Examination of Witnesses (Questions 43-59)
MR GRAHAM
MEEKS, MR
IAN CALVERT,
MR STEWART
BOYLE AND
MR GRAHAM
STOWELL
1 MARCH 2006
Q43 Chairman: First of all, may I thank
you for your written evidence. May I welcome the representatives
of the Renewable Energy Association and apologise for the slight
delay in your coming on to be our witnesses. For the record, can
I welcome Graham Meeks, the Head of Fuels and Heat of the Association,
Ian Calvert who comes from British Sugar, Stuart Boyle from Wood
Energy Ltd and Graham Stowell from Bronzeoak. Can I start our
questioning with you in the same way as I did with the NFU, which
is to ask you very straightforwardly what is good about Government
bioenergy policy and what is bad?
Mr Meeks: First of all, thank
you very much for the invitation to come and give evidence. The
colleagues I have with me today have been selected to represent
some discreet areas of the industry, from heat, power and fuels.
What I intend to do is to direct questions to the expertise that
is there. Returning to your question, the principal problem we
have today is that the significance of biomass in contributing
to our carbon abatement targets, our climate change targets and
also, increasingly, to the question of fuel security has simply
failed to be recognised and given the significance that it probably
deserves. If one looks at the current concerns that we have, for
example, on the security of gas supplies, if we are to believe
the line the Government has taken, the Energy Review has been
predicated on the assumption that our electricity supply mix by
2020 will become something like 60% gas powered and something
like 60 to 70%, maybe even higher than that, of our gas supplies
will be imported from unstable sources overseas. If we take a
step back and look at our heat supply in the UK at the moment,
90% of our heat in our homes today comes from natural gas. If
we look at the industrial and commercial sector, 55% of the heat
supply comes from natural gas. If we have got a looming problem
with natural gas in 2020 in the power sector, we have got a real
problem today. A lot of the institutional structures that we have
today simply fail to take into account what the heat market is,
what the transport fuels market really is and how biomass can
necessarily be used to address the concerns of climate change
and fuel security right across our energy economy.
Q44 Chairman: Can you define in simple
terms how you would like to see the Government's review of their
climate change programme and the Energy Review that is going on
address the deficit as far as the use of biomass is concerned?
If you had a free hand in designing what the words would be, what
would you write down?
Mr Meeks: First of all, we need
to move away from a narrow attachment to looking at energy supply
simply as how we deliver network utilities, electricity and gas,
and begin to approach it in a far more holistic way in which we
look far more at the energy services and how those can be delivered
by taking advantage not only of indigenous sources but a far greater
variety of energy sources. Biomass clearly has a major contribution
to make in terms of an energy source if we look at it as another
competing energy source alongside gas in the heat market and alongside
other renewable sources, fossil sources and nuclear in the power
sector and also, of course, in transport fuels. If we were to
look at the enormous opportunity and resource that is available,
not only with the current first generation biofuels which tend
to use higher value starches and oil seeds to provide the source,
but then we go to second generation biofuels where there is a
whole host of technologies which could be used in parallel and
in a coordinated manner with other energy systems to provide a
far more efficient overall energy system, I think the root of
this is really taking an holistic approach.
Mr Boyle: We have a policy at
the moment to go for 60% carbon reductions; that is official Government
policy. There is a longer aspiration to go beyond that. No one
who has seriously looked at this believes that we can get there
without a substantial role for biomass because what biomass addresses
is the fuel aspect, the heat aspect and quite clearly the base
load issue on the power side. It is recognised beyond a certain
level with the intermittent renewables that you need some base
load and biomass provides that possibility. At the moment that
is not fully recognised in the policy-making systems that are
there. There are additional qualities that you can give that.
In my own area, in heat, it is as though it does not exist. There
are major support mechanisms for power, some belatedly coming
along on the liquid fuels side and really nothing on the heat
side. So a whole third of the energy equation, which provides
big opportunities for reductions, at the moment is largely ignored.
So there is a lot of work to be done.
Q45 Chairman: Why is it ignored?
The Government would argue that they appointed Sir Ben Gill to
produce his report. I am sure they would say if they were here—I
am not a spokesman for the Government—they did recognise
it and they have produced a report.
Mr Boyle: That is absolutely right.
In that report you will find a great deal which echoes the criticisms
that we have just talked about and they have given a recipe of
policies to move out of that. There are four or five working groups
at the moment due to report in April. The proof of the pudding
will be in those recommendations and what the Government does.
So far there has been one single recommendation addressed, which
is to reduce VAT on biomass boilers from 17.5 to 5%.
Q46 Chairman: Who are these working
groups?
Mr Boyle: They are inter-governmental
working groups, Defra and the DTI mainly, with some other experts
brought in. They are looking at fuel infrastructure and policy
mechanisms right across the range.
Q47 Chairman: Is that the sum total
of their output to date?
Mr Boyle: Well, to be fair, they
are on a fast track to report within six months. Ben Gill reported
in late October and they will have until April.
Q48 Chairman: So we have a dual line
of inquiry by the Government. Are they following on or paralleling
Sir Ben's report?
Mr Boyle: The interesting thing
about this is it has become a little bit Kafkaesque here because
the climate change strategy is 20 months late and counting. The
problem with that strategy is that there is always another report
from a different sector coming along which then leads to a delay
in the climate change strategy, which then leads to the excuse
that because we are behind in our targets and we are missing all
sorts of things we had better wait for the biomass task force
or we had better wait for that review on wave and tidal, it just
keeps being put back. In a way you are putting off the inevitable,
which is to face up to the fact we are not hitting our carbon
targets, we need more intervention and we have got to do more.
We need to bring that to a head and realise there is an end point
here, acknowledge what has not worked and bring in what needs
to happen and then we can move forward.
Q49 Patrick Hall: I am not sure about
the distinction between power and heat because electricity is
used to generate heat and gas is used to generate electricity.
Mr Boyle: Obviously to provide
low grade heat, such as heating this room, or process heat for
industry et cetera you can use a variety of sources. At the moment
that is dominated a lot by gas in the domestic sector and 55%
in the industrial sector. You can use electricity for heat. It
is a very, very small part of the market because it is a very
inefficient and expensive way of providing heat. Electricity is
mainly for the high quality end: lighting et cetera. You have
got a few buildings where there are storage heaters and so on,
but anybody who has paid the bills for those knows it is pretty
expensive.
Q50 Mrs Moon: You talked about the
Government always being on the back foot and it never actually
getting there. Where do you see the hold up as being? Is there
a particular department that is slowing the process down? Sometimes
I feel that Defra has all the targets, but the actual changes
that we are looking for are often with other departments like
the DTI and the ODPM. Where do you think, if you pulled that plug,
we would see some movement?
Mr Meeks: I think you have hit
on the problem in that it seems to be the case that responsibilities
are spread too thinly across too many departments and it therefore
bears too small a significance within each of their respective
portfolios and so it simply does not receive the attention it
is due. I think if you put it in a single department you may begin
to see that it enjoys a greater significance with respect to the
ministerial brief, but unfortunately with the responsibility spread
fairly thin we do not reach that. We see that DTI has responsibility
for power and so they will begin to look at biomass applications
in the power sector. Defra appear to have inherited heat because
of the upstream issues of fuel supply and also the legacy of combined
heat and power which for some reason has always fallen outside
of DTI's gift and within Defra's, so they then have part of the
picture to deal with and, of course, the Treasury will always
have an interest in economic efficiency. In some respects, even
though they may be willing to pursue this, again it is not a significant
part of the respective departments' brief to then go in to bat
with the Treasury. I would also add that ODPM has an incredibly
important role to play in this and they are consistently found
to be a very difficult department to deal with, particularly with
some of the more local solutions which tends to be the optimum,
certainly for biomass power and also biomass heat. It really requires
the coordination of activity at a local level to create the market.
The ODPM is a very jealous defender of the interests of local
authority budgets and it will resist fiercely anything which they
see as in any way imposing additional costs. As a result of that
in particular I would say biomass, which requires a local intervention
as well as a national government one, falls foul of the ODPM's
very strong defensive tactics.
Q51 Mrs Moon: So the big barrier
is the ODPM, is it?
Mr Boyle: I think it is a bit
more complicated than that. You have put your finger on one of
the key problem issues for our sector, which is that it is disparate,
disjointed and incoherent. For a long time the DTI has simply
not understood heat. For the DTI energy means power. Unless it
is 10 megawatts you do not go into a meeting. So it is small scale
stuff, particularly with heating. Why is that? If you look at
where the allocations and the sources are, traditionally that
has been the case. That is a reality. On the heat side and on
some of the smaller scale biomass side it has been difficult to
find a champion. At the end of the day you are trying to change
infrastructure which has been geared up for the lowest possible
price, conventional fuels et cetera. You are trying to redirect
that with carbon reduction and other objectives are coming into
play. There is a lot of resistance to that. There are a lot of
pressure groups writing to you saying not to change anything.
In my sector we have the Chipboard Association that will write
in to you and say we cannot have too much wood fuel as it will
put the price up for them. With every change there is someone
who does not like it. Within that you need champions. At the moment
if you asked where is the champion for biomass, there is no one
department that you could point to and say that is the place it
should be, because the responsibilities are split right across
three or four departments. We must not forget the Treasury, of
course.
Q52 Mr Drew: I want to look at one
of the key levers which is the Renewables Obligation. I would
welcome your views on the efficiency of this particular means
to impose changes on the energy suppliers. More particularly,
I have been interested in the dysfunctionality of the Renewables
Obligation Certificates which were a fine idea and may be working
a bit better, but, of course, the whole market almost fell with
the collapse of TXU. What are your views on that workability if
you like?
Mr Stowell: The Renewables Obligation
has had a certain amount of success. It has encouraged us to develop
a full capacity for landfill gas. It has certainly encouraged
onshore wind to come onstream and it has been successful with
co-firing. What it has not been successful in dealing with is
other technologies, such as biomass and then the other offshore
and more expensive ones, ie wind, wave, tidal and solar. To my
mind there is an inflexibility when it comes to biomass in that
it does not recognise some of the other benefits not only just
in the rural community but in being able to present base load
capacity at the end of transmission lines. It helps reinforce
the system and so on. Those benefits are not valued in it. This
difficulty of getting biomass, which is just behind the crest
of a wave really in terms of the economics, and its applicability
under this system, is not really encouraging capacity to come
through. You have hit on one or two of the issues which cause
a problem. In order to have the development of small to medium-size
projects, which are the ones that are replicable throughout the
country, with definable catchment areas of feedstock, and to be
able to finance these projects, one does need to have a certainty
on the value of the output, electricity and ROCs and it has been
very difficult for developers of such projects to get good long-term
contracts for the sale of electricity without leaving a lot of
value on the table with the purchasers. So it has been quite difficult
to get a financing scheme together with the uncertainty of what
is going to happen longer term. You are talking about long-term
investments here, you are looking for debt terms of 10 years or
more and it is very difficult to establish those long-term values
in order to be able to finance projects. So there are constraints
on the RO system.
Q53 Chairman: Can I just stop you,
Mr Stowell, because you have painted a little word picture which
I have been following with enthusiasm. You have been talking about
medium-size projects doing a certain something or other. Can you
turn that into something tangible that I can understand?
Mr Stowell: With biomass power
you could be looking at anything from a few kilowatts up to 50
megawatts or maybe a little larger in terms of the output of projects.
Now, one or two of the larger projects have gone through with
capital grants and so on. By going through I mean they have reached
financial closure and they are being built. We are talking about
25 or 40 megawatt projects. The problem with those projects in
terms of replicability across the country is that they put a stress
on the feedstock supply, on the catchment areas of biomass. My
personal belief and my company's belief is that the replicable
nature of things in terms of feedstock supply is to concentrate
on catchment areas of 20 or 30 miles radius, which means that
you are more in the five to 10 megawatt range and those are quite
difficult to finance. They are also quite difficult economically
because biomass is rather like fossil fuel plants, ie the larger
the more economic you get and you get a benefit of scale. You
are getting into an area where you have to get all the benefits
of the economics you can, on costs of feedstock and so on to make
those work. They are not quite there with the ROC values as they
are at the moment.
Q54 Chairman: Put simply, unless
these plants are subsidised by the payment of the ROC they do
not produce power at an affordable price at the end of the day.
Mr Stowell: Not at the price of
feedstock which is there in the market at the present time.
Q55 Chairman: And to make the economics
work you have got to have a step change up in the size of plant
if you are using it as a source for power generation.
Mr Stowell: Yes. You are right,
there are step changes in the sizes of technology that you use.
The bigger projects do not necessarily suddenly become viable,
because the distance you have to bring fuel to the plant increases
and therefore the costs of fuel increases the larger you get.
So there are lots of dynamics in the economics of these projects.
Q56 Chairman: Do you think that influences
the answer you gave to our earlier question on why this is sounding
like it is in the all too difficult column?
Mr Stowell: It is difficult. I
would say, however, that some of the earlier and more successful
projects under NFFO[27]
were biomass projects and indeed at the moment more ROCs are produced
from biomass, if I include landfill gas and co-firing, than there
are from wind or any of the other renewables. So it is a major
renewable energy technology that does need to continue to be encouraged,
but I do have a problem. You asked about Government Departments.
The DTI has put biomass into their 2020 targets as a technology
which I think is very false and very discouraging for the industry.
Q57 Mr Drew: This is quite complicated,
but in a sense when we many years ago went to Denmark to look
at the upsurge in interest in wind there, one of the things that
really stuck in my mind was the fact that they ran it through
community engagement. Surely, if it were sold in the right way
in rural communities, people would buy into this? This is something
that could really regenerate those rural areas that need help
and with public subscription, which is seen to be old-fashioned
in this country, it could make a reoccurrence if somebody was
to drive this forward.
Mr Boyle: I have a lot of sympathy
with that view. We are involved with a number of communities on
LPG oil which have made the commitment to move forward. In saying
that, the decision-making process takes a lot longer because if
you engage with the community you are immediately putting six
to nine months on the decision-making, in contrast with a single
industrial client who, if they had the finance and the economics
stack up, could make a decision quite quickly. I think there is
a balance there certainly in terms of buying the support of the
local community, where local benefits help the management of local
woodlands, help generate a few jobs, et cetera, et cetera. The
pluses are all there, but I do not think we should be under any
illusions that that automatically overnight will change the economics
of the framework in which you are operating. At the end of the
day you have still got to access capital.
Mr Meeks: If I can just come in
on that point. The economic opportunity from the community point
of view is likely to come from the feedstock supply, the management
of the land, and the logistics that bring the fuel to the project.
In terms of financing these projects, particularly if as many
of these projects are stand-alone projects using a project finance
model, one has to have contracts at both ends of the project,
if you like; one for the supply of the electricity from the project,
and also to make that mean anything from the bankers' perspective,
you also need to have the up-stream contracts in place for the
supply of the feedstock into the project, and both of those need
to be with creditworthy, solid counterparties, and at the state
of maturity that we have with the supply chain at the moment there
is a concern that that upstream supply chain is not able to provide
the guarantees that one is looking for to effectively balance
the financing of the project.
Q58 Mr Drew: Can I be very clear
what do you mean by the upstream supply chain?
Mr Meeks: I mean the contracts
to supply the fuel. It is as simple as that. These contracts have
to be with a strong, creditworthy counterparty if the project
is to attract finance. We are at a stage today where we are transiting,
if you like, from where we are today, which is at a very immature
stage of the market, to one we would like to be in 10 years' time
where these supply infrastructures are mature, they are businesses
with a commercial track record, which one could raise money against
or for, but we have to get there and we have to find a way of
reaching that point. Perhaps one way one could look at that is
to look at the way in which the Government might underwrite or
guarantee the fuel supplies, to supply the financial underpinning
that would allow a bank to lend money to makes these projects
happen. That could be a very straightforward way of, if you like,
unlocking the credit risk that sits in a lot of these projects.
Q59 Chairman: I would like to take
forward this theme because you raised in your evidence in paragraph
17 some issues connected with co-firing.[28]
I do not want to go into it now but I would be most grateful for
a layman's explanation of what paragraph 17 means because I could
not work out what the numbers meant. I have received a number
of letters sent to me in connection with this inquiry, one from
Renewable Fuel Supply Limited and an interesting letter from Drax,
who have written saying that "the decision to reduce the
co-firing cap from 25% to 10% of obligation levels was taken as
a result of a major review of co-firing." That is a quote
from a letter sent to Melanie Wedgbury, who is the Head of External
Affairs at Drax, and I am not clear whether this was a letter
from the Minister for Energy on this particular subject. First
of all, it seems to me that co-firing is one sure-fire success
because it is straightforward to do, you have got a plant there,
you are going to make an instant impact on greenhouse gas emissions,
and yet, according to this letter and the statement from the Minister,
the Government have decided to make it less worthwhile or less
easy, I am not quite certain, and I hope you will explain to me
why they have decided in one area where you have got a winner
in 2004 they make it more difficult. I am not clear from the letter
and what the Minister says whether this is because it was costing
too much money or whether they just decided they wanted to cut
back. I do not understand.
Mr Meeks: The decision to set
this lower cap on co-firing was taken, I believe, in 2003. It
was a year into the introduction of the Renewables Obligation.
27 Non Fossil Fuel Obligation Back
28
Ev 17 Back
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