poised for Growth? Renewable Energy Crops in the UK In the past year the UK has witnessed a veritable “dash for

(mostly offshore) wind”, with major energy companies and

utilities poised to enter the renewables market in a manner and

scale not hitherto witnessed I. In contrast, despite the grants and

funding incentives which have been announced in the UK, reaction

and interest in the development of energy crop generation projects

has so far been more muted. Can energy crops now begin to

emerge as a second major source of new renewable energy for the UK? Y’;,: I’ ,rl:ia+i,, lmpax Capital reports.

During the development of its Renewables

Obligation (RO) proposals, and more

recently within the framework of the

Cabinet Office led energy review, the UK

Government has announced that it will

make available substantial capital grant

funding to support the development of off-

shore wind and energy crop generation pro-

jeers in the UK.2 The identification of

these two areas for specific additional sup-

port reflects a belief that, if the UK is to

achieve the ambitious targets set for

electricity generation from renewable

sources, these technologies are perhaps the

best placed to deliver the very significant

expansion of capacity volumes that will be

required.3 Currently renewable sources

meet only 2.8% of the UK’s electricity

demand, with more than half of this com-

ing from large scale hydropower. The short

term prospects for significant new capacity

from solar or wave power are limited, and

resource and planning considerations are

likely to constrain the growth in the UK of

hydro, onshore wind and energy

from wastes. Hence the focus

on offshore wind and energy

crops.

While the bulk of interest

and activity has focused on off-

shore wind to date, in fact ener-

gy crops offer a number of

potentially important advan-

tages compared to the offshore

wind option. Electricity genera-

tion is not intermittent and

may be adjusted to meet

demand. Generators should

therefore not be exposed to the

risk of imbalance charges,

which, whatever changes are

introduced to ameliorate the

position of smaller generators

under NETA, seem likely to

remain a feature of the UK electricity mar-

ket for the forseeable future. And while the

location of energy crops projects will princi-

pally be determined by fuel supply avail-

ability, since the best crop growing condi-

tions are most prevalent in the south and

east of the country, power stations can in

general be sited considerably closer to cen-

tres of demand than is the case for offshore

wind - thus diminishing the effect of

potential transmission charges or the need

for large scale enhancement of the network

which for example massive offshore wind

sites off the coast of Scotland may entail.

All the above said, it is self-evident that

energy crops projects have yet to grab the

attention of the market in the way that

wmd has, and there are identifiable reasons

for this. These can be broadly categorised

as those relating to technology costs and

issues relating to the costs and security of

fuel supply.

Technology costs Estimates vary as to the costs of electricity

generation from energy crop projects, and

there is very limited market experience thus

far. Under the Non-Fossil Fuel Obligation

(NFFO) scheme the ARBRE project, which

will utilise forest residues as well as energy

crops, has estimated generation at

8.65plkWh and 7 subsequent NFFO 4

contracts, which required developers to use

the more novel techniques of gasification or

pyrolysis, were placed in the range of 5.5-

5.8plkWh. ARBRE is currently in commis-

sioning and many of the other NFFO 4

projects have yet to be developed.

Forward projections anticipate reductions

in costs resulting from higher crop yields,

greater conversion efficiencies and scaling

up/mass replication of technology. Most

analyses put costs to 2010 at around 4.5 - 6

p/kWh, with further reductions to 3-

4p/kWh in subsequent decades*. These

42 March/April 2002 REE 4X.l J”; www.re-focus.net

FEATURE - POISED FOR GROWTH

f tgures would appear, for the next few years

at least, to broadly place energy crop and

straw/forest residue burning projects at the

borderlines of profitability under the fotth-

coming Renewables Obligation. This, allied

to the relative novelty of techniques such as

gasification and pyrolysis, goes a long way

to explain the reticence of major companies

to enter the sector. However such projec-

tions do not take account of the most

recently announced capital grant funding

for energy crops. Capital costs may amount

to as much as approximately 50% of dis-

counted lifetime costs for project developers

and Government capital grant funding,

which amounts to some E66m for energy

crop projects, therefore has the potential to

significantly boost project economics for

successful bidders.

Fuel supplies Developing energy crop projects is as much

about securing sufficient fuel supplies at

affordable rates as it is any other issue.

Establishing an energy crop planting regime

represents a substantial long term commit-

ment for a farmer or landowner, and there

can therefore be understandable reluctance

to commit land to a crop which is perceived

as having a limited track record and market,

which may not offer an annual return (short

rotation coppice is generally harvested on a

2-4 year cycle) and for which new capital

investment and contractual arrangements

may be requited.

Most critically of all, energy crops

inevitably compete against other land use

options, and thus against domestic or

Common Agticultultutal Policy (CAP) sub-

sidies for food production. To the extent

that subsidies for food production or live-

stock farming make these options mote

attractive than the returns offered by energy

crops, large scale switching to energy crops

is not likely to occur. Indeed, although

developments in crop yields and growth

rates may have some impact on the attrac-

tiveness of energy crops for the agricultural

community, the extent of switching will

essentially be determined by the level of

demand from the energy sector and the tel-

ative attractiveness of subsidy regimes.

This fact of agricultural life has been tecog-

nised by the UK Government with the recent

introduction of an Energy Crops Scheme in

England as part of the Rural Development

Programme. 5 This scheme offers establish-

ment grants for short rotation coppice (SRC)

and miscanthus at the level of f1,OOO per

hectare for SRC (or Al,600 per hectare for

former livestock land) and f920 per hectare

for miscanthus. Land under energy crops

remains eligible for set aside payments and

support at this level is on paper sufficient to

make energy crop plantation an attractive

diversification option for farmers, with annu-

al gross margin returns per hectare broadly

comparable to alternatives such as linseed

and oilseed tape.

For example annual gross margin returns

of 2324 per hectare have been estimated for

miscanthus and, based on producer group

Anglia Encrops estimates, returns for SRC

may be L.375 per hectare on IACS (arable)

land with set aside payments, and L187.50

pet hectare on non-IACS (pasture) land. For

comparison, returns from most convention-

al arable crops are estimated to be of the

order of t250-400 per hectare per year, with

wheat, which cannot be grown indisctimi-

nately, offering somewhat higher returns6.

Income for growers of energy crops comes

from the planting grant, set aside payments

(if applicable) and from sales of the hatvest-

ed crop - the latter element being variable

and dependent on negotiation with the put-

chaser, and thus likely to reflect the

demand-supply balance.

The Energy Crops Scheme also offers up

to 50% financial support7 available for the

establishment of producer groups for SRC

- entities which can manage the fuel sup-

ply arrangements at a level greater than

that of individual farmers/landowners8

The existence of such groups is likely to be

a critical element of the fuel supply chain,

both because such groups can allow fatm-

ets to spread the risks and returns of plant-

ing energy crops, and can provide genera-

tots with a single entity with which to han-

dle their fuel supply arrangements and

contracts.

Moreover, looking to the longer term,

anticipated developments relating to further

reform of the CAP following EU enlatge-

ment, and wider pressures to encourage

diversification within the farming commu-

nity as a result of depressed incomes from

livestock farming and crises such as the Foot

and Mouth disease, all tend to suggest that

available subsidies for food production will

in general diminish over time. To the extent

that this occurs, the long term attractiveness

of energy crops as a land use option is

potentially increased.

Financing energy crops generation projects It can be seen that the parallel emergence of

capital grants for plant development and

construction costs, and grant regimes to

support the establishment of energy crops

and producer groups, hold the potential to

improve significantly the economics of pto-

jects which can successfully exploit both

strands of UK Government funding.

For project developers, a sound approach

to financing arrangements can further help

to reduce, spread and mitigate risks.

Standard elements of such an approach are

likely to involve the creation of a special

purpose company to develop the project,

and the off-loading of construction and

operations and maintenance risks onto con-

tractors. The most critical issues for financ-

ing ate likely to surround the fuel supply

arrangements, which will need to be suff-

ciently robust and long term to satisfy

potential lenders and investors of the secuti-

ty of the project. Such arrangements are

likely to vary from project to project but

will need in some manner to incentivise

suppliers to ensure crop fuel delivery over

the lifetime of the project, to insure against

crop failures and also provide for the main-

tenance of fuel supplies in the event of

bankruptcy of supplier(s). Given the lead

times involved, both generation and fuel

supply elements need to be co-otdinated at

an early stage in project development and

expert financial advisors should be retained

when developing the financial structure of a

project and/or seeking to raise finance.

Technology is another critical aspect of

any renewable energy project, as lenders and

investors ate always reluctant to accept sig-

nificant technology risk. Energy crop pto-

ject developers ate faced with a choice

between the newer techniques of gasifica-

tion and pyrolysis, which offer the promise

of higher conversion efficiencies, and more

conventional combustion techniques,

which operate at lower efficiencies but are

generally cheaper to construct and have an

established track record. In the energy from

waste sector overall project costs from mote

conventional technologies are often still

favoutable and the mature nature of the

technology provides greater security for a

project. While the NFFO regime required

energy crop generation projects to utilise

new technologies, no such restriction

applies under the RO (unless a mixed input

of biomass and fossil fuels is being com-

busted).

Conclusion Development of energy crop generation pto-

jects in the UK has been restrained by uncer-

tainties over technologies and costs, with, thus

fat, only a very limited number of mostly

small-scale players showing an interest in the

market. Expansion of the sector has been fur-

ther constrained by the fact that it requires the

44 March/April 2002 RE}~~~~-~~~ www.re-focmnet

FEATURE - POISED FOR GROWTH

interaction of two very different worlds, agri-

culture and energy generation, which until

now have had little to do with each other. This

exacerbates something of a chicken and egg

situation in which uncertainties over fuel sup-

ply hold back the development of new gener-

ation projects, and new planting of energy

crops is restrained by apparent lack ofdcmand

from project developers. DEFRA calculate

that 100 - 150,000 hectares of energy crops

would need to be planted by 2007 to help

meet the Government’s 2010 renewable ener-

gy targets (approx 3% of arable land currently

under cereal production). This target may be

challenging but the recent significant expan-

sion of Government incentives, targeted

simultaneously at the agricultural and energy

generation sectors, and accompanied by the

demand driver of the forthcoming

Renewables Obligation, mean that previous

assumptions about the potential of the sector

now need to be reappraised. In this relatively

infant market, real opportunities may be

opening up for companies which have the

financial strength and credibility to bring gen-

erators, producers and fuel suppliers together,

the commitment to invest time in project

development, and the ability as early movers

to capitalise on the grant money available.

Footnotes The British Wind Energy Association

predicts that, based on current trends

and announced windfatm plans, the UK

may have as much as 2005 MW of

installed wind capacity by 2005, includ-

ing a substantial contribution from the

offshore wind sites leased by the Crown

Estates.

For details see the report Renewable

Energy in the UK - Building for the

Future of the Environment (www.cabi-

net-office.gov.uk/innovation/2OOl/ener-

gy/Renewener.shtml)

To the existing 10% target for 20 10, the

Cabinet office review recommends the

adoption of a 20% target for 2020.

See the ETSU report: New and Renewable

Energy: Prospects in the UK for the 21st

century March 1999 p.70 - 77

Broadly similar arrangements are in place

or under consideration in Scotland and

Wales, though the climate and topogta-

phy in these countries somewhat dimin-

ishes the volume of land which has real

energy crop potential.

Detailed estimated returns for al1 major

crops are contained in J.Nix (2001) Farm

Management Handbook, 32nd edition

7 Up to a maximum of L200,OOO

8 Detailed guidance on DEFRA’s Energy

Crops scheme is available on the DEFRA

website. For establishment grants see

www.defra.gov.uk/corpotate/regulat/for

ms/erdp/ecs/ecsestablishment.pdf and

for producer group grants see

www.defra.gov.uk/corporate/regulat/for

msletdplecs/ecsproducer.pdf

About the author Roy Collins is an analyst at Impax Capital

Corporation, a wholly owned subsidiary of Impax

Group plc. Impax Group is a London-based finan-

cial house focused on the renewable energy and

environmental infrastructure and technology sec-

tors. The Group provides corporate finance advi-

sory, asset management and strategic consulting

services to clients in the UK and overseas. Impax

Capital has arranged the finance for a number of

the UK’s most innovative biomass generation pto-

jects, including the UK’s first straw fired power

station at Ely in Cambridgeshire.

Contact: Roy Collins, Impax Capital, Impax

Group plc, Broughton House, 6/8 Sackville

Street, London WlS 3DG, United Kingdom.

Tel: +44 20 7432 2607; Fax: 44 20 7434 1123;

e-mail: r.collins@impax.co.uk; www.impax.co.uk

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