Forth Energys response to the Scottish Governments RO Banding Review Supplementary Consultation

Forth Energy, a joint venture between Forth Ports Limited and SSE plc, plans to develop three high-efficiency, wood-fuelled Combined Heat and Power (CHP) plants in Scotland. The plants will be situated at the Ports of Grangemouth, Dundee and Rosyth. Together they will have the capability to deliver 300 MW of reliable, controllable, renewable electricity to the national grid and up to 260 MW of renewable heat to neighbouring industrial and commercial users, and to new district heating networks. The combined output of the plants can deliver around 30% of the Scottish Governments 2020 renewable heat target and approximately 6% of the renewable electricity target. Forth Energy welcomes the opportunity to respond to the Scottish Governments RO Banding Review Supplementary Consultation and makes the following key points with respect to Proposal B (10 MW capacity cap for wood-fuelled dedicated biomass electricityonly generating plants): Forth Energy agrees there should be no support for new large-scale dedicated biomass electricity-only plants, as support for biomass under the ROS should focus on CHP plants. A wood-fuelled dedicated biomass CHP plant with an installed electrical capacity in excess of the ceiling should be eligible for ROCs for its electrical output, provided the plant has the capability to meet the Good Quality CHP (GQCHP) criteria at full heat output. An annual requirement to produce sufficient heat to meet the GQCHP criteria to be eligible for ROCs would significantly increase the risks associated with developing and operating a larger-scale biomass CHP plant in Scotland, and would consequently hinder progress towards meeting Scotlands 2020 renewable heat target. If such a requirement were placed on biomass CHP plants, Forth Energy proposes that a grace period be introduced to allow a newly commissioned plant to build up a heat customer base to meet the GQCHP criteria, and that established GQCHP plants should retain ROC support if heat production falls due to a reduction in customer demand.

We make the following key points with respect to Proposal C (biomass power value-formoney and affordability): A cap on dedicated biomass electricity-only plants under the RO is not necessary to ensure value for money, or to address feedstock lock-in. If a cap is to be implemented, an overall cap on the total electricity-only capacity which can accredit under the RO would improve investor certainty, compared to the proposed supplier cap. If a cap is to be implemented, it should exclude CHP plants which meet the GQCHP criteria in force at the point of accreditation under the RO.

Proposal B: Introduction of a 10 MW installed capacity ceiling for wood-fuelled dedicated biomass generating stations Key points Forth Energy agrees there should be no support for new large-scale dedicated biomass electricity-only plants, as support for biomass under the ROS should focus on CHP plants. A wood-fuelled dedicated biomass CHP plant with an installed electrical capacity in excess of the ceiling should be eligible for ROCs for its electrical output, provided the plant has the capability to meet the Good Quality CHP (GQCHP) criteria at full heat output. An annual requirement to produce sufficient heat to meet the GQCHP criteria to be eligible for ROCs would significantly increase the risks associated with developing and operating a larger-scale biomass CHP plant in Scotland, and would consequently hinder progress towards meeting Scotlands 2020 renewable heat target. If such a requirement were placed on biomass CHP plants, Forth Energy proposes that a grace period be introduced to allow a newly commissioned plant to build up a heat customer base to meet the GQCHP criteria, and that established GQCHP plants should retain ROC support if heat production falls due to a reduction in customer demand. Support under ROS focused on CHP plants Both DECC and the Scottish Government recognise the significant benefits that biomass CHP plants deliver in terms of fuel efficiency, security of supply, economic growth potential and long-term reduction in carbon emissions relative to fossil fuels for electricity and heating. The Scottish Governments latest draft Electricity Generation Policy Statement1 confirms its preference to see biomass used in heat-only or CHP schemes . The DECC UK Bioenergy Strategy2 identifies low risk bioenergy pathways to 2030 which are supportive of the use of biomass to generate heat and power through CHP processes and to provide heat for high temperature industrial processes. The DECC Future of Heating report highlights the role renewable CHP using biomass could play in reducing carbon emissions in industrial sectors3. Forth Energy believes that there are opportunities for CHP plants of all scales to either meet the energy demands of existing customers, or to act as a catalyst for inward investment, attracting new customers with heating (or cooling) requirements and growing the provision of renewable heat over time. The regulatory framework and financial support mechanisms
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Scottish Government (Mar 2012), Electricity Generation Policy Statement, p17 http://scotland.gov.uk/Resource/0038/00389294.pdf 2 DECC (Apr 2012), UK Bioenergy Strategy, p40 http://scotland.gov.uk/Resource/0038/00389294.pdf 3 DECC (Mar 2012), The Future of Heating, p82-88 http://www.decc.gov.uk/assets/decc/11/meeting-energy-demand/heat/4805-future-heating-strategicframework.pdf

should promote the development of a broad range of renewable CHP plants and encourage the growth of renewable heat uptake from those plants. As stated in our response4 to the Scottish Governments original consultation on banding under the Renewables Obligation (Scotland) (ROS)5, Forth Energy agrees that there should be no support for new large-scale dedicated biomass electricity-only plants, as support for biomass under the ROS should focus on CHP plants. We agree that a capacity ceiling for electricity-only plants is a practical way of implementing this. Forth Energy believes that a dedicated biomass plant should only be recognised as a CHP plant under the ROS (and hence be eligible for ROCs for its electrical output) if it is designed, constructed and maintained with the capability of producing sufficient heat at maximum output to meet the Good Quality CHP (GQCHP, as defined by article 2(1) of the ROS Order 20096 and CHPQA Guidance Note 447) criteria that are in force at the time of preliminary ROS accreditation. To meet this requirement, CHP developers will need to commit to significant upfront investment, installing the equipment which can allow the production of substantial volumes of heat. It should be noted that the heat is not necessarily a by-product of the generation process but may be an identified output from the plant, with a specific capital cost8. To ensure a return on its investment in heat producing equipment, a developer is strongly incentivised to locate the plant in an area where renewable heat demand is high, or is expected to grow, and will aim to produce and sell the maximum volume of heat possible throughout the plants operational lifetime. We believe that requiring dedicated biomass plants to have the capability to meet the GQCHP criteria throughout their operational lifetime to be eligible for ROCs would address the Scottish Governments desire to not support electricity-only biomass plants, without imposing risks on CHP developers that they are not in a position to control. We strongly suggest the Scottish Government adopts this approach for determining ROC eligibility for biomass CHP plants. The potential risks to CHP developments arising from the Scottish Governments proposals Forth Energy supports the principle that dedicated biomass plants should only be recognised as CHP plants under the ROS if they have the capability to meet the GQCHP criteria throughout their operational lifetime. However we understand that the Scottish Government is considering introducing an annual requirement for CHP plants to produce sufficient heat to meet the GQCHP criteria, in order to be eligible for ROCs for their electricity output. As explained below, such a requirement would introduce significant risks to the development and operation of renewable CHP plants within Scotland.

Forth Energy (Jan 2012), Forth Energys response to the Scottish Governments Consultation on Review of ROC Bands http://www.forthenergy.co.uk/assets/fe-ros-response-form-web.pdf 5 Scottish Government (Oct 2011), Consultation on Review of ROC Bands http://www.scotland.gov.uk/Resource/Doc/361576/0122199.pdf 6 Scottish Government (Mar 2009), The Renewables Obligation (Scotland) Order 2009 http://www.legislation.gov.uk/ssi/2009/140/contents/made 7 DECC (Nov 2008), CHPQA Guidance Note 44 https://www.chpqa.com/guidance_notes/GUIDANCE_NOTE_44.pdf 8 For our Grangemouth CHP plant, the capital cost of the heat infrastructure is over 25% of the overall cost.

Heat produced by a CHP plant can only be sold to, and utilised by, customers that are directly connected to the plant via a dedicated local heat network. This means that the heat produced by a CHP plant is constrained by its connected customers heat requirements, which are not directly within the control of the CHP operator. Thus any eligibility criteria for receiving ROCs which depends on the amount of heat consumed by its customers (and hence the amount of heat produced by the CHP plant), introduces a risk to the CHP operator over which it has no direct control. Under such a regime, a reduction in heat offtake from a customer (for example through efficiency improvements or a reduction in demand for its products), or the cessation of a heat customers operations (for example through insolvency or relocation), is not within the CHP operators control, but could result in the loss of its revenue stream from ROCs for its electricity production. This would exacerbate the downturn in revenues arising from the reduction in heat sales and loss of the Renewable Heat Incentive (RHI) tariff. The risks are highest for a CHP operator connected to a single customer who cannot compensate for the reduced demand by providing heat to alternative customers. The extent to which individual CHP plants would be affected by the introduction of ROC eligibility criteria based on heat production will depend on the precise manner in which the GQCHP criteria are used to determine eligibility. In particular, the impact will depend on how, if at all, the Quality Index (QI) for the plant is used to calculate ROC issuance. It is not clear from the consultation document whether or not the Scottish Government is considering scaling-back ROC eligibility for plants achieving a QI below the 100 threshold (as is currently the case for CHP Uplift), or is considering removal of all ROCs for a plant which does not meet the QI threshold. If the latter, this significantly increases the financial risks of operating a CHP plant. If a biomass CHP plants eligibility for ROCs were to depend on heat production rather than heat capability, developers, investors and finance providers are only likely to consider the construction of new CHP plants which can provide heat to customers who have: (i) a very high likelihood of long-term operation at the site; (ii) a stable profile of heat requirement; and (iii) the ability and willingness to underwrite the liabilities arising from not taking sufficient heat to ensure the CHP plant meets the GQCHP criteria. Such a requirement is also only likely to deliver new biomass CHP plants that are sized to match the heat requirements of customers who are both ready to take heat and can be connected during the approximately 3 year period of plant construction. CHP plants with a thermal capacity sized to allow the heat production and sales to grow in time, with the additional capital costs underpinned by the ROCs from electricity production (as is currently the case), are unlikely to be developed due to the high risk of being unable to meet the GQCHP criteria during the early years of operation (due to the lower heat efficiency of an oversized boiler until heat demand has grown sufficiently), and the subsequent loss of ROC revenue during those years. As set out above, introducing an annual requirement to produce sufficient heat to meet the GQCHP criteria to be eligible for ROCs would greatly increase the uncontrollable risks placed on dedicated biomass CHP plants. This would increase the difficulties in gaining board approval to commit to such projects, raising finance and attracting investors. The additional risks could significantly constrain future biomass CHP development in Scotland, and reduce the potential for CHP plants to be built with the aim of growing a customer base and heat network over time. These factors would hinder progress towards meeting Scotlands 2020 renewable heat target and the growth of low-carbon heat production beyond this date.
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Mitigating the risks to CHP plants If the Scottish Government does intend to introduce a ROC eligibility criteria based on heat production rather than capability, Forth Energy suggests two proposals to partly mitigate the risks that this would impose on biomass CHP plants. Firstly we suggest that a grace period be introduced to allow time for newly commissioned CHP plant to build up a heat load which would meet the GQCHP criteria. Where a CHP developer can demonstrate that it has invested in the infrastructure capable of producing sufficient heat from the plant to meet the GQCHP criteria, it would retain ROC support for its electrical output whilst building up a heat customer base and delivery network throughout the grace period. This ensures developers will only build CHP plants in locations where the growth in renewable heat demand is feasible and highly likely. It also places a considerable financial incentive on the CHP plant operator to develop its heat sales to a level which ensures the GQCHP criteria are met within the grace period, or lose the ROC support for subsequent years. Secondly we suggest that CHP plants which had previously met the GQCHP criteria, but where heat production is reduced due to a change in customer demand such that the criteria are no longer met, should retain ROC support. Where heat demand has reduced, the CHP operator would remain incentivised to seek additional heat customers and restore revenue through heat sales and RHI payments, thereby subsequently meeting the GQCHP criteria. If ROC support was withdrawn immediately this would severely reduce an operators income stream, threatening its survival and hampering its efforts to seek replacement heat customers. These two proposals ensure that larger-scale CHP developers invest in the infrastructure capable of providing sufficient heat to meet the GQCHP criteria; allow plants to be built where the developer is satisfied that an adequate level of heat sales can be delivered within the grace period to meet the GQCHP criteria; and shield operators from the uncontrollable risk of a reduction in heat demand, whilst ensuring they remain incentivised to increase heat sales subsequently. We would welcome the opportunity to discuss the implementation of these proposals in greater detail with the Scottish Government. Additional uncertainty arising from DECCs forthcoming CHPQA review The risks identified with linking ROC eligibility to meeting the GQCHP criteria on an annual basis are exacerbated by the uncertainty arising from the UK Governments forthcoming review of the CHPQA standards. This review introduces the potential for revisions to the GQCHP criteria and the Quality Index calculations. Forth Energy understands that any changes to the GQCHP criteria following this review may be applied to plants that are already accredited under the RO and ROS, potentially undermining the investment case on which the plant was designed and constructed. To provide future developers and investors with certainty that the criteria will not subsequently be amended for plant already in operation, there is a need for the GQCHP criteria to be grandfathered following this review. Any further reviews of the criteria should be undertaken with sufficient lead time so as not to impact on plant already under construction and for which the technical design has been agreed.

We urge the Scottish Government to promote the principle of grandfathering the GQCHP criteria in its discussions with DECC, to avoid additional risk to the delivery of CHP schemes that will assist in meeting its challenging 2020 renewable heat target.

Proposal C: Additional mechanisms for biomass power aimed at ensuring value-formoney and affordability. Key points Forth Energy has responded to DECCs consultation9 on biomass value for money and affordability. Our response reflected the different strategy for biomass use within the energy sector that has been adopted by the UK Government. Although Forth Energy is seeking consent to develop CHP plants, we do not support DECCs proposal for a supplier cap on dedicated biomass electricity-only plants under the RO, and made the following key points in our consultation response. A cap on dedicated biomass electricity-only plants under the RO is not necessary to ensure value for money, or to address feedstock lock-in. If a cap is to be implemented, an overall cap on the total electricity-only capacity which can accredit under the RO, would improve investor certainty compared to the proposed supplier cap. If a cap is to be implemented, it should exclude CHP plants which meet the GQCHP criteria in force at the point of accreditation under the RO. Value for money According to the DECC consultation proposals, The intention in setting a cap is to maintain value for money for consumer subsidies while also maintaining investor confidence (paragraph 12.3). Yet over the period 2013 to 2017 biomass electricity-only plants would receive between 0.4 and 0.5 ROC/MWh less support than the marginal renewable electricity technology of offshore wind. In addition, the energy biomass electricity-only plants supply is both reliable and controllable, unlike intermittent renewable technologies, including offshore wind. Accordingly biomass electricity-only plants represent better value for money to the consumer than the marginal (and uncapped) technology. It is therefore not logical to cap biomass electricity-only plants on the basis of value for money to the consumer. Feedstock lock-in The UK Government also believes it is desirable to limit support for dedicated biomass electricity-only plants avoiding significant feedstock lock in beyond the late 2020s. (paragraph 12.1 of the consultation). However, the UK Government should recognise the essential role dedicated biomass plants will have in providing controllable low-carbon electricity once the transitional technologies of conversion and co-firing cease to operate and prior to the commercial development of Carbon Capture and Storage. If long-term feedstocks can be sourced that meet the rigorous UK biomass sustainability criteria there should be no reason to constrain the overall capacity of the plants which utilise them.

DECC (Sep 2012), Biomass electricity and CHP plants ensuring sustainability and affordability http://www.decc.gov.uk/assets/decc/11/consultation/ro-banding/6339-consultation-on-biomass-electricity-combined-hea.pdf

Type of cap The proposed supplier cap on dedicated biomass electricity-only plants introduces an unnecessary degree of complexity and uncertainty for investors, contrary to the stated intent in paragraph 12.3. It could act as a much bigger constraint than the UK Government intends, as it introduces the risk of a dedicated biomass ROC value collapse10 for all such plants built beyond Apr 2013, not just those which may cause the cap to be exceeded. This risk will make investors nervous, making it difficult for developers to secure financing for any plants expected to be commissioned beyond Apr 2013. We suggest that, if a cap is deemed necessary it would be preferable to implement an overall cap on the amount of dedicated biomass electricity-only plant that can be accredited under the RO/ROS post Apr 2013. This would remove the risk of a dedicated biomass ROC value collapse for dedicated biomass and, if a pre-accreditation process was available, would allow developers and investors to secure funding and proceed to construction with confidence. Exclusion of CHP plants from any cap As stated in our response to Proposal B, both DECC and the Scottish Government recognise the significant benefits that biomass CHP plants deliver in terms of fuel efficiency, security of supply, economic growth potential and long-term reduction in carbon emissions relative to fossil fuels for electricity and heating. Given the importance both Governments place on CHP, Forth Energy agrees that, if a cap is deemed to be necessary, those plants which meet the GQCHP criteria in force at the time of accreditation under the RO/ROS, should be outside the cap. It is important for developer and investor certainty that the GQCHP criteria are grandfathered at the point of accreditation under the RO/ROS. In addition, any proposed changes to the GQCHP criteria for plants yet to accredit must have sufficient lead time, so as not to adversely impact those plants which have secured the necessary consents and funding and are committed to, or are under, construction.

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A dedicated biomass ROC value collapse could occur if the issuance of such ROCs exceeds the total volume suppliers can use for compliance under the RO/ROS, and if there is no expectation of the surplus being absorbed in future years. A similar issue occurred due to the surplus of EU Allowances (EUAs) issued in Phase 1 of the EU Emissions Trading Scheme which saw the EUA price collapse to 0.01.