Supplementary memorandum submitted by
Renewable Energy Association (REA) (Bio 27a)
Following our oral evidence session on 1 March
2006, the Chairman requested the Association to provide further
written evidence in respect of the development of the biomass
co-firing regime under the Renewables Obligation. I am pleased
to provide that additional memorandum.
The Association was also invited to provide
any additional submission that it considered appropriate, and
I have taken the opportunity to submit further evidence in respect
of two important areas:
— a framework for the growth of the
biomass heat sector; and
— support for biomass power generation,
including advanced conversion technologies.
With respect to the former, I am concerned from
comments made to subsequent witnesses that you may have been left
with the impression that the Association held a view that the
biomass heat market was "all too difficult" to address.
This is not the case, although it is our concern that Government
may adopt this position as a basis for not moving forward. In
fact the Association has a strong view as to the elements of a
strategy that should be adopted to exploit the potential benefits
to the UK of a developed biomass heat sector, and I am pleased
to expand on this in the attached evidence.
During our oral evidence session we discussed
some of the challenges faced in bringing forward biomass power
projects, and there was considerable discussion of the merits,
or otherwise, of the Bio-Energy Capital Grants Scheme in supporting
these developments. It may therefore be appropriate to expand
on this subject briefly to underlines some of the observations
from the oral evidence. It also provides an opportunity to address
a concern that our original written evidence, in highlighting
the limited progress of power projects to date under the Grant
programme, may have placed undue emphasis upon the specific circumstances
of some of so-called advanced conversion technologies. In practice
a number of commercial challenges are faced by a range of biomass
generation technologies, including these advanced technologies.
This experience has highlighted the reality of developing commercial
projects in a maturing market, and the need for Government programmes
such as the Bio-Energy Capital Grants Scheme to allow appropriate
time for developers to address these challenges in bringing into
operation.
Graham Meeks
Head of Fuels and Heat
Renewable Energy Association
ADDITIONAL EVIDENCE
Context for the Introduction of Changes to the
Biomass Co-firing Regulations
1. Co-firing is a unique element of the Renewables
Obligation. Although there are some other exceptions, most generating
stations are only eligible for ROCs if they are relatively newly
built (ie built after 1990). Allowing coal fired stations, built
well before this date, to participate was done specifically to
encourage the establishment of biomass fuel supply chains. The
government specifically wanted to encourage purpose-grown energy
crops as the addition of this resource could significantly increase
the total contribution that biomass could make towards the UK's
electricity demand.
2. However, there is a "Catch 22"
situation regarding new power plant fuelled by biomass, and energy
crops in particular. Farmers won't plant crops for a power station
that hasn't been built yet, and a power station can't obtain finance
to build a plant if it has no established fuel source. This problem
is also encountered, but to a slightly lesser degree, with other
forms of biomass. Co-firing was the means of overcoming this Catch
22.
3. The original policy intent was to allow co-firing
for a limited amount of time, in order to enable fuel supply chains
to become established, but to phase it out completely in 2011.
Caps were imposed, however, as indicated in the table below. These
caps had the objective of
— ensuring that co-firing was a temporary
measure;
— limiting the overall extent of co-firing,
so that it did not swamp the ROC market and leave no incentive
to build new renewable generating capacity, and finally; and
— encouraging co-firers to source energy
crops.
| Original rules |
April 2002 to March 2006 |
April 2006 to March 2011* |
| Cap on suppliers |
25% |
25% |
| Minimum energy crop requirement |
None |
75% |
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* From April 2011, co-firing would no longer qualify for ROCs.
4. Fairly soon after the Renewables Obligation came into
force (in April 2002) it became apparent that there would not
be sufficient energy crop available by 2006. Furthermore, even
if planting was to commence immediately, crops such as short rotation
coppice and miscanthus could not possibly be ready in time, given
the length of time taken from first planting to first harvest.
5. The Government announced a review of the co-firing rules
in the 2003 Energy White Paper. The statutory consultation document
was issued in August 2003. It covered a number of other issues
in addition to co-firing rules.
6. The changes introduced as a result of this consultation
are summarised in the table below. These new rules became law
on 1 April 2004.
| New rules |
Up to March 2006 |
April 2006 to March 2008 |
April 2009 to March 2010 |
April 2010 to March 2011 |
April 2011 to March 2016* |
| Cap on suppliers |
25% |
10% |
10% |
10% |
5% |
| Minimum energy crop requirement |
None |
None |
25% |
50% |
75% |
* From April 2016, co-firing would no longer qualify for ROCs.
7. In summary, the onset of the energy crop requirement was
delayed from 2006 to 2009 to allow more time for energy crops
to become established. And Instead of requiring 75% energy crops
from the outset, the requirement increased in stages, reaching
75% by April 2011.
8. The cap on the proportion of the Obligation that suppliers
could fulfil with co-fired ROCs was reduced to 10% from April
2006, and to 5% from April 2011. Previously it had remained at
25% for the duration in which co-firing was eligible under the
Obligation.
9. The objective of these new cap arrangements was to:
— to match the energy crop requirement more closely
with the anticipated level of energy crop availability; and
— to constrain the impact of co-firing on the Obligation
as a whole, in order that ROC prices did not drop significantly
thereby posing a problem for the development of other renewables.
10. The rule changes were met with a mixed response from
industry; energy crop growers were happy to be given more time
but were concerned that their customers' interest in energy crops
might be limited due to the caps; co-firers were happy to have
more time but were unhappy about the caps as it made planning
more complex; and many were unhappy simply because the rules had
been changed, as such changes generally undermine investors' confidence
in the Obligation.
Measures to Promote the Development of Heat Supply from Biomass
and Other Renewable Sources
11. The supply of heat from biomass and other renewable sources
has been demonstrated through a series of recent studies to offer
the potential to make a major contribution to a series of energy
policy objectives. Notably:
— The Carbon Trust have estimated that biomass heating,
using indigenous resources alone, could deliver carbon savings
of up to 5.6 MtC per annum.
— The Biomass task Force estimated that utilisation
of biomass resource in heat-only plant could deliver carbon savings
of up to 3.9 MtC per annum. These savings increase to 4.1 MtC
if combined heat and power plant is employed.
12. The Biomass Task Force found that implementation of the
actions proposed in its report to Government should increase the
renewables share of the heat market to 3% and 7% by 2010 and 2015,
from a level of 1% today. This would provide a major contribution
to increasing the security of UK energy supplies.
13. In this context the Government has set out policies in
its Climate Change Programme that are estimated to deliver only
100,000 tonnes of carbon savings by 2010. This level of ambition
falls a long way short of the potential contribution to the UK
energy supply and carbon abatement targets that biomass heat could
make, and which has been demonstrated by the studies described.
The situation underpins the need for the Government to develop
a coherent strategy to develop and grow the biomass heat sector.
14. Government should establish a strategy for the development
of a renewable heat market that addresses the immediate objectives
of achieving rapid and substantial growth of the sector, whilst
securing investment of the private capital necessary to support
this expansion. The long-term objective is to deliver greater
efficiency across the supply chain whilst ensuring the commercial
viability of the industry can be sustained.
15. An important contributing factor to both the short- and
long- term objectives must be that the environmental, social and
economic benefits of this supply option are fully and equitably
rewarded. The renewable heat industry is at a small scale today
and is perceived as such by the investment community. The pattern
of grant support adopted by Government presents a highly unpredictable
growth outlook for the industry which acts as a deterrent for
any large scale injection of capital, either from established
energy businesses or third party investors. Furthermore, the availability
of support for larger biomass energy installations, either via
the Renewables Obligation or the EU Emissions Trading Scheme (EUETS)
will continue to distort the market for feedstock supply in favour
of power generation. In the absence of any mechanism to redress
this balance, investors will be left with the signal that Government
does not value the potential contribution from biomass heat.
16. To address these concerns, and to secure the objectives
described, Government must establish a renewable heat strategy
reflecting the core elements set out below:
— A strategy must enable local actors, including
regional and local government, to take the initiative in facilitating
the development of the local infrastructure.
— Mechanisms should be introduced that provide renewable
heat with enduring support at a level that reflects the carbon,
energy security and wider economic benefits that it delivers.
Mechanisms should be tailored to reflect the specific circumstances
of the sectors or markets in which they are applied. Such mechanisms
will provide the enduring value in the industry that is necessary
to attract early-stage investment.
— Positive support via the planning framework, building
regulations and public procurement policies should be reinforced.
A planning policy requiring a minimum 10% of energy supply from
renewable sources should present a commercial opportunity to establish
renewable heat as a simple, cost-competitive option.
— Capital grants should be maintained in the short-
to medium- term as a basis for kick-starting the growth of an
installed base of renewable heating plant. Any grant scheme should
be structured to incentivise early movers and thus present an
immediate impetus for the industry to reach critical mass.
— These measures should be complementary, introduced
in a coordinated manner, and should together comprise a coherent
strategy for the growth of the renewable heat sector, that is
shared by Government and the wider industry.
17. Renewable heat supply can be delivered primarily through
a range of established, proven technologies. Renewable heat therefore
offers the advantage that, with the appropriate level of investment,
it could rapidly rise to meet its potential and so contribute
to Government objectives. Paragraph 41 of the REA's evidence highlighted
facets of the direction of the existing Bio-Energy Capital Grant
scheme. This reflects a concern that Government has recognised
neither the potential scale nor the immediacy of the opportunity
presented by biomass heat, and as a consequence has not sought
to reinforce these growth prospects with adequate levels of grant
funding.
18. It should be noted, however, that the mechanism for delivery
of grants, via a pre-approved grant package available to a series
of installations, has proved to be effective. This approach minimises
the transaction costs associated with accessing and utilising
these grants, and has generally proved popular with installers.
Development of Biomass Power Generation under the Biomass Capital
Grant Scheme
19. The implementation of the Bio-Energy Capital Grant scheme
highlights the problems presented when a single policy mechanism
seeks to address a range of policy options. In this specific instance
the scheme has sought to encourage deployment of established technologies
such as biomass heat, encourage the development of fuel supplies,
and to bring forward investment in power generation and CHP plant
that faces a range of commercial challenges distinct from those
faced by other renewable technologies.
20. The Association's original submission noted such considerations
with specific reference to advanced combustion technologies. It
is appropriate, however, to consider these within a broader context
of biomass power generation:
— Combined heat and power schemes offer the potential
for higher overall thermal efficiency than a power-only plant,
taking greater benefit from a renewable fuel resource. However,
the additional constraint of being required to secure, at appropriate
commercial terms, contracts with customers for the supply of both
power and heat will add considerably to both the costs and complexity
of a project.
— Similarly, the adoption of advanced combustion
technologies offers the prospect of higher plant efficiencies
and has been positively incentivised under the scheme. However,
such technologies can be regarded as "early-stage" by
potential investors and lenders, thus increasing the costs of
project finance and the complexity of the necessary risk management
structures.
— Power projects—irrespective of the technology
adopted - present a demand for biomass fuel that may be in excess
of established, local resources. The sizing of a biomass power
plant is highly dependent upon the cost and availability of appropriate
fuel, and the contracts necessary to secure fuel supplies are
fundamental to any plant's ability to secure debt finance. The
interrelationship between feedstock cost and availability on one
hand and plant design and financing on the other is a complex
one that lies at the heart of a biomass project development.
21. Each of the conditions or circumstances described will
add to the complexity, cost, and ultimately time that is required
to bring forward to operation any new biomass power or CHP plant.
It is the case that the timescales involved in the development
of most, if not all, of the projects bought forward under the
BECG scheme have exceeded the original expectations of Government
and in many cases the developers. The immediate impact of these
circumstances has been a lack of final realisation of the benefits
of these schemes to date, whether in respect of carbon savings,
economic development or development of fuel supply. However a
number of these schemes remain under development and hence the
potential to deliver environmental, economic and important learning
benefits remains.
22. The experience of the BECG scheme also highlights to
Government that the introduction on a commercial basis of new
technologies, and even existing technologies in immature markets,
demands an extended timescale. Artificial deadlines that fail
to reflect these constraints can add further to the risks presented
to investors and even act to undermine the viability of a project.
Renewable Energy Association (REA)
April 2006
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