Less than a month after publication of the Hendry Review, BEIS is already being accused of dragging its heels on implementing its recommendations.
However, the Hendry Review was commissioned as a response to the uproar over the government effectively ending support for the lowest cost renewables – solar and onshore wind – while committing electricity consumers to pay for the construction of Hinkley Point C.
As the reactor design has still not generated any electricity after 35 years of construction across 4 sites in Finland, France and China, any further commitment of consumers’ money to experimental generation projects needed to be independently justified.
The Hendry Review had clear terms of reference to assess the strategic case for tidal lagoons and whether they could represent value for money for the consumer, and recommended moving to secure the pathfinder project as swiftly as possible.
Yet, the report left five critical questions unanswered:
1. Is Tidal Lagoon Power’s financial analysis robust?
The review based estimates of subsidy costs for larger scale projects upon TLP’s current project assumptions and proposed financing structure. There was no assessment of TLP’s numbers which were published as part of their subsidy negotiations with the government. Financial gymnastics were required to achieve a lower headline rate than Hinkley for future tidal lagoon projects.
But there was no assessment of the CFD strike price for Hinkley or offshore wind on an equivalent basis. Nor was there a CFD equivalent for the pathfinder project, when it is calculated for future projects.
The overall cost has been quantified for each household, yet electricity is only one third of a household’s total energy cost, and households make up only one third of electricity consumption, with the remaining cost to be borne by businesses and the public sector.
2. Should the first-of-a kind project be small scale or large scale?
The tidal lagoon is based on established technologies and construction methods. The review recognises that the potential for cost reductions from learning on construction techniques and technology development is limited, unlike the experience with solar and onshore wind.
The report describes a potential cost reduction of 8-10%, yet the strike price calculations show a 20% reduction based on learning from Swansea Tidal Lagoon. This inconsistency is not explained.
If there is little learning from doing, then the lower unit cost of a larger project may be more cost effective than a pathfinder project which, at £1.3bn, does not come cheap.
3. What is the impact of intermittency, not just on National Grid, but on other investments in generation?
The report asserts that National Grid can manage the intermittency of the predictable tidal lagoon, but this will come at a cost. The value of predictability over flexibility is over-emphasised. Solar is nearly as predictable. So is wind is in the short term. The output of the tidal lagoon will be inflexible. The UK already has more inflexible nuclear, PV and wind capacity than is required on a sunny and windy day.
Any additional output at this time will have little value. There is a similar question as for Hinkley – by subsidising inflexible generation, what will be the impact on other generation?
4. What is the opportunity cost and are there more cost effective ways to achieve the project’s aims?
The assessment of value for money of tidal lagoon generation does not consider other ways the money could be spent to achieve the same aims.
Would generating electricity from solar and onshore wind; or reducing carbon emissions from a national programme of insulation be better value? Would it provide more jobs?
In a time of austerity and rising customer bills, the opportunity cost should be considered by government.
5. Is it an energy, infrastructure or regeneration project?
It is easy to be in favour of Swansea Tidal Lagoon, but the most difficult questions for the review are around financing. Who should pay, how much and what for?
These questions are not answered by the report.
In order to decide whether to support the Swansea Tidal Lagoon, just one simple question needs to be asked:
With an investment pot of £1.3bn to spend, if the government was looking to support:
- electricity generation
would it commit to funding Swansea Tidal Lagoon?
If the response to the first two options are yes, then a CfD paid by electricity consumers is an appropriate way to secure financing.
If the response to the last two options are yes, then it should be funded by general taxation.
If the answers are no, then the alternatives, including larger tidal lagoons, should be considered instead.