Select Committee on Environment, Food and Rural Affairs Minutes of Evidence


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%


*  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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