Biomass Combined Heat and Power in the United Kingdom
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INTERNATIONAL BUSINESS PROGRAMS
Master Program in International Finance and Economics (MiFE)
SEMINAR PAPERS IN INTERNATIONAL FINANCE AND ECONOMICS
Center for Applied International Finance and Development (CAIFD)
Biomass Combined Heat and Power
in the United Kingdom
Authors:
Shustrova, Tatyana; Karpman, Elena;
Ndereba, Joyce; Stoyanov, Stefan
Seminar Paper 10/2013
ISSN 2191-48502013
Biomass Combined Heat and Power
in the United Kingdom
Tatyana Shustrova
Elena Karpman
Joyce Ndereba
Stefan Stoyanov
Under guidance of
Prof. Dr. Klaus Stocker
Applied Research Project
SS2013
7/24/20131
Contents
List of Abbreviations ............................................................................................................................... 3
List of Tables ........................................................................................................................................... 5
List of Graphs .......................................................................................................................................... 6
1. Introduction .................................................................................................................................... 7
1.1 Project Objective and Hypothesis Setting ...................................................................................... 8
2. General UK Economy Outlook ......................................................................................................... 9
2.1 United Kingdom Energy Sector Economic Overview..................................................................... 11
2.2 UK Investment Climate ............................................................................................................ 12
2.3 Investment attractiveness........................................................................................................ 13
2.4 United Kingdom Energy Fossil Fuel Sector Overview .......................................................... 15
2.5 Renewable Sources Overview ................................................................................................ 18
3. The Biomass Industry in the United Kingdom .................................................................................21
3.1 Permanence of the Biomass CHP Industry in the UK .................................................................... 21
3.2 Competitive Structure of the Biomass CHP sector in the UK ......................................................... 22
3.3 SWOT Analysis............................................................................................................................. 25
Strengths ............................................................................................................................. 26
Weaknesses ........................................................................................................................ 26
Opportunities ....................................................................................................................... 26
Threats ................................................................................................................................. 27
3.4 Energy Contracting in the UK ....................................................................................................... 28
4. Biomass as an Energy Resource ......................................................................................................28
4.1 Why biomass is considered CO2 neutral? .................................................................................... 30
4.2 Technological Considerations ...................................................................................................... 32
4.3 Expressing CHP Efficiency ...................................................................................................... 34
5. CHP locations and potential energy consumers ..............................................................................36
6. Feasibility Analysis: Economic and Financial Evaluation ..................................................................42
6.1 Methodology............................................................................................................................... 42
6.2 Subsidies ..................................................................................................................................... 44
6.3 Annual Revenue .......................................................................................................................... 45
6.4 Investment and Annual Running Costs......................................................................................... 47
6.5 Operational and Maintenance Expense (O&M) ............................................................................ 51
6.6 Estimating Amount of Fuel .......................................................................................................... 52
6.7 Fuel Expense ............................................................................................................................... 53
6.8 Defining Cost of Capital ............................................................................................................... 53
7. Economic Analysis ..........................................................................................................................562
7.1 Scenario Analysis ......................................................................................................................... 57
7.2 Sensitivity Analysis ...................................................................................................................... 61
8. Environmental Analysis ..................................................................................................................64
8.1 Carbon Debt ................................................................................................................................ 64
8.2 Greenhouse Gas Savings and Their Cost ...................................................................................... 67
8.3 Analysis of Environmental Benefits ........................................................................................ 68
9. Hypothesis Evaluation and Conclusion ...........................................................................................69
10. References .....................................................................................................................................71
Appendix 1 : UK Key Economic Statistics ...............................................................................................78
Appendix X 2: Thermo-Chemical and Bio-Chemical Conversion Processes of Biomass Feedstock ...........79
Appendix 3: Components of A Boiler/Steam Turbine System .................................................................80
Appendix 4: Boiler Types and Description ..............................................................................................81
Appendix 5: Types and Description of Steam Turbine .............................................................................82
Appendix 6: Developers and Operators of UK Biomass Schemes with the Number of Plants Installed ...83
Appendix 7 : Kedko and Helius Energy short description ........................................................................84
Appendix 8: Economic Analysis ..............................................................................................................85
Appendix 9: Scenario 1 ..........................................................................................................................86
Appendix 10: Scenario 2.........................................................................................................................87
Appendix 11: Scenario 3.........................................................................................................................88
Appendix 12: Historical Sheffield Weather data series ...........................................................................893
List of Abbreviations
bbl/d Barrels per Day
bn. billion
CAPM Capital Asset Pricing Model
CCL Climate Change Levy
CH4 Methane
CHP Combined Heat and Power
CHPQA CHP Quality Assurance
CO2 Carbon Dioxide
CPI Consumer Price Index
DECC Department of Energy & Climate Change
DG
Market Observatory for Energy
Energy
EPA Environmental Protection Agency
FDI Foreign Direct Investment
FiT Feed-in Tariff
FYA First Year Allowance
GDP Gross Domestic Product
GHG Greenhouse-gas
GQCHP Good Quality CHP
GVA Gross Value Added
GW Gigawatt, 1000 watts
IEA International Energy Agency
IRENA International Renewable Energy Agency
IRR Internal Rate of Return
kJ kilojoule
L litre
LEC Levy Exemption Certificates
LLC Limited Liability Company
LNG Liquefied Natural Gas
LNG Liquefied Natural Gas
MMst Millions of Short Tons
MW Megawatt, 1000 watts
N2O Nitrogen Oxide
NHS National Health Service
NPV Net Present Value
NREAP National Renewable Energy Action Plan
NSA National Statistics Agency
O&M Operation and Maintenance
Ofgem Office of Gas & Electricity markets
PFC Global Consulting Firm Specializing in the Oil and Gas
Energy Industry
PI Profitability Index
PMA Plant and Machinery Allowance
PMI Project Management Institute
pv Photovoltaic
RHI Renewable Heat Incentive
ROCs Renewable Obligation Certificates4
SCC Social Cost of Carbon
SHU Sheffield Hallam University
SWOT
Strength, Weaknesses, Opportunities, Threats
Analysis
Tcf Trillion Cubic Feet
TW Terawatt, 1000 watts
UK United Kingdom
UK United Kingdom of Great Britain and Northern Ireland
WACC Weighted Average Cost of Capital5
List of Tables
Table 1 USD/GBP Exchange Rate Development 2005 – 2013
Table 2 EUR/GBP Exchange Rate Development 2005 – 2013
Table 3 UK Selected Sectors Contribution To The Economy , 2011
Table 4 Ratio Of Total Oil Production To Consumption
Table 5 Ratio Of Total Natural Gas Production To Consumption
Table 6 Ratio Of Total Coil Production To Consumption
Table 7 Overview Of EU Member States' Progress On Meeting 2020
Target
Table 8 Summary Of Recent Development Of CHP Production Using
Biomass In The UK
Table 9 Energy Content Of Various Energy Sources
Table 10 Percentage Savings From Biomass Feedstocks Compared To
Gas
Table 11 Sheffield Metropolitan Average Temperatures
Table 12 Hospital Inside Temperature Regime
Table 13 Criteria For Hearting Energy Consumption Calculation
Table 14 Heating Energy Consumption Final Results
Table 15 Description Of Scenarios
Table 16 Subsidies In The Form Of Renewables Obligation Certificates
And Renewable Heat Incentive
Table 17 Electricity Price Development
Table 18 Summary Of Proposed Capital Cost Ranges
Table 19 Summary Of Installed Capital Costs Of Biomass CHP In Europe
Table 20 Cost Structure Of Steam Turbine CHP
Table 21 Regression Results
Table 22 Scenario 1 Profitability Analysis
Table 23 Scenario 2 Profitability Analysis
Table 24 Scenario 3 Financing Structure
Table 25 Debt Repayment Schedule At 8% Interest Rate And 10 Years Of
Repayment
Table 26: Scenario 3 Profitability Analysis
Table 27: Biomass Energy Data Scenarios
Table 28 Savings Of GHG From Sheffield Biomass CHP Plant
Table 29 Social Cost Of Carbon Matrix6
List of Graphs
Graph 1 Progress In Renewable Electricity, Heat And Transport
Graph 2 Use Of Biomass Combined Heat And Power In Different Sectors
Of The UK
Graph 3 Sensitivity Analysis: Key Performance Indicators
Graph 4 Sensitivity Of NPV And IRR To Changes In Capacity Factor
Graph 5 CO2 Savings By Using Burning Wood Residue Pellets
Graph 6 CO2 Savings By Using Whole Trees Pellets7 1. Introduction Renewable energy technologies are the source of reliable, secure and affordable energy for household and industrial sector that can also optimize efficiency of electric and heat provision. Cost competitive, low carbon generation of electricity and heat in one process, called renewable Combined Heat and Power, offers a solution for a coherent and sustainable energy supply system that sets a ground for future technological innovations. It is the main tool in the hands of European Union governments to meet their policy goals and promote development in the region. The goal of this research work is a well-defined project with a concrete delivery plan and outline for technical, economic and financial model that is viable and attractive for potential investor, whether it is state owned enterprise, private heat and electricity producer or an individual willing to invest into renewable industry. To achieve the criteria of environmental sustainability and value creation for the region, the renewable CHP project will demonstrate its positive environmental impact and societal benefits in ensuring an affordable and reliable supply of renewable energy. To approach the research in a coherent manner the paper is structured into seven main sections. First section introduces a potential investor to the project through project description and a set of hypothesis. The three hypotheses are the centric part of the research: they provide a guideline and set the objectives that will be evaluated in the closing section. Second section provides an economic overview and valuable insights into the investment climate in United Kingdom. Third section focuses on the current state of the United Kingdom renewable energy sector closely associated with the UK government objectives and policy goals. Here, an in-depth SWOT analysis of biomass combined heat and power schemes draws a picture of potential risks and opportunities in the market. Forth section outlines a description of biomass as well as technical considerations of the project. Fifth section defines the CHP location and the primary consumer for energy. Sixth and seventh sections present economic and financial evaluation supported with necessary ingredients such as estimation of revenues, expenses and opportunity cost of capital. The two interrelated sections also include a scenario and sensitivity analysis to check the robustness of investment project to changes in input parameters. Eights section evaluates the project on the basis of
8
environmental impact. Finally, a conclusion on the attractiveness, viability and
profitability of investment into biomass CHP system is drawn in the ninth section.
1.1 Project Objective and Hypothesis Setting
Research Objective: To evaluate whether it is economically financially and
environmentally feasible to construct and operate a dedicated Biomass CHP plant for
providing renewable energy to Northern General & Royal Hallamshire Hospitals
To assess the research objective following hypothesis are formulated and will be
proved or disproved in the course of the present research work
Hypothesis 1: Financial soundness delivered by biomass CHP is sufficient to attract
private equity investor as well as commercial lender. Indicators for evaluating financial
strength of the proposed biomass CHP are:
Net Present Value (NPV)
Internal Rate of Return (IRR)
Profitability Index.
Hypothesis 2: Investment into biomass CHP is profitable for a private investor under
current United Kingdom legislation and subsidies OR Financial incentives for deploying
biomass CHP provided by United Kingdom Government are sufficient to attract even
risk –averse investor. Hypothesis 2 will be evaluated by comparing amount of granted
subsidies in relation to initial investment outlay
Hypothesis 3: Biomass CHP scheme of a given scale is environmentally friendly and
completely reflect the notion of renewable energy sources.
Criteria for justification: Reduction in the level of CO2 emissions9
2. General UK Economy Outlook
Year 2012 was a very difficult year for European Union and brought austerity measures,
chronic global uncertainty and weak consumer confidence. Nevertheless, the current
economic UK position suggests moderate optimism and allows for positive projections.
For the UK key economic statistics see Appendix 11. This section doesn’t cover detailed
economy analysis, but focuses on important investment indicators and the general
investment conditions in UK.
After a period of depressing growth in 2011 and 2012, the UK economy has slightly
recovered in the first half of 2013. The GDP grew by 0.3% in the first quarter of 2013.
Recent positive economic growth stopped the public fears of a return to technical
recession referred to as a “post-Olympic syndrome”.2 The latest PMI surveys have
indicated recovery in all major economy sectors and a return to solid growth in retail
sales in May. More comforting situation in the Eurozone in comparison with the recent
years positively influenced equity markets despite the recent volatility. The employment
improvement rate of 2012 has slowed this year, but still keeps the upward trend. The
Chancellor’s Spending Review as of 26th of June projected possible losses in the public
sector, though to be offset by improvements in the private sector. Consumer price
inflation (CPI) has showed some volatility during the recent months and could potentially
increase to around 3% over the summer, but it is restrained by prolonged low earnings
growth and easing of the pressure caused by global commodity prices3.
The main projections for the coming years assume following4:
According to the main scenario GDP is expected to grow gradually from 0.2% in
2012 to around 1% in 2013 and around 2% in 2014, provided the Eurozone
current relative stability will last. Services will be the main sector of growth, but a
gradual recovery of manufacturing and construction sectors is also expected
during the next 18 months.
London and the South East are projected to be the main regions of recovery, but
all regions are supposed to return to positive growth in 2013-14.
1
Hawksworth, John, Yong J. Teow, Smita Mehta, and Esmond Birnie. "UK Economic Outlook March 2013." PWC. N.p., July 2013.
Web. 16 July 2013: 34.
2
Ibid, p.5
3
Ibid, p.8
4
Ibid, p.310
CPI is projected to exceed target level and be at around 2.7% in 2013 and 2.4%
in 2014 with some moderation in the next years, unless in global commodity
prices rise again in 2014. Inflation scenario also implies a continued decline in
real earnings growth in 2013-14 with six successive years of negative real
growth. A gradual recovery in real earnings is forecasted for 2015-17 years, but
the level of real earnings will still be 5% lower than its peak in 2008.
At the same time subdued real earnings growth will, however, support total UK
employment growth at a healthy rate during the next five years, despite projected
public sector job losses.
A gradual recovery in housing prices is also expected during the next few years.
In cash terms, average UK housing prices are likely to return to 2007 peak level
by the end of 2014, although in real inflation-adjusted terms this improvement is
projected for 2021.
The level of interest rates is likely to increase over the next years, which will help
savers a lot, at the same time borrowers (including government) should prefer to
stick to long-term funding at current relatively low rates and prepare for higher
rates in the medium to long perspective5.
The projections presented above prove that United Kingdom economy is still affected by
the financial meltdown, but shows movements on the way of recovery.
Another important factor for investment recovery is stability of the currency. Two charts
below show successive stable values of British Pound after the period of volatility in
2008 and 2009. Thus, no major foreign investment deterioration can be assumed due to
currency depreciation in future.
Table 1: USD/GBP exchange rate development 2005 – 2013
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013
USD/GBP 0.550 0.543 0.500 0.545 0.641 0.648 0.624 0.631 0.649
average value
Source: historical rate database at http://fxtop.com/
Table 2: EUR/GBP exchange rate development 2005 – 2013
Year 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
EUR/GBP
average
value 0.684 0.682 0.684 0.796 0.891 0.858 0.868 0.811 0.852 0.852
Source: historical rate database at
http://epp.eurostat.ec.europa.eu/portal/page/portal/exchange_rates/data/database
5
Hawksworth, John, Yong J. Teow, Smita Mehta, and Esmond Birnie. "UK Economic Outlook March 2013." PWC. N.p., July 2013.
Web. 16 July 2013: 3.11
The information given above supports optimistic projections on economic and
investment development in UK. In order to make the present economic overview more
descriptive, next section provides an analysis of UK energy sector.
2.1 United Kingdom Energy Sector Economic Overview
The Energy sector in United Kingdom has a significant economic impact across all
sectors of the economy. This impact appears directly from the employment and
production activities within the sector and indirectly from industry purchases of
intermediate inputs and capital goods from a wide range of other UK industries. The
total direct contribution of the UK energy sector into economy in 2011 measured in
proportion to GDP was £20.6 billion, a 16% increase from the pre-crisis level of 2007.
Together with indirect impact from activities through the supply chain such contribution
reached about £86 billion, which is 5% lower than 92 billion in 2010 level. This reduction
reflects falling margins and revenues among industry participants caused by a decrease
in demand and increase in fuel costs in 2011. The contribution to GDP is closely
correlated to the composite level of the sector turnover, also decreased from £ 93 billion
in 2010 to £88.7 billion in 2011. Nevertheless the contribution of the energy sector to the
UK economy stays at its historical average of 1.6% (2.8% in terms of turnover)6.
Table 3: UK selected sectors contribution to the economy (2011)
Energy Information and
sector Manufacturing Construction communication Mining
Contribution to GDP
(£bn) 20.6 146 70.5 85.8 23
Share of UK GDP 1.60% 11.00% 5.30% 6.50% 1.70%
Composite level of
Energy Sector
Turnover (£bn) 88.7 477.2 184.1 184.1 50.7
Share of UK economy
(Turnover) 2.80% 15.40% 6.00% 5.90% 1.40%
Source: Knight, Angela. "Powering the UK: Investing for the future of the Energy Sector and the
UK." Ernst & Young : 5
Table 3 illustrates the Energy sector contribution in comparison with other key
industries. The sector provides 2.8% of the UK total economy turnover, which is in line
with the trend of the last ten years.7
6
Knight, Angela. "Powering the UK: Investing for the future of the Energy Sector and the UK." Ernst & Young : 5. Web. 1 June
2013. .
7
Ibid, p.612
Energy sector broad contribution is not stipulated only by direct influence, but also
covers intermediate goods and products consumption through the supply chain, which
is considered as the indirect effect. Indirect and direct effect in turn cause increased
spending, which is considered to be the induced effect, spending may include food,
housing, transport, clothing, education and entertainment.
The Energy sector has one of the largest effects on other sectors via increased
consumption along the supply chain and continues to increase its capital investment
and employment rate, despite the shortages in demand and margins. It proves the long-
term nature of the industry investment cycle in terms of the service length of the assets,
and reflects the lead times between investment and revenue.
The indirect employment benefit in the energy sector is also critical from employment
perspective. The sector is estimated to include over 650,000 jobs in the UK, about half
a million of which are indirectly associated with the Energy sector. Thus each new direct
job in the Energy sector generally supports three other jobs elsewhere in the UK
economy. This, combined with the consistency with which jobs are created by the
sector, particularly in areas of high unemployment, provides strong evidence of the
potential role of the Energy sector in the economic recovery and economically attractive
sphere for investments.8
2.2 UK Investment Climate
The UK has historically spent less on investment, including infrastructure, than other
similar advanced economies. Over the past 40 years the UK has been at, or close to,
the bottom in terms of investment as a percentage of GDP. However, after the
liberalization of the Energy sector during the late 1980s and early 1990s, this
relationship began to change. As a result, investment in the sector has been more
closely linked to fuel prices and regulatory cycles. The most recent market trend,
starting in 2006, proves to be by far the largest in terms of the volume of investment.
This investment cycle is stimulated both by the drive to decarbonize the electricity
sector, but also necessity to ensure a smooth transition to a position as a net gas
importer. Replacing and upgrading the ageing energy infrastructure is also an important
goal for the UK Government.9 As a result, the average rate of investment per year has
increased from c. £5bn per annum in the early 1990s to £7.4bn per annum since 2006.
8
Knight, Angela. "Powering the UK: Investing for the future of the Energy Sector and the UK." Ernst & Young : 7. Web. 1 June
2013. .
9
Ibid, p.1613 Currently the level of investment is at its highest for 20 years at around 50% of Gross Value Added or 12% of the sector’s turnover. This latest increase in investment is even more important for the UK economy as it has experienced recession times and a significant drop in investment as a whole: investment in the Energy sector increased by 73% between 2007 and 2011, when the investment in the economy as a whole fell by 17%. This ‘un-cyclical’ nature of investment of the energy sector is therefore a good support for economic growth at a time when such stimulus is desperately needed. 10 Renewable energy segment of Energy sector is also an attractive market, and already brings new jobs throughout the supply chain. According to DECC, the investment into renewable energy sector between 1 April 2011 and 31 July 2012 amounted to £12.7bn in total and originated 22,800 jobs. In 2012 UK Trade and Investment 71 projects on renewable energy Foreign Direct Investment took place and generated or safeguarded 2,625 jobs11. Renewable energy also had the largest source of inward investment in the period 2011/12 among sectors of advanced engineering and environmental technology and became joint seventh largest sector in terms of FDI project number in the UK. In addition to current investment, there is a significant potential for Renewables industry moving forward to 2020. Sources prove that the renewables sector (electricity, heat and transport) directly supports around 110,000 jobs and indirectly another 160,000 jobs along the supply chain. By 2020, it is estimated that the sector could support about 400,000 directly along immediate supply chain jobs and many more indirectly. 2.3 Investment attractiveness In 2011, the UK managed to retain its position as Europe’s leading destination for FDI projects, despite suffering a 7% decline with simultaneous 4%increase of the total number of projects in Europe, according to the Ernst & Young’s 2012 UK Attractiveness Survey12. The UK’s leadership in European FDI is stipulated by two main factors: the position as the preferable investment location for US companies, and its strength in 10 Knight, Angela. "Powering the UK: Investing for the future of the Energy Sector and the UK." Ernst & Young : 16. Web. 1 June 2013. . 11 "UK Renewable Energy Roadmap Update 2012." : 21. Web. 1 June 2013. . 12 Knight, Angela. "Powering the UK: Investing for the future of the Energy Sector and the UK." Ernst & Young : 22. Web. 1 June 2013. .
14
several key sectors. The six aspects of the UK that foreign-based companies
considered most attractive from an investment perspective were: the quality of life,
cultural aspects and language (with 88% rating this as very attractive or fairly attractive);
the stable political environment (86%); technology and telecommunications
infrastructure (85%); the stable social climate (83%); education in trade and academic
disciplines (80%); and entrepreneurial culture and entrepreneurship (76%). Most of
these factors that make UK attractive to foreign investors were also highlighted through
the interviews with the key stakeholders in the Energy sector. In particular a number of
key factors influencing the attractiveness of the UK as a destination for investment in
the Energy sector were identified:
stable political environment
stable regulatory environment, including clarity and transparency and
consistency of policy and regulation
high quality and low cost workforce
good availability of capital/funding and a reasonable return on investment
public sentiment in favor of investment
speed of the planning and consent process
The stability of the political and regulatory environment and the quality of the workforce
were highlighted by a number of companies as main differentiators when comparing the
UK to other jurisdictions. The UK regulated networks in particular were seen as one of
the most attractive places to invest for international infrastructure funds. The UK has in
fact consistently been scoring high in most of the factors above; it has provided a
reasonable rate of return while holding a highly skilled workforce, a stable policy and
regulatory environment.
Thus, taking into account the critical role of energy sector within the UK economy,
improvement of investment climate combined with positive investment perception and
attractiveness, an investment into energy sector business can be projected to be
beneficial from UK economic perspective.
In order to define an appropriate for investment energy sphere, analysis of the current
state of fossil fuel and renewable sources market is conducted in the next section.13
13 Knight,
Angela. "Powering the UK: Investing for the future of the Energy Sector and the UK." Ernst & Young : 20. Web. 1 June
2013. .15 2.4 United Kingdom Energy Fossil Fuel Sector Overview United Kingdom is the largest in EU producer of oil and second in scope of the natural gas output.14 In 2011, the UK exported approximately 690,000 bbl/d of oil 15 and in 2012 0.5 Tcf natural gas to Ireland and Belgium. According to the export data retrieved by UK's Her Majesty's Revenue and Customs the 82% of crude oil exports were delivered to EU countries, mainly Germany and Netherlands. Nevertheless, the output pace of the last decades has sharply changed. The peak period of massive crude oil and natural gas production in 1990s was replaced by steadily declining tendency in the natural resource production started in the beginning of 2000s. Infrastructure and reservoirs aging have affected UK's oil production during the last years, supplemented by acute in 2012 high production decline rate and wide-spread outages due to technical problems. Thus, in 2012 UK produced around 1 million bbl/d of liquid fuels, including 881.000 bbl/d of crude oil, which was 14 percent less than in 2011, and reached its minimum level since 1970.16 The similar situation was observed in the natural gas sector; the 2012 production level was 15 percent lower than the previous year and reached 1.5 trillion cubic feet. Here, in addition to the steady production declining trend, natural gas output was affected as a result of the Elgin gas leak occurred in March 2012.17 UK coal production level also experienced a general decrease with dipping to the bottom level in 2007, though since then there was a slight hike with the output level totaling 20MMst in 2011 (data for 2012 are not available yet).18 Nowadays United Kingdom became a significant oil importer, buying more than 1 million bbl/d in 2011. In accordance with UK's Her Majesty's Revenue and Customs, the majority (67%) of the imports came from Norway, a decline from the 72-percent share from the previous year. The remainder of UK oil imports came from Russia (8%), Nigeria (7%), and the Middle East (2%). Natural gas consumption has also become increasingly reliant on imports. In 2004, the UK became a natural gas net importer, with pipeline imports coming from Norway (55% 14 "United Kingdom." EIA. N.p., 14 May 2013:1. Web. 10 July 2013. . 15 Ibid, p.8. 16 Ibid, p.5 17 Ibid, p.13 18 Ibid, p.20
16 of total), additional gas from the Netherlands (15%) and Belgium (3%). According to PFC Energy data LNG import level reached 28 percent of the total of 2012. The proportion of net import is still rather low in comparison with other countries of the European Union, though steadily increasing year-over-year. The trend of declining production rate of petroleum and natural gas versus consumption is common for the whole European Union. Table 4: Ratio of Total Oil Production to Consumption Total Oil Production/ Consumption ratio 1990 1995 2000 2005 2010 2011 2012 UK 1.12 1.55 1.45 1.02 0.86 0.73 0.66 EU-27 0.22 0.27 0.25 0.21 0.17 0.16 0.15 Source: self-generated, Eurostat Table 5: Ratio of Total natural Gas Production to Consumption Total Dry natural Gas 1990 1995 2000 2005 2010 2011 Production/ Consumption ratio United Kingdom 0.85 0.99 1.13 0.92 0.60 0.54 EU-27 0.59 0.59 0.54 0.43 0.37 0.36 Source: self-generated, Eurostat UK coal consumption also exceeds its production rate and this disproportion is increasing sharply, which makes this energy source position more critical in United Kingdom than in the European Union energy sector. The main reasons for it were decreasing domestic consumption and a surge of low-cost imports. The UK imported 35 MMst of coal in 2011, making up more than 64% of its total coal consumption (55 MMst). The main import sources were Russia, Colombia and United States. Table 6: Ratio of Total Coil Production to Consumption Total Coil Production / 1990 1995 2000 2005 2010 2011 Consumption ratio UK 0.87 0.66 0.51 0.32 0.35 0.36 EU-27 0.89 0.85 0.79 0.76 0.75 0.76 Source: self-generated, Eurostat The main fossil fuel trends shown above prove the increasing reliance of the country on imported fuels. Moreover this resilience will definitely rise, since further fossil
17
production level and total energy demand are planned to decrease with a different pace.
According to the analysis of the UK Department of Energy and climate change, total UK
energy demand is projected to fall by 7% between 2011 and 202019. And though UK
production still provided the equivalent of 72% of UK oil use and 55% of UK net gas use
in 2011, by 2020 net importers are expected to reach the level of 43% of our oil demand
and 53% of our gas demand20.
Nevertheless, UK production will remain a significant contributor to the energy needs for
many years to come, and maintenance of a fiscal and regulatory environment designed
to provide significant level of energy security within the country.
Thus being aware of the country's increasing reliance on fuels import, the UK
government has developed main energy policies to deal with the domestic production
declines. These include:
using enhanced recovery from current and maturing oil and gas fields
promoting energy efficiency
decreasing the use of fossil fuels and thus reliance on imports
promoting energy trade cooperation with Norway
decarbonizing the UK economy by investing heavily in renewable energy
However, huge investments in the energy infrastructure are needed in order to
decarbonize energy production in UK21.
Nuclear energy sources could definitely ease the reliance on imported fuels, 16 nuclear
reactors provide for one-fifth (19% in 2012, 17% in 2011) of total electricity generation
and are central to the UK government plans for future electricity generation. But there’s
obviously an issue, since all these reactors are scheduled to be retired by 2023 22.
Currently Government tries to incentivize this energy sector for building new nuclear
plants, but in spite of multiple policy discussions feed-in tariff is still not extended to
nuclear generation.
The analysis of UK Energy sector proves the possibility of energy shortage in UK in
middle-term perspective, unless alternative energy sources are further developed and
used. Thus renewable energy sources play an important role in promoting UK energy
sector development.
19
"Energy Security Strategy." (2012): 15. Web. 3 June 2013.
.
20
Ibid, p.20
21
"United Kingdom." EIA. N.p., 14 May 2013:1. Web. 10 July 2013.
.
22
Ibid, p.1718 2.5 Renewable Sources Overview The UK is legally committed to delivering 15% of its energy demand from renewable sources by 2020 contributing to the European Union energy security and decarburization objectives. This commitment is shared by the Devolved Administrations, setting challenging domestic targets on both renewable electricity and heat consumption levels to be achieved by 2020.23 The shift towards 15% of its energy supply from renewable sources is in progress. 3.8% of UK energy consumption came from renewable sources in 2011; this is up from 3.2% in 2010. Progress is illustrated in Graph 1 which shows that United Kingdom has a lot of challenges to overcome in order to meet next interim target on the way to meeting the 2020 target. Graph 1: Progress in Renewable Electricity, Heat and Transport Source: "UK Renewable Energy Roadmap Update 2012." : 13. Web. The comparative analysis of the progress on meeting 2020 target by UK and other European countries shows that UK has the biggest challenge among the others (except Malta and Luxembourg) due to very low start and country infrastructure specifics24. 23 "UK Renewable Energy Roadmap Update 2012." : 9. Web. 1 June 2013. . 24 "Report From The Commission To The European Parliament, The Council, The European Economic And Social Committee And The Committee Of The Regions, Renewable Energy Progress Report." European Commission . N.p., 27 Mar. 2013.:15 Web. 5 July 2013. .
19
Table 7: Overview of EU Member States' progress on meeting 2020 target
Member 2005 2010 1st interim 2020
State share share target target
Austria 23.30% 30.10% 25.40% 34%
Belgium 2.20% 5.40% 4.40% 13%
Bulgaria 9.40% 13.80% 10.70% 16%
Cyprus 2.90% 5.70% 4.90% 13%
Czech
Republic 6.10% 9.40% 7.50% 13%
Germany 5.80% 11.00% 8.20% 18%
Denmark 17% 22.20% 19.60% 30%
Estonia 18% 24.30% 19.40% 25%
Greece 6.90% 9.70% 9.10% 18%
Spain 8.70% 13.80% 10.90% 20%
Finland 28.50% 33% 30.40% 38%
France 10.30% 13.50% 12.80% 23%
Hungary 4.30% 8.80% 6.00% 13%
Ireland 3.10% 5.80% 5.70% 16%
Italy 5.20% 10.40% 7.60% 17%
Lithuania 15% 19.70% 16.60% 23%
Luxembourg 0.90% 3% 2.90% 11%
Latvia 32.60% 32.60% 34.00% 40%
Malta 0% 0.40% 2.00% 10%
Netherlands 2.40% 3.80% 4.70% 14%
Poland 7.20% 9.50% 8.80% 15%
Portugal 20.50% 24.60% 22.60% 31%
Romania 17.80% 23.60% 19.00% 24%
Sweden 39.80% 49.10% 41.60% 49%
Slovenia 16.00% 19.90% 17.80% 25%
Slovakia 6.70% 9.80% 8.20% 14%
UK 1.30% 3.30% 4.00% 15%
EU 8.50% 12.70% 10.70% 20%
Source: Renewable Energy Progress Report, p.15, see the corresponding footnote
Nevertheless the progress on the way to 15% obligation is visible, which allows UK
Government to express optimistic projections concerning meeting the target, despite
public criticism.25 The main results on the way are as follows:
In line with 2020 strategy renewable electricity experienced dramatic growth in
electrical output since July 2011 to June 2012, the total electricity generation
from renewables increased by 27% reaching 37.9TWh from a total of 14.4GW
installed capacity. The important contribution to this achievement has been done
25
"The UK Renewable Energy Strategy." Official documents of Government UK. N.p., July 2009:1. Web. 1 July 2013.
.20
by Scotland, and moreover it is projected that by 2020 that 100 % of Scottish
electricity will be generated from renewables by 2020.
Renewable transport is on track to meet the interim transport target, as defined
by the Renewable Transport Fuel Obligation, of around 5% by 2013/2014.
60% increase of offshore wind lifted country capacity to 2.5 gigawatts, UK
already has more offshore wind power than any other country.
A five-fold increase in solar PV capacity was detected.26
Hence, any investment into renewable energy projects allowing main energy sector
players such as households, communities, public services and business to have a
dedicated renewable energy source is very welcome by UK Government and
community. It is confirmed by the introduction of a new Renewable Heat Incentive and
Renewable Obligation Certificates to provide guaranteed payments for energy
18
produced. Thus, present biomass CHP investment project aimed at providing
renewable energy for two of the biggest UK hospitals are in line with the country’s
needs. The choice of the renewable energy technology will be analyzed further in the
present research, but it can be considered initially advantageous since it incorporates
two of the main eight technologies27 listed below:
Onshore wind
Offshore wind
Ground source heat pumps
Air source heat pumps
Marine – UK has greatest natural wave power resources in the world28
Renewable transport
Biomass electricity
Biomass heat
These technologies suppose to carry the capability of delivering more than 90% of the
UK’s renewable energy by 2020. However, the main sources of renewable energy that
currently contribute to electricity in the UK are Hydro, Biomass and Wind.
Wind power, which has been the largest growing source of energy over the past 10
years, is now the second largest source of renewable energy currently in place in UK.
26
"UK Renewable Energy Roadmap Update 2012." : 5-7. Web. 1 June 2013.
.
27
Soares, Tania, and Peter Meisen. "Is 100% Renewable Energy Possible for the UK by 2020?" GENI (2012): 15. Web. 3 June
2013. .
28
"The UK Renewable Energy Strategy." Official documents of Government UK. N.p., July 2009:1. Web. 1 July 2013.
.21
The first largest is biomass. Biomass gets more attention due to less seasonality and
vast array of usage options such as electricity, heating and cooling.
3. The Biomass Industry in the United Kingdom
According to the UK National Renewable Energy Action Plan (NREAP), the use of
biomass is extremely limited in the UK at the moment. Despite this constricted use,
biomass still has great potential to play a strategically important role in Britain's present
and future energy mix and is expected to contribute up to 21% of all renewable energy
by 2020.29 This is probably due to the fact that energy drawn from biomass can be
stored and used as needed whereas for other renewable sources of energy, power
produced cannot be stored for use as required.30
There are various methods of producing energy using biomass. Combined heat and
power (CHP) production was selected for this project since it presents the most optimal
way for most institutions or firms to reduce their consumption of fossil fuels from on-site
boilers and power plants from which they draw electricity and heat simultaneously. 31
3.1 Permanence of the Biomass CHP Industry in the UK
The economic viability of present biomass CHP project and the profitability of such an
investment rest heavily on basic conditions such as the availability and sustainability of
consumer demand, the volume permanence of the heat load and the cost of fuels
required for the production of heat and power using biomass. This section will explore
some of the dynamics of operating a biomass CHP plant in the long run and in so doing
evaluate the permanence of biomass CHP as a whole. Key drivers in the biomass
industry will serve as an indicator of the permanence of this sector.
Given its great potential, the bioenergy industry is quite likely the most dynamic of all
sources of renewable energy in the UK today. According to research done by Drax
Group32, a company which (according to Drax) operates the largest, cleanest and most
efficient coal fired power station in the UK and that is currently transitioning from
conventional energy sources and completely transforming three of its six generators into
29
Ares, Dr. Elena. Biomass Standard Note: SN/SC/6586. Standard Note: SN/SC/6586 ed. London, UK: House of Commons
Library, 9 May 2013. 1-9. Print.
30
Hickman, Leo, ed. Biomass: should we burn trees to generate electricity? UK: The Guardian, 2013. N. pag. Web. 4 June 2013.
< http://www.guardian.co.uk/environment/blog/2013/may/09/biomass-burn-trees-generate-electricity>.
31
Introducing combined heat and power A new generation of energy and carbon savings. UK: Carbon Trust, 2010. 4-6. Web. 4
June 2013
32
Drax Group Plc Preliminary Results for the Year Ended 31 December 2012. North Yorkshire, UK: Drax group plc, 2013. Web. 4
June 2013.22 sustainable biomass run generators, one of the most influential key drivers in the use of biomass as a renewable energy is the commodity markets. 33 These play a crucial role since one of the factor conditions considered in the economics of combined production of heat and power (CHP) using biomass is the relative cost of fuel used to burn the biomass in order to produce heat and power. According to the aforementioned study carried out by Drax, the effect of the incident that occurred at Japan's Fukushima nuclear plant for example continues to be felt in the UK. This has led to increased demand for liquefied natural gas and consequently to a rise in LNG prices in the Asian market. 34 This might have an undesired effect on the permanence of biomass as a renewable energy source since all power prices are interconnected. Despite the drawbacks that might be caused by rising natural gas prices, value can still be realized from the electricity that is generated from it regardless of the end use which can either be for own use or for export into the grid for the basic reason that it can be stored to be generated and used as needed. This will inadvertently lead to the establishment of biomass as a great renewable energy source leading to growth and quite possibly sustainability of the biomass industry in the UK. According to KPMG’s green tax index, the UK has one of the highest carbon taxes in the world35, which has generally made renewable sources all the more attractive given their low rates of carbon emission. This has created great incentive to use biomass since perceived rates of carbon emissions are low as compared to conventional fuels such as coal that have been used for years in the UK hence lowering costs of production, from this point of view. All in all, the biomass industry in the UK has great potential for growth and the support available for investment in the industry outweighs any short-comings there are, hence making a great case for the permanence and long-lasting growth of this industry. 3.2 Competitive Structure of the Biomass CHP sector in the UK As already mentioned, there are various methods of CHP production. This production is also done on various scales regardless of the preferred method of electricity and heat 33 Drax Group Plc Preliminary Results For The Year Ended 31 December 2012. North Yorkshire, UK: DRAX GROUP PLC, 2013. 6 Web. 4 June 2013. 34 Drax Group Plc Preliminary Results For The Year Ended 31 December 2012. North Yorkshire, UK: Drax Group Plc, 2013. 6 Web. 4 June 2013 35 "KPMG Green Tax Index." KPMG Green Tax Index. N.p., 9 May 2013. Web. 19 July 2013. .
23
generation. Classification using this scale level criteria segments biomass CHP into
industrial CHP, CHP with district heating, trigeneration, packed and mini CHP as well as
mini CHP.36
In the UK, combined heat and power is especially used in the industrial, commercial and
public sectors. According to Carbon Trust37 there are approximately 1438 CHP plants
currently in operation in the UK, of those, 328 are industrial, 1110 are in commercial,
public administration, residential, transport and agricultural sectors. Three sectors
account for the lion share of CHP electrical capacity which amounts to 76% of the 328
CHP plants used in industrial use. Breaking down this percentage, 33% is used in the
chemical industry, 32% in oil refineries and the remaining 10% in paper publishing and
printing38 (Graph 2).
Graph 2: Use of biomass Combined Heat and power in the industrial sector in the UK
Chemical Industry
24% 33%
Oil Refineries
10%
Paper publishing &
32% Printing
All other industries
39
Source: own illustration using data provided by Carbon Trust
The number of biomass CHP schemes in the UK has been rising steadily over the last
half decade (see Table 8). According to the latest digest of United Kingdom energy
statistics (DUKES), the net number of schemes added between 2007 and 2011
increased fivefold. This remarkable increase has been partly been attributed to 194
small scale schemes introduced by CHP suppliers using biomass.40 Net number of
schemes added in this case refers to actual new projects less decommissioned ones.
This indicates that the number of competitors increased and with it the competitive
rivalry in energy production using biomass CHP has generally grown tremendously in
36
Combined heat and power: chapter 7. 26 June 2012th ed. United Kingdom: DUKES, 2012. 193 - 200. Print.
37
Carbon Trust. Introducing Combined Heat and Power: A new generation of energy and carbon savings. London, UK: Carbon
Trust, 2010. 4-6. Print.
38
Carbon Trust. Introducing Combined Heat and Power: A new generation of energy and carbon savings. London, UK: Carbon
Trust, 2010. 4-6. Print.
39
Carbon Trust. Introducing Combined Heat and Power: A new generation of energy and carbon savings. London, UK: Carbon
Trust, 2010. 4-6. Print.
40
Combined heat and power: chapter 7. 26 June 2012th ed. United Kingdom: DUKES, 2012. 193 - 200. Print.24
recent years.41
Electricity capacity also rose steadily as is to be expected alongside this net number of
biomass combined heat and power schemes that were in operation in the period
between 2007 and 2011. The overall capacity as compared to previous years only
dropped in 2007 by a mere -0.6% and then kept increasing from thenceforth. This
bespeaks that more gaps were discovered during this time that could be covered using
biomass energy which in turn led to an increase in total electrical capacity as well as
percentage capacity.
Table 8. Summary of recent development of CHP production using biomass in the UK
Unit 2007 2008 2009 2010 2011
Number of schemes 1407 1427 1485 1577 1880
Number of schemes 45 20 58 92 303
added during the year
Electrical Capacity MWe 5398 5410 5573 6053 6111
Capacity added % -0.6 0.2 3.0 8.6 0.9
Electricity generation Gwh 27833 27529 26428 26772 27191
Heat generation GWh 51298 51913 48096 48273 48627
Overall efficiency % 66.7 66.9 67.0 66.7 67.2
Load factor % 65.3 64.8 56.8 56.6 54.6
Source: Adaptation of figures acquired from combined heat and power: chapter 7, digest of United
Kingdom energy statistics (DUKES) 26 June 2012) p. 193
Electricity and heat generation decreased slightly which most likely indicates that the
combined heat and power producers re-evaluated demand for heat and electricity and
adjusted production accordingly. This indicates that one of the most distinctive
advantages of using biomass as an energy source, in that generation can be adjusted
accordingly by managing the feedstock used and the load factor based on power
generation and capacity hence reducing costs and improving efficiency of the plant
simultaneously. This assumption is backed by the values achieved in overall efficiency
from 2007 to 2011 as stated in Table 8.
These statistics serve to give a feel of the potential and past success production of heat
and power using biomass has had in the UK in some of the industries that are gradually
moving from use of fossil fuels to biomass.
The largest and most successful of these biomass CHP plants in the UK is built in
Sheffield.42 According to the municipal council of Sheffield, 225,000 tonnes of municipal
41
Combined heat and power: chapter 7. 26 June 2012th ed. United Kingdom: DUKES, 2012. 193 - 200. Print.25
waste is used as feedstock to produce approximately 20 MW el of electricity for the
national grid and 60 MW th in district heating.43 The amount of heat delivered per annum
amounts to approximately 120,000 MWh such that 21,000 tonnes of carbon dioxide are
reduced using this process. This evidently makes biomass in the context of biofuel
production using CHP renewable.44
Given the success rate of this plant, which is the only one of its kind in the area,
Sheffield is a wise choice of location for the set-up of this project due to the proven
success rate, demand and well established infrastructure such that excess output from
this project can be easily transferred into the city grid.
Learning effects as well as proximity to stakeholders and experts plus institutions
looking to switch to biomass and make use of biomass as a renewable energy source
makes Sheffield the ideal location for a biomass as a biomass plant in the UK.
Although, as mentioned earlier, the use of biomass in the UK is still limited at this time,
some firms have already discovered the potential and developed use of biomass or at
least tried to integrate it with the other energy sources they use. These companies
include Drax PLC which apparently is the largest electricity producer in the UK and runs
the most efficient coal-fired plant is currently transitioning from coal to biomass.
According to Drax, one of its six combustors has already been completely remodelled to
use biomass only and is all set for use.45 E.on and UK Biomass Limited to mention but a
few are following suit and are also key players in the biomass industry in the UK since
they are currently in different phases of planning and implementing biomass projects in
the UK.
3.3 SWOT Analysis
This SWOT analysis takes a general look at the internal characteristics of some of the
key companies mentioned above that are already operating or in the process of
planning entering the biomass industry in the UK as well as external factors affecting
the biomass energy industry in the UK.
42
Sheffield District Energy Network. Sheffield, UK: Veolia Environmental Services, 2009. Web. 4 June 2013.
.
43
Finney, Dr. Karen, Prof Vida Sharifi, and Prof Jim Swithenbank. Sheffield District Heating Identification and impacts of the
potential expansion of Sheffield’s existing city-wide district energy network using GIS heat mapping. Sheffield: Sheffield
University Waste Incineration Centre Energy and Environmental Engineering, 2012. 4. University of Sheffield, UK. Web. 4 June
2013. .
44
Finney, Dr. Karen, Prof Vida Sharifi, and Prof Jim Swithenbank. Sheffield District Heating Identification and impacts of the
potential expansion of Sheffield’s existing city-wide district energy network using GIS heat mapping. Sheffield: Sheffield
University Waste Incineration Centre Energy and Environmental Engineering, 2012. 6. University of Sheffield, UK. Web. 4 June
2013. .
45
Drax Group Plc Preliminary Results For The Year Ended 31 December 2012. North Yorkshire, UK: DRAX GROUP PLC, 2013. Web.
4 June 201326
Strengths
According to the international energy agency, biomass is the fourth largest resource
after oil, coal, and gas. It is diverse, readily available, and abundant and can be
replenished as needed.46
Unlike electricity produced using solar and wind energy which generally cannot be
regulated and highly depends on present weather conditions, heat and power
produced using biomass can be stored and produced on demand. 47 In this context,
heat and power production using biomass is even more efficient than all the other
renewable energy sources.
Weaknesses
One of the greatest weaknesses of biofuel is that it is rather bulky as compared to
other sources of energy. This makes transportation thereof rather challenging and
costly.
Wood pellets used in the production of heat and power using biomass have to be
imported. Consequently the price of these wood pellets is linked to the international
markets which in turn links the cost of producing heat and electricity to this market
as well.. In essence, fluctuations in the future fuel (wood pellets) may cause the cost
of heat and electricity production to fluctuate as well
At the moment, government subsidies for biomass are rampant in the UK, since the
government is trying to increase the use of biomass as an alternative energy source
in its quest to reach its renewable energy target of 20% of by 2020. The market for
biofuel is therefore currently driven by the governmental subsidy pattern. The more
subsidies there are, the higher the number of entrants into the market and vice
versa. Right now the subsidies are only set to run till 2017 which essentially implies
that in four years’ time the entire market structure of the biomass industry is most
likely to shift. Models of projects that rely heavily on these subsidies will have to be
thoroughly revised and there is no telling whether or not the biomass industry in the
UK will have grown to a self-sustaining level to survive without the subsidies.
Opportunities
Due to their decentralized nature, biomass plants can be built on a small scale. This
probably explains the emergence of a great number of small scale plants in the UK
46
Bauen, Ausilio, Göran Berndes, Martin Junginger, Marc Londo, and François Vuille. IEA Bioenergy Annual Report 2012. Paris,
France: International Energy Agency, 2012. 81-85. Print.
47
See section on 'Permanence of the Biomass Industry' for a clear explanation of how biomass energy can be storedYou can also read
