Consultation on the grandfathering policy of support for Dedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation March 2010
Consultation on the grandfathering policy of support forDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation
March 2010
Contents
1. ExecutiveSummary 3
2. ReasonsforConsultation 6
3. Optionsconsidered 9i. Grandfatheringatbandreceivedonaccreditation 9ii. Grandfatheringatcurrentlevels,withpotentialtoupband 11iii. Grandfatheraminimumlevel,withtherestfreefloating 12iv. Nochangetocurrentpolicy 13v. TreatmentofBioliquids 15
4. Preferredoption 16
5. CombinedHeatandPowerandEnergyCrops 18i. CombinedHeatandPower(CHP) 18ii. EnergyCrops 19
AnnexA–HowtheROworks 20
i
1
Theclosingdateforresponsesis28May2010.
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Additional copies Youmaymakecopiesofthisdocumentwithoutseekingpermission.Furtherprintedcopiesoftheconsultationdocumentcanbeobtainedfrom:
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Telephone:03000686833
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2 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation
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FerryLienertDECCConsultationCoordinatorArea6A3WhitehallPlaceLondon,SW1A2AW
Email:[email protected]
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Thisconsultationandcallforevidenceonthepolicyongrandfatheringsupportfordedicatedbiomass,anaerobicdigestion(AD)andenergyfromwaste(EfW)intheRenewablesObligation(RO)hasparticularrelevancetoelectricitygeneratorsandsuppliersoperatinginthesemarkets.Itisalsoofinteresttoindustriesindirectcompetitionforthefuelusedbythesegenerators.
WithinthecontextofthelevelandbalanceofsupportofferedtotechnologiesacrosstheROitisrelevanttoenergyconsumersandtheirrepresentatives,electricitysuppliers,energygenerators,networkoperators,Ofgem,environmentalandenergyefficiencyorganisations,energyservicecompanies,installers,theconstructionsector,financeinstitutionsandotherstakeholderswithaninterestintherenewableenergybusiness.
ExecutiveSummary 3
1.ExecutiveSummary
InaGovernmentstatementon3February2010,wesetoutourcommitmenttousingsustainablysourcedbiomasstomeetourrenewableenergyneeds.WealsorecognisedconcernsfromanumberofdevelopersandinvestorsinthebiomassindustryoverthecurrentlackofgrandfatheringofsupportundertheRenewablesObligation(RO)forbiomass,anaerobicdigestionandenergyfromwaste.
Grandfatheringisthepolicyintentionthat,onceaccredited,ageneratorreceivesasetlevelofsupportoveritsperiodofeligibilityfortheRO.Grandfatheringpolicyisthereforenottoapplyanychangestolevelsofsupportatsubsequentbandingreviewstoexistinggenerators.
Towardstheendof2009,representativesofthebiomassindustryraisedconcernsthatthelackofgrandfatheringhascausedanumberofprojectstostall,asinvestorsplaceahighdiscountrateonfutureRenewablesObligationCertificates(ROC)levels.Theyarguethatitisthereforedifficultfortheseprojectstosecureanadequatelevelofdebtfinancingtomakethemviable.
InvestorcertaintyintheRenewablesObligationiskeytooursuccessinencouragingthedeploymentofrenewables.Since2002wehaveseenathreefoldincreaseinrenewableelectricitybroughtonbytheRO.Buttomeetourlegallybindingtargetsonrenewableenergy,wemustcontinuetodevelopourrenewablesgenerationcapacity.
Biomasselectricitygenerationisoneofthefewrenewableelectricitysourcesthatisdispatchable;generationcanbeplannedandchangedtomeetconsumerdemand.Itisthereforeoneofthelowcarbonsolutionsthatcanhelptobalancemoreintermittentsourcesofenergysuchaswind.Itisthereforeanimportantpartofourlowcarbonenergymix.
Thebiomassindustryhaveidentifiedupto5GWofdedicatedbiomass,energyfromwaste,gasificationandanaerobicdigestionprojectsthatareinplanningorpre-buildphase;anestimated£13billionworthofpotentialinvestment.Butforsomeoftheseprojectstocomeforward,investorshavesaidthattheyrequirecertaintythattheRenewablesObligationwillprovidethenecessarysupport.However,wemustensurethatanyproposalsrepresentvalueformoneyasitwillbeenergyconsumerswhowillultimatelypaythroughincreasedenergybills.
TheROtakesintoaccounttheupfrontcapitalcostofnewrenewablesgenerators,ongoingoperationandmaintenancecosts,aswellastheongoingfuelcosts,netofelectricityrevenues
Unlikeotherrenewablesgenerators,biomassgeneratorshaveanongoingfuelcost.Industryhaveinformedusthattheyareunabletofixthisfuelcostforthefull20yearsoftheROsupport.Therefore,grandfatheringtheirtotalsupport(whichtakesinto
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accountboththecapitalandfuelcosts)for20yearsatcurrentlevelscouldresultinfuturemarketdistortionifbandswerechangedfornewentrants.ItwaspreciselyforthisreasonthatwedidnotgrandfathersupportforbiomassontheintroductionofbandinginApril2009.
Likeothertechnologies,dedicatedbiomassdevelopersshould,however,beabletofixthenonfuelcostsfortheupfrontbuildoftheproject.Wearethereforeproposingapolicytograndfathertheproportionassociatedwithnonfuelcostfordedicatedbiomass,butnottograndfathertheelementofsupportwhichhelpspayfortheongoingfuelcosts.ThisbringsthebiomassgrandfatheringpolicymorecloselyinlinewithourpolicyforotherrenewablesundertheRO,andaimstoprotectexistinggeneratorsfromhavingsupportreducedduetoabreakthroughintechnologywhichreducestheupfrontcapitalcostfornewgenerators.
ItalsoretainsflexibilityfortheROtorespondtochangesinbiomassfuelcostsifrequired.Shouldbiomasspricesrise,thereisflexibilitytoraisethelevelofsupportforbothnewandexistingdedicatedbiomassgenerators,thusmaintainingalevelplayingfieldforsuchstationswhencompetingforfuel.Likewise,shouldbiomasspricesfall,supportlevelsforbothnewandexistinggeneratorscouldbereduced,subjecttoapolicyintentionnottogobelowtheminimumlevelforexistinggenerators.
TheGovernmentisaskingforevidencetoinformadecisiononwhattheappropriateproportionoftheROClevelshouldbefornonfuelcostsforgeneratorsaccreditedbeforethenextbandingreview,thatcanhelpinsettinganappropriateminimumlevel.
Werecognisethatanaerobicdigestion(AD)andenergyfromwaste(EfW)withcombinedheatandpower(CHP)haveadifferentfuelsupplyrisk.ADplantstendtobesmallscale,usinglocallysourcedfeedstock,oftenatloworevennegativecost.Thesesmall,oftenonfarm,ADgeneratorsshouldbelesssensitivetochangestosupportlevelsforfutureentrantstothemarketandlesslikelytobecompetingforthesamefuel.Underthefeed-in-tariff(FIT)scheme,duetolaunchon1April,supportistobemaintainedforthelengthofthetariffforalltechnologies(includingAD).WethereforeproposetobringtheROinlinewithFiTsupportwithapolicytograndfatherADplantsaccreditedby31March2013atthecurrentROClevel,i.e.2ROCsperMWh.Weproposethatanygeneratorsaccreditingfrom1April2013shouldbegrandfatheredattherateapplicablefollowingtheoutcomeofthe2010–2013BandingReview.
StandardenergyfromwastewithCHPplantsaremorelikelytosecurelongterm,upto20year,fuelcontractsaspartofPFIdealswithlocalauthorities.Thesecontractsarestructuredtomakeitcostlytoterminateearly,thusprovidingadegreeofcertaintyofcosts/incomeforboththeLocalAuthorityandtheEfWgenerator.WethereforealsoproposeapolicytograndfathersupportforEfWgeneratorsatthecurrentROClevel,1ROCperMWh,providedtheyareaccreditedby31March2013.AswithAD,weproposethatanygeneratorsaccreditingfrom1April2013shouldbegrandfatheredattherateapplicablefollowingtheoutcomeofthe2010–2013BandingReview.
ExecutiveSummary 5
The½ROCupliftprovidedforfordedicatedbiomasswithCHPisaimedatsupportingtheadditionalcapitalcostofthistypeofbuild.However,theRenewablesHeatIncentive(RHI)isduetobelaunchedin2011,andwewanttoensurethatthetwoincentivescomplementeachother.WewillthereforeconsiderfurtherwhethertograndfathertheCHPupliftandconsultinthesummer.
AsannouncedinBudget2010,wewillconsultonproposedsustainabilitycriteriaforbiomasslaterthisyear.Withsustainabilitycriteria,inordertoqualifyforsupport,bio-energygenerationwillneedtodemonstraterealgreenhousegassavingsandbecarriedoutinamannerwhichdoesnotgiverisetodamaginglandusechange,undermineglobalfoodsuppliesorinflatefoodprices.Anygrandfatheringwouldonlyapplywhereageneratorisusingsustainablebiomass.Onceinforce,ifgeneratorsareusingbiomassthatdoesnotmeetthesustainabilitycriteria,theywillbeineligibletoclaimROCsforgenerationfromthatfuel.
Wearenotcurrentlyproposingtograndfathersupportforgeneratorsusingbioliquids,asthereisaquestionastowhetherputtingbioliquidsintoelectricityisthebestwayofhelpingustoachieveourrenewableenergytargets(giventheirpotentialuseforheatandtransport).Ourpolicyremainsforflexibilitytoamendsupportlevelsforbioliquidsatfuturebandingreviewsforbothnewandexistinggenerators.
Therewasinsufficientevidenceonwhichtoconsiderchangingourpolicytowardsthegrandfatheringofadvancedthermaltechnologies,suchasadvancedgasificationandadvancedpyrolysis,attheircurrentlevelof2ROCperMWhsupport.Thispositionwillbereviewedusingtheevidencefromthisconsultation.
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2.ReasonsforConsultation
WhentheROwasintroducedin2002,supportwastechnologyneutralandsetat1ROCperMWhforalltechnologies,sobringingononlythecheapesttechnologies.Itdidnothelpsupportthemoreexpensive,emergingtechnologies.
InApril2009bandingwasintroducedintotheRenewablesObligation,allowingustosetsupportlevelsgroupedbytechnologytypeintofourbands.Thisrecognisedthatsometechnologieswerecheapertodeploythanothers,andthatsomerequiredadditionalsupporttoreachmassdeploymentlevels.ThelegislationallowstheSecretaryofStatetoreviewthebandsatscheduledreviewpoints,withthefirstscheduledreviewduetobeginthisOctober,withanychangescomingintoeffectinApril2013.
Bandingreviewsallowustheflexibilitytoadjustsupportascircumstancesinthemarketetcchange,thusretainingvalueformoneyandensuringtechnologiesreceivetherightlevelsupport.
Thebulkofcostsformostrenewabletechnologiesarelargelyupfrontcapitalcosts,withlowongoingmaintenancecosts.Existinggeneratorsdonot,therefore,tendtobenefitfromanyfutureinnovationinthesectorthatreducesbuildcosts,orincreasestechnologyefficiency.
Inordertoensureinvestmentinthesetechnologies,weintroducedtheconceptofgrandfathering.ThisisapolicyintentiontomaintainingalevelofsupportforthefulllifetimeofeligibilityfortheRO,fromthepointofaccreditation.Forgrandfatheredgenerators,ourpolicyintentisnottochangetheoriginallevelofsupportreceivedatfuturebandingreviews.
Thepurposeofthispolicyistoallowgeneratorstofinancethefixedcostsoftheirdevelopmentoverthelifetimeoftheproject’seligibilityforsupportundertheRO.
Followingtheconsultationonbandingandgrandfatheringin2008,wemadeadecisionnottograndfathersupportforbiomassas,incontrasttootherrenewablestechnologies,alargeproportionofabiomassgenerator’scostsarefuelcosts,whichcanvaryovertime.Grandfatheringcouldthereforehavetwoeffects:
1. Ifsupportissettoohigh,stationscouldbeovercompensated.Settoolow,andplantswouldnotbeabletocompeteforfuel;
2. Generatorsenteringthemarketindifferentyearscouldreceivedifferentlevelsofsupport,yetwouldcompeteforthesamefuelstock,therebypotentiallydistortingthemarket(asonewillbeabletopaymorethantheother).
FutureRObandingreviewscouldthereforeresultinanamendmenttothelevelofsupportforexistingbiomassgenerators,aswellasnewones.InApril2009,actual
ReasonsforConsultation 7
supportwasincreasedforexistingbiomassgeneratorsfrom1ROCtobetween1.5ROCsperMWhto2ROCsperMWh,dependingontechnologytype.Ifexistingbiomassgeneratorshadbeengrandfathered,inlinewithothertechnologies,thisincreasewouldnothavebeenpossible.
Sincetheintroductionofbanding,andtheincreasedsupportforbiomass,wehaveseenanincreaseinplanningapplicationsforbiomassgeneratingstations.Thebiomassindustryhaveidentifiedupto5GWofdedicatedbiomass,energyfromwaste,gasificationandanaerobicdigestionprojectsthathavebeenproposedorareinplanningorpre-buildphase.
However,thebiomassindustry,banksandequityprovidershaverecentlyraisedconcernsovertheuncertaintyoffuturesupportlevels.Developersarguethatbanksandequityprovidersarenowholdingoffinvestmentinbiomassprojects.Withoutcertaintyoversupportlevels,developersarguetheywillbeunabletoobtainfinance,andprojectswillthereforenotgoahead.
Followingrepresentationsfromindustry,anddiscussionswithbanksandequityinvestors,weannouncedwewouldrevisitourcurrentgrandfatheringpolicyfordedicatedbiomass,anaerobicdigestionandenergyfromwaste.Wedonotintendtorevisitgrandfatheringpolicyforanyothertechnologyinthisconsultation.
Aspartofthisexercise,wehavealsoconsideredwhethertograndfatherthe½ROCupliftfordedicatedbiomasswithCHP,and/ortograndfatherthe½ROCupliftforgeneratorsusingenergycrops.
Inrevisitingourbiomassgrandfatheringpolicy,weengagedwithawiderangeofdevelopers,investorsandtradeassociations,andtheRenewablesAdvisoryBoard.
Inadditiontoaseriesofmeetingswithindividualbiomassdevelopersandinvestors,wesetuptwoworkinggroups:
1. Anindustryworkinggroupwithbiomassdevelopersfromarangeofcompanysizes,andfromacrossdedicatedbiomass,ADandEfWsectors
2. Aninvestorworkinggroup,withrepresentativesfromanumberofbanksandequityinvestors
Thepurposeofthisconsultationisto:
• seekviewsonwhetherourpreferredoptionisthebestwayforward
• gatherevidenceonthecostsfordedicatedbiomass,ADandEfW,andtheproportionofcostsattributabletononfuelcosts
• testourassumptionsoverinvestorreactiontograndfatheringandthereforethelikelyamountandtimingofinvestmentthatwouldcomeforwardunderdifferentoptions
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• seekviewsastowhetherthereareanyotherunintendedconsequencesofourpreferredoption
ThetotalnumberofRenewablesObligationCertificates(ROCs)awardedforbiomasstechnologiesisnotbeingreviewed.WewillbereviewingbandinglevelsforalltechnologiesinthescheduledBandingReview,duetostartinOctoberthisyear.AnychangestobandsasaresultofthescheduledBandingReviewareduetocomeintoeffectfrom1April2013.
Optionsconsidered 9
3.Optionsconsidered
Wehaveconsideredfourpossiblepolicyoptions:
i. Grandfathering at band received on accreditation ii. Grandfathering at current levels, with potential to upband iii. Grandfather a minimum level (the rest free floating) iv. Do nothing scenario – business as usual
Wehavealsoconsideredhowtotreattheuseofbioliquids.
i. Grandfathering at band received on accreditation Underthisoption,biomassgeneratorsaccreditedby31March2013wouldbegrandfatheredatcurrentROClevels.Entrantsfrom1April2013wouldreceivenewsupportlevels,ifchangedfollowingthe2010–13BandingReview.
Thisisinlinewiththegrandfatheringprincipleforothertechnologies,andshouldgiveinvestorsthecertaintytheyneedoverfutureincome.Thisoptionwouldgrandfathernotonlythesupportforcapitalcost,butalsotheongoingfuelcost.
Fuelpricesarevariableovertime,andanumberofdevelopershavemadeclearthatlongterm,20yearfixedpriceandvolumefuelcontractsarenotcurrentlyavailable.DevelopersarethereforecurrentlysubjecttovariablefuelcoststhroughoutthelifetimeoftheireligibilityfortheRO,andwillhavetocompeteagainstbothexistingandfuturegeneratorsforfuel.Thereisconsiderableuncertaintyabouthowthemarketwilldevelopinthefuture.Itmaybethecasethat,asanE4Techstudysuggests,manypowerplantsarelookingforlongtermcontracts,somewithinvestmentinthebiomasssupplychain,withonlysmallamountsofspotbuying.Howeverinvestorsaresayingthatthecurrentfuelpricevolatilityandlackofcertaintyofsupportisstallingcurrentplans.
Thishasthepotentialtocreateafuturemarketdistortion;ifROClevelsarenotallowedtorespondtobiomassprices,generatorsaccreditingindifferentbandingreviewperiodswillreceivedifferentlevelsofoverallsupport,placingsomeinvestorsatacompetitivedisadvantagewhensourcingfuel,whileotherswillreceiveexcessrents.
Providinginvestorswithgrandfatheredsupportatcurrentlevelsmayincreaseavailabilityofdebtfinanceforbiomassdevelopers.However,itwouldbedifficulttoamendbands,eitherupordown,forfuturegenerators,withoutcausingthismarketdistortion.Thisriskmayprovetobetoogreatfortheequityinvestorstotake.As
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projectsneedamixofdebtandequityinvestment,thisoptionmaylimitdeploymentpotential.
Whilstfuelpricevariabilityisamajorconcernfordedicatedbiomass,itislessofanissueforanaerobicdigestionandenergyfromwasteplants.
ADplantstendtobesmallscale,usinglocallysourcedfeedstock.LargerADplant,suchasthoseusingmunicipalfoodwaste,aremorelikelytosecurelongtermfuelcontracts.Theywouldthereforebelesssensitivetochangestosupportlevelsforfutureentrantstothemarket.
EnergyfromWasteplants(EfW)aremorelikelytosecurelongterm,upto20year,fuelcontracts,aspartofPFIdealswithlocalauthorities.
InvestorshavestatedthatgrandfatheringsupportforADandstandardEfWatcurrentrateswouldprovidethecertaintytheyneedandensurethecontinueddeploymentofthistechnology.AnumberofinvestorsanddevelopershavesuggestedthisasapotentialsolutionforjustADandEfWgeneratorswhooperateindifferentmarketconditions.
Impact on value for money.TheimpactonthecostoftheROwilldependonfuturefuelpricescenarios.Ifforexamplefuelpricesfallatthenextbandingreview,grandfatheringcouldleadtopotentialoversubsidyundertheRO.Thismakesgrandfatheringpotentiallypoorvalueformoney,particularlyfordedicatedbiomass.
Impact on deployment.Takinginvestorsassumptionthatthelackofgrandfatheringiscausingahiatusininvestment,whichcouldleadtolowerinvestmentinrenewablesintheUK,thengrandfatheringcouldreducetheriskofsuchahiatusrelativetooption4.Wearelookingforevidenceontheimpactofgrandfatheringoninvestmentdecisions.
Q1:Whatinformationcanyouprovideoncurrentbiomassfuelcontracts,feedstocksourcesandpricesfordedicatedbiomass?Howdoyouexpectthemarkettodeveloplongerterm?
Q2:Doyouagreethatgrandfatheringatcurrentlevelsfordedicatedbiomasscouldresultinunfaircompetitionifbandswerechangedfornewentrantsinafuturebandingreview?Pleaseprovideyourargument.
Q3CouldgrandfatheringADandEFWcausesimilarmarketdistortion?Doyouagreethattheriskislessforthesetechnologies?Pleaseprovideyourargument.
Q4:WhatarecurrentADandEfWfeedstockpricesorsubsidiesfordisposalandwhatdoyouestimatethesepricestobeinthefuture?Arethesearrangementsdrivenbylandfillgatefees?Doyouagreethatthesefeedstocksarelesssubjecttopriceuncertaintythandedicatedbiomassplant?
Optionsconsidered 11
Q5:WhatevidenceistherethatwithoutgrandfatheringtherewouldbeahiatusininvestmentforAD,EfWanddedicatedbiomass?
ii. Grandfathering at current levels, with potential to upbandUnderthisoption,ifatthenextbandingreviewweincreasetheROCbandfornewentrants,thenexistinggeneratorswouldbebandedup.However,ifthelevelofROsupportwasdecreasedfornewentrants,existinggeneratorswouldnotbebandeddown,butgrandfatheredattheleveltheyreceivedonaccreditation.
Thisoptionwouldinsulateinvestorsagainstanydownsiderisk,whilstprovidingaccesstoanyincreasesinsupport.
However,thisoptionislikelytoofferextremelypoorvalueformoneytoconsumers.Itlocksincurrentlevelsofsupport,whichmayleadtofutureovercompensationiffuelpricesfall.Consumerswouldbebearingallthecostofthis.
Grandfatheringatcurrentrateswouldessentiallyfixthefuelcostcomponentaswellasnonfuelcosts.Ifbiomasspricesfall,wewouldneedtoreducesupportfornewentrantstoensurevalueformoneytoconsumersandcomplywithEUStateAidrules.But,bykeepingexistinggeneratorsatahigherlevel,notonlydoesthisrepresentpoorvalueformoneyforelectricityconsumers,italsomeansthatnewentrantstothemarketmaybeunabletocompeteforfuel.Grandfatheringwithanupliftonlyexacerbatesthisissue,andplacestheriskofbiomasspriceincreasesontheconsumer.
Impact on value for money.TheimpactonthecostoftheROwilldependonfuturefuelpricescenarios.Ifforexamplefuelpricesfallatnextbandingreview,grandfatheringcouldleadtoincreasedoversubsidyundertheRO,asunderoption1.Moreovercostswillbehigherthanunderoption(1)underarisingfuelpricescenario.Underoption1,levelsofsupportremainfixedunderrisingfuelprices,whereasunderthisoptionadditionalcostswillbeincurredunderhigherfuelprices.
Impact on deployment.Takinginvestorsassumptionthatthelackofgrandfatheringiscausingahiatusininvestment,grandfatheringcouldreducethisriskrelativetooption4,andthereforethecostofmeetingtherenewabletargetrelativetothestatusquo.Wearelookingforevidenceontheimpactofgrandfatheringoninvestmentdecisions.
Q6:Towhatextentdoesgrandfatheringriskmarketdistortion?Isthereevidencetosupporttheextenttowhichthisdistortioncouldaffectfutureinvestment?
Q7:Doyouagreethatthisoptionofferslessvalueformoneytotheconsumer,duetothelackofresponsetofuturefuelprices?
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iii. Grandfather a minimum level, with the rest free floatingUnderthisoption,aproportionoftheROCsupportlevelwouldbegrandfatheredtotakeintoaccountthefactthatsome,butnotall,ofthecostofabiomassgeneratorisfornon-fuelcosts,forexampletheupfrontcapitalcostofbuildingageneratingstation.FullROCsupportforothertechnologiesisgrandfatheredastheirupfrontcapitalcostsmakeupthemajorityoftheircostsanddonotchangeoncethegeneratorhasbeenaccredited;eveniftechnologyadvancesmeanthatcostscomedowninfuture.
Ifweweretoapplythesameprincipletobiomassgenerators,theproportionoftheROClevelthatisdeemedtobeduetonon-fuelcostscouldbegrandfathered,leavingtheelementthatsupportsthevariablefuelcost‘freefloating’i.e.subjecttochangeatfuturebandingreviews.Thiswouldprovidesomecomfortoverthelevelofsupportfornewplantandgiveafirmerbasisforinvestmentinthebiomasspowergenerationmarket.
Ifbiomassfuelpriceshavechangedatthetimeofthenextbandingreviewthensupportlevelsforallnewandexistinggeneratorswilltakeaccountofthenewbiomassfuelpricelevels.Existinggeneratorswouldreceivethenewlevelattributedtofuelcosts,howeverthegrandfatheredelement,attributedtonon-fuelcostswouldnotchange.Newgeneratorswouldhavetheirnon-fuelcostsgrandfatheredattheleveldeterminedbythereview.
Thisoptionshouldprovideinvestorswiththesecuritythatexistinggeneratorsreceiveaminimumlevelofsupport,allowingbankstolendonthatbasis,andanyallowancetheymightmakeforfutureuncertainbiomassprices.Italsoprovidesmoreprotectionforconsumersthanoptions1and2as,shouldbiomasspricesfall,supportcanbedecreasedwithoutriskingahiatusindeployment.
WewouldwelcomeviewswithsupportingevidenceastowhatproportionofthecurrentROClevelshouldbeattributabletothenon-fuelcosts.
Wehaveidentifiedtwopotentialwaystodeterminethesupportneededforcapexandopexelements
1. Takelevelisedcapitalandoperationalandmaintenance,netofelectricityrevenuestoestimatethelevelofROCtosupportbiomassnonfuelcosts.
2. Determinethecontributionofnon-fuelcoststototalcosts,andapplyproportionallytotheROCband.
Weareseekingevidencetosupportwhichmethodologywouldbemostappropriatetouse.
ThisoptionisnotconsideredappropriateforADandEfW.Small-scale,on-farmADgeneratorsarelesslikelytorelyonfeedstockswithfluctuatingprices,oftenusingon-farmwaste.Incaseswheretheysourcefuel,forexampleusingfoodwaste,theymaybepaidtotakethefueli.e.thefuelisnotacost,itisanincomestream.Thesame
Optionsconsidered 13
appliestoEfWplants,wherethereisoftenagatefeepaidtothegeneratorfortakingthewaste.
Furthermore,EfWplantsaremorelikelytobeabletosecurelongtermfuelcontractsunderLocalAuthorityPFIdeals.IftheyaresubjecttoanyelementofuncertaintyovertheleveloffutureROsupport,banksmayrestricttheleveloffunding,orrequirehigherratesofreturn,meaningthatfewerprojectsarelikelytobedeployedand/orathighercost.
Impact on value for money.Lessriskofexcessrentsduetolowerlevelgrandfathered.Thusbettervalueformoneyfortheconsumer.
Impact on deployment.Wearelookingforevidenceontheimpactofgrandfatheringoninvestmentdecisions.
Q8:Pleaseprovideevidenceofactualcostsandrevenuesfordedicatedbiomass,ADandEfWplants,includingevidencetodemonstratetheproportionofthesecoststhatisnonfuel?
Q9:Whichmethodologyfordeterminingasupportlevelfornonfuelcostsisthemostappropriate,andwhy?Arethereanyothermethodsweshouldconsider?
Q10:IsthisanapproachtothelevelofgrandfatheringthatcouldworkforADandEfWplants?
Q11:Whatevidencecanyouprovidetosupportwhetherthislevelofgrandfatheringcouldbringforwardinvestmentindedicatedbiomass/AD/EfW?Whatlevelsofdeploymentwouldyouexpecttosee,andwhenwouldyouexpectgeneratorstobeaccredited?
iv. No change to current policyThisoptionmaintainsourcurrentpolicy,atleastuntilanybandingchangesin2013.Thisleavesuswiththegreatestflexibilitytorespondtofuturepricechanges,andthusensuresthatconsumervalueismaintained.
Accordingtoindustry,thisoptionmayresultinahiatusindeploymentofbiomassgenerators.AnumberofdebtprovidershavestatedthattheywilldiscountROCrevenuewhenmakinglendingdecisions,meaningthattheyareunlikelytooffermuch,ifany,debtfinancing.
Itispossiblethat,intheabsenceofgrandfathering,someadditionalresourcewillstillcomethrough,assomeinvestmentscouldbeonbalancesheet,andcouldthereforeraisefinancewithoutthebenefitofgrandfatheringpolicy.SmallscaleADplantsalsohavetheoptionofoptingfortheFeedinTariff(FiTs),whichwillbegrandfathered.
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Overall,giventhefeedbackwehavereceivedtodate,wewouldexpectdeploymentofbiomasselectricitylevelstobelowerthanundertheotheroptions.
ModellingbyRedpoint(2010)wouldsuggestthatifthereisahiatusinbiomass,therewouldbepotentialtomeettherenewableenergytargetof15%ofenergyfromrenewablesby2020,throughothermeanssuchasco-firing.Thiscouldreducetheoverallcostofreachingtherenewableenergytarget.
Nonetheless,werecognisebiomasselectricitygenerationhasanimportantroletoplayinensuringadiverseenergymix.biomassisoneofthelowcarbonsolutionsthatisdispatchable–i.e.thelevelofgenerationcanbeadjustedwithaconsumerdemand–andcanhelpcountertheintermittentnatureofotherrenewabletechnologies.
Useofanaerobicdigestioncanalsoreducetheamountofmethane,apowerfulgreenhousegas,losttotheatmospherethroughdiversionofwastefromlandfillandcaptureofmethanefrommanures,slurriesandsewagesludge.
WhilstmostADprojectscouldswitchtotheFeedinTariffs,duetocomeinon1Aprilthisyear,therecouldbeahiatusinADplantdeploymentifinvestorsrequireprojectstoundergoduediligenceunderthenewscheme.Dependingonprojectfinance,thereisariskthatsomeprojectscouldpotentiallybecancelled.
Additionally,energyfromwasteisintegraltoourwastemanagementpolicy.TheEULandfillDirectiverequirestheUKtocutthevolumeofbiodegradablemunicipalwastesenttolandfillto35%ofthatproducedin1995by2020andsetsinterimtargetsfor2010and2013.
ThecurrentpolicynottograndfatherROsupportforADandEfWmaythereforeriskbothdeliveryoftheADImplementationPlanandLandfillDirectivetargets.ItcouldalsoincreasethecostofwastedisposalforLocalAuthoritiesasalternateroutesmayneedtobefound.
Q12:Doyouagreethatalackofgrandfatheringwillimpactdeploymentlevelsfordedicatedbiomass,ADandEfW,andifso,towhatextent?
Q13:IstherepotentialforothertechnologiestobedeployedundertheRO?Ifso,atwhatlevels?
Q14:Ifthereisnochangetocurrentpolicy,howeasywoulditbeforproposedADprojectstoswitchtheirfundingtoFITs?
Optionsconsidered 15
v. Treatment of BioliquidsThemajorityofbiomassstationsuseasolidfuelsuchaswoodchips,strawandpoultrylitter.Currentsupportlevelshavebeensetforsolidbiomassplantswiththesetypesoffuelsinmind.However,thereisamuchsmalleramountofbioliquidsusedsuchastalloil.Bioliquidsdevelopedforthetransportsectorsuchasbio-dieselandbio-ethanolcanalsobeusedtogenerateelectricity.
Thereisaquestionastowhetherbuildingbioliquidelectricityplantandputtingbioliquidsintoelectricityisthebestwayofhelpingustoachieveourrenewableenergytarget,wheretheymaywellhavegreatervalueinhelpingachieveourtransporttargetandindecarbonisingheat.Assuch,wearenotproposingtoprovideanygrandfatheringforgeneratorsusingbioliquidsunderanyoftheoptionsabove.
Thiswillprovidetheflexibilitytoamendsupportlevelsforbioliquidsatfuturebandingreviewsforbothnewandexistinggenerators.
Q15:Doyouagreethatbioliquidsshouldnotbegrandfathered,andwhy?
16 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation
4.Preferredoption
Basedontheevidencepresented,itseemsclearthataonesizefitsallsolutionisnotappropriateforbiomasselectricity.Thusweareproposingasplitsolution.
Fordedicatedbiomass,wearemindedtograndfathertheproportionofnon-fuelcosts.Dedicatedbiomassdevelopersneedaflexiblesupportregimethatcanadapttochangesinbiomassprices,whilstensuringalevelplayingfieldismaintainedbetweencompetinggenerators,accreditingatdifferenttimes.Thiswillensuremarketdistortiondoesnotoccurthroughfixingsupportforfuelsataparticularrate.Thisisalsonecessarytoprovidevalueformoneyforconsumers.
ADandEfWplantsontheotherhadappeartohavelessofanissuewithfuelpricevariabilityastheyareabletonegotiatelongertermfuelcontracts.
Wearethereforemindedto:
• grandfathersupportatcurrentlevelsforADandEfWgenerators;and
• grandfatheraminimumlevelofsupportfordedicatedbiomass,setastheproportionofcostsattributabletononfuelcosts.
Thiswouldapplytouseofbiomass,butnotbioliquids.InlinewiththegrandfatheringprinciplesforothertechnologiessupportedundertheRO,supportwouldbegrandfatheredfromthepointofaccreditation.
OurproposedgrandfatheringpolicyforADandstandardEfWprojectsmeansthataccreditedgeneratorswouldreceivethesamelevelofsupportreceivedonaccreditationfortheremainderoftheirlifetimeintheRO.
DedicatedbiomasswouldhaveaminimumlevelofsupportgrandfatheredonaccreditationandwouldreceivethislevelfortheremainderoftheirtimeintheRO.Ifsupportforfuelcostsfordedicatedbiomassareincreasedatafuturebandingreview,allexistingprojectswouldbebandedupsothatallgeneratorsreceivethesamelevelofsupportforfuelcosts.
However,ourproposedpolicytograndfatheraminimumlevelmeansthat,shouldbandsfordedicatedbiomassbeloweredtolessthantheminimumgrandfatheredlevelatanyfuturebandingreview,anygeneratorsaccreditedbeforethebandingreviewcomesintoeffectwouldreceivetheminimumlevel,withnewentrantsreceivingthenew,lower,rate.
Weproposetosettheminimumlevelfordedicatedbiomassastheproportionofcostsattributabletononfuelcosts.Thefreefloatingelementwillbebasedontheproportionofcoststhatareattributabletoongoingfuelcosts.Wewouldwelcomeviewsastowhatthisproportionorlevelshouldbe.
Preferredoption 17
Webelievethisproposalgivesthebestbalancebetweenensuringdevelopersandinvestorshavethecertaintytheyneedtoinvest,whilstretainingenoughflexibilitytocopewithpotentialvariationsinfuturebiomassandelectricityprices,somaintainingvalueformoneytotheconsumer.
TheGovernmentiscommittedtomeetingthe15%renewableenergytargetby2020,andthisoptionshouldhelpachievethat.Anydecisionongrandfatheringofsupportforbiomasswillneedtobemadeinthecontextofafullvalueformoneyanalysis,toensurethatconsumervalueismaintained.
Q16:Doyouagreethatthisproposaloffersthebestbalancebetweenvalueformoney,investorconfidenceandflexibility?Ifnot,pleasegiveyourreasonsandstatewhatalternativeoptionyouthinkwouldbemoreappropriate.
Q17:DoyouagreethatseparatesolutionsareneededforADandEfWanddedicatedbiomass?Pleaseprovideyourargument
Q18:Doyouagreethatthisoptionwouldallowcurrentinvestorstogoaheadwiththeirplans?Whatdeploymentlevelswouldyouexpectandwhy?
Q19:WhatbuildtimeswouldyouexpectforAD,EfWanddedicatedbiomassgenerators?
Q20:Howshouldsupportforadvancedthermaltechnologies,suchasadvancedgasificationandadvancedpyrolysis,betreated?Shouldwegrandfatherthenonfuelcosts,orgrandfatheratcurrentlevels?Pleaseprovideyourargument.
18 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation
5. CombinedHeatandPowerand EnergyCrops
Underthecurrentbandingstructure,generatorswithCombinedHeatandPower(CHP)receiveanadditional½ROCuplift,uptothemaximum2ROC/MWhsupportlimit.Thismeansthatadedicatedbiomassgeneratorcanreceive2ROCsperMWhiftheyareaCHPgeneratorontheirgoodqualityelectricityoutput.Likewise,ifageneratorusesenergycrops,theyreceivea½ROCupliftcomparedtoregularbiomass.
i. Combined Heat and Power (CHP)TheCHPuplifttakesintoaccountthehigherupfrontcapitalcostsofCHPtechnologies.However,theRenewableHeatIncentive(RHI),duetobeimplementedinApril2011,willprovidefinancialsupportfortheheatgenerationofCHPstationsinthefuture.Detailsoftheschemearecurrentlybeingconsultedon,includingwhethertograndfathersupport.TheconsultationcanbeviewedonDECC’swebsite:http://www.decc.gov.uk/en/content/cms/consultations/rhi/rhi.aspx
TheproposedtransitionarrangementsfromtheROtoRHIforCHPgeneratorsare:
• CHPstationsaccreditedunderRObeforethepublicationoftheRenewableEnergyStrategy(i.e.before15July2009)willcontinuetoreceivetheROplusuplift,butwillnotbeeligiblefortheRHIontheirheatoutput.
• ROeligibleCHPstationsinstalledonorafter15July2009willbeofferedaoneoffchoicetoclaimtheROplusuplift,ortheRO(minusuplift)plustheRHI.OperatorsofCHPstationswillbeabletomakethischoiceatanypointupuntil1April2013
• CHPstationsaccreditedfrom1April2013willnolongerbeeligibleforthe½ROCCHPupliftontheirgoodqualityelectricityoutput.However,theywillstillbeabletoclaimROCs(minusuplift)ontheirelectricityoutputandtheRHIontheirheatoutput.
However,theproposedtransitionarrangementsareouttoconsultationandthereforesubjecttochange.Assuch,wewouldnotwanttosetagrandfatheringpolicyontheCHPupliftwithintheRO,untilboththetransitionalarrangementsaredecidedon,andadecisionhasbeenmadeonwhetherornottograndfathersupportundertheRHI.
WewillconsultfurtheronthisaspartofthestatutoryconsultationfortheRenewablesObligationOrder2011,laterthisyear.
CombinedHeatandPowerandEnergyCrops 19
ii. Energy CropsWhenbandingwasintroduced,theGovernmentwaskeentoencouragethedevelopmentoftheenergycropsupplychain.Thisremainsaveryimmaturemarket,andtheadditional½ROCperMWhforgeneratorsusingenergycropswasaimedatprovidingsupporttothesesupplychainsandtosupportthehigherfuelcost.Sinceweareproposingtograndfathernonfuelcosts,wedonotproposetograndfathertheenergycropuplift.
Assupplychainsmatureinthefutureitshouldbepossibletoreduceorremovethisuplift.Assuch,ifwedonotfeelthatitwouldbeappropriatetograndfatherthissupport,giventhatfuelpricesaresubjecttovariationovertime.
Q21:Doyouagreethattheenergycropupliftshouldnotbegrandfathered?
20 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation
AnnexA–HowtheROworks
• TheROworksbyplacinganobligationonlicensedelectricitysupplierstosourceaspecifiedandannuallyincreasingproportionoftheirsalesfromrenewablesources,orpayapenalty.
• Theleveloftheobligationis9.7%forthe2009/10obligationperiod,andwillriseto11.1%for2010/11.
• GeneratorsareissuedwithRenewablesObligationCertificates(ROCs)foreverymegawatthour(MWh)ofeligiblerenewableelectricitytheygenerate.Asof1April2009,whenweintroduced‘banding’,differenttechnologiesreceivedifferentnumbersofROCsperMWh.Thisreflectsdifferencesbetweentechnologiesincludingthecostofgenerationandpotentialforlarge-scaledeployment,andprovidesincreasedsupporttotechnologiesthatarelesswell-developedorfurtherfromthemarket.
• GeneratorsselltheirROCstosuppliersortraderswhichallowsthemtoreceiveapremiuminadditiontothewholesalepriceoftheirelectricity.ROCscanbesoldwithorwithouttheelectricitytheyrepresent.
• SupplierssatisfytheirobligationbypresentingROCstoOfgem,whoadministerthescheme.WheretheydonotpresentsufficientROCstheyhavetopayapenaltyknownasthebuy-outprice.Thisissetat£37.19/MWhfor2009/10(andlinkedtoRPI).
• ThismoneyisheldbyOfgeminthebuy-outfunduntiltheendoftheobligationperiod,whenitisrecycledtosupplierswhopresentedROCsonapro-ratabasis.
Department of Energy and Climate Change www.decc.gov.ukFirst published March 2010. © Crown copyright. URN 10D/671