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FORUM FOR RENEWABLE ENERGY DEVELOPMENT IN SCOTLAND - PROMOTING AND ACCELERATING THE MARKET PENETRATION OF BIOMASS TECHNOLOGY IN SCOTLAND

ANNEX D: BIOMASS ENERGY- THE CASE FOR GOVERNMENT SUPPORT

Biomass Research Report Summary:

Financing the Development of a Biomass Energy Industry in Scotland

Research Studies undertaken by Future Energy Solutions and Avayl Engineering

Introduction

1. The Scottish Executive commissioned Future Energy Solutions (FES) to conduct a study into the nature and scale of the financial/fiscal challenge to be overcome if biomass is to become a commercially viable energy source in Scotland, and to suggest measures which could help achieve this.

2. FES produced a final draft of the report in September 2004. The full report and appendices will be published on the Scottish Executive website. This summary note sets out the key findings and recommendations.

Objectives

3. The study investigated the following objectives:

• The potential employment benefits from the development of biomass plant in Scotland.
• The financial support schemes for biomass projects currently available at Scotland, UK and EU level.
• The views of key stakeholders to determine if there is a need for a capital grant based support scheme and, if so, the form that that support should take.
• The justification, components and operational requirements for such a scheme.

Recommendations for Scottish Biomass Capital Grant Schemes

4. The study concluded that a new capital grant scheme was both required and justifiable. While the main priority should be to fund energy conversion plant, it also recommended that it would be worthwhile considering support for other links in the supply chain such as for wood processing equipment.

5. Specific recommendations were as follows:

• Market intervention for supporting good quality biomass Combined Heat and Power (CHP) is justified on environmental and social grounds. Market failures can occur for various reasons, but they all result in the same outcome: price does not reflect the "true" cost. In the electricity market the price of a unit of generation from a coal or gas plant does not reflect all the costs of production, as the damage to the environment from emissions is not reflected in the price, and currently there are no existing funding schemes for biomass CHP to offset the favourable economics of fossil fuel technologies. Furthermore this is the most environmentally beneficially option (supported by the Royal Commission on Environmental Pollution). Full CHP process optimisation should be prioritised.
• There is also a case for supporting larger heat-only projects on the grounds that this would help in developing credible fuel supply infrastructures.
• There is also a strong case for supporting 'infrastructure for biomass energy projects' e.g. chippers, dryers, harvesters, pellet production facility, on the grounds that the sector is currently poorly developed.
• The case for supporting merchant power generation is less persuasive because schemes already exist that provide support for this sector. This option is assigned a lower priority status.
• State Aids clearance will need to be secured if the decision is taken to proceed.
• A two-stage application process is recommended, with initial funding targeted at 'feasibility studies', as a way of increasing the chances of successful plant development and operation.
• Performance data from supported projects should be collected to develop a set of 'good performance benchmark data' for supporting future financing applications.
• Extensive promotion of the scheme will be required to promote awareness and raise the profile of biomass developments generally.

Existing Financial Support Schemes

6. Despite the plethora of financial schemes (or information sources) that could be potentially available to support firms' already active, or wishing to becoming active, in the biomass field most of these are aimed at encouraging innovative advances in technology whereas the present need is for a scheme to underwrite the initial capital investment costs of already proven biomass technology, thereby stimulating commercial scale development. The report reviews 32 funding schemes at UK and EU level categorised according to: supply, demand, infrastructure, promotion or any combination.

7. Information is provided which:

• Briefly describes each scheme
• Indicates the total amount of funding available
• Indicates if the scheme is currently open to bids
• Indicates the level of funding available for individual projects
• Outlines eligibility criteria
• Details how to apply
• Provides website links

Justification for New Capital Grants Schemes

8. The study considered the existing support available to ensure any proposed scheme did not duplicate current efforts to assist market development. In addition, a workshop was held during the study to bring together a wide range of stakeholder interests in biomass. Following the culmination of these activities, it was concluded that despite concerted efforts, the biomass market is not fully commercial and merits intervention to try and catalyse activity and develop the sector.

Draft Blueprint for Capital Grant Schemes

9. The report presents a table summarising the stages involved in establishing a grant aid scheme. Further work would be required to ensure compatibility with State Aids Procurement regulations. In terms of scheme assessment, it is recommended that the focus should be on quantifying the benefits; assessing the best value to the Executive and in particular in assessing the credibility of the proposer to deliver successful projects.

Employment and Environmental Impacts

10. To augment information contained within the FES report, the Scottish Executive commissioned Ayayl Engineering in November 2004 to focus on potential employment impacts of biomass. Permanent employment opportunities are associated with the fuel supply chain and transportation, and these are similar irrespective of the form of the biomass plant. A summary of the employment prospects and carbon dioxide displacement is shown in the tables below.

Employment Impacts

11. To calculate employment impacts, assumptions were made in relation to the potential additional generation capacity the data from which was mainly derived from the DTI Gap analysis upper case for Scotland, namely based on

• a 40% Scottish Renewables target
• a mixed renewable technology scenario (referred to as Example 2 in Gap Analysis) as opposed to a high wind scenario (Example 1)
• on current demand levels (21 TWh)

12. Based on this additional generation capacity modelled by 2020 is 691Mwe ² (out of a total of 4,869MWe required for Scotland) split as follows;

13.

The total job years, average jobs, jobs/MW and peak jobs are estimated to 2020 split as follows;

14. The above figures include direct, indirect, induced and export jobs involved in development, construction, manufacturing, operations and fuel supply. In general, manufacturing is assumed to have a UK content of circa 60%.

15. It should be noted that the above estimates of generation capacity and employment relate only to the use of wood fuel and do not take into account the potential of energy crops. They are therefore conservative estimates of the potential of the biomass sector.

Carbon Dioxide Displacement

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