Do dedicated biomass electricity generating plants make financial sense? E.ON UK has recently announced a plan to build a second power station using 100% energy crops as fuel. The first investment – a £90m power plant at Lockerbie in Scotland – will open within the next few months. The second plant, still only in the planning stage, will be in Sheffield on the site of a previous generating station. Both power plants will use wood from forestry and specially planted willow but Sheffield will also burn waste wood from other sources, such as industrial pallets. These are the first two large-scale plants in the UK if we exclude the ill-fated Arbre plant of several years ago. (Arbre was an extremely advanced wood chip gasification plant built in Yorkshire. It was never fully commissioned.)
By the standards of the electricity industry, the E.ON investments are tiny. The proposed Sheffield plant has a price tag of £44m compared to £1bn for E.ON's intended investment in the new super-critical low(ish) emissions coal power plant at Kingsnorth in Kent. Nevertheless, Lockerbie and Sheffield do appear to make good financial sense, at least in part because of the revisions to the renewable energy subsidy scheme announced in the government's June 2007 Energy White Paper.
This article looks at the prospective financial return from operating a power plant burning wood and other energy crops.
Some background Most coal-fired stations in the UK mix a small percentage of biomass into the coal stream. Usually less than 2% of raw material going into the combustion process, biomass is attractive because it reduces the carbon footprint of the plant and generates valuable Renewable Obligation Certificates (ROCs). The material used is usually waste agricultural products from outside the UK, such as olive stones or oil palm residues.
Some of the largest coal-fired stations, such as Drax and Didcot A, have announced plans to increase the portion of biomass in their fuel mix to 10% after investing in equipment to pulverise the biomass so that it mixes effectively with coal and does not affect power station performance. Drax, which is responsible for generating about 7% of the UK's electricity, intends eventually to burn about 1.5 million tonnes a year of biomass, including a large amount of locally produced wood and other bioenergy crops such as miscanthus (also known as elephant grass).
Electricity generators in other European countries operate dedicated simple bioenergy plants. The E.ON proposals mirror these, and they do not appear to use new and relatively untried technologies, such as the gasification process that the Arbre plant was intended to pioneer. Gasification may raise the operating efficiency of the plant, but involves greater risk that the plant will not work as intended.
The E.ON plans E.ON UK announced that it would develop a dedicated biomass-burning power station at Lockerbie in the Scottish Borders in 2005. In June 2007, the plant started testing its boilers prior to full operation. It is said to be 'on budget and on time'. The plant is scheduled to produce about 44 MWh, or about 1% of the maximum output of Drax, the UK's largest power station. The plant will need about 220,000 tonnes a year of fuel.
Lockerbie is close to sources of wood from forestry plantations, and the plant will use waste products from this source. E.ON and its contractor Renewable Fuels have also been writing contracts with local farmers to supply energy crops, primarily Short Rotation Coppice (SRC) willow.
E.ON's Sheffield proposal is for a smaller 25 MWh plant. The sources of wood for the proposed project will include industrial wastes as well as energy crops. Situated in an industrial area of the city, the plant may be able to supply heat to local manufacturing sites as well as electricity to the grid. The budget for this plant is £60m.
As far as we can tell, these two generating stations are the only proposals for dedicated bioenergy plants in the UK.
ROCs and ROC banding The Renewables Obligation encourages generators to use renewable sources of fuel by awarding tradeable certificates to power plants not using fossil fuels or uranium. Each megawatt hour (MWh) generates one certificate, worth a minimum of about £33, but with a current auction price of about £45. A plant using bioenergy qualifies for ROCs.
In the 2007 Energy White Paper, the government announced firm plans to change the basis on which ROCs were awarded to encourage new technologies and reduce subsidies to electricity generators using well established and cost-competitive techniques such as burning the methane from landfill sites. The banding scheme will award one ROC per MWh for energy crops burned in coal or oil power stations, but two ROCs per MWh for power plants specially built to use only renewable fuels. This higher level would cover Lockerbie and Sheffield. As we will show below, this increased subsidy through the ROC system has a very important impact on the economics of a bioenergy plant.
Bioenergy and biofuels EU obligations oblige the retailers of motor fuel to mix at least 5% biofuel into each litre of petrol or diesel within a few years. A biofuel is made by distilling the sugars contained in foods into ethanol, or extracting the oil from seeds or algae to make diesel. Biofuels use only part of the food, and require substantial energy inputs to turn wheat grain, for example, into ethanol to add to petrol. Using the entire crop for burning in a power station is inherently more efficient than just using the oils or the sugars for biofuel production. However, this advantage may diminish as technologies advance that enable biofuel refineries to process more and more of the agricultural crop, and not just the valuable grains and seeds.
Nevertheless, the EU directive that demands that motor fuels must have 5% bio content will mean that biofuel refineries will be competitors to power stations burning bioenergy. Both are competing for agricultural land. The new BP/ABF ethanol refinery at Hull will be less than 30 miles from Drax power station. Since transport costs for bio crops are high, both places will be trying to attract farmers into supplying their plants. We can expect that farmers will carefully examine their options. Will they grow grain for food, sell it to the BP biofuels refinery or convert their land to willow for burning in Drax?
The prospective economics of dedicated bioenergy plants The following figures represent our best estimates of the finances of dedicated bioenergy plants. We base the figures on our assessment of the likely costs and revenues of a plant similar to the proposed Sheffield investment. These figures are intended to be used as illustrative rather than precise assessments.
The source of revenues: The sale of electricity The Sheffield plant will burn about 180,000 tonnes of wood products a year. At approximately 14 gigajoules (GJ) per tonne (about 3,900 kilowatt hours), the total calorific output will be about 700,000 MWh a year. A plant of this type will typically be about 30% efficient, turning about this percentage of the heat into electricity. This means that the plant will export about 210,000 MWh to the grid. At a price of about £40 per MWh, the revenue from the sale of electricity will be £8.4m. The figure for the price of electricity is somewhat lower than that currently achieved by Drax, which is obtaining about £48 per MWh.
ROCs At the current auction price of about £45 for one ROC, the output of the power plant will generate certificates worth about £18.9m, or over twice the value of the electricity sales. This assumes that for a dedicated bioenergy plant each MWh generates two ROCs, (though the government has only promised this extra allocation until 2013).
Value of ETS certificates E.ON has told us that Lockerbie will be receiving an allowance under the European Emissions Trading Scheme (ETS) but because the plant will be burning 'carbon-neutral' fuel, it will not need this allowance. The ETS certificates can therefore be sold. If a bioenergy power plant is allocated an allowance corresponding to the average carbon content of UK electricity (0.43 tonnes of CO2 per MWh), it will receive certificates covering just over 90,000 tonnes of CO2, worth about €20 at today's prices for phase 2 ETS. These allowances are worth about €1.8m or about £1.2m.
Heat A power plant burning wood in an industrial area, or indeed close to any buildings, including newly built domestic homes, can be used to supply heat that would otherwise be wasted. The Sheffield plant is located in an area that has vacant industrial sites that could be used for manufacturing businesses that need heat for industrial processes. Power generators probably take no account of potential revenue from this source; it certainly cannot be predicted. But if the supply of surplus heat is sold for 1p a kWh, and it is used 50% of the year, it would be worth £2.4m.
Table 1: Summary of potential sources of revenue
|Source of revenue||Value (£m)|
|Sale of electricity at £40 per MWh||8.4|
|Two ROCs per MWh at £45 per MWh||18.9|
|Carbon allowances saved at €20 per tonne of CO2||1.2|
|Possible revenue from waste heat sold to industry||2.4|
A coal-fired power station pays about £1.45 per GJ for coal. To get farmers to convert to SRC willow or miscanthus requires generators to pay about £4.50 per GJ for biomass, or over three times as much as fossil fuel. At this price, farmers will generally achieve profits approximately equal to that generated with wheat, at least until the latest extraordinary spike in the spot market proce. If wheat prices continue to increase, the price paid for SRC willow will also need to rise.
SRC willow takes several years to establish, though it requires very little work once it has successfully started growing. It should be productive for at least twenty years. The government has usually subsidised farmers who wish to start growing SRC and miscanthus with a grant that covers between 50% and 100% of the establishment cost. At the moment (early September 2007), there is no subsidy available, though industry players such as Renewable Fuels suggest that it will probably be reintroduced in the next few months.
Coal-fired power stations generally obtain their biomass through agents that contract with farmers. These agents will often carry out all the harvesting and transport actvities as well as guaranteeing payment for the willow for at least ten years.
To run a plant the size of E.ON's proposed Sheffield generating station will require about 180,000 tonnes of fuel per year. This will cost E.ON about £11.3m at current prices.
Transport The fuel will need to be transported to the plant, and we have budgeted a cost of just over £10 per tonne. This figure varies according to the distance that the fuel has to travel. Renewable Fuels, the agent handling the purchasing of SRC for Lockerbie, told us that the figure may be as high as £12 per tonne. (But, to compensate for this higher cost, the price of the fuel at Lockerbie may be lower because it uses waste wood from the forestry industry and does not have compete directly with wheat for land use for much of its fuel.)
Staff The E.ON press release about the proposed Sheffield plant suggests that the plant will employ about 20 people when it is fully operational. At a full cost of £45,000 per person, the budget will be about £900,000.
Other costs The plant will require maintenance and repair, as well as other overhead costs. The capital cost of the plant is about £60m and we have assumed a total figure of 2%, or £1.2m, for all other costs.
Repairs and maintenance expenditures at Drax were about 3.4% of tangible fixed assets in 2006. Drax is an older plant, of course, and its assets are written down. We therefore believe that maintenance expenditure of 2% of fixed assets for a new biomass plant is a reasonable figure.
Table 2: Summary of potential costs
|Source of costs||Amount (£m)|
|Other operating costs||1.2|
The profit and loss statement
Combining the costs and revenue into a profit and loss account shows that, before considering depreciation and interest charges, the plant will achieve an operating profit of over £13m a year.
Table 3: Potential profit and loss statement
|Total revenues (excluding heat)||28.5|
|Operating profit before depreciation and interest charges||13.3|
E.ON expects to invest £60m in its proposed Sheffield plant. If we summarised the operating economics correctly, it will achieve a return on capital of over 22%. It looks like a good investment, though this will depend the price of power, ROCs and ETS certificates, as well as the load factor that the plant is able to achieve.
A key sensitivity is the percentage of the time that the plant is being used to generate electricity. This will directly affect the value of its output. Drax achieved technical availability of about 90% last year, and produced total electricity output of about 75% of its rated maximum. (This means that it was not operating all the time that it was technically ready to do so. At certain points the price of electricity on the wholesale markets was not high enough to cover its fuel and other variable costs.)
For a biomass plant subsidised by two ROCs for every MWh of output, the income from generating electricity will always be greater than the cost of fuel. (Two ROCs are currently worth £90 per MWh. At today's wood prices, the cost of fuel is less than £55 per MWh. Unless the auction price of ROCs collapses, it will make sense to run the plant even if the wholesale price of electricity were to fall to zero. So it is only planned and unplanned outages that will be likely to affect the total amount generated. In a new, specially designed plant it should be possible to keep operating at least 85% of the time. If the illustrative economics detailed above are accurate, and the plant operated at 85% capacity, the financial return would fall to about £11m, providing a 19% return on capital.
Conclusion This article has tried to show that dedicated biomass plants appear to make good financial sense but that the attractive financial profile depends entirely on the subsidy created through the ROC system. The fuel costs at a plant such as Sheffield will exceed the value of the electricity produced and E.ON is therefore taking a gamble that ROC prices will remain firm and that the banding scheme that advantages dedicated bioenergy plants will remain after 2013.