Ballooning cost of the barrage

Madoc Batcup says inaccurate cost-estimation has flung a wrecking ball at the development of tidal energy in the Severn Estuary

Madoc Batcup is a Director of Wales in London and a barrister working in financial services.

The announcement by Chris Huhne, Energy Secretary of the UK government, that the Severn barrage will not be taken forward is wholly unsurprising.  The cost estimate of over £20 billion for such a barrage was contained in the feasibility study published in December 2008. This estimate meant that this was a project that could only be funded by the public sector and it has come at a time when there are enormous pressures on public expenditure.

However the recently released feasibility study report, which dismisses the possibility of  the commerciality of any tidal power generation bears some hall marks of political manipulation as opposed to rational assessment.  After carrying out a very extensive feasibility study on a number of options in their report of 2008, Parsons Brinckerhoff reached the conclusion that the cost of a Severn barrage would be between £19.6 and £22.2 billion, and the cost of a lagoon enclosure on the ‘Welsh Grounds’ would be between £4.1 and £4.9 billion.  It also gave the estimated comparable costs of a number of other different options, and it was on the basis of this comparative costing that a shortlist of five options, including the two above, was drawn up.

Now, just over 18 months later, these cost estimates have been radically revised.  The estimated cost of the Severn Barrage has gone up only slightly to £23.2 billion, those of the Welsh Grounds very substantially to £6.8 billion.  However, the government has decided to cast its magic wand of ‘optimism bias’ over the calculations which has launched their cost into the stratosphere.  In the case of the Severn barrage, this lifts the expected cost to £34.3 billion, and in the case of the Welsh Grounds lagoon to £10.1 billion.  The other shortlisted projects are also made massively more expensive through this method.

Given the fact that optimism bias has flung a wrecking ball at the development of tidal range energy in the Severn Estuary, it should perhaps be explained that this is a methodology used by the UK government to assess potential cost over-runs for projects.  It has been particularly used for pricing PFI schemes and comparing them with projects delivered by the public sector.  The government published a ‘Green Book’ which establishes HM Treasury guidance to the framework for the appraisal of capital projects, and there is a specific supplement which deals with optimism bias.  Table 1 on p.2 of this supplement shows that optimism bias for non-standard civil engineering projects can be between 6% and 66% of capital expenditure, while equipment and development capital costs have an even higher degree of possible variance.  This approach therefore provides the potential for a huge change in potential cost based on some very subjective assumptions.  In addition the return on capital required by investors in the feasibility study is put at 10%.  No attempt was made to justify this figure – as the report notes “It should be noted that the 10% is a purely illustrative cost of capital and not the result of any detailed analysis.”

The report then goes on to compare the cost of electricity generated from the Severn with various alternatives, including gas, coal, nuclear etc.  The study has used an optimism bias of some 30% generally for the Severn projects (although differing on a project by project basis), while it has assumed only 15% for nuclear power in comparisons.  The cost of nuclear power appears extraordinarily low, and given the very uncertain costs of the final disposal of spent fuel even from existing power stations it is by no means clear what allowance has been made for these in the overall calculation.  (The study suggests that the UK may need as many as 30 nuclear power stations by 2050).  Taken together with great uncertainty in respect of future costs of fossil fuel, and the vulnerability of the UK to overseas supply, which does not apply to tidal range power, there can be little doubt that this study is as much subjective as objective in its assessment of the comparative cost of tidal range energy as a source of electricity generation.

There can be no doubt that these are challenging engineering projects, with a considerable degree of uncertainty.  However, if the UK government were serious about the potential of tidal range electricity they would commission a pilot project to assess more accurately and on a smaller scale what the costs would be.  Although this would not deal with site specific geo-technical data, it would deal with issues such as supply chains, construction risk, electricity generation capacity, financing costs, technical innovation and provide a stepping stone to the intermediate introduction of the technology if successful.  Dismissing the potential of generating up to 5% of the UK’s electricity production, on the grounds of a paper-based exercise, using financial models to add billions of additional pounds of cost by calculating hypothetical risk, rather than engage directly with the engineering challenges on a small scale basis, seems to be verging on the cavalier.

It may be that these particular, arithmetical gymnastics may be to Wales’ advantage.  It was by no means clear how Wales would benefit from the construction of these installations. The creation of both the construction and operating jobs had a very wide estimated range, with a substantial minority coming from the local area. Also, in calculating the potential net regional GVA Wales was lumped together with the southwest of England, and the Cardiff Weston barrage showed that in one scenario there could be a reduction of GVA, given adverse impacts on the shipping activities.  In addition it was always assumed that residual ownership would revert to the UK government.

Now is the time to insist that the rights to the exploitation of the waters and seabed off the coastline of Wales, and the legal ownership of that seabed be transferred from the Crown Estate and Westminster to the Welsh Government, since it is clear that the UK Government has decided to take a back seat in terms of their exploitation for energy purposes.  It is also time for the Welsh Government to review in earnest the potential for a pilot tidal lagoon scheme, such as the one proposed for Swansea Bay, so that the true costs of tidal range electricity from a lagoon can be more accurately quantified on a much smaller scale.  The key theme of the feasibility study was that that the various options were all very large projects, and that they could potentially be very risky.  It is now time for the Welsh Government to look at the feasibility of a much smaller project, where the risks can be more easily controlled, and where the residual value would be retained by them.

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