In this report, Greentech Media and the Prometheus Institute for Sustainable Development address the underlying fundamentals that will determine when ocean power technologies will become competitive with other renewable and traditional energy sources, what technologies will bring the industry to that point, and how investment, government policies and power sector buy-in will drive the growth of this industry. While today fewer than 10 MW of ocean power capacity has been installed worldwide, we believe that in six years the industry has the potential to break 1 GW of installed capacity on an annual market size of over $500 million.
The Potential of Ocean Power
The value proposition for ocean power is twofold. First, ocean power technologies are based on well-understood principles derived from hydrodynamic physics, marine design and construction, and mechanical and electrical engineering. Unlike solar photovoltaics, which rely on innovations in materials research and processing technology to reap efficiency gains, the research, design and development processes for ocean power technology hav e been practiced for hundreds of years. As such, the capital and energy cost paths for ocean power technologies are relatively predictable. Second, ocean energy is an abundant, dense and predictable resource. Waves propagate over thousands of miles of ocean and their size and energy content can be known from three to five days in advance. Tides and marine currents are 832 times denser than the air flowing over wind turbines and are predictable up to the minute at least 100 years in advance.
Understandable and rapidly declining costs coupled with high performance and output are the primary factors that will drive down the levelized cost of energy for ocean power technologies in the long term. In this report, Greentech Media and the Prometheus Institute for Sustainable Development address the underlying fundamentals that will determine when ocean power technologies will become competitive with other renewable and traditional energy sources, what technologies will bring the industry to that point, and how investment, government policies and power sector buy-in will drive the growth of this industry. While today fewer than 10 MW of ocean power capacity has been installed worldwide, we believe that in six years the industry has the potential to break 1 GW of installed capacity on an annual market size of over $500 million. More than $2 billion will be invested in that time in commercial production and installation. Based on current trends, a similar amount will be invested in research, design and development during that time.
Ocean Power Technologies
Wave energy technologies are the most heavily researched and funded sector in the ocean power industry. Out of the 35 companies analyzed in this report, 24 are developing wave energy technologies. This is likely due to the scale and availability of the ocean wave resource when compared to the marine current and tidal stream resource. The potential to bring renewable electricity to the nearly 50 percent of the world's population living within 60 miles of a coastal area is another factor driving the outsized development of wave energy technologies.
The majority of companies developing wave energy technologies are working on devices called point absorbers. Point absorbers resemble offshore buoys that mark channels and measure environmental and meteorological data, though they are much larger. These devices are researched and developed at a higher rate than other kinds of wave energy devices because of their ability to absorb energy from oncoming waves in all directions. Their behavior is much the same as that of a cork in a bathtub, bobbing in reaction to multi-directional ripples. All other wave energy devices are designed to absorb oncoming energy from only one direction or dimension in space. Multi-directional absorption, however, is not without its problems. The device must be tuned to the wave climate in which it is submerged, or the energy created will not flow smoothly through the power-take off system. Some companies have developed advanced tuning systems, while others have overlooked this critical issue.
Tidal energy technologies have received relatively less attention than wave energy technologies, despite their comparative success in commercial deployment and in lab and in-water testing. Of the 35 companies analyzed in this report, only 11 are developing tidal energy technologies. While geography is a limiting factor in the deployment of tidal energy devices, in the future this may be mitigated by some of the promising aspects of this method of power generation. In addition to the obvious technology transfer possibilities from the wind industry to the tidal industry - the link here is much clearer than the technology transfer link between wave power and the offshore oil and gas industry - tidal energy provides an exceptionally predictable source of power. Since tides are a function of lunar phasing, it is possible to predict incoming tidal power hundreds of years in advance. Of all the renewable energy technologies, with the possible exception of geothermal power, tidal power is the most predictable and reliable. This could help in alleviating, though not solving entirely, the problem of dispatchability that many power companies and utilities cite as a reason for not adopting renewable energy technologies.
The majority of tidal energy companies are developing horizontal axis turbines. In many ways these are analogous to both land-based and offshore wind turbines, and the general shape, mounting and fixing technology, and power take-off system designs are essentially the same. There are, however, several critical differences. Size is by far the most important factor separating horizontal axis turbines operating in the water from horizontal axis turbines that harness wind power. Tidal turbines generating 1 MW of power can be up to one-third the size of a wind turbine with a similar generating capacity.
The Ocean Power Industry
The United Kingdom has led the development of the ocean power industry. Between 1976 and 1982 the U.K. Wave Energy Program provided £60 million in funding for wave power research. Prof. Stephen Salter from the University of Edinburgh spearheaded most of the research, developing a prototype that laid the foundation for many of the current technologies. While the program was disbanded under pressure from the British atomic energy industry, design and engineering advancements introduced by Prof. Salter provided the groundwork for future wave power research. His device, the Duck, reportedly absorbed 90 percent of the energy incident on the device, and achieved conversion efficiencies of close to 90 percent at an estimated levelized cost of energy of roughly £0.05/kWh. Despite the amount of research and development that has gone into ocean power technologies generally, and wave power devices specifically, no device has matched the Duck's performance.
The ocean power industry has developed in locations with the greatest future market potential. As mentioned previously, the United Kingdom could generate close to 20 percent of its electricity from its potential ocean power resource. In Canada this figure is more than 25 percent, while in the U.S. it slightly less than 9 percent. The first commercial deployments are slated to occur in these areas, and it is likely the first utility-scale wave farms and tidal arrays will also happen first in these markets. Notable exceptions include Lunar Energy's planned 300-MW tidal array in South Korea and Oceanlinx's 16.5-MW project in Namibia. The diffusion of ocean power companies across a small number of largely similar countries reflects the resource-dependent nature of the industry. It is also reflective of the strong maritime heritage of a number of these countries, and the availability of support and service companies with extensive experience in marine construction and engineering. This includes active ports, as well as the availability of nearshore transmission and distribution systems. Extending power lines is both expensive and permits are difficult to obtain. Initial siting will occur where nearshore grid connections are easily available. It is likely these countries will continue to lead the ocean power industry, and that this lead will solidify as stronger market-oriented support policies become established to move the industry from its current state.
The Ocean Power Market
Slightly more than $500 million has been invested in the 35 most active ocean power companies since 2001. This total includes venture capital, government-backed DII funding, and equity and debt financing raised on the capital markets. This figure does not include government-backed funding of wave parks and testing facilities, except where that funding intersects with DII funding, nor does it include government-backed funding of university research or of the handful of companies yet to test an early-stage prototype at a research center or ocean lab.
Tracking the ocean power industry in terms of revenue and market size proves difficult at this early stage. Only a handful of advanced ocean power companies have reported any sort of revenue. ESB Independent Energy signed a five-year Purchase Power Agreement with Marine Current Turbines to buy electricity generated from the tidal company's recently installed 1.2-MW turbine in Northern Ireland. Though the PPA's value was undisclosed, ESB Independent's parent company, ESB, made a €4 million investment in the SeaGen project in the weeks leading up to its installation in early April. This investment may give some indication of the PPA's value. In 2006, Marine Current Turbines sold a technology development license to EDF Energy, a subsidiary of Electricité de France, worth €2 million. Ocean Power Technologies was the only other company reporting revenue. Revenues in 2006 were $1.7 million. Revenues in 2007 climbed 45 percent to $2.5 million, largely on the back of a follow-on contract from the U.S. Navy and payments by Iberdrola and Total from the first phase completion of the 1.39-MW power plant in Santoña.
Analyzing the growth of the ocean power industry through investment inflow is a good way of assessing market trends. In three of the years between 2001 and 2006 investment levels hovered around the $50 million dollar range. Spikes in these years, however, were each caused by different investment sources. Venture capitalist and the capital markets discovered the ocean power industry for the first time in 2003. Big VC rounds raised by Oceanlinx and Pelamis Wave Power, as well as Ocean Power Technologies's first IPO on London's AIM, drove investment in 2008. There was only one VC deal in 2005, and investment was pushed to a modern record on the back of 10 large DII funding grants, eight of which number in the millions of dollars. 2006 was relatively dry in terms of VC and government grants. Funding in this year occurred largely through non-VC equity financing arranged as follow-on investments for VC deals in the previous year. Advanced ocean power companies pursuing full-scale prototype installations began to break away from the pack in 2006, moving into 2007 on the top of bigger VC rounds and the industry's first significant IPO. Three companies each raised $15 million VC in 2007, while Ocean Power Technologies managed a $90 million IPO on the Nasdaq. Also in 2007, the got serious about building a world-class ocean power program, doling out £13 million in DII grants to eight ocean power technology companies and one water transport company.
The Future of Ocean Power
The real driver for the adoption of ocean power technologies will be premised on the value of energy these devices generate. Installed system cost is a primary component in determining the value of energy generated. However, other variables also play a significant role. Operations and maintenance costs, especially those related to unplanned maintenance, play a dominant role in determing the cost of energy delivered from a wave farm. Unplanned O&M, especially in the event of system failure related to ocean storms may increase the cost of energy significantly. Thus, investing the development of robust devices able to withstand heavy seas and high winds will likely continue to be a primary investment driver in this industry.
If we assume that the useful lifetime of a wave farm is 25 years, it is conceivable that the installed system cost will be amortized before the end of the 25-year life cycle. Following that, O&M will remain as the only recurring payment on the system. This will allow the cost of energy generated from a wave farm to drop precipitously. The cost structure for renewable energy technologies is significantly different than that of a fossil fuel-fired power plant. The latter is weighted heavily toward fixed capital costs and installation costs - more than 90 percent in some cases - while the former's cost structure is weighted towards fuel and ongoing operations that represent upwards of 80 percent of the plant's cost of energy.
Levelized cost of energy takes into account all fixed and recurring costs of a wave power device as a function of the energy it is able to generate. Lower fixed and recurring costs and high energy output leads to lower LCOE values. This, in turn, will lead to greater competitiveness of ocean power technologies relative to other energy sources. We derived LCOE at each cumulative installed capacity milestone for a wave farm deployed in an area with a wave energy density of 45 kW/m. This corresponds to sites in Western Spain and Portugal as well as parts of the Pacific Northwest. We assumed that O&M costs are roughly 5 percent of the total installed cost for a 100-MW wave farm, and that wave farms have a capital recovery factor of 15 percent. We assumed a real discount rate of 10 percent over the 25-year useful life of the wave farm, which allowed us to derive an annualized payment of the total installed system cost. The annual O&M cost was added to this figure to derive a total annualized cost. Finally, we assumed that the wave farm had a capacity factor of 37.5 percent and power take-off efficiency of 80 percent. This allowed us to derive a value for annual energy output measured in kWh. The total annualized cost was divided by annual energy output to derive LCOE.
In the United States the figure cited most often for "grid parity" for solar power technologies is $0.15/kWh. However, this is an inapt description. It is usually necessary to think about achieving grid parity with conventional power sources in a disaggregated way. Power prices in the Northeastern United States are nearly twice those in the Southeastern United States. Similarly, the extremely high price of electricity in certain remote island communities may bring about the installation of wave and tidal arrays in those areas faster than in areas, like the Pacific Northwest, that have relatively low power prices. Ocean power technologies will thrive initially in areas with high wave energy density. The greater availability of wave energy in these areas means that devices will be able to absorb more energy and convert that to power at a greater rate than devices in areas with low wave energy density.