June 3rd, 2016
The last decade has seen a dramatic rise in the UK’s use of biomass to generate energy – both electricity and heat. However, as concerns have grown that – under some scenarios – biomass does not deliver cost-effective reductions in carbon emissions compared with other renewable technologies (i.e. it has higher ‘marginal abatement cost’ for CO2), there has been a bit of a cooling off from the Department of Energy and Climate Change (DECC). So, what is the future for large-scale biomass in the UK?
A centre of mass
The most visible sign of biomass scepticism is that the new Contract for Difference (CfD) mechanism does not support biomass plant that generate electricity and no heat. Nevertheless, we are likely to see at least 1.5 GWe of electricity-only biomass come online in the next 2-3 years.
The final investment decision enabling for renewables (FIDER) process, which was the ‘bridging’ phase between the Renewable Obligation (RO) and the CfD, resulted in at least two electricity-only biomass conversions (Lynemouth at 420 MWe and Drax at 645 MWe) being supported with CfDs. There is also still nearly 200 MWe more capacity to fill under DECC’s 400 MWe ‘cap’ for support for dedicated biomass under the RO. These must be commissioned by 31st March 2017, or at least by the end of the agreed ‘grace period’ that runs to 30th September 2018.
The picture is perhaps a little less bleak for biomass as a source of combined heat and power (CHP). DECC is keen to meet the UK’s EU Renewable Energy Directive (RED) target, and to achieve this in part through renewable heat. The current Renewable Heat Incentive (RHI) consultation, and the associated Impact Assessment, suggest that DECC views large biomass CHP projects as easy, cost effective ‘wins’ compared with other renewable heating technologies.
Large scale biomass CHP projects therefore look set to continue to be able to claim support under the RHI, whilst also benefitting from CfD support. DECC has proposed the same RHI tariff for biomass projects of all sizes: 4.17p/kWh (£41.70/MWh). ‘Large’ projects only get this for the first 35% of heat load, after which they receive 2.03p/kWh (£20.30/MWh). Coming on top of CfD payments, this represents a substantial level of support. Furthermore DECC is consulting on a RHI ‘Tariff Guarantee’ from spring 2017. Like pre-accreditation under the Feed-in Tariff, this mechanism is designed to help large biomass CHP projects ‘lock-in’ to a tariff early, while they try to reach financial close.
The problem for large-scale projects has always been finding sufficient heat offtake at sensible cost to meet the ‘good quality’ CHP (GQCHP) requirement – even with the five year grace period I discussed in a previous blog. However, developers are devising new solutions to this problem. Orthios has planning consent for two large biomass CHP projects (each of 299 MW) in Wales where it is planned to use the heat in aquaculture – for example, to warm water so that prawns can be grown for human consumption.
Chinese firm, SinoFortone is backing the projects to the tune of £2 billion, funding announced as part of President Xi Jinping’s visit to the UK last October. It is not yet clear whether these projects can meet GQCHP criteria, but SinoFortone is likely to be lobbying hard for RHI support. At the same time, Government knows that the two projects rely upon this external funding, which is also set to create a reasonable amount of new jobs in two economically depressed areas of Wales.
Should they gain support, the two Orthios projects could receive over £100 million/annum under the RHI – most of the total annual RHI budget (across all technologies, domestic and non-domestic) of around £120 million through to 2020. Government would then find it difficult to fund both these projects in the same or consecutive years without ‘crowding out’ all other projects.
However, the RHI operates on a ‘first come first served’ basis. Unless the Tariff Guarantee mechanism comes into force, Orthios could find that, by the time they are ready to seek accreditation for the projects in 2020/21 there might not be enough RHI budget left.
Should Orthios’ projects secure significant RHI support, it would greatly reduce the CfD strike price they require, making them very competitive in any subsequent auction. Again, though, their success could come at a price. Orthios’ CfDs would likely represent a significant amount of the annual CfD budget. This would crowd out not only other biomass CHP projects, but also, potentially, other technologies in the same ‘unestablished’ CfD pot – such as offshore wind.
Whilst DECC is not due to publish the exact design of the next CfD allocation round until the end of 2016, this possibility should represent a serious concern for some developers. For DECC, it may well represent an unintended consequence of the interaction of the subsidy schemes: the department’s intention appears to be for CfD-funded offshore wind to deliver much of the electricity-driven portion of the UK’s RED target.
The RHI consultation strongly suggests that the calculation methodology for progress towards the budget cap will not be set out in regulations. Instead, Government will look to take account of market intelligence and use ‘risk-based’ judgement to assess as accurately as possible at what point it may be necessary to close the scheme. This process effectively leaves decisions to Ministers’ discretion and opens the door wider for ‘political’ decisions.
Let off steam?
I remain slightly sceptical regarding the Government’s ability to fulfil its commitment to fully withdraw CfD support for large scale CHP projects that fail to secure sufficient heat off-take within the five year grace period. Under the FIDER process, MGT Biomass finally reached financial close in summer 2015 for its 299 MWe plant. However, a related news article states that, in addition to producing steam for neighbouring industrial sites, it will ‘recycle steam produced by the facility for use by the plant’. This is slightly worrying as it implies that DECC’s view of what might constitute eligible heat use under the CfD may be ‘flexed’ to enable projects to gain support.
As well as muddying the rules around RHI budget allocation in ways that could benefit biomass CHP, Government also appears willing to move the goalposts in respect of eligibility for support. In the RHI consultation, DECC states that it is considering updating eligible heat use criteria. It cites ‘outdoor heat uses’ or ‘heat uses which see heat quickly lost to the external environment’ as areas under review. With regard to anaerobic digestion, it also mentions the drying of digestate as a use under review – but it does not, for example, specifically mention drying of biomass fuels or, most pertinently in relation to the Orthios projects, the heating of water for aquaculture.
Ultimately, to determine eligible sources of heat, DECC should be considering the counterfactual in all instances. Is the renewable heat legitimately displacing the need to generate heat in some other way? For heat used in manufacturing processes or to heat homes, the answer is simple. The answer for drying of digestate should also be simple: it’s unlikely that we would be using other sources of heat to do this in the absence of the support mechanism.
Prawn and raised
Some cases, like aquaculture, will be more complex: let’s focus on growing prawns as an example. Prawns are often currently farmed in areas of former (now decimated – in no small part due to the activity itself) mangrove swamps in warm countries, where water does not need to be heated. Against that counterfactual, the Orthios plant is unlikely to displace any existing heat use, but it might have some climate-related benefits (as well as impacting on resilience) if, at the margin, it reduces the rate of depletion of mangrove forests. Cultivation in the UK would also avoid the need to transport prawns from Thailand or China, but related CO2 emissions are minimal.
Whilst one might hope that prawn farming in Wales would be less environmentally damaging than overseas alternatives, such issues have not so far been within the scope of thinking in respect of RHI-eligibility. Within the UK, the result would simply be that ‘renewable heat’ supports an activity which would not be happening in the absence of the RHI – increasing renewable heat supply, but also increasing the overall demand for heat.
Even if there were convincing arguments round the carbon (and/or wider environmental) benefits of the Orthios projects, we would still need to ask whether they should be funded ahead of others. If they receive RHI support, it may well be at the expense of smaller biomass and heat pump projects in both domestic and non-domestic settings that more directly displace non-renewable sources of heat. If that in turn allows them to bid competitively in the CfD auctions, their success could come at the expense of many other smaller, prospective biomass CHP, advanced conversion technology and offshore wind projects that deliver greater benefits at lower overall cost.
It is difficult to see how Government can maintain that such projects offer value for money towards meeting RED targets when they need both RHI and CfD support – especially when there is growing concern about whether they deliver real carbon reductions. As doubts about biomass become increasingly widespread, there is likely to be pressure to address this flaw in the system. Investors and developers across a range of renewable energy technologies will be watching developments closely, with many hoping for a change in the subsidy schemes to ensure that funding goes to projects with more tangible emissions benefits.