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Markets - Organics 19 April 2014

With 143 anaerobic digestion (AD) plants now in operation in the UK, and 200 further projects in planning, prospects for the sector look promising.

What’s more, the Government strongly supports the sector. But changes to financial incentives for renewables are causing some concern, and the market needs some key questions resolved to continue to build on its strength.

One of the most talked-about issues in recent months has been the 20% cut in support levels for AD projects up to 500kW under the Feed-in Tariff (FIT).

Following strong representations from ADBA, the Renewable Energy Association (REA), the National Farmers’ Union and other trade bodies that such a cut was unjustified given the low level of deployment at this small scale, the Government pledged to hold a consultation in January to address the issue.

But this was abandoned in February after it became clear that the Government’s preferred options to tackle the ‘degression’ problem were no longer feasible given the high number of projects which had applied for preliminary accreditation after securing planning permission.

The 20% cut in subsidies for new AD projects, which came into force on 1 April, is likely to be followed by further reductions in October and will affect the viability of projects at this scale.

We are also waiting for clarification on the Budget announcement that companies accredited under the Renewable Heat Incentive (RHI) or Renewables Obligation will be excluded from Enterprise Investment Scheme (EIS) funding, effective from the assent of the Finance Bill in the summer.

We believe there are at least 25 projects in development which would be affected by this change, and many more in earlier stages of planning which would use EIS funding.

EIS is particularly attractive to investors and represents a valuable source of funding for project developers, who might otherwise struggle to attract funding given the additional risks which AD investments carry in terms of issues such as feedstock contracts - which the Green Investment Bank (GIB) has recognised.

ADBA, therefore, believes there is a strong case for exempting AD from this EIS restriction, as the Government has already done for projects using the FIT.

On the positive side, the market appears set to benefit from an expansion of support under the RHI itself.

Currently, AD plants generating heat can only benefit from the RHI if their plant has a thermal capacity below 200kWth. This has resulted in many larger combined heat and power AD plants wasting heat because the cost of developing infrastructure to make use of it is prohibitive without RHI support.

From this spring, all plants commissioned from 4 December 2013 will be able to access the tariffs for any heat they can make good use of. Plants below 200kWth will receive 7.5p/kWh, those between 200-599kWth will get 5.9p/kWh and projects with a thermal capacity of 600kW or above will receive 2.2p/kWh.

The Government will clarify the rules for existing plants which are generating electricity only when the regulations are published.

With a significant degree of uncertainty around the future of funding for AD projects, the role of the GIB is important. Its remit is to invest in

“UK projects which are both green and commercial”, and has identified waste as a priority sector.

It has made a number of investments in AD projects already, such as the development of a 1.5MW food waste project in Dagenham with £11m equity funding, around half of the total cost of the project.

The bank is also looking to expand its scope, with plans to explore £50m of debt financing for AD projects, as well as a promise to “explore the financing of farm-scale AD projects at an aggregated level”. This which could help the smaller scale sector affected by FIT degression.

On top of the expansion in RHI support for AD projects and welcome GIB backing, resolving the serious issues around FIT and EIS funding in the coming months would go a long way to boosting the business case for many projects, and ultimately ensuring that the industry’s massive potential is delivered.

  • More detail on GIB’s future investment plans can be heard at UK AD & Biogas 2014 in Birmingham on 2 July, where Partha Vasudev, Vice President Waste & Bioenergy, will be outlining the bank’s goals in the AD market. On top of the expansion in RHI support for AD projects and welcome GIB backing, resolving the serious issues around FIT and EIS funding in the coming months would go a long way to boosting the business case for many projects, and ultimately ensuring the industry’s massive potential is delivered.

Charlotte Morton, chief executive, Anaerobic Digestion and Biogas Association (ADBA)

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