Salmon farm permits: A Licence to kill Innovation?

At the turn of the millennium in Dublin, there was a minor transport revolution: taxi operators had been trading on a limited pool of licences in a boom time city, where demand for late night travel was soaring. As taxi rank queues became intolerably long, licences to operate a single taxi in the city were being exchanged at more than €100,000 each. It was boom time for those in on the game. But with accusations of a “cosy cartel”, it was politically untenable. The regulator eventually succumbed to the pressure and deregulated the sector, issuing licences for €6,000 to anyone who wanted one. Recent entrants who had re-mortgaged their houses to gain a foothold in the business, were destroyed overnight. It was only a harbinger of the disruption to follow, with the onset of the internet-driven ride-sharing revolution. But what has all that got to do with the price of Salmon?

Like Dublin’s 1990’s taxi drivers, Norway’s salmon producers also trade on a limited pool of perpetual licences to carry on their trade in Norway’s pristine fjords. With the onset of environmental concerns and a sense that in-fjord salmon production has reached its environmentally sustainable capacity, the regulator has slowed the issuing of new licences to a trickle. In a 2018 auction, producers paid between €13,000 and €25,000 per tonne of licenced biomass containment, raising €300m for Norway’s local municipalities. Legacy corporates that are lucky enough to already hold such (increasingly) valuable licences were the largest price setters in that auction. Impact-9 estimates that (licence costs aside) conventional coastal salmon production costs about €2.63 per kg of salmon, even allowing for the increasing incidents of production losses due to sea lice. The profit margins are very healthy indeed, in a market where consistently high global demand means prices hover around €5 per kg.

Fig 1: In-fjord salmon production cost estimate (excluding licence costs)

But consider the tens of millions of euro required to acquire and hold a new licence for a competitor to enter the market. Impact-9 estimates that this increases the cost to over €4/kg. This presents a more marginal investment case that requires access to a lot of up-front capital, discouraging new market entrants. However, it is still just about profitable where salmon prices stay closer to €5/kg.

Fig 2 Salmon production cost estimates including licence costs

(a) New In-Fjord Production including licence (b) Offshore projects proposed under Norway’s 2016 licence concession and (c) Impact-9 target economics for global offshore farming markets. (8% discount rate applied to cash flow including licence holdings)

From Figure 2(a) above, it can be seen that the capital cost of the farm equipment for a conventional nearshore fish production site is only a very small proportion of the cost of conventional fish production (about €15 / m3 containment, representing only €0.15/kg of the production cost) and tiny compared to the cost of licencing. To move production further offshore, hardware costs would increase, potentially dramatically, to address the additional exposure. But the economic case is clear: in a properly functioning market, cheaper licences available to offshore projects can offset the additional cost of operating there. In that case offshore salmon farmers will have a whole ocean to play with in order to compete against in-fjord producers.

So isn’t there a financial incentive to move production offshore?

The amount of financial “fat” in the business model to solve the problem is startling. Impact-9 estimates that in a “free licence” scenario, the affordable capital cost of hardware is ten times current costs, even when it is assumed that maintenance costs increase proportionally. Upsides of going offshore are also likely to materialise in the form of reduced sea lice losses, better fish growth and better quality fish protein. Recognising these implications in 2016, the Norwegian Directorate of Fisheries offered precisely incentive. Best of all it didn’t cost them a penny. Surely, this is an opportunity that Norway’s renowned marine engineering community would grab with both hands?

As reported previously, they fell short. The solutions brought to bear under the 2016 scheme were depressingly un-innovative. This came as a huge surprise to this author, monitoring developments from the adjacent marine energy sector, where marine structural innovation was in our DNA. Impact-9 estimates that the cost of the successful projects, such as the 7000 tonne Ocean Farm 1 net pen will fall short of economic viability, even projecting to the economies of scale for future planned variants (see Fig 2(b)) and assuming a “free licence” scenario. Rival Havfarm 1 recently announced a weight gain during construction from 22,000 tonnes of steel to 33,000 tonnes per structure further, denting policy hopes of breaking in-fjord’s “monopoly” on salmon production.

So why have current initiatives missed the mark?

It is difficult to say. The conventional salmon production industry has consolidated around a large supply chain, tailored for production under its capped pool of licenced in-fjord locations. Unless competitive offshore salmon farming becomes an undeniable reality, incumbent salmon producers can cling to the comfort of their hugely profitable and valuable stock of in-fjord production licences. Is it realistic to ask such businesses to take financial risks to move offshore? How hard should they try, if success only serves to devalue their existing licence holdings and opens them to competition from new actors better suited to operating offshore hardware, perhaps in new marine jurisdictions?

In any event, producers like Salmar (Ocean Farm 1) and Nordlaks (Havfarm) did develop offshore solutions that are impressive, but that only oil and gas production economics can really support. Perhaps the scheme’s provision to convert the innovation licence to future conventional nearshore production was too generous? Was this simply an invitation for in-fjord producers to profit from failure?

Enter the Disrupters

When there is an undeniably better market solution, the defensive dam eventually breaks. Just ask Dublin’s taxi drivers. At Impact-9, we are certain that a seismic shift in aquaculture is long overdue and we want to lead the way in developing that disruptive solution. Free of incumbent interests, we can tackle the problem with a more international perspective, taking a distinctly different approach.

Fig 3: Impact-9 offshore farming concept

Impact-9’s competitive offshore solutions will focus on driving down operational costs and improving safety in the context of site exposure. It will:

• Maximise the use of available water depth at exposed locations for global deployability;

• Facilitate submergence for protection against sea lice;

• Integrate feed storage with state-of-art automation and feed supply;

• Provide a safer working platform over the containment space;

• Eliminate nearly all diver-based operations;

• Reduce dependence on large support vessels and well-boats;

• Present new opportunities for embedded renewable power.

Crucially, we have set a competitiveness target of €40 / m3 for containment hardware in offshore locations (See Fig 2(c)). Free licences are not a sustainable proposition: the solution must be competitive for the consumer, deliver for the host environment and benefit the communities in which the farm will operate. That means being able to pay to borrow the ocean space for farming. But it need not cost the earth.

Once qualified, the solution can open immediate access to enclosed but exposed seas and bays on the western seaboards of Scotland, Ireland, Faroes, Norway and elsewhere, which offer “in between” exposure levels, delivering sustainability, without going straight to open ocean sites. Even for in-fjord operations, the payback for Impact-9’s inherent sea lice defence will likely be attractive. This can give an immediate commercial foothold before extending our reach further offshore. In the medium term, we see opportunities to grow rapidly, working with farmers in markets where the licencing system facilitates competitive market entry based on site-specific exposure levels.

If successful, these initiatives will pave the way for huge amounts of new global fish production capacity. When solutions like ours emerge, responsible regulators will begin the winding down of inshore capacity on environmental grounds, similar to the current “traffic light” initiatives in Norway, in order to shift the sector onto a more sustainable offshore footing. Incumbent licence holders may cry foul, but the prize is too big: a growing global industry, delivering better-quality, sustainable protein for cheaper, closer to markets and with improved public buy-in. And why stop at salmon?

Delivering on this vision requires innovation and collaboration. There is no design rule book on the shelf and incremental adaptation of current hardware is unlikely to deliver. We are now working hard to qualify novel aspects of our design through experimental projects and end-user engagements. Our aim is to have hardware in the sea within two years and we are always on the lookout for those innovative aquaculture producers who share this vision and want to join our efforts!