Analysis finds biomass subsidies could save UK over $2 billion

By Katie Fletcher | February 29, 2016

In February, U.K.-based NERA Economic Consulting and Imperial College prepared an analysis for Drax that makes the case for allowing biomass conversion to compete for contracts for difference (CfD). The report “U.K. Renewable Subsidies and Whole System Costs: The case for biomass conversion” finds U.K. consumers could save more than £2 billion ($2.8 billion) if the country’s government’s planned renewable energy auctions are opened up to include a wider mix of technologies.

Drax commissioned the report to examine different options for the design of future CfD auctions. NERA and Imperial College analyzed the impact of system integration costs (SICs) of renewable technologies and assessed potential policy reforms the government could consider to better reflect these costs. The report quantifies the SICs in order to arrive at estimates of the whole system costs imposed by different technologies. The report concludes that SICs are a potentially significant part of the overall cost—for some technologies can add 10 percent or more to the cost of electricity—and they need to be taken into account by the government in its policy decisions if it is truly to control the impact on consumer bills.

Dorothy Thompson, Drax CEO, referenced the report in the company’s recent quarter four and full-year 2015 financial earnings meeting. She said that on a whole system-cost basis, biomass is £7 to £35 per megawatt-hour more affordable than other technologies and could save consumers in the region of £2 billion, assuming another 500-MW biomass conversion is done. “We think it’s a rather conservative assumption…the current administration has been clear—when it comes to new renewable generating capacity, affordability is a critical criterion.”

The U.K. government is currently planning for up to three further CfD auctions before 2020, but these are for “less established” technologies like offshore wind. The government has not revealed whether there will be further auctions for “established technologies” (onshore wind, solar power and biomass conversion), and it is also unclear to what extent the auctions will be used to promote greater competition between renewable technology categories—which could drive down costs for consumers.

The analysis demonstrates that in order to minimize the impact on consumer bills of the low-carbon transformation, it is essential that the government considers the whole-system costs, and not just the levelized cost of energy or the subsidies paid to individual projects. NERA analyzed two alternative policy options whereby the government could take better account of system costs and increase competition between technologies. Both options would allow established technologies (and less-established technologies) to compete for CfD contracts, starting with the next auction this year. Under both alternative policy options, the government would share the budget for CfD auctions more equally between less established and more established technologies, and would allow biomass conversion to compete for a CfD contract against other established technologies such as onshore wind and solar. The report stated that to allow competition on a level playing field, it is assumed the government makes CfD contracts available to biomass conversion on the same terms as other technologies, a 15-year CfD.

One policy option analyzed is a market-based approach, which exposes renewable generators to more market prices reflecting their system costs (CM revenues and CfD reference price harmonization). Option two is entitled Administrative SIC handicaps, and modifies the CfD auction process to enable the auction administrator to rank new renewable projects to reflect not just their own private costs, but also the system integration costs they impose on consumers.

 “We find that such policy options could save consumers around £1.9 to 2.2 billion,” the report states. “To realize these benefits, the competition between established technologies should be on a level playing field. For example, all technologies (including biomass conversion) would be offered CfDs for the same 15-year period.” The £1.9 to £2.2 billion (in 2012 prices) over a 15-year period is equivalent to approximately £73 to £85 per household.

According to the analysis, SICs for biomass conversion are close to zero, relative to those of nuclear generation, and in later years, biomass conversion actually has lower SICs than nuclear, due to the additional flexibility that biomass is able to offer compared to nuclear.

Based on the assumptions set out in the main report, all costs taken into account, biomass conversion is the most cost-effective renewable generation available at scale. The low SICs of biomass reflect that it is a reliable and flexible power source to provide firm capacity, the study states. “Including biomass as part of the generation mix is likely to lower the costs associated with adding more wind and solar power to the system,” the report states. “This means that it can enable the integration of other intermittent renewable technologies (by providing back up generation), and help to facilitate the phasing out of old coal-fired power stations, whose closure is putting pressure on security of supply.”

The full report can be downloaded here.