Renewable optimism

The Renewable Energy industry in the South West may be on the brink of a pioneering phase, but are we really poised to turn the expertise and geography of the region into hard cash, asks Richard Cobb, partner at Michelmores.

A conference in Plymouth last week on Offshore Renewables, organised by the Peninsula Research Institute for Marine Renewable Energy (Primare), highlighted some of the challenges faced by those seeking to bring the latest renewable energy innovations to market and enter the supply chain for existing projects.

The bottom line

The problem is that free wind, free waves and free tides do not mean free electricity. In money terms the price to beat is that for fossil fuel electricity - wave and tidal power (and wind to a lesser extent) is still a long way from offering genuine competition once the tax breaks and subsidies are taken away.

Investing in a new technology that produces the same product as the old one but at four times the cost is a tough sell to the average capitalist, which is why the whole industry is reliant on political interference in terms of target setting and economic aid. Are artificial profits a safe bet for investors?

Feed in Tariffs and Renewable Obligation Certificates are both designed to make renewable energy look more attractive, but there is a tension between the requirement to have long term commitments to allow the return on investment that project finance requires and the reality that better technology may render current devices and pricing models obsolete.

Funding renewable energy technology

It should be easy, right? Everybody wants it, the UK government both subsidises it and requires it, and investors like a fast growth sector with ever-growing customer demand.

Yes and no: the UK may be the largest offshore wind energy player in the world so far, but most of the devices are designed and built outside the UK. The companies that fund new generating sources are not going to source locally unless it is better or cheaper. Experience from Round 1 Offshore Wind projects in the UK such as Rhyl Flats is that 75% of the funds went overseas.

Windfarms on land and offshore are a reality now. When it comes to the much less proven world of "wet renewables" developers are much further off from their pay day.

A typical device development aimed at the "wholesale" generating market starts in an academic lab, needs £1m to make a 1:5 scale prototype, £15m to make a full scale engineering prototype and only then can justify a small array for 2 years of testing and ultimately a project financed commercial deployment.

80% of the new technology innovations come from academia and it is no surprise that outside investors are reluctant to fund the early stages. That is why since 2000 there have been some 20 different government schemes and funding streams for the development, demonstration and deployment of renewable energy technologies. Since the election we have been promised a Green Bank and other initiatives.

The problem is we are in a fragile economy at a time when some VC's are questioning their own business models. Atlas Ventures (who backed Ashburton's Orthogon Systems) have themselves said "there is too much money locked into VC funds that is not being returned". It is the yawning gap VCs are supposed to fill between the initial £250k to £3m funding and the project finance that can prove fatal to developers. For every spin-out like Orecon which has nearly got there, there will be many more UK innovations that stay in academia or splutter to a halt after the initial funding dries up.

That is why any news from the likes of Qinetiq that they are looking at private sector funding for developers is welcome, alongside other "corporate venturer" funds. Fundamentally though, the technology still has to make business sense.

In some ways it is a "success gap" not an "equity gap" that we need to fill, and the 1% inspiration behind each great idea needs to find the other 99% perspiration to make the idea become a business. And here we need a deeper pool of management talent in the South West than I fear we currently have.

Atlantic Array

Back to the here and nearly now, it is clear that the South West has much to gain from the 250 wind turbine development now approved off the North Devon coast. Within the supply chain, whilst many expect the turbines to come from European market leaders Siemens or Vestas, there are many other routes in. In particular, ocean and seismic surveyors and environmental impact assessment professionals will be required in the early stages and then the logistics of erecting and commissioning the equipment between now and 2019 will lead to numerous opportunities for local suppliers.

Falmouth, with its deep water port and companies such as A&P Falmouth who are proactively addressing the renewables sector, has much to gain. It is also clear that Primare itself will expect to distil some of the real business opportunities from the south west knowledge and geographic base .

Community Projects

At the other extreme of the Atlantic Array supply chain, is the growing demand for community funded microgeneration projects. We have been involved in these at various levels, including an innovative community bond for a wind farm in Wales and work on the Skypark community heating project in Exeter. These projects cover everything from community groups clubbing together to put PV Panels on the school roof (using all the available grants and carbon trust loans) to "solar vineyards" such as that mooted in Cornwall.

There is still of funding and advice available at this level, and with the new Feed in Tariffs aimed at microgeneration projects we expect the South West to meet the challenge of living up to its Low Carbon area status by embracing schemes such as these with enthusiasm.

Show us the money

So there is still government funding aimed at renewables, albeit aimed at specific pressure points - where do we get it?

Amid the excitement there is an elephant in the room, or rather standing near the exit. Funding managed by the South West RDA has played a key role in many low carbon/renewable energy initiatives in the region. There is a fear that the current paralysis caused by announcements that the RDA is to be abolished will be followed by a painful void when the replacement (and much lower cost) Local Enterprise Partnerships are brought in.

It is likely, however, that of all the sectors supported by the RDA, renewable energy will be one where the political will to accelerate change will continue unabated. It is unlikely the South West's recent designation as the first Low Carbon Economic Area will be withdrawn and, with the Coalition's Lib Dem soapbox, it would be a blow for the region if the loss of the RDA led to any less money being committed to the region's emerging status on the European stage of renewable energy.

It is up to the innovators and business community in the region to ensure it is not just the loose change of all that investment that remains in the region.

For more information on the issues raised in this article, please contact Richard Cobb, Partner, Michelmores.