Member Info for Timaeus

So, “the accounts we give of things [should] have the same character as the subjects they set forth”. Turbine 2 has undergone “significant upgrades to improve performance and reliability.” If one of the “major steps” was wet-mate, it is likely there was at least one other “significant upgrade to improve performance and reliability.” One possibility would be the installation of a tidal turbine pitch system following the completion of EASME a few months before Turbine 2 was reshored last year. Given the character of the account in the RNS, which characterises Phase I of MeyGen as a “demonstrator project”, it would make good sense to trial a turbine pitch system in the sea, perhaps without increasing blade length at this stage.

It is Turbine 4 that has now been reshored early “for preventative maintenance and upgrade work”. Apparently, more “improvements, learning and data” are needed “to unlock the next phase of turbines at the MeyGen site”. Interesting phrase, “the next phase of turbines”.

Mr Reid comments on proving the technology, learning lessons and constant innovation. Sounds like science in action. The account in this RNS eschews any hint of over-blown rhetoric and is restrained and sophisticated as well as gracious in its well-deserved praise for the team. Classy. And arguably of the same increasingly interesting and sophisticated character as the whole MeyGen project.

In his prefatory remarks Timaeus describes the account he is about to give as a “likely account” (eikôs logos) or “likely story” (eikôs muthos). The description is a play on words: the subject of the account is itself an “image” (eikôn) and, Timaeus avers, “the accounts we give of things [should] have the same character as the subjects they set forth” (29b3–5). Fashioned after an unchanging and eternal model—a possible subject of a definitive and exact account—the universe as a thing that becomes is shifting and unstable, and hence any account given of it will be similarly lacking in complete accuracy and consistency (29c4–7). This may be read as lowering our expectations—the account is no more than likely. At the same time, Timaeus says he will strive to give an account that is “no less likely than anyone else’s” (or “any other [account]”) (29c7–8) and, while the account cannot be grasped by understanding (nous, 29b6—the faculty for apprehending unchanging truths), it nevertheless merits our “belief” (pistis, 29c3) and fulfils certain standards. As Timaeus’ account proceeds, we are frequently reminded of its “likely” character, and both the negative and positive connotations of that characterization should be kept in mind.

(Plato’s Timaeus, Stanford Encyclopaedia of Philosophy, First published Tue Oct 25, 2005; substantive revision Fri May 13, 2022)

In a company offering generous, tax-efficient share option schemes to help retain, motivate and reward senior executives those same executives might be sensible to refrain from purchasing shares in the company out of taxed earnings. For example, a Company Share Option Plan gives you the option to buy up to £60,000 worth of shares in the future at a fixed price. You will not pay Income Tax or National Insurance contributions on the difference between what you pay for the shares and what they’re actually worth. You may have to pay Capital Gains Tax if you sell the shares.

Company in-house expectations will be that meeting business targets within reasonable timeframes will drive up SP and generate significant margins for executives. At SAE the CSOP Options vest on the third anniversary of grant and are exercisable at 1.15p per Ordinary Share, being the closing price of the share for the last dealing day immediately prior to the date of grant. In addition, a further award and grant of an equal number of CSOP Options will be made in January 2024 to qualifying employees, with an exercise price referenced to the Ordinary Share price at that time. The message? The Board expects the present team to remain in place over the coming 3 to 4 years to deliver the next phase of Meygen.

The 2021 Annual Report included (at Note 3 to the Financial Statements) a stress-tested management forecast to mid-2023 that described material uncertainties during the going concern period. The 30.8.22 RNS detailed the staged Development Premiums payable by UES in connection with the BESS including a £4m payment receivable on financial close of the project (then expected in Q1-23) and entry to the lease. That lease completed a week ago on 20.6.23. The process of extending the maturity date on the Abundance bonds completed on 26.6.23. Both these completions should have helped resolve the uncertainties, but the auditors probably need some time and space to assimilate all that for their report.

Now Proteus has finished retrofitting/upgrading the 4th turbine, they’ll have capacity to work on another one and it was always going to be cost-effective to ask a ship putting a turbine back in the water to bring in one of the others. The message is loud and clear as a ship’s bell for anyone interested in hearing it. SAE is planning to continue as a going concern.

7. After getting badly burned by Uskmouth, SAE now seems to be pursuing an asset light business model which could well be a sound strategy. Carrying debt could help protect the company against predatory takeover. The task will be to maintain and protect cashflow while servicing and controlling borrowing.

8. While SAE seeks to extract what reparative value it can from BESS developments at Uskmouth, the major focus will still be on Meygen. The SAE 2021 Annual Report referred to building the 86MW already consented on the way to full capacity at the site of 398MW. According to the 8 November 2022 RNS, the next Meygen phase involves going to 28MW. The October 2022 TIGER Report on Cost reduction pathway of tidal stream energy in UK and France refers (at p11) to 2026/27 as the commissioning year for 28MW at Meygen. SAE’s website currently refers to the CfD award for 28MW having a target commissioning date of 2027.

9. Turning over the envelope for a moment, if a 1.5MW turbine brings in £150,000 a month:

- 28MW could bring in more than £33m a year and more than £600m over a 20-year period

- 86MW could bring in more than £100m a year or £2bn over 20 years

- 398MW could bring in more than £450m a year or 9bn over 20 years.

10. Going to 28MW over the next 4 years or so will require maybe 12 or 15 more turbines. SAE won’t be making them in-house. Who has the capacity to scale up a production line? Proteus? Or is the plan for Proteus to assemble turbines from parts manufactured elsewhere and then to service them periodically? All this begs 2 questions: how will the cost of manufacturing 12 or 15 more turbines be met and who will own them? It isn’t necessary for SAE or Meygen to raise the funds to buy more turbines. They could be leased the way passenger airlines lease their planes and railway operators lease their trains from rolling stock companies – if the margins are right. The key to scaling up could be LCOE reduction and the biggest driver of LCOE would be increasing rotor diameter and rated power. Whisper it quietly but the best thing the SAE board and senior management could do next would be to get a 2MW turbine into the water. And then a 3MW turbine.

4. We know about wet-mate connector improvements halving post-servicing re-installation costs. Another area is advanced rotors and blades. As well as reducing loads in extreme conditions, individual blade pitch control can improve yield and reduce LCOE by 6.4%. In January 2022 SAE announced completion of the EASME tidal turbine pitch system development project. (The pitch system connects the blades to the turbines rotor shaft and controls the blades pitch angle within the tidal flow.) The new pitch system enables the rotor diameter and rated capacity of the turbine to increase.

5. The TIGER report found 8 drivers that could reduce TSE LCOE by 67.5%. Almost 40% of that reduction “comes from increasing the rotor diameter and rated power which have a compounded effect greater than the sum of the individual innovations.” The obvious inference would be that larger rotor diameter and device rated power is a key driver - if not quite the TSE LCOE holy grail. Increasing device rated power allows more energy to be captured at rated flow speeds. Coles and Walsh estimated that deploying AR2000 turbines at Meygen compared to AR1500 would reduce LCOE by 20%. Research from TIGER calculated that LCOE could be reduced by 38% when considering 3MW, 26m rotor diameter turbines compared to 2MW, 20m turbines. The TIGER report (at p9) describes the AR2000 and AR3000 as “in development” but no timetable is given.

6. With the 4th turbine out of the water for so long being retro-fitted with wet-mate has there been an opportunity to up-grade in any other interesting respect? When will SAE get the first 2MW and 3MW turbines in the water?

1. Tidal energy is a long-term project.

2. There’s a limit to the size of premium worth paying for the predictably of expensive tidal energy over less predictable but cheaper to produce wind and solar.

3. The mission, for the rest of this decade, is cost reduction. Drew Blaxland is on record talking about being on a “mission of reducing the cost of tidal energy.” The mission statement on the SAE website reads, “To collaborate and innovate to reduce costs and deliver sustainable energy projects”. The TIGER report identifies ways the levelized cost of energy (LCOE) for Tidal Stream Energy (TSE) can be reduced. It sets out the areas offering the greatest potential for LCOE reduction in the period to 2030. These areas include economies of volume from larger farms. Research suggests LCOE reductions of between 28-40% may be available through SAE’s plans to scale up to 28MW and 86MW at Meygen.

Ultimately, the alternative in the best interests of the company would have been positively to facilitate the buyout happening in the manner most calculated to help it succeed, engender goodwill and to promote really productive collaboration between Proteus and SAE now and in the future. The signs are that’s exactly what SAE’s board have aimed for: not overburdening Proteus with debt, costs or by insisting on taking an unsustainably high minority share of the new company. Let there be no angry, unjust criticism of the SAE board for what was at one and the same time their honourable, virtuous, dutiful and business-like response. Fac utrumque florebit? Make both flourish.

On 17 December 2021 SAE announced a Long-Term Incentive Plan (LTIP) and the grant of options over 20,300,000 Ordinary Shares in the Company, representing 2.8% of the Company’s existing share capital. The CEO and the CFO were each granted 5m options and the balance of 10.3m options was awarded “to a group of senior employees considered key to the continuing development and success of the Group.” The options were granted subject to continued employment. As at 25 February 2022 only 3m of the shares were not yet issued/allotted. But the LTIP couldn’t turn back the tide.
Full and fair recompense for your labour is a wholly legitimate aspiration and so is a fair and adequate stake in the intellectual property you have helped develop. In a more just world, fair reward would be a universally recognised worker’s right. If you have dedicated your working life to developing tidal power as the good people of ATES have and you become persuaded the best way to preserve and further your life’s work is to support a viable management buyout, how could you in all good conscience not seek it?
And the SAE board’s response to the bid? Generally speaking, company directors have a fiduciary duty to act in the best interests of the company rather than in the financial interests of shareholders, be they LTH’s or instant profit-seeking day traders. Among other things, directors have to balance their duty to the company of maintaining confidentiality with their duty to keep shareholders informed. Faced with a proposed management buyout of ATES, SAE’s board might have responded by doing everything they could to prevent it. That would have risked a level of acrimony that demotivated and ultimately completely alienated the ATES management and staff. Not good for business or in the best interests of the company. Nor would have been mere acquiescence or acceptance.

Of two things hard to find on this BB, Latin and real insight, the latter is much the harder to post. Consider some of the possible factors behind the ATES management buyout and what the SAE board’s response to the bid might have been.
The MeyGen project began in 2010, but some of the people in ATES have dedicated the bulk of their working lives to developing underwater turbines from prototype to commercial scale array. SAE’s then Director of Turbines & Engineering, Drew Baxland, talked about the 20-year journey involved on Episode 3 of Tidal Power Express (see https://www.youtube.com/watch?v=NYPWI9nKvNI). In that discussion he refers to the purchase of the Bristol-based tidal business, Marine Current Turbines Ltd from Siemens AG by SAE’s predecessor Atlantis Resources (AR) – an all-share deal announced on 29 April 2015. That transaction was probably a core component of what became SAE’s Advanced Turbine & Engineering Services (ATES) Division.
On 17 December 2017 the deal was announced which involved AR changing its name to Simec Atlantis Energy and the transfer of ownership of Simec Uskmouth Power to SAE in exchange for an almost 50% holding in the new company. This was how GFG thought to isolate the financial risks attached to a moribund coal-fired power station and if possible, develop a source of cheap electricity for its steel-making plant nearby.
The public record does not tell where on a vertical axis between distraction and catastrophic disaster – or a horizontal between unholy alliance and poisoned chalice - the tidal-dedicated people of ATES would have put their views about Uskmouth. But it seems clear the SAE board became aware of a growing issue about retention of senior staff and the need to take action.

If, following the ATES management buyout, SAE now gets planning permission for the BESS, the company might look much better set with a healthier balance sheet, reduced overheads and outgoings and at least 3 income streams (excluding Subcoal) of potentially significant value. With planning permission and financial close (expected in 2023 Q1) for the BESS, some £10m of debt gets taken off the balance sheet while added as assets will be the value of SAE's 85% holding in the SPV company jointly owned with SIMEC Group and the value of SAE's 21% holding in Proteus. SAE is now relieved of the need to borrow, or dilute share value, to raise the capital to tool up and create the production line to roll out turbines. SAE won’t be paying the costs of ATES.
The income streams:
1) BESS - an 85% share of the rent income from the BESS (plus rent income as well as development premiums from any further BESS projects at Uskmouth);
2) MeyGen - a 77% share of the CfD supported income stream from MeyGen, including revenue from redeployment of the 4th (wetmate retrofitted) turbine (due by March 2023) and following the installation of a further 30 MW of tidal turbine capacity by 2025; and
3) Proteus - a 21% share of any profits made by Proteus.
What price SAE shares 6 months and 3 years from today?

If SAE has retained the intellectual property rights in the AR1500, AR2000 and AR3000 technology, Proteus would need (and might have to pay SAE for) permission to use that design technology in building the turbines. The real value to SAE of this deal with Proteus might not come from any immediate cash payment at all but from SAE isolating financial risk: substantially reducing outgoings it could no longer afford while acquiring a significant (albeit minority) interest in a turbine manufacturer with the capitalisation and private equity working capital needed to build them.

Something all the most successful organisations have in common is the ability to embrace, manage and adapt to change. What was really important here was to find a way to get the turbines built, deployed and generating renewable energy.

An early RNS confirming a positive outcome to the BESS planning application is likely to be most valuable in terms of loan and debenture repayments; deferred debenture interest payments; cashflow; and SP as well as helping to resolve any lingering uncertainties about SAE adopting the going concern basis for its accounts.

Planning consent is expected before the end of 2022 but presumably SAE have had contingency plans in place in the event that permission is not obtained when expected or at all.

The 30th August RNS (announcing progress with grid connection variations) is particularly worth re-visiting https://www.londonstockexchange.com/news-article/SAE/sae-achieves-milestone-in-bess-project-delivery/15604587. The £6m interest free loan from UES will be repaid by the £6m development premium payable to SAE upon the award of planning consent for the BESS. With financial close, scheduled for Q1 2023, a further £4m development premium will be payable to SAE (potentially timely given that £4.97m of Atlantis Future Energy debentures are due to mature on 23rd March 2023).

It appears the UES loan enabled SAE to repay a £2m convertible loan from Simec Group (who own about 29.7% of SAE). SAE no longer owes any money to Simec Group.

Back in March 2022 SAE committed to establishing a new Special Purpose Vehicle (SPV) company owned 85% by SAE and 15% by the SIMEC Group to hold the land and assets required to progress sustainable energy projects at the Uskmouth site. Pursuant to that commitment SAE has entered into a Shareholder Agreement and land agreements with Simec Group as a basis for sharing the revenues from the BESS project in proportion to the SPV shareholding.

Clearly, SAE has for some time been doing business by setting up new, jointly-owned SPV companies in order to isolate financial risks. Proteus could be seen as a way of isolating risks.

Any objective risk analysis of weaknesses and threats to SAE would likely have identified issues with capitalisation, working capital and debt as well as cashflow. Let’s pause and ask what would become of SAE as a result of the BESS planning consent being refused or subjected to lengthy delays? How would SAE meet the timetable for repaying the Abundance bonds? The whole MeyGen project could have been threatened or even derailed – but not now.

Potentially a really smart move if it means that in exchange for no longer having to pay the costs (including wages) of its Advanced Turbine & Engineering Services (ATES) division SAE has effectively acquired a significant minority stake in a company that is going to be using private equity funding to manufacture turbines for leasing to MeyGen. Though unheralded, the announcement rather confirms that for some time SAE’s business plan for MeyGen has not included building or owning the turbines itself or needing to raise the capital to do so.

Note that Proteus Marine Renewables was incorporated as a private limited company on 11th July 2022 – see https://find-and-update.company-information.service.gov.uk/company/14226131. The nature of the company’s business is recorded as 28110 - Manufacture of engines and turbines, except aircraft, vehicle and cycle engines 74100 - Specialised design activities.

It is highly unlikely that SAE’s Adviser and Broker Investec or their award winning legal team at Ashurst LLP would allow SAE to do this deal without negotiating with Proteus a strong shareholders agreement affording the best form of legal protection for a minority shareholder including express contractual provisions regulating the raising of further capital to avoid diluting existing shareholdings.

Also, good to see that the timetable for the expansion of output at MeyGen is crystallising: the Proteus website refers to the installation of a further 30 MW of tidal turbine capacity by 2025. That’s the equivalent of a new turbine being deployed every couple of months or so from some point next year until 2025. SAE is the majority owner of the income stream that will generate.

Anyone care to reflect on the contrast between a company that can significantly increase its revenues having reduced its outgoings and the way the UK Plc public finances are being mismanaged at the moment?

Point is: nowhere is it written in stone that MeyGen will be unable to lease turbines or that SAE will have to do a major capital raise, dilute share value, rely on a sugar parent or submit to a takeover from some greenwashing giant fossil fuel polluter. Economists like Mariana Mazzucato have shown that the development of important new technology is often publicly (ie government) funded.

Sources for AR2000 being deployed in future phases of MeyGen:

1. Nigel Hopley, SAE’s Mechanical Engineering Manager at
https://www.asme.org/topics-resources/content/introducing-worlds-most-powerful-tidal-turbine

2. The AR2000 tidal turbines are expected to be deployed on future phases of SIMEC Atlantis’ iconic MeyGen project in Scotland, the wider company project pipeline and will also be available for sale to commercial developers.
https://www.offshore-energy.biz/simec-atlantis-makes-progress-on-novel-variable-pitch-system-for-2mw-tidal-turbines/

3. TIGER Cost reduction pathway of tidal stream energy in the UK and France - October 2022
https://ore.catapult.org.uk/wp-content/uploads/2022/10/Tidal-stream-cost-reduction-report-T3.4.1-v1.0-for-ICOE.pdf (see page 25 - Coles and Walsh estimated that deploying AR2000 turbines at Meygen compared to AR1500 would reduce LCOE by 20% (D. Coles and T. Walsh, “Mechanisms for reducing the cost of tidal stream energy,” in EWTEC, Naples, Italy, 2019)).

The business plan would need to include a return for the ROSCO equivalents (and, through them, the manufacturers) and, after operating costs are covered, something for the owners of MeyGen. If the turbines don’t need to be made, bought or owned by SAE, the business plan doesn’t need to include a massive capital raise by SAE or any significant dilution of share value.
Financial viability will turn on the balance of projected leasing, installation and operating (including maintenance) costs against projected revenue from sales of power generated to the grid. Recent announcements point to that balance progressively tipping favourably.
The subsea hub enables connection of multiple turbines to a single power export cable reducing the costs associated with grid connection. The development of the AR2000 represents a major step towards increased efficiency and power output. Testing of the new VPS (Variable Pitch System) for the 2MW turbines was completed in December 2021. VPS should help maximise power output and reduce shutdowns in exceptional or adverse tidal conditions (VPS alters the angle of the turbine blades relative to tidal flow and is used to control the output of the turbine as well as providing soft startup and braking). The wet mate connection system (currently being retrofitted to the 4th (1.5MW turbine) due for redeployment in March 2023) more than halves the cost of future operation and maintenance deployments.
When the CfD for MeyGen was announced on 7.7.22 for 28MW at a strike price of £178.54/MWh CEO Graham Reid had good reason to suggest the significance of the announcement could not be overstated. CfD further tips the balance in favour of a viable business plan for SAE to deliver the world’s first commercial scale tidal array and, with future CfD rounds, a clear path to delivering the full 400MW at MeyGen.
It is not difficult to follow the golden thread to a point where each time a vessel like the North Sea Giant visits Pentland Firth at slack tide she is there for two cost-sharing reasons: to deliver a new or freshly serviced, VPS fitted AR2000 turbine for wet mate (re-)deployment and to recover the next one due for routine service at Nigg. It is arguable that climate security hangs by such threads.

Securing planning permission for the BESS and releasing value from Uskmouth look like the immediate priorities for SAE. The Interim Results Summary dated 30.9.22 mentions that the company is now working towards adding further BESS projects on the Uskmouth Sustainable Energy Park site. But the company’s business plan for MeyGen is what runs like a golden thread through all its recent announcements.
If you want to operate an airline you don’t need to begin by building a facility to manufacture a plane or by buying a plane when you can just lease one. Half the world’s passenger carrying aircraft are leased by their operators. Nearly all the trains in the UK are leased to their operators by 3 ROSCO’s (rolling stock companies) called Angel, Eversholt and Porterbrook who apparently receive about 13% of the price of all ticket sales. If you want to run a solar farm on your land (while you are still allowed to) you can lease the panels. Some people even lease the car they drive.
SAE has developed, tested and deployed the AR1500 with design and manufacture supported by others, notably Lockheed Martin. Demonstrably, the technology works. Using admirable comms skills, the SAE website suggests in the most carefully worded way that Phase II of MeyGen could provide the scale to justify the establishment of turbine manufacturing facilities at Global Energy’s facility at Nigg Energy Park.
But surely, at least until that facility is ready, other companies (perhaps an aircraft manufacturer whose production lines are quiet currently) could be licensed by SAE to manufacture an AR2000 every month or two for the next few years. Turbines could be owned by tidal energy equivalents of ROSCO’s and leased to MeyGen.