THE MACRO ECONOMIC DEMAND FOR BIOMASS POWER IN THE UK 

Aeternum Capital operates in a number of sectors across UK Infrastructure connected with Power, Waste, Transport and Biofuels.  Aeternum believe the challenges facing the UK in fulfilling its Renewable Energy obligation present a compelling investment opportunity. 

It is almost certain that the UK faces the threat of a significant energy gap by 2025.  By 2025 a ¼ (21GWe) of the UK's existing electricity generating capacity will have closed. These forced closures apply to both the aging Coal fired power stations and all but one of theUK's nuclear power stations as a result of compliance with European environmental regulations. 

In the midst of these closures, even at current levels Renewable electricity supply must grow by 15% p.a through to 2020, to meet climate change and renewable energy targets. 

The UK government is seeking renewables to accommodate at least 117 TWh/y of electricity by 2020, 30% of all UK electricity consumption.  This rate is unfeasible at current levels of investment in the sector.  Over £200billion of investment is needed by 2020 to secure supply and meet targets. 

Biomass power in the UK is expected to supply 10% of total electricity by 2020 (25% of renewable electricity supply) with the Planned investments into biomass power required to secure base load power to ensure grid stability. 

Most of the UK Utility focused on Renewable Energy from Biomass have made broad estimates of the future biomass requirements of their respective projects.  Since the majority of UK biomass power plant's' will  source 100% of feedstock from abroad, each project must ensure it achieves the requisite security, longevitiy, and price stability. 

Independent research opposite indicates the feedstock requirements of each of the 28 live Biomass projects over 50MW. This suggests that if all 28 projects are eventually completed as planned, their annual requirement for feedstock  23.6 million tonnes per annum. 

Each power plant's expected feedstock demand is broken down between imports and domesticUKsources. Of the twenty-eight >50 MWe projects that are planned 87% are likely to rely on imported Biomass. 

Evidently, the larger the plant, the greater its reliance on imports. The UK's 14 largest projects have a combined biomass feedstock requirement of 17.2 million tpe/y respectively. Biomass Feedstock Requirements for UK Power.  

Biomass Feedstock Requirements for UK Power 

The feedstock requirements of the 28 plants broken down by three categories of solid biomass: wood chips; wood pellets; and other biomass.  

Some of the projects have already developed quite detailed feedstock sourcing strategies and have supply contracts in place if not already signed. Others are only just beginning to think about the subject. However, even the more advanced projects are keen to maintain as much feedstock flexibility as possible. 

Wood pellets are likely to be a vital component of the co-firing feedstock at existing coal-fired plants in the UK.  The two new co-firing projects (at Drax and at Peel Energy's Ayrshire plants) are likely to be the biggest users of pellets.  However an increasing number of dedicated projects are including pellets in the feedstock mix. 

Co-firing biomass with coal is a relatively quick and inexpensive method of generating renewable electricity. We suspect that in time it will receive more attention and support fromUKpolicy makers than it has done lately. 

Since the allocation of Renewable Obligation Certificates for co-firing was halved in April 2009 the demand has faltered - but this is forecast to change substantially given the current delays in dedicated Biomass Power. 

The UK Government will be forced to  follow the European example and encourage more substantial co-firing (up to 50% in some cases) of the existing coal fired power stations rather than closure. Given the current price signals, the volume could increase very substantially. 

Large Combustion Plant Directive (LCPD), six of the UKs coal-fired power stations must close by 2015  reducing the UK's coal-fired generating capacity to 21.1 GWe. 

Financial constraints for UK Biomass Projects 

The ease of financing renewable energy investments is closely associated with the political risks that these investments face.

 Feedstock supply risk is often an equally important concern for investors. 

Despite the recession and the financial crisis, there is still a significant appetite for renewable energy investments. Globally, the rapid growth in investment in new 'clean' energy assets has stalled, but investment has held steady at over $100 billion in each of the past two years 

In theUK, a recent survey found that investors saw renewable energy as the most attractive environmental investment opportunity, though their enthusiasm will certainly have to scale new heights if the UK energy industry is to attract the £200 billion of investment that is said to be required by 2020. 

An investment in a large biomass power plant is perceived to be more complicated than an investment in some other renewable energy assets developers of biomass power projects must work harder to de-risk their projects.

Technology risk

The larger of the biomass power plants planned for theUKwill be the largest of such plants in the world. 

The circulating fluidised bed boiler technology that all of theUKplants will be using is already employed at large scale throughout the world. The large plants proposed for theUKare not much larger than some that are already operating, the largest being that of Alholmens Kraft AB inFinland. 

Logistics/shipping risk 

As a low value, high volume, commodity, the profitable supply of biomass is largely about logistics. The import volumes that are potentially involved are massive; if they all go ahead, this will be equivalent to about 28 million t/y of green wood chips. 

Assuming an average cargo size of 40,000 t, this import requirement would require 700 fully-laden chip carriers to arrive in the UK each year, or one every 12 hours, 365 days a year. This gives some sense of the investment required in shipping and port handling capacity, if all the biomass power projects are to be realised. 

It also explains why several of the biomass project developers are teaming up with port operators (e.g. SSE/Forth Ports and DONG/ABP), and why financiers are keen to see a credible logistics/shipping strategy in the project proposals that are presented to them. 

At the moment, while the global economy is still emerging from recession, shipping capacity is not generally a constraint. However, it should be remembered that the world's fleet of specialised woodchip carriers is relatively small and aging. The fleet is almost wholly controlled by Japanese trading companies and pulp and paper producers. In recent years,Japan's wood chip imports have declined, creating opportunities for ships to be redeployed to other areas and routes. Nevertheless, the capacity of the fleet is finite and although it is possible for wood chips to be transported in standard bulk carriers - albeit at a higher cost, usually - freight costs are a risk that the biomass power projects will need to manage. 

Feedstock supply risk 

Of the many challenges that a biomass power project will need to overcome, arguably the most important concerns feedstock. This is not to imply that we believe that feedstock risk is in any sense unmanageable, it is just that feedstock is the one area of a project that a developer should put most effort into getting right. 

This is much the same as at a typical coal-fired or gas-fired power station. But there is a big difference: whereas a new coal or gas plant can quite easily tap into pre-existing and well-developed feedstock supply chains, a new biomass plant must expect to develop a supply chain from scratch.