Examination of Witnesses (Questions 60-79)
MR GRAHAM
MEEKS, MR
IAN CALVERT,
MR STEWART
BOYLE AND
MR GRAHAM
STOWELL
1 MARCH 2006
Q60 Chairman: Can I just be clear
because this is a new territory for me, when we talk about caps,
are we talking about the percentage of the burden which can be
either in this case by coal and 25% in biomass?
Mr Meeks: The Renewables Obligation
requires the electricity suppliers who are obligated to supply
a certain proportion of their electricity from renewable sources.
The cap that is referring to effectively separates out that obligation
and says it can only meet, say, 25% of its obligation through
the use of the Renewables Obligation Certificates from co-firing.
So if, for example, its obligation in year X was 4,000, let us
say, then it would only be allowed to submit 1,000 co-fired ROCs.
Q61 Chairman: Why?
Mr Meeks: I believe the concern
at the time—and this is an understanding of the situation—was
a concern within government that co-firing would be too successful
and would take up too large a proportion of the Renewables Obligation
and therefore squeeze out the opportunity for other renewables
technologies, and it was almost, if you like, ring-fencing a particular
proportion of the obligation to prevent that from happening. At
the same time, they wished to balance that against what they saw
as the opportunity with co-firing, which was to bring forward
domestic energy crop production. They took the opportunity in
2003 to change the RO because the immediate response they got
from stakeholders across the industry was that the initial proposals—and
even now I cannot remember the detail—would not have facilitated
that, so they made a number of changes looking forward—and
as I say these changes were introduced to do that in 2003—that
would effectively change the role of co-firing as the obligation
moved forward. There is the co-firing cap which goes from 25%
to 10% this year and in 2009 it would be necessary for co-firers
to use a minimum proportion of energy crops within the mix of
fuel that they put into the station.
Q62 Chairman: To me as a layman sitting
here, it does not seem to make any sense because if you are trying
to hit the various targets that you opened up your evidence with,
and which we know the Government is trying to achieve, and we
know the CO2 outputs in sum total have risen, not gone down, in
the last few years, would it not be the case that you take all
opportunities? Is there any evidence you have come across to substantiate
the position in 2004 which saw co-firing as a threat? Have you
heard of projects where somebody was going to build a wind farm
or wave development or something else and who said, "Gosh,
we can't do that because of co-firing"?
Mr Meeks: I think there was a
wave of optimism that existed in 2002 about the speed with which
the market would be able to respond to the signals that were laid
in front of it by the Renewables Obligation, and I think we are
now reaching a point in 2006 where the reality is beginning to
dawn, and exactly the point you make, Chairman, given where we
are in terms of the Climate Change Programme Review and the evidence
I am sure that that will present about our rather paltry performance
in relation to the targets, we need to be pursuing all the opportunities
that we have in front of us.
Q63 Chairman: I do not want to lead
you in this answer but are you sending a clear message to this
inquiry that the Government should look again at these numbers
in the light of the reality you have just described?
Mr Meeks: In terms of the way
that the RO is likely to stimulate a number of technologies, including
offshore wind in particular, which is now facing some increasingly
recognised difficulties, the Government really does need to look
at how effective the RO is in delivering what it set out to do.
Chairman: Sir Peter?
Q64 Sir Peter Soulsby: Can I take
you back again to the question of renewables and heat because
this is something you touched on earlier on that has not perhaps
had the same degree of attention as the use of renewables for
generating electricity. Back in 2004, the Royal Commission on
Environmental Pollution was very supportive of a Renewable Heat
Obligation similar to the Renewables Obligation for electricity,
yet when the Biomass Task Force came to look at that they said
it would be "unworkable". How do you respond to that?
Mr Boyle: I was very intimately
involved in that and had about four or five meetings with Sir
Ben and his fellow members. I think the issue for us is two-fold.
One, as a company, a recommendation for a five-year 40% capital
grant would do wonders for our business, so on a purely selfish
note that recommendation would do a great deal to lift the industry
because the current Bioenergy Capital Grant of about 22% is too
low to make it a must-have investment kind of decision. So if
that is a recommendation, no problem whatsoever. It would do a
great deal to stimulate the market. If you look at countries like
Austria and Sweden with 10 years plus of capital grants of 35%,
it has really led to a massive increase in a sustained big growth
industry, which is why they dominate the manufacturing side of
biomass boilers. Most of the boilers sold in this country are
from Sweden, Austria, Germany, etcetera, because they have got
a huge domestic market. However, in the UK we have tended to take
an approach on capital grants which is, "Give it two or three
years and hope that miracles happen"; then the capital grant
programme goes away and, what a surprise, it does not take off.
We do not have a track record of the Treasury supporting long-term
capital grant support. The worry is that you will not build a
sustainable industry with a relatively short-term set of grants
and big uncertainty whether after three or four years it all drops
away. That is why the discussion on a longer term support mechanism
grew because we were concerned that when grants end we will not
have built a sustainable industry. Our concern on the conclusion
of Sir Ben is that as an Association we are not saying that a
Renewable Heat Obligation is the answer; however, we would certainly
like the assessment and analysis to be done. Our big concern at
the moment is that the Royal Commission certainly did not do any
research, the Biomass Task Force did not do any research, the
Defra/DTI joint report, which was supposed to look at this, did
not do any research, so we are dismissing this without the intellectual
capital or time to assess whether it could work or not. Our own
view is that there are certainly the ingredients in there and
we think it is workable, but the detail has not been done, and
certainly a longer term support mechanism to take you beyond the
vagaries of a Treasury on-and-off situation, which is no way to
build a sustainable low carbon market, should be looked at.
Q65 Sir Peter Soulsby: Who should
do the research and over what sort of timescale might that be
possible?
Mr Boyle: It is a pity that the
opportunity has really been missed with the research that came
out of the Energy Bill because there was a commitment by DTI and
Defra to do joint research. In the end we ended up with a not
great report which looked at how big was the renewable heat market.
We could have told them that a year and a half ago. It is pretty
big. What we have not got is any mechanism. Clearly DTI and Defra
have dropped the ball and I think the research should be commissioned
by them because ultimately they have to carry it out. Six to eight
months of focused research, with the right set of parameters,
will answer, we believe, the bulk of the questions, and then we
can have a discussion about it and decide whether it is appropriate
to move forward or not.
Mr Meeks: The Department for Transport
sponsored the introduction of a Renewable Transport Fuel Obligation
and effectively did the evaluation of that in a period that went
from, I believe, April 2005 to an announcement by ministers in
November of last year. So the focused evaluation, given that all
the studies that have been done to provide the basis of evidence
have already taken place, could be done in a relatively short
timescale.
Mr Boyle: I am afraid there is
a little bit of a feeling at the moment by civil servants of "not
another obligation". They are very over-worked and I have
a great deal of sympathy. They are trying to do a lot more with
less people. I have sympathy on a real world sort of level but
there is definitely a "not another obligation" approach
and that has affected the willingness of the DTI to take on and
embrace the concept and approach of a Renewable Heat Obligation.
Q66 Mrs Moon: I am interested that
you felt the research should come from Defra and the DTI because
the previous evidence we had from the National Farmers' Union
was that they wanted local government to take a lead in this area
because they felt that the public sector (and local government
was part of it) had the capacity to invest in combined heat and
power units that could take the biomass. So why have you gone
for that end and the National Farmers' Union would say, "No,
it should be ODPM"? Since you are talking about being realistic
and "not another obligation", part of the problem that
ODPM are obviously faced with is that they do not want a rise
in their council tax. How do we square that circle at the same
time?
Mr Boyle: This is a little bit
apples and oranges. On some sort of obligation which might be
placed upon fuel supplies, it has to be national legislation,
it has to come from the centre. There may be elements of that
where obviously in terms of monitoring, et cetera, at the local
level, regional heat targets and so on, you can move down and
delegate, but, frankly, where local government is really knocking
the spots off central government and showing what can be done
in this area is in a very simple initiative that took place two
and a half year ago in the London Borough of Merton which said
that commercial developments above a certain size will have a
minimum of 10% renewables. It got challenged but is now accepted
and the GLA adopted it and 52 plus local authorities have now
adopted it. It is sweeping the country. That includes any developer
of offices, schools or PFIs, all sorts of things. It is not about
a local authority saying, "We would quite like you to do
a bit of renewables please", and getting into a planning
gain discussion. On this occasion this is a box that they have
to tick, a minimum level of renewables. That simple policy applied
at a local level of planning has done more to increase dramatically
the market in renewable heat across the board in solar, biomass,
et cetera, because the developers accept, "We have got to
do it. Let's get on with it." It is a small additional cost
to them. If you have a 400-house development, if you have got
to do 10% renewables, it is a tiny marginal cost but you get to
the big development. That is where local authorities working at
that sort of level are a fantastic lever. Let us move it out 10,
15, 20% and start ramping it up. That is where you will get the
real change.
Mr Meeks: From an economist's
standpoint they are building developments which are going to be
lasting for 20, 30, 40 or 50 years. The fact that these projects
may have a very long pay-back if appraised in perhaps a more normal
way becomes less relevant. They are creating value, they are allowing
developments to proceed, and also they are being implemented in
a way that is consistent with the economic lifetime of those developments.
It seems a logical way to take it forward and one that should
not cost the Exchequer much, if anything.
Q67 Lynne Jones: I find all this
conversation very interesting because in the 1980s and 1990s local
authorities were busy getting rid of their district heating schemes,
for example, which at the time I remember being quite critical
of. You have been critical of the Bioenergy Capital Grants scheme
and you have expanded on that just now about the fact that it
is just a short-term scheme and there has not been the uptake
of the money that has been made available. Apart from having a
scheme lasting a bit longer, what other changes would you like
to see? We have, for example, vast amounts of our local authority
housing which does not meet the Decent Housing standard and yet
the Government does not seem to be making money available. There
is £10 million here not taken up. So what changes would you
like to see in the Capital Grants Scheme? There may well be projects
that have been given the go-ahead that may not actually take place
so what should happen to that funding? The other side of that
is whether the stimulation of this investment is going to be sufficient
to reduce the cost of capital investment in biomass or are there
other areas of work that need to take place to reduce the costs?
Mr Meeks: There are a lot of questions
there. The first question on Bioenergy Capital Grants, I would
say it has been very much a mixed bag because, as you appreciate,
it has covered quite a broad spectrum of technologies from pure
power technologies through to heat only and also a range of scales,
so I will ask Graham to perhaps start off with talking about the
power side of things where it has perhaps been less successful,
and I think on the heat side, Stewart, it probably has been perhaps
a different story, and that is maybe where the lessons are to
be learned. Graham?
Mr Stowell: On the power side,
there has been some success with the larger projects which I mentioned
before. Where the support mechanism has not been taken up yet—there
are a number of reasons for that. Part of that is the economics
of biomass and trying to get long-term contracts of fuel supply,
but if we look just at the Capital Grants Scheme, there are some
constraints there. For a start, the Government has given itself
the right to withdraw those before the completion so that does
not give banks any confidence. It is a mechanism that means that
it reimburses after the money has been spent so the balance of
funding needs to fund the whole lot before it gets some money
back. Some of those projects, because they were selected by tender
and certain criteria, actually have pushed advanced technologies,
which banks of themselves find difficult to support, so some of
the reasons are not just the money availability but actually the
other criteria that go around it. Mr Meeks made a point that one
of the issues that we tried to present to help unlock some of
these projects, a mechanism whereby we could release private sector
not only capital but debt from banks, might be by coming up with
a commercial guarantee scheme supported by Government. Nobody
has really wanted to get involved with this, although it is a
very simple mechanism—and I can say this from personal experience
because we have developed biomass and biofuels projects abroad—the
Philippines, for example, has managed to do this to enable international
debt to come in without any difficulty. I suppose it is not really
understanding what it takes to close financing on projects of
a reasonable size. We are talking about the £20 million-plus
capital cost projects. Those are some of the reasons why it has
not happened. I think there are mechanisms that can make it work.
They need to be followed through a little, but they are not terribly
difficult to do. It just needs to move the goalposts a little
bit.
Q68 Lynne Jones: What have other
countries done that has been different apart from having a more
sustainable length of time for the availability of the money?
Mr Stowell: In terms of other
capital grants?
Mr Meeks: Would it be worth just
talking on the other aspects of the Bioenergy Capital Grants Scheme
because it has been quite different in the way it has been administered
in different sectors?
Mr Boyle: I think in our sector
we would probably say six and a half, maybe seven out of ten.
The first reasons that it has been different from Graham's experience
on the power side is that it has been ring-fenced for companies
so you do not have to go bespoke for a single project. We have
a certain amount agreed for us and the criteria that we can sort
out pretty quickly with the grant administrators, the Lottery
and DTI, means we can move pretty quickly and we can offer it
to clients upfront. Instead of having to wait and claim back afterwards
we will do that as part of the package. We can say, "This
price includes a Bioenergy Capital Grant." They have good
staff, they are very flexible, and they have recognised a big
gap in the market for funding support for district heating. They
have been flexible enough to accept district heating infrastructure
to go in, which is beyond their original brief but they have been
pragmatic enough to realise that the big potential growth in that
area is district heating and if nobody is supporting the grant
funding on the pipework it is not going to happen. Those are the
pros. The cons are that there is 22% of allowable costs. You cannot
include the cost of the boiler house and a number of other costs
are not included in here so you are probably ending up with 17
or 18% of total project costs, which is too low to make a fundamental
difference on certain projects, which means then in certain areas
you have to go and get two or three other grants. In Yorkshire
you go to Yorkshire Forward and say, "Can we have a grant
from there?" That takes another six months. Then you maybe
want a third one. So instead of it being a rapid turnover, you
have to waste another nine months to assemble the grants to get
to the 40% figure. If you had a very simple 40% quick rapid turnaround
you could replicate and really move the market much more quickly.
That is the real area of concern. It is just not big enough and
the criteria of what is included in this is too restrictive at
the moment. I think experience overseas where there have been
grant schemes is if it is simple, quick, rapid, clear and at the
right level then it works, and I think if we could get some changes
those would be the areas.
Q69 Lynne Jones: The point about
local authorities is important because in Birmingham where I come
from they have got tower blocks and blocks of low-rise flats,
in fact, some of them where they have taken out previous district
heating schemes. Are they eligible for any of this money?
Mr Boyle: Firstly, retro-fitting
district heating back into systems taken out is very, very expensive,
which is why it is always a pity when it comes out. It is much
easier with the pipework in there to upgrade it, to bring in a
wood boiler; that is cost-effective. To retro-fit the infrastructure,
to dig up the concrete and all the rest makes it extremely expensive.
It is not impossible but you need very substantial support. You
are making a long-term, 100-year social investment. In new build
it is completely different. If you are digging the ground anyway
to put the pipework in at the start, then the marginal costs are
relatively low and it really makes sense. My sense at the moment
is that again with the planning, to really influence all new build
and larger, denser settlements we should look at district heating
with biomass. You should really turn it on its head and you should
have a good reason for not doing it rather than having to buy
into it. In that way you get many more schemes much more cost
effectively. You can retro-fit but the numbers are a little bit
frightening at times
Q70 Chairman: Mr Calvert, I would
like to ask you a question because we have heard about the potential
from our other three respondents for the use of biomass both as
a heat source and a potential power source. You have taken an
interesting punt. You have decided to go ahead with your bioethanol
plant. You do not know what the Chancellor's capital allowances
are going to be, you do not know if the 20 pence is definitely
going to carry on, but you have decided to take a punt. As far
as the heat source of your system is concerned, are you considering
using biomass as a way of a) making your total project more CO2
friendly and b) capturing some of the potential cash that we have
just been hearing about?
Mr Calvert: Hello, Chairman, I
am here representing the part of the REA that is interested in
liquid biofuels and in particular investing in large-scale, future,
domestic, liquid biofuels plants. You are obviously mentioning
the British Sugar investment at Wissington which, for the record,
is a 70-million litre (that is 55,000 tonne) per year ethanol
plant using sugar syrups as a feedstock, so it is integrated with
an existing sugar factory. We have started building it now and
I would not like to say it is a punt, I am sure it is a considered
investment, but it is the first so in that respect it is bold.
It is the first investment in a bespoke bioethanol manufacturing
facility in the UK. It is also quite small and it is for us a
limited opportunity because it is so tightly integrated with an
existing sugar facility. That integration would extend in all
probability, and I believe it does in fact, to the way the plant
is fuelled because there are some highly specific issues relating
to that plant at that site in Wissington in Norfolk. It has already
got a very modern combined heat and power plant. I am sure we
will come on to life cycle analysis in a moment, but the clever
thing to do is supply any heat that the bioethanol plant needs
(which is low temperature heat) which could be effectively supplied
from the waste heat from a power station, which is what CHP is.
The clever thing to do with that plant is to connect it to the
existing CHP plant. That is not to say that British Sugar has
not looked at and continues to look at biomass opportunities.
We are always alive to that and are active in that area in fact.
Mr Stowell: Could I just answer
your question specifically does it help the CO2 to use biomass
as a fuel source; yes, very much so. It is not particularly relevant
to this country but we are developing bioethanol distilleries
in the Far East, using sugar cane as a feedstock and using the
biomass from that to produce the heat and power and selling surplus
electricity into the grid. That way our CO2 balance is orders
of magnitude better than grain distilleries that use fossil fuels.
Q71 Chairman: What I am getting from
you, Mr Stowell, with your observations about overseas investment,
is greater investor certainty as opposed to the domestic situation
where there is vast uncertainty. I was intrigued from the British
Sugar point of view that we have had you before us on a number
of occasions where you have talked about what you would like to
do, but you have said that there is so much uncertainty that you
were not actually going to invest in this plant. Then all of a
sudden you decided to put in for a planning application and now
you have gone and done it, against a background of uncertainty
because you still do not know what the capital allowance regime
is going to be, unless you have got a special line to the Chancellor,
and you do not know definitely if the 20 pence per litre duty
derogation is going to be sustained for whatever the investment
period is for which you want to recoup the cost and make an investment
return. How come for a company like yours where investor certainty
is rather important you have decided to make an investment? What
is the value of the investment in the bioethanol plant?
Mr Calvert: We are talking of
the order of about £20 million.
Q72 Chairman: So you are putting
£20 million of your shareholders' capital at risk against
a very uncertain investor background and you have bothered to
do it. Why have you done it?
Mr Calvert: As I said, the Wissington
investment is a special case. It has got some advantages because
of its integration with the sugar factory. We have referred to
it as a niche opportunity and it does not in any way point to
there being loads and loads of other future investments. When
we talk about uncertainties, as previous speakers did from the
National Farmers' Union, in the regulatory regime surrounding
biofuels investments, I can assure you that that uncertainty is
still there and we are very involved with the development of the
Renewable Transport Fuel Obligation because that is the key and
the fact that the RTFO will work will deliver a future large-scale
industry that we are really interested in and, in that respect,
the Wissington investment is not a pointer of the way forward.
All subsequent bioethanol plants in the UK will be contingent
upon the RTFO actually working. By working it is a simple test;
it has to generate a market, ie get the customers to interact
with our sales force and say, "Yes, we recognise the Government's
intent or the regulatory intent is that they want us to include
5% in our products, we will buy it from you at the market rate,"
and we stand ready to make large quantities and large investments
at the market rate but we are very worried.
Q73 Chairman: Just to clarify a point
finally for me on this. Again, when you first started out, I was
pretty clear that this was going to be a sugar beet-related enterprise.
Then in an intermediate period you extolled the virtues of grain
as a very efficient feedstock. Now, as I understand it, you have
gone back to sugar beet. Why?
Mr Calvert: It gives me pleasure
to set the record straight on this. Obviously there has been some
confusion over the past few years. I have been involved with this
for about the last six years and early on we did some work to
share with Government as to what would be the preferable feedstocks
for a large-scale bioethanol plant, and I do assure you that at
the time we came to the conclusion that in the current environment
wheat in the UK would be the preferred feedstock. It is not a
huge difference and yields can change but, as I remember it, we
felt that a wheat plant would deliver ethanol about 10% cheaper
than a sugar beet plant at that time. Since then obviously we
have identified the opportunity to build this small plant at Wissington
and we have gone ahead with that, and that is a clear demonstration
that we mean what we say and we are ready to commit to this industry.
We feel, as I know Government does, that this is a tremendous
opportunity, so we have made that small step and we will be first
in the market for manufacturing that fuel in the UK. However,
the point about a wheat-based plant still being the preferred
feedstock for a large-scale investment is still true and that
is what we and many other competitors and members of the REA are
still considering. There is tremendous potential for wheat to
ethanol plants in the UK and you should not have to swap your
wheat with someone in Spain to make it, as I heard earlier. We
have got an exportable surplus of about three million tonnes and
that in itself could meet 5% of UK petrol demand with no agricultural
changes by 2010. We stand ready to make that investment but it
is dependent on the RTFO.
Chairman: Gentlemen, it has been a fascinating
hour or so. We could probably have another hour, but I fear that
colleagues may have to depart to do other things and you have
homes to go to. Can I thank you most sincerely for a very stimulating
evidence session. You have given us a great deal of food to think
about. We are hoping before much time has passed to go to the
United States and another group to go to China, and I think they
will have gained a great deal in terms of some very useful background
information from you to guide them in the type of questions they
will be asking, particularly in countries where some of the things
you want to see developed here are more advanced. So thank you
very much indeed for your contribution.
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