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U.K. Removes Financing Obstacle for Biomass Energy
July 27, 2010, 1:58 PM EDT
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e-mail this story print this story digg this save to del.icio.us add to Business Exchange By Louise Downing

(Updates with details of decision from fourth paragraph.)

July 27 (Bloomberg) -- The U.K. government removed an obstacle to financing biomass power plants, which burn living matter to generate electricity, saying it would support the industry through obligations on utilities to use clean energy for the next 20 years.

The Department of Energy and Climate Change said it will “grandfather” its backing for anaerobic digestion and energy- to-waste plants. For biomass developers, the government also extended its support to all fuel costs. It initially planned to support only non-fuel costs, including construction.

“Today’s announcement will come as a great relief and follows many months of intense discussions between the industry and government,” Gaynor Hartnell, chief executive of the Renewable Energy Association, said in a statement. “This should unlock some 13 billion pounds ($20 billion) of much-needed private investment in the sector.”

Unlike other renewables, which have their Renewable Obligation Certificate levels fixed for 20 years in a set-up known as “grandfathering,” the support for bio-energy projects has been subject to review every four years because biomass feedstock costs depend on market fluctuations.

DECC has been working to change this. It proposed to fully grandfather anaerobic digestion and energy-from-waste, and to part-grandfather biomass. The latter was viewed by the “majority” of industry as “unworkable,” the industry’s lobby group said in May.

Bio-energy Industry

Today’s news could affect in excess of 500 companies active in the bio-energy industry. Drax Group Plc, Helius Energy Plc and Prenergy Power Ltd. are all examining projects in excess of 100 megawatts, and a number of companies that put projects on the back-burner may resume their work.

"We welcome recognition of the need to grandfather dedicated biomass to encourage investment, which rightly reflects the long term nature of this capital investment,’’ a Drax spokeswoman said in an e-mailed statement. “Further, we accept that the industry is best placed to hedge against the fuel risk and believe that this is preferable to hedging against regulatory risk.”

Drax said last month it would go-ahead with plans to convert a coal-fired plant to biomass and develop three 290- megawatt projects if the government developed a “suitable policy”.

Industry Reaction

Clessidra Capital Partners, an Italian private equity house, said the bidding process for the sale of its 300-megawatt plant developed by Prenergy was still ongoing because the industry was waiting to hear the outcome of the grandfathering proposals.

Hartnell said in an e-mail today that she is “delighted” that the government has listened to the views of the REA and that “so many” REA members shared detailed financial information with officials.

“Enough evidence was fathered to justify a move from the original proposal and our members are now looking forward to getting back to work on developing their projects,” she said. “Now this obstacle has been removed.”

DECC said it will push ahead with its proposal not to grandfather bio-liquids.

“The industry was pleased with DECC’s previous proposal to grandfather anaerobic digestion and waste-to-energy but upset at the idea that dedicated biomass would only be partly grandfathered,” said Irmgard Herold, an industry analyst at Bloomberg New Energy Finance. “The result was that biomass projects were put on hold, and if the proposal had been passed, banks would have been reluctant to provide debt.

‘‘In theory, the split of renewable obligations sounded good, but implementation would have been tricky as there is no established biomass price index in operation,’’ he said. ‘‘Grandfathering at current levels, as now proposed by DECC, is surely the best solution to promote large-scale biomass development. Fuel price risk still remains for developers however. They will need to fix long-term supply deals in order to maximise their chances of securing debt finance.’’

--Editors: Reed Landberg, Randall Hackley

To contact the reporter on this story: Louise Downing in London at [e-mail]

To contact the editor responsible for this story: Reed Landberg at [e-mail]