From the uplifting words of Barack Obama in his inauguration address to the more mundane wordsmiths of the British statutory draftsmen in the U.K.’s Renewables Obligation Order, it seems like the harnessing of energy from “the soil” or biomass and energy crops is gathering political support and gaining momentum on a global basis.
It is perhaps not appropriate to describe the generation of heat and power from the burning of trees and plants as an emerging industry. However, recent developments in this area and the political need to secure non-fossil-fuel energy sources means that the attention focussed upon biomass and energy crops is now greater than at any time since Bronze Age man started to burn outcrop coal.
Biomass and energy crops can also mean different things to different people. For the purposes of this article, I shall adopt the terminology as used in the draft U.K. Renewables Obligation Order of December 2009, in which biomass is defined as:
“fuel used in a generating station where at least 90 per cent of its energy content is derived from relevant material (that is to say, material which is, or is derived directly or indirectly from plant matter, animal matter, fungi or algae).”
Energy crops are further defined as meaning:
“A plant crop planted after 31 December 1989 which is grown primarily for the purpose of being used as a fuel or which is one of the following:
- miscanthus giganteus;(a)
- salix (also known as short rotation coppice willow);(b)
- populus (also known as short rotation coppice (c) poplar).”
In the last 18 months we have seen a proliferation of biomass projects notable for their divergence in scale and technologies.
Located next to the deep-water harbour at Port Talbot in South Wales, the Port Talbot Renewable Energy Plant is notable for its size. Generating 350 MW by the combustion of clean wood chip fuel, the plant is intended to supply enough renewable energy to supply one in every two homes in Wales. The plant has received s36 consent under the U.K.’s Electricity Act and appears to be proceeding to a financial close.
The 73 MW plant developed by the AIM-listed Helius Energy at Stallingborough in Humberside received considerable media attention in September 2008, when it was acquired by RWE Innogy for a purchase price in excess of UK£28 million. The plant was permitted but not built, and the purchase price represented a sum in excess of UK£380,000 per MW.
Helius has also reported plans to develop a further 100 MW plant to be located in Avonmouth Docks in the U.K.
At the other end of the scale, a number of developers seem to be developing local and small-scale projects on a portfolio basis.
One such is the Virginia-based renewable energy private equity fund. Intrinergy, which in joint venture with Shanks closed the construction of the Valorbois SMW CHP biomass and wood pellet facility in Belgium in October 2008.
It would therefore appear that two models are emerging in the marketplace: the large-scale power plant owned and developed by long-standing players in the power market or the local plant as part of a portfolio of similar projects developed by entrepreneurs.
Each project has its own challenges, but there is significant commonality between the drivers of such projects and the particular challenges that they face.
The 23, January 2008, Renewables Directive of the EU is looking to create a regulatory framework by which the EU as a whole will generate 20% of its energy needs from renewable sources by 2020. Subject to what happens at COP 15 in Copenhagen this coming December, it may well be that these targets increase post 2020.
In the U.K., the Energy Act 2008 sets out a series of measures that seek, in part, to meet the obligations imposed by the Renewables Directive.
It is clear from the provisions of the Energy Act that biomass and energy crops have been identified as important elements of the U.K.’s meeting its obligations under the Renewables Directive.
As has been widely reported, the Energy Act has introduced a statutory framework by which relevant Secretaries of State can introduce bandings for Renewable Obligation Certificates (“ROCs”) favouring different renewable energy sources and emerging technologies utilising those sources. In summary, the current proposals for ROC banding for biomass and energy crops are as follows:
Co-firing of energy crops 1 ROC
Co-firing of biomass with CHP 1 ROC
Dedicated biomass 1? ROCs
Dedicated biomass with CHP 2 ROCs
Dedicated energy crops with CHP 2 ROCs
Additionally, the Energy Act contains further provisions to encourage, amongst other renewable sources, biomass, particularly:
- A feed-in tariff for sub–5 MW plants, thereby giving (a) a guaranteed, certain and easily collectable income for power generation; and
- A renewable heat incentive for heat used from a (b) biomass CHP plant.
The U.K.’s provisions are replicated across the EU. Indeed, the U.K. has for some time been behind other EU member states in terms of the support regimes in place. Particularly, the U.K. has been dragging its feet to implement support regimes for heat generated from renewable energy sources. I acted as counsel on a biomass CHP plant in Europe last year where more income was derived from the sale of green certificates for heat than for power.
With support regimes in place, there do, however, remain a number of problems with getting biomass and energy crop power projects closed.
However, the industry is not without its difficulties.
The primary problem with biomass and energy crops is the nature of the feedstock itself.
The large- and small-scale models for biomass power plants clearly demonstrate the challenges being faced by biomass projects.
It is no coincidence that the Port Talbot, Stallingborough and Avonmouth plants are all located in ports. Put simply, the U.K. does not produce the necessary quantities of virgin timber to operate these plants. Accordingly, they require the shipping of significant quantities of materials over long distances.
The Port Talbot plant has been the subject of considerable debate in South Wales, with a certain amount of questions raised about how climate change can be reversed by shipping large quantities of timber from North America.
Whether biomass power plants of 350 MW are politically sustainable remains to be seen. What is clear is that transportation continues to attract the attention of the EU with regard to its emissions and entry into the European Emissions Trading System (“ETS”). Clearly the EU has taken the easy option of including aviation from 2012 within the ETS, but it is surely only a question of time before shipping is also included.
It would be ironic if large-scale biomass became unaffordable because of cost increases caused by the introduction of an emissions cap and trade system for shipping.
Also of concern is the nature of the suppliers of biomass to the power sector. As has been the experience of the biofuels industry with biomass, we have the meeting of two industries, agriculture/forestry and energy, that have not traditionally done business together.
The terms of business that both industries have traditionally traded upon are materially different, and on the supply side, the financial strength of counterparties has raised significant issues.
Those projects that have closed have either not utilised project finance or have required the banks to take a view. On projects I have worked upon, bankers have managed to get themselves comfortable by an independent analysis of the local market. Therefore, they have been able to reach a view that even if the supplier disappears, there will be a significant volume of locally supplied biomass to ensure that the plant can continue to operate. In reality, it is not sustainable to build a small project some distance from your fuel source.
A number of the traditional commodity houses are starting to look at the biomass/energy crop market to see if there is a role for them in such transactions. Whether the price they seek to extract from taking such a role is detrimental to the project as a whole remains to be seen.
Again, it is no coincidence that the large-scale biomass plants have been designed to use long-established, tried and tested technology - in reality, incineration. In these difficult economic times, raising of debt-finance is hard enough - to seek UK£100 million plus for an emerging technology is impossible.
Indeed, it is proving to be difficult to raise debt on a small scale for new technologies, but a couple of solutions have emerged:
- Build the plant with equity - from a developer’s (a) point of view, there is not much point in building single plants. The corporate infrastructure costs of developing a power project are only sustainable if a portfolio is going to be developed. By any analysis, such a portfolio is going to require a significant equity injection. If equity for a portfolio can be raised at an early stage, then the first project can be 100% equity-financed for construction and then refinanced on a traditional debt/equity basis once the technology has been proved to work. Once the technology is proven then the portfolio can be rolled out into the market.
- Obtain export credit guarantees. It is a fact of life (b) that most of the technologies used in the biomass industry emanate from Germany or Scandinavia. The wind industry has already seen German and Scandinavian government-backed financial institutions essentially providing performance guarantees for plants manufactured in their own jurisdictions. Given the terms of reference of the institutions concerned, there is no reason why such guarantees could not be provided for biomass technology. Clearly, the attitude of funders would be dramatically different if they were aware of government-backed performance guarantees for the technology concerned.
The final problem emerging for the sector is the availability of debt. With the debt markets remaining very constrained, it is proving extremely difficult to finance projects seen as high risk in terms of fuel supply and technology risk or where a new entrant lacks a long-term relationship with its proposed funders.
Again, a number of practical solutions seem to have emerged in terms of raising debt. These have included the following:
- See if you can find a link between your technology (a) supplier and your proposed funder. If you are using German technology, see if you can find a German bank.
- Try to raise political supplier/access grant monies to (b) reduce the debt levels. Do everything that you can to boost the covenant of
- your fuel supplier, and consider selling it an equity interest in the project - a bank will be attracted to the fuel supplier’s having a financial interest in the success of the project.
- Locate close to your fuel supply and your off-taker.
Whilst there are clearly challenges facing the biomass/energy crop power sector, this is an area that has, to date, received significant support. With governments around the world identifying climate change and clean technology as a route out of the global financial crisis, it is an area where one can only expect to see more support emerging.
A well-structured project stands every prospect of meeting the expectations of those supporting its development.