The burgeoning anaerobic digestion (AD) industry is becoming a key part of the resource management sector. MRW looks at the challenges ahead and charts its complex funding system.
AD has a key role in driving the recycling of food waste but, as a relatively novel technology, investors still see it as a risky proposition. This means Government subsidies are critical for it to remain a viable business prospect.
Only an even greater surge in electricity prices would reduce the need for Government support, say industry insiders. They are also watching any food to landfill ban proposals closely.
In the meantime, with the current incentives in place, the number of operational AD plants in the UK has doubled in the two years since Defra launched its Anaerobic Digestion Strategy and Action Plan.
There are now more than 110 operational AD plants in the UK, according to the latest Defra figures.
Operational AD plants in the UK
The major subsidies offered are: Feed-in Tariffs (FITs); Renewable Obligation Certificates (ROCs) and the Renewable Heat Incentive (RHI).
The most popular of these for AD developers is FITs. There are 59 AD plants signed up to FITS, which allow them to receive payments for every kWh of renewable energy they produce.
The level of the tariff depends on the type and size of technology used, and when it was installed.
Most AD plant operators prefer FITs over ROCs, according to Matt Hindle, policy manager for the Anaerobic Digestion and Biogas Association (ADBA).
He told MRW: “Clearer, more stable returns [from FITs] have been attractive to investors.”
Mick Fishwick, chief executive of organics recycling firm TEG Group, echoed this, saying investors value being able to fix tariffs over a period of time.
But, industry members fear a degression - fixed annual percentage reductions in tariffs - of up to 20% for plants under 500kw capacity from April 2014 when energy regulator Ofgem announces new tariff levels next February.
It is also expected that if the aggregate capacity of plants over 500kw reaches 38.4MW, this will trigger a 10% degression.
David Collins, head of biogas at the Renewable Energy Association (REA), said that the allocation for plants below 500kw “has barely moved so it’s not the right time to reduce the tariffs”.
Fishwick said closing deals on AD projects is a lengthy process and therefore the threat of future degressions increases risk and could deter funders.
Another issue with FITs involves medium-sized businesses taking advantage of the 4.8p extra tariff for plants below 500kw capacity.
Some companies intend to build a plant in excess of 500kw, but then divide the project in two and build one plant up to 499kw to receive the better tariff. They then expand the size of the plant and current legislation allows them to keep this better tariff, Collins claimed.
“We don’t think this a particularly good use of money,” he said. The REA is pushing for one capacity for the whole industry rather than allocations for different sizes of plants in order to eradicate this issue, he adds.
A third challenge with FITs involves the pre-accreditation of plants, which allows a tariff to stay in place for one year while a plant is built.
Collins said that the Government counts pre-accreditations as well as the real deployment of plants in its capacity assessment. This means they can contribute to lowering subsidies even if they are not built in that year.
But on the other hand, he said pre-accrediting plants has value because it gives confidence to investors.
ROCs - the system under which an energy generator receives a ROC in exchange for the number of MWh of clean energy it produces, and certificates can also be traded - also face degressions. This is set to start with a move from 2 ROCs per MWh now to 1.9 ROCs in 2016.
Nearly 40 plants have benefited from ROCs. But they are due to be replaced by Contracts for Difference (CfDs) in 2017, and will only apply to plants above 5MW in size.
Collins said that CfDs will not be generally relevant to the AD sector as so few AD plants are above 5MW.
They are not so large because of problems with delivery distances for the amount of feedstock required and digestate distributed at such a capacity.
Consequently AD companies could shift from ROCs to FITs when the CfDs come into play.
Hindle noted: “There is a plan to continue support for existing [ROC] projects after 2017. How long they continue to receive support will depend on when they accredited the project.”
RHI has had the least uptake of all the subsidies relevant to the AD sector, with only two RHI accredited AD plants - one for biomethane and one for heat from biogas. Under the system, RHI payments are made to the producer of biomethane for injection to the gas grid or to a heat network.
RHI support for gas-to-grid at all capacities has been in place since November 2011 but difficulties with the technologies mean uptake has been slow.
There are another nine full gas-to-grid applications waiting for accreditation, according to Ofgem data.
Although there is only one tariff for gas-to-grid biomethane, Collins warned that it could be split into several tariffs in the future.
In another much-anticipated development, RHI payments could be extended to the owner of heat installations of more than 200kWt, whereas currently they are not.
A Department for Energy and Climate Change (DECC) spokesperson said: “We consulted on proposals to introduce support for biogas combustion above 200kWt in September 2012 and will be announcing the results of this consultation soon.”
Collins said: “It’s the first RHI in the world so it’s understandable they are taking their time announcing the higher end of the scale. Non-domestic RHI can be quite a big expenditure.”
All of these changes, and the planned degressions especially, have caused frustration in the sector. Fishwick said: “The industry needs a bit of consistency and it needs the Government to stop meddling. Set subsidies at a sensible level and give the industry and the funders a bit of visibility.”
Plant capacity subsidy (FITs)
- <250kw = 15.6p
- 250kw-500kw= 14.02p
- >500kw = 9.2p