consultation on the grandfathering policy of support for · 6 consultation on the grandfathering...

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.

E-mailresponsesarepreferred.Pleasesubmitrepliesto:rfi@decc.gsi.gov.uk.Alternatively,hardcopyrepliesshouldbesentto:

RFITeam,RenewablesDirectorate,DepartmentofEnergyandClimateChange,4thFloor,AreaA/B,3–8WhitehallPlace,London,SW1A2HH.

Additional copies Youmaymakecopiesofthisdocumentwithoutseekingpermission.Furtherprintedcopiesoftheconsultationdocumentcanbeobtainedfrom:

RFITeam,RenewablesDirectorate,DepartmentofEnergyandClimateChange,4thFloor,AreaA/B,3–8WhitehallPlace,London,SW1A2HH.

Telephone:03000686833

Anelectronicversioncanbefoundat:http://decc.gov.uk/en/content/cms/consultations/grandfathering/grandfathering.aspx.Otherversionsofthedocumentareavailableonrequest.

Confidentiality and Data Protection Whenthisconsultationends,membersofthepublicmayaskforacopyofresponsesunderfreedomofinformationlegislation.

Ifyoudonotwantyourresponse–includingyourname,contactdetailsandanyotherpersonalinformation–tobepubliclyavailable,pleasesaysoclearlyinwritingwhenyousendyourresponsetotheconsultation.Pleasenote,ifyourcomputerautomaticallyincludesaconfidentialitydisclaimer,thatwon’tcountasaconfidentialityrequest.

Pleaseexplainwhyyouneedtokeepdetailsconfidential.Wewilltakeyourreasonsintoaccountifsomeoneasksforthisinformationunderfreedomofinformationlegislation.But,becauseofthelaw,wecannotpromisethatwewillalwaysbeabletokeepthosedetailsconfidential.

Wewillsummariseallresponsesandplacethissummaryonourwebsiteatwww.decc.gsi.gov.uk.Thissummarywillincludealistofnamesoforganisationsthatrespondedbutnotpeople’spersonalnames,addressesorothercontactdetails.

Help with queries Pleasedirectanyqueriesaboutthisconsultationtoourdedicatede-mailaddress:rfi@decc.gsi.gov.uk,orinwritingto:

RFITeam,RenewablesDirectorate,DepartmentofEnergyandClimateChange,4thFloor,AreaA/B,3–8WhitehallPlace,London,SW1A2HH

Telephone:03000686833

2 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation

Ifyouhaveanycommentsorcomplaintsabouttheconsultationprocess,pleaseaddressthemto:

FerryLienertDECCConsultationCoordinatorArea6A3WhitehallPlaceLondon,SW1A2AW

Email:Consultation.coordinator@decc.gsi.gov.uk

AcopyoftheCodeofpracticeonConsultationscanbefoundat:www.decc.gov.uk/Media/viewfile.ashx?FilePath=Consultations\1_20090408170031_e_@@_codepracticeconsultation.pdf&filetype=4

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.

6 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation

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

8 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation

• 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

10 ConsultationonthegrandfatheringpolicyofsupportforDedicated Biomass, Anaerobic Digestion and Energy from Waste under the Renewables Obligation

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