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Ministers' commitment to AD is under the spotlight

The Government’s shake-up of energy subsidies for renewable energy has certainly split the EfW industry and raised fundamental questions for the anaerobic digestion (AD) sector. 

The Department of Energy and Climate Change’s (DECC) shake-up of the Renewables Obligation (RO) subsidy system was hotly anticipated and its arrival on 25 July has generated considerable debate since. 

While EfW technologies such as gasification and pyrolysis will gain from the changes, support for the much-vaunted AD industry has been cut.

A significant line proposal was that all new AD plants with a capacity below 5 megawatts (MW), the size of almost all existing plants, would not be eligible for ROCs.

The initial reaction from the AD trade bodies was one of fury.   

The Renewable Energy Association (REA) said that, coupled with an earlier announcement on feed-in-tariffs (FiTs), the news spelt “disaster” for AD and raised questions about ministers’ commitment to AD.

The Anaerobic Digestion and Biogas Association (ABDA) said the Government was “undermining investor confidence” and the proposals would “shock” the industry.

But leading AD figures have explained the situation is more nuanced.

It is important to recognise AD plants have been eligible for either ROCs or FiTs.

FiTs, subsidies for small-scale (ie <5MW) renewable energy generation, cover a raft of technologies and were launched in 2010.

Ministers introduced a mechanism in July, ‘degression’, which decreased the tariff costs over time to reflect falling technology costs as capacity increases.

With small AD plants already benefiting from FiTs, is it right they should receive further subsidies through RO?  

Some in the industry are adamant they should be eligible for both.

Mike O’Brien of Biogas Developers said the closure of the RO option would be “the worst news ever”.

“Unless it can be reversed through the consultation process we will be packing up business as there will be no funding available for AD,” he said.

Other sector experts are less convinced. James Phillips, a renewable energy specialist at law firm Burges Salmon, said having separate incentive regimes offering different levels of support for the same installations was “probably undesirable from a policy perspective”.

Phillips added it could encourage developers to plan projects to fit certain bands to maximise subsidies rather than for ultimate purpose: generating energy efficiently.

“If you set out an incentive that has these boundaries then, of course, it’s one of the very first things a developer is going to think about because it affects the bottom line. You are going to design your project match up with where the tariffs are set,” he explained.

But Lucy Hopwood, head of biogass at consultancy NNFCC, warned cutting off the RO option for smaller AD plants could create problems for how FiTs are distributed.

She believes degression triggers have been set too low and this could strangle growth. 

Hopwood said: “The concern is that the thresholds that have been set are unoptimistic; so the baseline degression for the small-scale is about 3MW which could be six 499kW plants, or it could be 20 smaller plants for example. It’s really restricting the scale of projects that can develop without triggering the faster degression.”

David Collins, head of biogas at the REA said the proposals could see “smaller plants being elbowed out by larger ones” because of the restricted capacity available in the FiTs scheme.

Collins said the real solution would be to increase the money available for FiTs.

But some AD bosses said the announcement was not all bad news.

Philip Simpson, commercial director at food waste recycling firm PDM, said it was understandable people in the industry were questioning the Government’s commitment to AD.

The announcements were “inconsistent with the noises they’ve been making previously about AD being a really important and integral part of the renewables solution”, he said.

Despite this, he saw the impact of the announcement on the incentives landscape as “relatively neutral” for AD.

He said: “I think the driver is to try to reduce the cost of power to UK plc. Projects will still be viable. It’s still a very attractive market. Just not quite as attractive as it could have been.”

He added: “We take a pragmatic view that if we can reach a situation where the funding for the AD market becomes more sustainable in the longer term it can’t be a bad thing.”

Simpson said the industry should look to increasing efficiencies to reduce its reliance on subsidies.

He said the policy of “divergence on the cost of support for renewable energy” was a positive thing which would encourage “enhanced efficiencies”.

“As the market matures the unit costs should come down, and efficiency should go up. And that should help you live with a lower level of public support.”

The sentiment was echoed by NNFCC’s Hopwood who said the drive for efficiencies, such as Wrap’s publicly funded Driving Innovation in AD programme, could reduce reliance on incentives.

She said if those programmes are successful they could reduce capital expenditure on technology by up to 40%, making the whole AD process more efficient and cost effective.

“If that’s achieved I think Government is right in being cautious about the thresholds for [FiTs] degression because then we can expect capital expenditure coming down by up to 40%, and if that’s achieved it’s questionable whether we need the FiT at the rate it currently is. If that’s successful the industry won’t have to rely on incentives as much as it has in the past,” she said.

But the REA’s Collins said relying on increased efficiency from innovation which had only just been researched was “over-optimistic in the extreme”.

AD is also at a disadvantage compared with competing renewables technologies when it comes to efficiency funding, he argued.

“In terms of the construction and engineering costs that AD is made up from – rather than being made on an assembly line with reductions through volume, like solar panels – it is hard to see reductions in capital costs. I think it’s too early to rely on innovation.”

Collins said constraints on incentives would limit the ambition outlined in the Government’s renewable energy action plan to achieve 660MW of installed AD generation capacity by 2020.

But despite this, and accusing ministers of undermining investor confidence, ABDA said it was convinced Government is “supportive of AD in principle”.

ADBA policy manager Matt Hindle said the AD Strategy and Action Plan, launched alongside the Waste Review last June and the investment made in digestate market development were evidence of that (see comment).

Hindle is not alone in pointing out the work done by ministers beyond subsidy provision, such as investment in developing the digestate market. 

PDM’s Simpson said the key was to focus not on subsidies but on the supply chain: working to secure feedstock, pushing for a food waste landfill ban, and to develop markets for digestate.

He said if the Government in England would introduce a landfill ban, stimulating the AD market, the subsidies paid for ultimately by electricity consumers, would not be necessary.

“Then it’s the market paying for disposal, going back to a traditional form of ‘polluter pays’: you produce the food waste, you incur the cost.

“If we can do something there to prime the pump, to get the AD market going, then it isn’t the electricity consumer having to pay the price to clean up the environment. Why should they pay the cost of diverting food waste from landfill?”     

Likewise industry expert Paul Levett, a former deputy chief executive at Veolia, said incentive changes were not the major issue the industry had to confront.

He said: “Providing that the accreditation administration and approval regime is clear and effective, I don’t think that the incentive levels themselves will be a deterrent to investors.

“The main risks remain over capacity in particular regions and the need for long term certainty regarding outlets for the disposal of digestate.”

The depth of the damage to the sector of the withdrawal of ROCs remains to be seen but with the proposed changes not due to kick until April 2013, it’s highly feasible the uncertainty will damage investor confidence.

If ministers are to avoid a gap between rhetoric and action on a technology they insist they back, robust progress on their AD Action Plan outside of subsidies will be imperative.

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