Economics and financial cost of Swansea Bay tidal lagoon questioned
Policy Exchange.com and Richard Howard comment, 11th January 2017: If ever there was a textbook example of how to go about Government lobbying and project development, then it is the Swansea Bay Tidal Lagoon project.
The developer, Tidal Lagoon Power, has done a frankly incredible job of promoting the project to policymakers and financiers. The project has gone from an interesting idea on paper a few years ago, to being backed financially by investment bank Macquarie amongst others, to garnering significant political support by the likes of the Rt. Hon. Sir Ed Davey (as Secretary of State for Energy and Climate Change), other Coalition Government Cabinet members, and the Welsh Government.
Based on my own knowledge of the project and technology, I suggest that it would be folly for the Government to agree to progress the Swansea Bay project further.
The main reason for this is simply the cost of the technology. The developer’s latest estimates are that the Swansea Bay project would cost £1.3 billion to construct. Interestingly, this headline cost has already increased by more than 40% compared to earlier estimates — a 2014 report to the developers assumed a lower capital cost of £913 million.
In order to get a better handle on the relative cost of the technology, it is informative to consider the cost per unit of electrical output (£/MWh) — often referred to as the ‘Levelised Cost of Energy’.
The same report from 2014 put the cost of Swansea Bay at £168/MWh, roughly four times the current wholesale price of electricity. By comparison, the Government’s own estimates show that other low carbon technologies are considerably cheaper:
Swansea Bay Tidal Lagoon makes wind, solar, Carbon Capture and Storage, and nuclear look cheap.
Moreover, if the question is whether tidal lagoons could play a ”cost effective role”, then it is worth considering even cheaper ways to cut carbon emissions, such as improving energy efficiency.
It would be far better to spend the £1.3 billion insulating our homes properly (see our recent report on cost effective routes to decarbonise heating).
Backing an expensive technology such as tidal lagoons would leave less space within the Levy Control Framework funding envelope to spend on other, cheaper technologies. The Levy Control Framework budget has already been overspent to 2020 — a point exposed in a Policy Exchange report in July 2015.
The project developer has suggested that the headline “strike price” (or subsidy support level) required by the project is far lower than £168/MWh — potentially similar to the £92.50/MWh agreed strike price for Hinkley Point.
However this is only possible by tweaking parameters of the Contract for Difference (CfD) subsidy contract such as the term and indexing rate, and assuming some form of Government grant to the project. These tweaks simply obfuscate the true cost of the project. All technologies could achieve a lower strike price if they were given the same treatment.
The project developers (and other proponents of tidal rangetidal range The difference in height between high and low tide) claim that subsequent tidal lagoons in Cardiff and Newport will be considerably cheaper than Swansea Bay — potentially cheaper than offshore wind or nuclear. This is due to the larger size of the subsequent projects and resulting economies of scale. In reality this claim is totally untested and purely based on desk-based analysis by the project developer.
The difficulty with tidal range is that it is caught somewhere between being a mature and immature technology.
There is already one significant example of the technology — the 240MW tidal barrage at La Rance in France, commissioned in 1959 — but as yet the technology has not been deployed widely.
If tidal range is considered ‘mature’, and the Cardiff/Newport projects are so much cheaper than the Swansea Bay project, then surely we progress with them instead?
Or conversely, if tidal range is still considered ‘immature’ and a further ‘experiment’ is required, then is it appropriate for this to be a £1.3 billion experiment paid for by bill-payers or taxpayers?
Even if the Government wishes to pursue tidal range as a technology, then it is not unreasonable to question whether Swansea Bay is the ‘right’ project to demonstrate the technology, or whether a smaller scale experiment should be undertaken first.
Proponents also make the case for the Swansea Bay project on the basis that it will create jobs, and could help to develop an export.
A group of manufacturers recently wrote an open letter to this effect, which was published in the Financial Times.
It is undoubtedly true that building tidal lagoons will create UK jobs — both in civil engineering and in manufacturing components. No doubt this will also be a politically attractive proposition, since many of these jobs will be situated in South Wales — helping to rebalance the economy away from London.
However, the fact that it will create jobs is it itself not a sufficiently strong argument — spending £1.3 billion on any infrastructure project would create jobs.
The Government could instead choose to spend the same money on alternative sources of energy, or other forms of infrastructure such as roads, hospitals or schools. All of these projects would create jobs.
The relevant question here is: what is the return on investment (for UK plc) in supporting the Swansea Bay project versus alternatives?
Which forms of investment would best tackle the UK’s long-standing economic challenges such as sluggish productivity growth (as highlighted in a recent Policy Exchange report, The New Industrial Strategy)?
It should not be forgotten that a tidal lagoon would need to be paid for via subsidies on energy bills, passed on to energy users (households and businesses).
Levy-funded policies push up energy bills, which means that households and businesses have less money to spend or invest in other areas. You cannot simply look at the jobs created by building a tidal lagoon – you also need to look at the wider effects across the economy.
It is also not clear that supporting the Swansea Bay project will establish a significant export industry as claimed.
One of the reasons that there has been ongoing interest in tidal is that the UK has amongst the best tidal resource in the world. Tidal range resources tend to be highly concentrated in very specific areas.
There is interest in developing tidal lagoons and barrages in a number of countries such as Canada and India, but they cannot be developed everywhere.
Total global installed capacity of tidal energy devices (tidal range and tidal streamtidal stream The flow of water through channels or around coastlines as a result of tidal water movement) stands at around 0.5GWs. If the UK wishes to become a market leader in low carbon technologies, then it might be better to focus on technologies with truly massive global potential – such as solar, wind, nuclear, Carbon Capture and Storage, or electric vehicles.
Finally, the proponents of tidal power claim that it is different from other forms of renewable energy such as wind and solar, due to the fact that it is predictable.
Whilst that may be true (the timing of tides can be predicted decades in advance), tidal lagoons still do not produce power 100% of the time, and in that sense are not wholly reliable.
In any case, the intermittency of renewables can be managed using a range of technologies including thermal power generation, storage, demand response, and interconnection.
To summarise, in our view the Government should resist the urge to back tidal range, or the Swansea Bay project, any more than other low carbon technologies.
Whilst the project would deliver many jobs and benefits, the same could be said of other energy or infrastructure projects.
If tidal range projects can compete on cost terms, then of course they should be supported, but that is not the proposition which is currently on offer.
However the developers try and dress it up, the Swansea Bay project is considerably more expensive than other low carbon technologies. If the Government chooses to back this project, then it will have a job to explain why this represents good value for money.
Indeed, since the Competition and Market Authority’s report on the energy market, the Government has an obligation to carry out an Impact Assessment and defend any decision to award CfDs on a non-competitive basis.
Source: Policy Exchange.com, 11th January 2017. For further details, see
https://policyexchange.org.uk/the-folly-of-swansea-bay-tidal-lagoon
