Will biomass CHP be side-lined under CfD?

Unlike many other renewables it’s a base load solution - not dependent on sun and wind - and we have a plentiful supply of waste wood in the UK which needs to be recycled in one way or another. Landfill isn’t an option.

But as we move from the Renewable Obligation Certificate (ROC) scheme with the Renewable Heat Incentive (RHI) to Contracts for Difference (CfD) it looks like biomass renewables may be getting side-lined in the bid for subsidies. That can’t be good.

So what are CFDs?

As part of the government’s electricity market reforms to increase the percentage of energy from renewable sources and to reduce carbon emissions, a new system of long term contracts in the form of CfD has been introduced to replace the earlier ROC scheme. The purpose is to incentivise investments in new low-carbon electricity generation in the UK by providing stability and predictability to future revenue streams for investors.

Under the scheme electricity generators will bid for and enter into CfDs with the Low Carbon Contracts Company (LLCC) a government-owned business which will manage the contract. This will enable a generator to stabilise its revenues at a pre-agreed level (the Strike Price) for the duration of the contract. The whole idea is to subsidise and encourage investment by reducing a generator’s exposure to volatile wholesale prices and at the same time protect consumers from overpayment.

Albeit somewhat complicated as these things tend to be, it sounds good so far, at least on paper, providing it leads to an equitable framework of support to all renewables to ensure we achieve a desirable balanced energy mix.

We are currently transitioning from ROCs, which will finally close to new projects on 31 March 2017, subject to some grace period arrangements. From that point generators will be required to bid for CfD funding in competitive auctions for millions in annual government funding, split across three pots:

  1. established technologies such as onshore wind and solar
  2. less established technologies including offshore wind and biomass CHP
  3. biomass conversion

First CfD auctions

The first CfD auction round took place earlier this year and the early signs already are that onshore wind will dominate to the exclusion of biomass CHP, smothered by a process that appears to favour big business. If solar PV fared poorly, biomass CHP was worse.

Of the 27 renewable energy contracts awarded five were waste-related. This included three advanced conversion technology (ACT) or gasification projects and two energy-from-waste projects. But the Pot 2 allocation was totally dominated by two offshore wind projects totalling 1,162MWe and it meant that no CfDs were awarded to biomass CHP projects which were effectively squeezed. It was also notable that budget wasn’t allocated for Pot 3 biomass conversion projects at this stage.

Negative signals

Already this is sending a signal to potential investors who will be unwilling to invest time, energy and capital in planning potential biomass investments if the CfD process remains unsupportive. This is despite the fact that biomass CHP utilising domestic virgin and waste wood is an excellent way of generating local electricity and heat, and one that is far more efficient than electricity generation on its own.

What’s more, UK waste wood is an abundant resource. An estimated 10 million tonnes are produced every year, including forestry residues and other sources. By contrast, a typical medium sized CHP plant can convert 6,000 to 80,000 tonnes of British waste wood (including grades A, B & C, forest thinnings, stumps and bark) and other low quality waste wood into 170,000MWhr of renewable thermal energy, each year. Currently it’s a resource we are squandering - much of it exported to the benefit of biomass projects in Northern Europe.

According to Dr Tim Rotheray, director of the Association of Decentralised Energy, “the design of the (CfD) scheme currently makes biomass CHP near-uninvestable.”

Part of the reason is that biomass CHP is dependent on its heat consumer. Under the RO scheme if a CHP plant lost its heat consumer it would continue to receive some subsidies as a renewable electricity producer. Under CfDs all support for both renewable electricity and heat drops to zero if the heat consumer moves away.

The picture may change once the next budget allocations are made and the next round of auctions takes place, but we are already seeing delays here, and therefore further uncertainty. The way funding is split into different competing pots isn’t helping.

Of course, of the 27 projects that secured contracts in the first round it’s going to be very interesting to see how many of these were realistic auction bids and whether they can in turn progress these from paper to real projects, in terms of financing at least, when the 12 month deadline to submit their Milestone Requirements Notice is up.

Even before the CfD scheme, which now forces competing technologies to bid for funding, attracting the right investment to carry projects forward was challenging. It’s not that investors aren’t hungry to invest. As a provider of both fuel handling and combustion solutions for biomass CHP we spend our time talking to almost as many interested investors as we do project owners.

They look predominantly for proven technology, certainty over fuel supply, planning consents, grid connections, heat consumers and a robust procurement method. With all these lined up projects have a good chance of proceeding, but not if government contracts are only available through an unbalanced auction system that pitches competing technologies unfavourably against each other.

So what’s to be done?

Either we continue down the route we seem to be taking and, in the process, ignore the goal of a balanced energy economy and the benefits of waste wood biomass solutions, or tweaks to the CfD are introduced to make it more open to smaller, independent generators as well as big business.

Government support to make it easier, not more difficult, is what will make a difference.

Matt Drew Saxlund MD

Matt Drew, managing director, Saxlund