1. As such, the
cost and performance envelope described in Table 1(b) represents a useful target to maximise the chance
of successfully financing a phase 1 project.
Phase 2 Cost and Performance Envelopes:
Once phase 1 projects are performing reliably and operational costs and associated risks are understood
with some confidence, it should be possible to build a business case for larger projects and take advantage
of economies of scale. Grants will be difficult to justify at this scale and so such projects will need to be
commercial based on a bridging tariff alone (such as the 5 ROC market in the UK or equivalent feed in
tariffs). Phase 2 affordable costs are calculated here based on:
1. The internal rate of return (IRR) demanded by an investor: Projects at this scale will need to pay for
themselves using normal commercial finance. An IRR of 10% is selected for this analysis, though this will
depend on the project and the investor. However, offshore projects will carry risk, and some contingency
must be included to attract such finance.
2. The revenue stream for the project: ESB considers that tariffs of between €220/MWh (proposed
Renewable Energy Feed in Tariff (REFiT) for Ireland) and €300/MWh (approx equivalent to 5 ROCs in the
UK market) will be available to undertake these early projects of limited scale. There may also be niche
applications for technology (e.g. island communities or in applications for offshore oil and gas activities)
where higher tariffs are payable for small projects. €300/MWh is used in this analysis.
3. The lifetime of the project: A project life of 20 years (approaching expected design life of hardware) is
appropriate for Phase 2 projects.
Table 2 shows the resulting affordable cost and performance envelope for phase 2 projects. An enhanced
tariff of €300/MWh is likely to be unsustainable at scale and therefore there will be a limited market for
such projects.
Phase 3 Cost and Performance Envelopes:
Economies of scale, incremental technology improvements as well as improvements in performance and
reliability will have a significant impact on the economic case. In order to achieve economic parity with
offshore wind, ESB considers the following case:
1. The internal rate of return (IRR) demanded by an investor: As for Phase 2 projects, an IRR of 10% is
selected for this analysis. Offshore projects of large scale will still carry risk, and some contingency must be
included to attract such finance.
2. The revenue stream for the project: Based on Renewable UK [1] projections for offshore wind levelised
costs; ESB considers that tariffs of £130/MWh (~€160/MWh) may be available for offshore renewable
generation projects beyond 2020.
3. The lifetime of the project: A project life of 25 years is considered appropriate for Phase 3 projects.
Table 3 represents the resultant cost and performance envelope. Note that the current investment cost of
offshore wind projects in the UK are circa €4m/MW and such projects can now achieve a capacity factor
of 35-40% with operational costs of €80-90k/MW/year (see Renewable UK [1]). These costs are within the
envelope described in Table 3 (highlighted). As such, Table 3 represents the cost and performance currently
required for a significant market to develop, as for offshore wind.