Lynemouth likely to pass muster with the European Commission

The Commission may well tweak the subsidy regime the UK government has agreed with RWE to convert Lynemouth to biomass, but it is unlikely to block it, says Alan Osborne.

The renewables sector is quietly confident the European Commission will accept that UK support for the conversion of RWE’s Lynemouth power station from coal to biomass complies with European Union state aid law.

This is despite the fact that the Commission has launched a detailed inquiry into the detail of the government’s decision. The broad consensus is that some changes may be required of the subsidy system, but it will not be thrown out.

Brussels announced on 19 February that it would be conducting a detailed review of Lynemouth, questioning in particular the projected returns of the plant, and this has caused problems for the principals involved.

“It’s stalling our ability to put the financial decision together but we’re very hopeful. We’ve invested lots of time and money and it’s shovel-ready – everything is in place, planning consents, etc, to begin this conversion,” says RWE spokesperson Kelly Brown.

In May last year the Lynemouth plant was awarded one of eight renewable electricity investment contracts under a scheme run by the Department of Energy and Climate Change (Decc), in a package touted by the UK as a signal of its green credentials. Six projects have thus far secured Brussels’ approval for their state aid element. EU competition rules give the European Commission the right to block or order a repayment of subsidies it considers unfair or that could distort EU markets. Another project, the Drax Unit 3 biomass conversion, is still being assessed by the Commission.

Brown says the inquiry is holding up progress. An early contract had been approved by the UK government in May last year “to enable us to make the final investment decision”, but she says: “Unless you’re absolutely sure that this [state aid] issue won’t hinder the commercial base, you can’t move forwards.” Brown says RWE had been hoping for resolution since June 2014 and no-one will proceed until the issue is resolved.

Explaining in a background paper the reasons for its “in-depth investigation” into the Lynemouth plant, the Commission said it considered that the financial calculations and estimates regarding key cost parameters “may be too conservative”. At this stage, the Commission “therefore has concerns that the actual rate of return could be higher than the parties estimate and could lead to overcompensation”.

Among the parameters considered were the load factor of the plant (the actual electricity produced in a year compared with the maximum possible), its efficiency and the cost of wood pellets.

The amount of wood pellets to be imported from overseas is “considerable, as compared to the volume of the global wood pellets market”, said the Commission. “Subsidising such a large volume of wood pellets could significantly distort competition in the biomass market.” In conclusion, the Commission said it was “concerned that on balance the measure’s negative effects on competition could outweigh its positive effect on achieving EU 2020 targets for renewable energy”.

The Commission paper said it would investigate further “to make sure the public funds used to support the project are limited to what is necessary and do not result in overcompensation. It will also assess whether the positive effects of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass”.

In state aid cases such as these, it is not uncommon for Brussels to demand changes in the project as a condition for allowing it.

However, the Renewable Energy Association (REA) says it is does not think the Commission’s concerns about the wood pellet market are justified. REA spokesman James Court says: “We don’t think there’s a distorting effect. They’re using very different materials.

“These are waste products, things being swept up and utilising wood being used for sustainable forests, so we don’t feel that they’re contributing to any distorting effect.”

Brown insists that in any case there is enough wood pellet capacity to serve the plant and others. “We aren’t the only station that will be sourcing wood pellets. There’s also the biomass conversion at Drax,” she says. “We wouldn’t be proceeding with the project if we didn’t believe there was enough supply in the wood pellets market.”

Court says that while the delay may be frustrating for RWE, “it’s important for the industry to ensure that everything’s been done well.

“We understand this is a routine part of the state aid process and while there will be a delay. We believe the Commission will recognise the significant benefits biomass power can bring to the UK’s energy mix.”

Yizhou Ren, a Commission spokesman for competition, tells Utility Week that “there are no deadlines in state aid investigations, unfortunately, so we cannot anticipate the timing of a decision. The length of a procedure can depend on a number of different factors such as the complexity of the case and the level of co-operation from the member state concerned”.

A Decc spokesperson says the department is relatively unconcerned, calling the state aid decision “a normal part of the Commission’s process”.

Court adds that he does not think the Commission is trying to delay the project unnecessarily – for instance by postponing a decision until after the UK’s May general election. That election could result in a different party taking the reins at Decc (the current secretary of state is Liberal Democrat Ed Davey).

Lynemouth is also likely to escape the politicisation of the Hinkley Point C nuclear project, Court says.

“I think  there’s probably less national state or member state involvement in this than in Hinkley Point, which is much more controversial. I don’t think this is a decision where there is as much member state disagreement,” Court says.

Converting old power stations into something more sustainable is “something we ought to be doing, and biomass is one of the most cost-effective ways of doing this”, he says.

Alan Osborne is a freelance journalis