Memorandum submitted by United Utilities
1. INTRODUCTION
1.1 United Utilities is the UK's leading
multi-utility company, with interests in water supply and treatment,
electricity distribution and generation, and gas and telecoms
infrastructure and services.
1.2 We are committed to supporting the development
of renewable energy. United Utilities is a major developer of
renewable schemes, with 75 megawatts installed capacity and plans
to reach 450 megawatts by 2008.
1.3 Our renewable development company, United
Utilities Green Energy (UUGE), was established in 1993 and rapidly
became a leading initiator, developer and operator of renewable
energy schemes, initially specialising in landfill gas generation
and hydro-electric power. UUGE operates 40 schemes throughout
the UK, as far a field as Scotland and Surrey. Together these
schemes have a capacity of 60 megawatts. In addition, United Utilities
Water, our water business in the North West of England, has 15
megawatts of renewable capacity, mainly from burning sewage methane,
and with some small hydro.
1.4 UUGE is now developing significant onshore
and offshore wind farms and biomass projects across the UK. Our
ambitious growth plans mirror the Government's target to increase
the amount of electricity from renewable sources to 10% of the
total by 2010. Currently the UK generates only 1.5% of its energy
needs from renewable sources—a figure that lags far behind
countries like Germany and Denmark, which achieve more than 20%.
2. BIOMASS
2.1 United Utilities recognise that wind
farms are a fluctuating and unpredictable source of electricity
production and that the value of the portfolio would be increased
through the inclusion of a significant proportion of stable base-load
generation. With the exclusion of waste-to-energy, which has a
range of permitting issues, the only realistic source of new base
load renewable generation is biomass.
2.2 This instability of wind is reflected
on a national level where an increasing dependence on wind can
lead to potential system instability. Base load generation offers
stability to balance this effect.
2.3 United Utilities find that the value
of their portfolio of renewables generation is increased through
both the effect of diversification and of stability offered by
a potential inclusion of biomass. We remain committed to biomass
as a means of generating power.
3. HEREFORD BIOMASS
United Utilities are currently developing biomass
generation through a single project in Herefordshire. The success
or failure of this project will have an impact on the view of
biomass as a business stream in the short term. All following
information has been extracted from actual project data developed
as part of the Hereford Biomass project.
3.1 PROJECT SUMMARY
3.1.1 Hereford Biomass is a 20MWe power-only
scheme utilising a mixture of energy crops, proposed to be predominantly
miscanthus with some additional willow to suit bed conditions
in the boiler, and forestry fuel sourced from local public and
private sector woodland.
3.1.2 The conversion technology was selected
for flexibility of operation as well and efficiency and bankability.
A report commissioned from Fichtner Consultants of Stockport showed
that fluidised bed combustion was the most flexible conversion
technology in terms of moisture content and particle size while
also being proven in many applications and thermally efficient.
3.1.3 Biomass is of value to the community
in which the project is based due to the diverse value streams
created by the fuel supply, operation and power generation associated
with the project.
3.1.4 For instance the Hereford project
offers:
| Value Area | Comment
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| Job Creation | 24 Jobs are to be created directly employed on the plant, including operating staff and management. Up to 150 farms are expected to supply miscanthus and willow fuel to the plant, offering a significant level of support to those employed. 150 jobs in the local sawmill would have significant additional security from the offer of a secure local market for the supply of co-products from the mill.
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Electricity Production | Biomass-fuelled power offers stable generation with a high utilisation. Overall availability of up to 85% is possible with this plant, giving annual generation of 149,000 MWh of electricity into the local distribution network, a figure that equates to the energy needs of 35,000 average homes.
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Rural Income | With a crop requirement of 4,000ha, an average yield of 15tonnes/ha, a fuel price of £24/tonne and an average commitment of 12.5ha per farm this relates to an average income per farm of £4,500 per annum across 320 farms in Herefordshire.
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Heat Production | While there will be no high grade heat produced from the generator, there will be a potential to provide low grade heat to suitable local markets such as horticulture or domestic heating.
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3.1.5 Biomass also offers a stable, base-load generation
that has significant value when considered as part of a predominantly
unstable wind-based renewables portfolio.
4. PAST EXPERIENCE
OF BIOMASS
DEVELOPMENTS
4.1 Since 1994 there were three NFFO rounds from which
15 contracts were offered to biomass projects of various types
of which only three were ever commissioned and only two remain
operational.
4.2 The poor record of biomass has meant that a high
risk premium is required in order to finance the development of
any new schemes. This premium affects the capital cost of the
project as well and the cost of fuel to it.
4.3 Biomass contracts were offered under NFFO to either
conventional combustion-based schemes or to the more innovative
technologies, such as pyrolysis and gasification, under separate
priority areas. Of the two defined areas, the combustion technologies
can be considered to be proven, with a large number of commercial
projects across the world generating through boilers and steam
turbines. Gasification and pyrolysis on the other hand are unproven
technologies and while there is no particular suggestion that
the technology does not work, as it cannot be demonstrated at
a commercial scale, the risk premium on the capital cost is currently
prohibitive. In particular, the recent failure of the Arbre scheme
in North Yorkshire has had a seriously detrimental effect on confidence
in innovative technologies for the conversion of biomass. It is
now very difficult to secure finance for a gasification-based
biomass project due to the very poor track record of the business
area.
4.4 Technology risks are less with combustion-based projects
due to the availability of demonstration projects around the world,
particularly in Scandinavia. NFFO contracts for combustion technology
have failed not necessarily due to the failure of the technology
but due to the failure to gain consent or due to the high price
and lack of security of fuel.
5. BIO-ENERGY
CAPITAL GRANT
SCHEME
5.1 The recent bio-energy capital grant scheme is effective
in addressing the issues of cost premiums on the capital items
of a biomass project but the high cost of fuel procurement remains
a significant hurdle to the successful development of a biomass
plant, particularly if the fuel is energy crop.
5.2 Risk premiums and the cost of effective EPC wraps
have pushed the capital cost of the construction of a biomass
conversion plant in the UK up to about 35% higher that that expected
in the rest of Europe. The Bio-energy Capital Grant Scheme, offering
grant of up to 40% of eligible costs was effective in addressing
the capital requirement of a biomass plant but left little to
address the additional premiums payable on the fuel requirement.
6. REVENUE SUPPORT
6.1 The shortfall in revenue from a power-only biomass
project that would be required to achieve commercial viability
is £15/MWh. At one point during the construction of the Renewables
Obligation this figure was used to discuss the potential for a
banded obligation, where a separate obligation for biomass projects
would require a higher level of buy-out compared to other, more
convergent, technologies.
The United Utilities proposed biomass power production scheme
in Herefordshire will require additional revenue valued at £15/MWh
in order to be commercially viable.
6.2 This support, similar to the capital grant, is seen
as a pump-priming measure in order to prove the fuel supply mechanisms,
increase yields of crops and reduce the significant risk premiums
payable for fuel. Future projects would be expected to benefit
from the demonstration of commercial viability that revenue support
at this stage would offer.
6.3 Discussions are continuing between United Utilities
Green Energy Limited, DEFRA and the DTI about mechanisms for the
payment of revenue support. This issue is critical to the success
of the current round of biomass proposals and also the energy
crops support scheme administered by DEFRA.
7. COMMERCIAL PERFORMANCE
OF BIOMASS-BASED
POWER GENERATION
7.1 The current commercial position of biomass in the
UK can be summarised in the following manner:
|
| Cost Item | £/MWh
|
|
| CAPEX | 23.7 |
| OPEX | 11.5 |
| FUEL | 32 |
| Sub-Total | 67.2 |
| Value of Capital Grant | [6.5]
|
| Total cost of Production | 60.7
|
7.2 The current projected income from renewable generation
under the Renewable Obligation is £46/MWh taking into account
potential fluctuations in Climate Change Levy, ROC prices according
to achievement of the Obligation and projections in the wholesale
price of electricity under NETA.
7.3 The gap of £14.7/MWh is the current stumbling
block for the development of new biomass capacity in the UK.
8. COMMON AGRICULTURAL
POLICY REFORM
PROPOSALS
8.1 The current draft of the reform of the Common Agricultural
Policy proposes to support the deployment of biomass through the
offer of a "Carbon Credit" of
45 per hectare for energy crops grown in competition with food
and at the same time would allow perennial crops, of which forms
of biomass are a major example, to be grown on set-aside land
(without the Carbon Credit).
8.2 While such measures are welcome, the only change
in the proposals from the status quo is the carbon credit. An
offer of additional support through the carbon credit of
45/ha for a crop with a target yield of 16 green tonne(gt)/ha
translates into a payment of less than £3/gt. While the commercial
viability gap stands at about £15/MWh the carbon credit alone
will do little to support the deployment of energy crops.
8.3 At the time of preliminary energy crops price negotiations
the growers made the assumption that the current position with
respect to the Common Agricultural Policy would apply. In other
words, the price reflected in the current biomass commercial models
already assume that biomass would be grown on set-aside land without
affecting payments. The latest proposals regarding the CAP make
little impact on the assumed commercial position of biomass projects.
9. FORESTRY FUELS
9.1 The term, "Biomass" relates just as much
to forestry material as to energy crops. The bio-energy capital
grant scheme, which is currently absolutely necessary to the successful
development of a biomass plant, dictates that at least 50% of
the energy input to a biomass plant must come from energy crops.
Forestry material however is a more secure fuel type and just
as valid from a greenhouse gas reduction point of view.
9.2 It is necessary that forestry material is recognised
as a valid form of fuel and that any support mechanism developed
for biomass-fuelled generation related to forestry material in
the same manner as energy crops.
10. CONCLUSION
10.1 Biomass-based power generation is a valuable part
of any renewable generation portfolio due to its high availability
and stability. In addition it offers a range of value streams
to communities around the fuel supply and generation parts of
the scheme that are greater than other renewables.
10.2 Biomass has suffered in past years from a number
of deficiencies that have affected confidence in the current market.
In particular:
— Over confidence in ill-developed fuel supply networks
and lack of financial robustness of suppliers.
— Difficulty in achieving planning consents.
— Over prescription of technology types.
The combination of the above has lead to a well-founded perception
of risk among contractors and suppliers and a consequent premium
payable on contract prices.
10.3 In addition to the capital plant items of biomass
projects similar risk premiums are applied to fuel supply and
fuel supply networks. The lack of existing supply infrastructure
in either energy crops or in forestry material has lead to a security
requirement in the fuel supply where at least 250% of the fuel
requirement being shown to be available leading to a high overall
fuel price.
10.4 The bio-energy capital grant scheme is effective
in addressing the issues of capital cost of projects and can,
if it results in successful project deployment, be expected to
act as a pump-priming mechanism and lead to lower future capital
prices.
10.5 Fuel prices at present have no similar support mechanism
and it will be necessary to consider the provision of revenue
support in the form described in addition to the available ROC
prices if projects are to go ahead at this stage.
April 2003
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