By Paul Homewood
From the Telegraph:
Concern over the costs of a £1.3bn tidal lagoon project planned for Swansea have resurfaced after its developer admitted that they remain well above the price of other energy technologies.
Mark Shorrock, the boss of Tidal Lagoon Power, told a committee of MPs that he would need a deal offering financial support of £89.50 for every mega-watt of electricity produced to build the groundbreaking 320MW project.
But under questioning he admitted that this could only be achieved with extra financial help from the Welsh Government, and a contract almost double the length than what is typically offered to developers of new nuclear or renewable energy projects.
On a like-for-like basis the Swansea Tidal project would need a contract price of £150/MWh. The sum is well above the eye-watering price of the Hinkley Point C nuclear power project which will cost bill payers £92.50 for every megawatt produced over 35 years.
https://www.telegraph.co.uk/business/2018/05/09/swansea-tidals-cost-claims-crumble-questioning/
I have watched the full Committee session (available here), and can add a few more details and comments:
1) Shorrock, under questioning, was forced to admit that without help from the Welsh Govt the strike price would be £92.70/MWh, guaranteed for 60 years.
2) If it was spread over only 35 years, as is the case with Hinkley, the price would need to rise to £150/MWh, again without aid.
3) Shorrock refused to disclose the amount of aid he would need from the Welsh Govt, which would be in the form of low cost equity. He stated that this was the responsibility of the latter to reveal, although the Welsh First Minister, Carwyn Jones, has been equally reticent.
Pressed though, Shorrock was forced to admit that it would be in the region of £200m.
4) Output from Swansea Bay would be about 500 GWh a year, just 0.1% of UK total generation.
5) Income would be about £50m a year, and running costs would £16m, leaving £34m to service capital costs.
6) Charles Hendry, former Minister at DECC and the author of the official report which recommended that the tidal project go ahead, repeated the spin that Swansea would only cost 30p a year for everybody in the country.
But as one of the MPs reminded him, no matter how it was packaged it was still £1.3bn. He and Shorrock were also reminded that this was “Welsh Govt money”, but “taxpayers’ money”.
Unfortunately, the Committee failed to challenge certain aspects and claims.
1) For instance, on several occasions, both Hendry and Shorrock claimed that the project would boost both the local and UK economy via the supply chain. Their view was that £1.3bn was a small price to pay for this.
However, there is no magic money tree. That money could have been spent on something else, which may have offered better value.
To put Swansea Bay into perspective, it will produce about 500 GWh a year, worth £22m at market prices. Shorrock admits that running costs will be £16m a year, so there will be added value of just £6m. This hardly seems much of a return on a spend of £1.6bn!
Just supposing, for instance that this money was spent on local infrastructure, roads, rail etc. Would that generate a greater return?
2) The proposed strike price of £89.50 will not be fully index linked. (One of the complaints from another witness, Richard Howard, was that the exact terms of the deal were still a secret).
According to Shorrock, this meant that after 40 years, the price would drop below the market price, which would have inflated in the meantime.
While this may be good news for our descendants, it certainly is not for the current or next generation of taxpayers.
However, there is a more serious issue. Given that running costs of £16m would amount to £32/MWh, would the project actually be viable after 40 years, with the strike price falling in real terms.
On top of all this is the risk of silting. While it may be possible to keep this under control in the short term, it may be prohibitively costly to do so in the longer term, as margins are progressively squeezed.
Put simply, the scheme may not have an economic life beyond even 20 to 30 years, never mind 90. If costs become unsustainable, Tidal Lagoon Power may simply pack up shop, safe in the knowledge that they have already made a handsome project in the early years.
If that happens, holders of long term bonds, who will finance the bulk of the project, had better watch out. (Shorrock told us that the share capital is currently £25m)
3) This leads us nicely on to the question of Welsh Govt aid, which Shorrock says will be equity, to take advantage of low public borrowing costs.
As with the rest of this deal, little has been announced publically. But it seems reasonable to assume that the dividend payable on the Welsh equity will be much lower than to other shareholders. (Otherwise, why not simply raise funds on the market?)
If the project does end up closing earlier than projected, this could mean that much of the Welsh funding ends up being written off.
Governments can borrow relatively cheaper because they are a sound risk. To then use this money on an intrinsically risky enterprise would undermine the government’s credit rating, if taken to its logical extreme.
4) Just to confuse matters further, Shorrock’s arch eco rival, Dale Vince, has entered the fray, claiming that his Solway scheme would be much cheaper, and asking that the government hold an open competitive process.
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May 11, 2018 at 08:36AM
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