Biomass is too risky for most

The government has agreed a generous subsidy with Drax to convert to biomass, but that deal is not available for anyone else, and new plant is too risky for most investors, says Nigel Hawkins.

In the 1980s, the iconic 3,960MW Drax power station flew the flag for the coal sector. Almost 40 years later, it seems set to play the same role for biomass.
Originally, the government placed its hopes of kick-starting biomass investment on the Arbre project, centred on the Eggborough power station. But the Arbre project collapsed and closure now beckons for Eggborough.
Subsequently, there have been repeated changes of policy, especially between coal-fired conversion and dedicated new-build biomass. With more demands placed on green energy funding, it is hardly surprising that few biomass projects have got off the ground.
But, now there is a new biomass poster boy: Drax.
Importantly, for Drax, the government’s biomass strategy has switched sharply towards supporting the conversion of coal-fired plants whose closure is threatened either by a substantial rise in the carbon price or by the impact of the Large Combustion Plant Directive.
Perhaps, too, the government has recognised that there are serious difficulties – short of offering monster subsidies – in kick-starting investment in dedicated biomass plants, although a few have materialised over the past decade.
In Drax’s case, last month the government reached for its cheque book by guaranteeing a support price of formidable generosity, namely £105/MWh, for the two units earmarked for biomass-fuelling – broadly twice the current electricity wholesale price.
By comparison, the nuclear strike price was set at £92.50/MWh – and that will underpin the financing of a new £16 billion nuclear complex at Hinkley Point.
No wonder Drax Power chief executive Dorothy Thompson was pleased with the outcome. So, too, were the markets. Drax Power’s shares took off immediately after the announcement and finished 2013 up 47 per cent on the year, way above any other UK utility, most of which had lacklustre share price performances.
While those backing the Drax biomass project will be very satisfied, the prospects for new biomass plants elsewhere are far less bright. Aside from Eggborough, Npower’s owner, RWE, has scrapped its plans to convert the large coal-fired plant at Tilbury to biomass. It cited commercial reasons for this decision – the finances simply do not stack up. At Ironbridge, Eon has undertaken conversion – from coal – of some units but this is only a short-term expedient, not a long-term biomass commitment.
In short, only Drax seems likely to receive the necessary financial subsidies to justify wide-scale – and durable – conversion from coal to biomass.
Neither are the prospects looking particularly favourable for new dedicated biomass plants, especially with the government’s continually evolving biomass policy. Some biomass projects have secured financing and been built in recent years, but in capacity terms they are very small beer compared with the behemoth that is Drax.
One of the most well-known is the 39MW biomass plant at Thetford, fuelled by chicken litter. And at Ely, a 38 MW straw-fuelled plant is in operation. The well-established combined heat and power plant at Slough, now owned by SSE, continues to operate, and over the years has been fuelled from various renewable sources. SSE is currently in the process of modernising the generation facilities on the site. Encouragingly, the 100MW Helius Energy biomass project at Avonmouth is also making progress, with financial close expected this year.
Nevertheless, despite the considerable interest in building biomass plants, many have been “parked”. The reasons are various, but generally involve either planning problems or a lack of finance.
The UK Biomass Energy Centre has a raft of projects on the drawing-board. Some have been there for years. Most notably, perhaps, are the three Forth Energy projects in Scotland (at Dundee, Grangemouth and Rosyth) where wood is proposed as the fuel. Despite several years of discussion, none of these plants has been built.
In recent months, the government has placed an effective 400MW cap on new dedicated biomass by limiting financial support to that capacity level. While this cap is partly financially-driven, there are real doubts as to how green some proposed biomass schemes actually are – especially if they are large.
In Drax’s case, for example, large volumes of wood are to be shipped from the US to east coast ports, before being transferred to the site where large fuel storage sheds are being erected.
More generally, funding a new dedicated biomass plant faces many challenges. Aside from the standard difficulty of securing planning permission at a site that is commercially viable, any potential investor has to consider the “big numbers”.
First, the capital expenditure cost per megawatt for a biomass plant is considerable, and compares unfavourably with most other energy sources.
Second, like gas-fired plant, biomass fuel input costs will be a high percentage of total generation costs. By contrast, the operating costs of an onshore wind plant are
minimal.
Third, the subsidy per megawatt has to be sufficiently high – and enduring – to yield a rate of return that exceeds the cost of capital, which will reflect the many risks – such as a premature reduction in the subsidy payment or interruption to fuel supplies – associated with investment in new biomass plant.
In seeking to raise finance, many biomass plant promoters fall short in meeting the necessary financial criteria. Hence, in many cases, financial close is not achieved and the project remains on the drawing board.
There is real hope, though, that the Green Investment Bank may play a key role in driving ahead some stalled biomass projects, now that it is gearing up its activities.
Nevertheless, despite Drax and the laudable completion of a handful of agricultural biomass projects, UK biomass still faces challenging times.