EU to investigate U.K. support of Lynemouth biomass conversion

By Erin Voegele | February 19, 2015

On Feb. 19, the European Commission announced it has opened an in-depth investigation to assess whether the U.K.’s plans to support the biomass conversion of the coal-fired Lynemouth power plant are in line with European Union state aid rules.

According to the EC, it will investigate to make sure public funds used to support the project are limited to what is necessary and do not result in overcompensation. The investigation will also assess whether the positive effects of the conversion in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass. In addition, the EC said the opening of the investigation gives the U.K. and interested third parties an opportunity to submit comments.

Following the conversion, the Lynemouth facility would have the capacity to generate 420 MW of electricity from wood pellets. The U.K. plans to support the conversion project through a Contract for Difference (CfD), which fixes a certain sales price, or strike price, for the electricity. The EC explained the subsidy means the generator of the Lynemouth plant will earn money from selling its electricity from the market. When the average wholesale price of electricity is below the strike price, the generator would receive a top-up payment. Estimates provided by the U.K. show the plant would operate through approximately 2027, generating an estimated 2.3 TWh of electricity annually. The facility would take in approximately 1.5 million metric tons of wood pellets per year, sourced primarily from the U.S. and Canada.

According to the EC, in its preliminary analysis it considered that the parties’ final calculations and estimates regarding key cost parameters may be too conservative and is concerned that the actual rate of return could be higher than the parties estimate, which could lead to overcompensation. The EC also noted the project will use a considerable volume of pellets from overseas, and subsidizing such as large volume of wood pellets could distort competition in the biomass market. The EC said it is concerned that the subsidy’s effects of competition could outweigh its positive effect on achieving EU 2020 targets for renewable energy.

The Lynemouth project is one of eight renewable energy projects selected for the first CfDs under the U.K.’s electric market reforms. In 2013, the U.K. Department of Climate Changed announced that the government had sent out draft investment contracts to a total of 16 renewable energy projects that had progressed to the next stage of the final investment decision (FID) enabling for renewables process. In mid-December of 2013, the DECC announced that only 10 of those projects had been found to be provisionally affordable under the budget caps released earlier that month. The list of projects was later reduced to eight. Those projects, including the Lynemouth and a Drax biomass conversions and the dedicated biomass with combined-heat-and-power (CHP) Teesside project, signed contracts in June 2014, along with five off-shore wind projects. 

In July, the EC granted state aid approval to the five wind projects as part of a larger announcement from the commission that indicated the U.K’s Contracts for Difference (CfD) subsidy program is in line with EU state aid rules.

In January, the EC approved the U.K’s plan to provide state aid to the proposed Teesside CHP plant, a 299 MW biomass-fired facility. The Drax and Lynemouth biomass conversion projects are still awaiting EC state aid approval.