Examination of Witnesses (Questions 160-174)
PHILIP WOLFE,
MALCOLM CHILTON,
ALAN RAYMANT,
PETER DICKSON
AND ROBERT
SMITH
10 SEPTEMBER 2003
Q160 Mr Mitchell: Has that gone into
Government, have you had any indication of their reaction?
Mr Dickson: Yes. We have been
talking to DEFRA quite openly about this for some time, DEFRA
and indeed DTI, we have been talking about it quite openly.
Q161 Mr Mitchell: Is it not an enthusiastic
reaction? The Treasury is the crucial thing, of course?
Mr Dickson: The Treasury is crucial
but also the European State Aid Rules is an issue that we have
to talk about, because, of course, there have been grants offered.
We are talking currently, and I could not say whether it has been
an enthusiastic reception or not because discussions are continuing
about it.
Q162 Mr Mitchell: Is that continuous
support? For how long would Government support need to be in place
to get things off the ground?
Mr Dickson: The issues which exist
with the fuel procurement projects, the risk game, generally speaking,
they can be considered to be short-term issues, a lot of them
are a function of the lack of success and the lack of experience
and the lack of demonstration projects which exist currently in
the UK. Obviously, as that experience expands and as demonstration
projects are developed and as the experience of the UK industry
develops, it can be expected that those risk premiums also will
reduce, and that is certainly the way we hope to see it happen.
We would like to think that is not a long-term position but is
an interim position for which we need support.
Q163 Mr Mitchell: As experience develops
and the number of plants increases, you would expect that the
costs will come down over that period?
Mr Dickson: That is what we hope
to see, yes.
Mr Wolfe: A further issue which
could help to bring down costs is the processing of the fuel.
At the moment, there is some new development work that is proposed
within fuel processing, and there was a grants scheme announced
by DEFRA to assist fuel processing, at a relatively modest level
in total, I think, just three million pounds. Actually, that scheme
has been delayed substantially, it should have come into operation
this summer, now it is not likely to come into operation until
something like next summer at the earliest. That, again, is a
measure which can help to bring down costs in the foreseeable
future which currently is not making the advances that it should.
Q164 Mr Wiggin: What about imported
biomass, what role does that play? If biomass is imported, what
will happen to our greenhouse gas and environmental impact profile?
Mr Raymant: There are a number
of generators currently who are importing biomass for co-firing,
and we are one of those. There are a number of reasons for that.
One is the availability of biomass material, and the second is
that, as I mentioned earlier, a number of the existing power stations
clearly have established fuel supply and logistic systems in place
which, by and large, dictate where you can get the fuel from.
For example, we have a power plant in Kingsnorth on the Medway
and the primary fuel source is ships coming across from the Continent,
and therefore, inevitably, that is the preferred fuel supply chain.
That is one factor, economics is another factor and availability
is the other. In terms of the environmental impact overall, I
guess then you need to look at that on a global scale rather than
a UK scale, in terms of the CO2 production.
Q165 Mr Wiggin: We have heard about
straw. I think miscanthus is one which is promoted in my constituency.
Will biomass which originates in the UK be able to compete on
price and energy content with imported biomass?
Mr Raymant: I think that will
depend on where you are taking the material. If you are using
it for co-firing then I think you have to look at the logistics
and supply chain very carefully.
Q166 Mr Wiggin: So really it is very
finely priced, effectively, but the imported stuff is quite cheap?
Mr Raymant: Certainly, the supply
costs, the delivery costs would be. To pick up on the point which
Malcolm made earlier, if you are looking at a dedicated plant,
you would need to build that within about a 50-mile radius of
where the fuel was coming from.
Mr Chilton: We burn only UK-sourced
fuels. The cost of cereal straw, or even miscanthus, or seed rape
straw, is pretty well constant, it is about £30 a tonne,
and it works out at just over £2 a gigajoule, and I am sure
that is fairly competitive with imported fuels. Even so, and even
though there is a large quantity of cereal straw available, I
mentioned earlier that there are about five million tonnes of
this straw available and currently we are burning only 200,000
tonnes, and I do not think anybody else is doing anything, we
are still not building new plants. It is not necessarily a fuel-cost
issue. Of the £30 a tonne that we pay for straw typically
only ten% of that goes to the farmer, so if the farmer decided
he would knock off £1, or he would halve his price to us,
really it would not make a great deal of difference. The cost
is in baling and storage and transport and all of those things,
and really I do not think they will decline with volume, they
are just there. We are not building these plants because of economics,
the revenues do not really cover operating costs, and capital
grants are somewhat irrelevant when revenues are not covering
operating costs. I suspect that is the real reason for poor take-up
of capital grants, they do not make a big difference to this situation.
From our perspective, the only real solution to that is to increase
the revenue in some way.
Q167 Chairman: Sorry, just to interrupt
you there. You are building these plants for philanthropic reasons,
are you?
Mr Chilton: No. I think probably
it is worth clarifying this. Currently we burn about a million
tonnes of biomass—chicken litter, straw, meat and bonemeal,
that sort of thing—and generate about 100 megawatts, which
I am sure is the vast bulk of biomass generation in the UK. All
of those were built under the NFFO scheme. I assume you are familiar
with the NFFO scheme, which was a government-backed subsidy for
power generation, and typically round about six pence a kilowatt
hour was paid for electricity, and the credit risk associated
with that was negligible, it was a government-backed scheme. Under
the Obligation, under which we work currently, the credit risk
is deemed to be very high in terms of the payments for the Renewables
Obligation, both the basic three-pence payment that you get and
also the recycle benefit that we get from the Obligation. Credit
risk is seen to be high because that money is channelled through
suppliers, it does not come directly from government, and so we
have great difficulty actually financing these projects. The banks
see these projects as being a lot more risky than projects which
were financed previously under the NFFO scheme. To reduce that
level of risk we have to increase returns, and we cannot increase
returns because the revenues are just not adequate, so really
the whole industry has ground to a halt. The only solution, on
residues like straw, which as they are cheaper should be the first
biomass fuels that are used for energy production, the only way
of breaking the cycle is to increase revenues largely through
additional power pricing. Support to farmers would not really
make that much difference, certainly in the case of straw, because,
as I mentioned earlier, the farmer gets very little anyway. In
the case of energy crops, like short rotational coppice, then
support to the farmer is a more important issue, but straw is
so much cheaper at the moment compared with energy crops. Typically,
straw is round about £2 a gigajoule, in energy terms, and
coppice would be about £2.80 per gigajoule, so already it
is more expensive. If we cannot encourage the take-up of straw
then we have got still a long way to go before we will encourage
the take-up of even more expensive fuels, but even the cheapest
fuels at the moment are completely stalled in terms of development.
Q168 Mr Wiggin: There is one other
thing which the Government is encouraging councils to burn and
that is waste. As I understand it, if you do that, you have an
agglomeration in the bed of your incineration unit, but what research
has been done to look at burning waste?
Mr Chilton: A lot. Let me just
clarify that confusion. Agglomeration occurs with fluidised-bed
boilers, which are very rare technology. Actually we have one
on a plant in Scotland which burns chicken litter, and it is not
a particular problem now. Waste is an important form of biomass,
about 60 or 70% of residual waste after recycling is biomass,
but in the UK at present it is very difficult to develop waste-burning
schemes. Waste-burning schemes do not benefit from the Renewables
Obligation at all, and we were talking about NIMBYism earlier
on, it is even greater for waste-burning schemes than it is for
renewable energy plants.
Mr Wolfe: We do see potential
for reduction of the cost of custom energy crops, UK-based, and,
Bob, perhaps you have some information on that.
Mr Smith: I think, in terms of
energy crops, there has been a rather historic legacy from the
ARBRE situation, where energy crops were grown for a project in
Yorkshire, and in its five or six years of establishing energy
crops it went a long way to getting over quite a few of the problems.
Unfortunately, as we all know, ARBRE went into liquidation last
year, but it left a legacy of historic information which is not
being utilised at the moment. Certainly from my perspective, as
Fuel Supply Manager for ARBRE, a lot of the problems which were
being encountered with energy crops generally were being overcome,
particularly in the latter years. There were substantial increases
in yield, harvesting techniques, production capacity, and overall
better production techniques would have increased yields quite
significantly if it had continued and planting had continued.
I do see that the suggested changes to the Renewables Obligation
would benefit the establishment of more energy crops but we still
come across the same old problem that, whatever happens at the
moment, the only potential for energy crops, as such, is co-firing,
because the plant is there and is able to burn it straightaway.
We have an issue that energy crops produced off the farm, energy
crops in the definition of miscanthus or particularly short rotation
coppice, means it comes off the farm as a chunk, and to get that
into any of the coal-fired capacity in the UK it has to be processed
into a dust, basically, be blown in with the coal or mixed with
the coal. That in itself is a barrier to people developing more
energy crops and the co-fired generators wanting to use the crops.
I take the point that energy crops are seen to be expensive, but
I would counter that by saying that they have never really had
the opportunity of scale and economy to demonstrate that they
could be made cheaper. Straw and arable crops have been grown
for many, many years, short rotation crop has had six years' experience
in the UK and it came to an end. Sweden has got 18,000 hectares
of energy crops and they seem to manage very well with yields
significantly less than the UK, these are significantly less than
the UK's anticipated yield and the yields which can be achieved
off UK crops at the moment. Going back to your point, I do see
that energy crops could become economic, given the right drivers
and the RO changes which are being considered at the moment. I
have slight reservations and concerns about the levels of SRC
that would be required by 2011. If you look at the coal-fired
capacity that could accept energy crops, about 12,000 megawatts,
then the actual hectarage of energy crops which would be required
at 75% is enormous, and maybe those percentages should be reviewed.
Q169 Chairman: One of the problems
of using crops for energy in temperate climates is the relatively
poor conversion ratios, of energy out, compared with palm oil,
cane, that sort of thing. What can one do to try to use a product
both as mass and fuel, whereby gas from the sugar cane can fire
the boilers, and of course that increases the gains you are getting
from the biofuel which emerges from that? Is there scope for doing
that in the UK, for example, or do we have to keep a fairly clear
distinction between biomass and biofuel?
Mr Wolfe: I think there are certain
crops which may well suit that, and rape is one good example,
where you could use the seed for oil and then you could use the
straw for power generation. So there are some crops which would
seem to lend themselves to that.
Q170 Chairman: So that the two processes
could support one another?
Mr Wolfe: It would seem so, yes.
Q171 Chairman: Rape would be the
obvious candidate to do that?
Mr Wolfe: Rape is the first one
which comes to mind where clearly you could differentiate the
two and make use of both separately. In the case of things like
short rotation coppice, for example, it could be used for one
or the other but there is no particular logic in trying to strip
it down to do both.
Q172 Alan Simpson: I am just a bit
anxious about the suggestion that what is needed to make biomass
economic is an increase in the price of energy. It just struck
me that if we had a general increase in energy prices and people
could make more money out of other sources, why on earth would
they still want to turn to the development of the biomass. I am
just not clear that if that is the strategy it would work. What
is the most important mechanism that you see for us having a biomass
energy industry for the future?
Mr Chilton: We were not talking
about a general increase in electricity pricing, and, let us be
clear, biomass is more expensive than the average price of electricity
generated in the UK, and it only happens at all because of the
Renewables Obligation, or some other support mechanism, like the
Non-Fossil Fuel Obligation that we had previously. We are talking
about, potentially, an increase in the level of the Renewables
Obligation, so that increase would be there only to encourage
renewables, it would have no effect on other forms of generation.
It would have an effect, of course, it would increase the average
price of electricity bought, slightly, but it would not encourage
other forms of generation.
Mr Raymant: Could I add a point
to that, because clearly under the Renewables Obligation itself
it does not actually prescribe which renewable technology generators
should follow, so therefore if there is a general rise in the
price of renewable energy it would not necessarily encourage more
biomass, it may just make onshore/offshore wind more attractive.
Therefore, from my company's perspective, what we would be looking
for is a reduction in the fuel cost. I take Malcolm's point about
the primary cost, ie the cost of growing it, but from our point
of view what we are worried about is the cost of material coming
through the power station gate, and we would need to see that
cost coming down in order that biomass became competitive with
other renewable sources, such as offshore and onshore wind. If
we had just an increase in price overall, it would not make biomass
more attractive compared with the alternatives.
Mr Wolfe: One final point on that
is to come back to what we said at the beginning. We would see
biomass as being strategically important within a diverse mix
of renewables because of its "on demand" capability,
unlike many of the other renewables, so we think there are strategic
reasons why one should seek to encourage the mix to include an
element of biomass.
Q173 Chairman: Gentlemen, thank you
very much indeed. If there is anything else you wish to add at
a later stage perhaps you would let us know, and if we have any
further questions for you obviously we will be in touch with you,
but we are grateful to you for coming here today.
Mr Wolfe: There is one further
point we could make, and we have touched on this before, but just
for clarity, and that is to say there have been a number of grants
awarded to biomass schemes. We have a serious doubt that many
of those will end up being taken up and realised. It seems to
us that, because of the other issues that we have mentioned, there
is a severe doubt if many, of even any, of those grants which
have been awarded actually will end up in new capacity. So the
problems we talked about are real and need addressing, and one
should not take undue comfort from the fact that there appears
to be some schemes being processed because grants have been awarded,
that does not mean necessarily the capacity will be realised.
Q174 Chairman: That is a very important
point, and I am conscious that there may well be a vote in one
minute from now, but perhaps you would like just to amplify that
particular point you have made in writing, which is a very important
point indeed? If the Government is offering grants which are unlikely
to have any effect, because there is a wider range of issues which
are at stake, that is something which we need to explore, and
we would be very grateful if you could drop us a note, simply
setting that out in a little greater detail, as soon as you are
able to do so?
Mr Wolfe: We will be happy to
do that.
Mr Lepper: Chairman, if that would be
possible before next week?
Chairman: It would be particularly helpful
if you could do that in what remains of this week because we have
two ministers on show next week and we would very much like to
have the information to present to them.
Mr Mitchell: Then they will withdraw
the grants and say nobody needs them.
Chairman: Gentlemen, thank you very much
indeed.
The Committee suspended from 4 pm to 4.25
pm for a division in the House.
|
