WPAC – Improper assessment
June 30, 2015
By Gordon Murray
June 30, 2015 - The European Commission’s directorate-general for competition is investigating whether the UK government’s support of the biomass conversion of Lynemouth Power Station (LPS) complies with EU state aid rules, putting in jeopardy a project that would consume 1.5 million tonnes of wood pellets annually.
Located on the northeast coast of England, some 50km from the Scottish border, LPS was commissioned as a 420MW coal-fired plant in 1972 as part of an aluminium smelter owned by Alcan. After the smelter closed in 2012, Alcan sold the power station to RWE Supply and Trading. The station remains coal-fired but RWE intends to convert it to biomass and operate it to provide base-load power.
In May 2014, the UK government selected LPS to receive support under its Final Investment Decision Enabling for Renewables (FIDeR) scheme. The UK government introduced the FIDeR scheme as an incentive for developers to invest in low-carbon electricity by establishing a strike price for renewable electricity. The strike price for biomass conversions is set at £105/MWh with the contract duration capped to March 2027. By the time it is completed, the Commission’s state aid investigation will have delayed the project by at least a year, lessening the time available for a return on investment.
The Treaty on the Functioning of the European Union (the Treaty) prohibits governments from providing state aid (i.e. financial aid) to individual companies so as to prevent them from gaining advantage over their competitors and distorting markets.
The Treaty provides for Member States to grant state aid legally where it helps market or equity objectives that the market would otherwise fail to deliver – such as promotion of research, development and innovation, environmental protection, and so forth. The Commission is responsible for enforcing the Treaty.
In its assessment of the UK government’s support of LPS, the Commission has identified two issues that may violate state aid guidelines. First, the Commission believes that the assumptions used for calculating the internal rate of return were too conservative – that thermal efficiency and load factor were under-estimated; and wood pellet costs may have been over-estimated. These assumptions might result in significant changes to the IRR, and lead to over-compensation.
The second issue is that the Commission believes the amount of feedstock required to operate Lynemouth entirely on biomass (approximately 1.5 million tonnes/year) will distort the global wood pellet market – for pellet buyers and for the competition for raw materials, including for other industries such as pulp and paper and board manufacturing.
The Wood Pellet Association of Canada recently responded to the Commission’s public consultation on its findings regarding the UK government’s support of LPS. WPAC argued that with respect to the issue of LPS, the biomass conversion project is essential. Our industry cannot afford to lose a potential new customer for 1.5 million tonnes of wood pellets annually.
First, WPAC argued that pellet costs for the project had not been overestimated. The Commission suggested that long term price of wood pellets should be as low as $160/tonne. WPAC pointed out that the wood pellet sector operates with low margins. At a price of $160/tonne, pellet producers would be losing money. Producers may sell occasional spot cargoes below cost to satisfy short-term cash flow needs, but they need a higher price in order to sustain their businesses.
With respect to the issue of possible distortion of the biomass market, WPAC argued that such risk is non-existent as evidenced by the following:
- According to a study by Pöyry, the southeast United States, Western Canada, and Russia collectively have 50 million oven dry tonnes (m ODT) of surplus biomass feedstock (SE USA – 20 m ODT; W Canada – 14 m ODT; NW Russia – 16 m ODT). Moreover, the North American pulp and paper industry is declining due to falling demand for writing paper and newsprint, further reducing demand for feedstock.
- The wood pellet industry’s fibre paying capacity is substantially lower than that of either the pulp and paper industry or the board industry. Wherever a board pulp mill or a board mill exists, pellet plants are economically unable to compete for feedstock.
- Bill Mauro, Minister of Natural Resources and Forests for Ontario, has invited investors to develop a wood pellet industry in his province. Ontario has some 11 million cubic metres (equivalent to approximately five m ODT of wood pellets) of surplus feedstock available.
- The Commission relied on 2011 and 2012 wood pellet production and consumption data for its evaluation. Yet from 2012 to 2013, wood pellet imports to the EU grew by a further three million tonnes and from 2013 to 2014, by another 540,000 tonnes. Total North American pellet exports grew from 3.2 million tonnes in 2012 to 4.5 million tonnes in 2013, and 5.6 million tonnes in 2014.
- In Canada, one million tonnes of new pellet production capacity is presently under construction and will be operational in 2015: Rentech – 550,000 tonnes; Pinnacle – 250,000 tonnes; Groupe Savoie – 30,000 tonnes; and Pacific BioEnergy and Canfor Joint Venture – 175,000 tonnes.
- In the United States, four million tonnes of new production capacity is presently under construction and will be operational in 2015: Zilkha – 275,000 tonnes; Solvay Biomass Energy – 240,000 tonnes; Drax – 900,000 tonnes; Fram – 150,000 tonnes; German Pellets – 578,000 tonnes; Low Country – 70,000 tonnes; E-Pellets – 450,000 tonnes; Enviva – 1,000,000 tonnes; and Enerpellets USA – 250,000 tonnes.
- About 90 per cent of international wood pellet trade is confirmed by long-term bilateral contracts. LPS will not interrupt existing long-term contracts. There is more than enough new North American capacity coming online in 2015 to feed more than three power plants the size of Lynemouth.
The wood pellet industry cannot afford to lose a project that will consume 1.5 million tonnes of wood pellets annually. WPAC is convinced that the Commission’s assessment of the UK government’s support of LPS view is in error. We can only hope that the Commission takes our comments and those from other supporters seriously and that the Commission amends its findings in favour of the UK government and LPS. •
Gordon Murray is executive director of the Wood Pellet Association of Canada. He encourages all those who want to support and benefit from the growth of the Canadian wood pellet industry to join. Gordon welcomes all comments and can be contacted by telephone at 250-837-8821 or by email at email@example.com.
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