Energy crops - fact and fiction

The excellent Bishop Hill has spotted an announcement by ScottishPower that they are looking to contract farmers to grow energy crops for their Cockenzie and Longannet coal-fired power stations. I can shed (I hope) a little more light on this announcement. It should not be taken at face-value.

I have posted several times on the Renewables Obligation (RO), the mechanism by which the Government encourages renewable electricity. It might be an idea to review the earlier posts to remind yourself how it works, and of the byzantine complexity and illogicality of the proposed changes to it. In short (or as short as I can make it), electricity suppliers are obliged to buy an increasing proportion of their electricity from renewable sources. Renewable generators are awarded Renewables Obligation Certificates (ROCs) in the proportion 1 ROC/MWh, which they can sell to suppliers, who use the ROCs to demonstrate the extent of their compliance with their obligation. Suppliers have to "buy out" however much of their obligation they cannot satisfy by surrendering ROCs, at a defined, indexed "buy-out price", which sets the market value of ROCs. The buy-out pot of money received from all suppliers is "recycled" to suppliers in proportion to the number of ROCs surrendered. This increases the value of ROCs in response to shortfalls in the market - the fewer ROCs in total, the more valuable is each ROC, and therefore each renewable MWh. Conversely, if every supplier has purchased sufficient ROCs to meet their obligation in full, the value of additional ROCs collapses to zero - an effect, known in the industry as the "cliff-edge", which ensures that there will never be full compliance, because people will stop developing projects as compliance-levels approach 100%.

There was doubt, during the development of and consultation on the original plans for the RO, whether co-firing of biomass in fossil-fired (typically coal) power stations offered sufficient environmental benefit to justify inclusion in the RO. The displacement of coal for combustion is balanced by impacts on the efficiency of the process and on the choice of whether coal is used for baseload (i.e. continuous) or for load-following (i.e. intermittent) generation. The environmental benefits were judged to be moot, and the original assumption was that co-firing would not be included within the obligation.

Regardless of the carbon-benefits, the Government was persuaded during the consultation process that the RO was a suitable vehicle to deliver an agricultural objective - the encouragement of the growing of energy crops. The cheapest, and most widely available materials for use for co-firing are by-products, such as forestry and timber-mill waste, rape meal, or imported palm-kernel and olive-pressing waste. Energy crops are more expensive, requiring displacement of other crops, and offering no additional revenue-stream from the agricultural market. They are defined (for no obvious reason) as crops planted after 1989 for the primary purpose of being used as a fuel. Typical energy crops are short-rotation coppiced (SRC) willow or poplar, and elephant grass (miscanthus).

The Government therefore included co-firing of biomass within the RO, but provided that energy crops should constitute 80% of the fuel used after 2006. Co-firing (with or without energy crops) was seen as potentially both cheap and plentiful, and the fear was that, without restriction, it could flood the market and prevent the development of other renewables (due to the "cliff-edge" effect). As an additional constraint, the government therefore included a provision that suppliers could not satisfy more than a minority share of their obligation with co-fired ROCs. That share was set originally at 25%, has since been reduced to 10%, and is due to fall to 5% in 2011.

Following the introduction of the RO in 2002, the co-firers (effectively all the major electricity-generation companies) lobbied to persuade the Government that they could not develop energy-crop capacity by 2006 ("would not" was more like it in reality). The Government quickly capitulated, pushed back the deadline for any energy-crop requirement to 2009, and dramatically lowered the proportion that would be required initially, with a gradual escalation (25% in 2009, 50% in 2010, and 75% from 2011). This, of course, had the opposite effect to that intended by the Government, as the co-firers used the time to find further ways to delay or water-down the energy-crops requirement, rather than to enter into the contracts with farmers that they had so far avoided thanks to lack of imminent pressure. With this initial success under their belts, the co-firers then campaigned to overturn the original view that the environmental benefits of non-energy-crop co-firing were moot. This, along with advice from many of the same players that more support was required for offshore wind, contributed to the decision by the Government to review the whole mechanism, a process that is currently underway.

The result of this review looks like being not so much a dog's dinner, as the regurgitated product of that dinner. The Government has been persuaded to junk the original logic of treating all eligible technologies equally in order to encourage the most efficient projects. Instead, they are now trying to target support at technologies according to "need", on the false assumption that such an approach is either valid or possible. Why would you want to encourage more expensive carbon-savings? If the answer is "to support RD&D of less mature technologies", an output-based (rather than capital-based) market mechanism of uncertain value is about the worst way to do that. This was recognised in the original proposals, which were accompanied by a grant programme to support RD&D. Unfortunately, the Government had its usual degree of success at picking winners to support with grants (for instance, they announced the third round of grant-funding for offshore wind, which got the lion's share of the grants, before the first round had even been built and the lessons learnt). That, combined with the fact that the Government has been so profligate with our money more generally, means that there is no longer enough money in the pot to continue with a substantial centrally-funded grant programme, which is why the Government are looking to offload the cost of supporting RD&D in a thoroughly inappropriate manner onto consumers, who ultimately pay for the RO.

But let us say that the objective of supporting more expensive carbon-savings in this way were valid. Could you do it? Do the costs of projects fall conveniently within narrow technology bands? Of course not. Every project has different costs and revenue streams. If they give 1 ROC/MWh to one technology and 2 ROCs/MWh to another, based on bogus economic generalisations (carried out for them by the usual parasites at Ernst & Young), that ensures that the more expensive projects of the former cannot be developed, even if they would have delivered cheaper carbon-savings than the cheapest projects of the latter. This is nonsensical from an economic and environmental point-of-view.

The Government is nevertheless determined to press on with this plan, ignoring the public advice of most established players in the industry (except for the odd token concession to make it look like they are listening). They propose to give:

• 0.25 ROCs/MWh to co-firing from non-energy crops, landfill gas and sewage gas,
• 1 ROC/MWh to onshore wind, small and refurbished hydro plants, co-firing with energy crops, and Energy-from-Waste (EfW) incorporating CHP (EfW without CHP gets nothing),
• 1.5 ROCs/MWh to offshore wind and dedicated biomass, and
• 2 ROCs/MWh to wave, tidal stream, anaerobic digestion, gasification, pyrolysis, solar photovoltaics, geothermal, and dedicated biomass with CHP.

If I highlighted every absurdity in that list, we'd be here till Christmas. So let's just return to the co-firing issue. As you can see, energy-crop co-firing stands to get 400% more support than non-energy-crop co-firing. Another proposed change would remove the cap on co-fired ROCs as a proportion of the overall obligation (although 10% would be retained as a trigger for review of the banding levels, which manages expertly to combine an increase in the uncertainty for other renewable generators with an ongoing uncertainty for co-firers - a lose-lose scenario that only politicians and bureaucrats could imagine was helpful). The upshot of all this is that non-energy-crop co-firing looks suddenly unappetising, particularly given low and uncertain future carbon prices in the equally daft EU Emissions Trading Scheme (EU-ETS), while energy-crop co-firing begins to look viable. Hence ScottishPower's announcement.

But it is more complicated and subtle than that. There is a lot of internal politics and positioning going on amongst the big energy companies. Most electricity companies nowadays are vertically-integrated (i.e. they have combined generating and supply businesses, and often distribution businesses as well). These vertically-integrated companies - EDF, E.ON, RWE, Centrica, Scottish & Southern Energy (S&SE) and ScottishPower (SP) - dominate the market. Their models are based on carving up that market. For the sake of brevity, we will refer to them as the FLBs (Fat Lazy Bastards) from here on. External competition from independent generators and suppliers are unhelpful to them, except at the margins where they may be useful for offloading the risk of supplying intermittent power. Independent generators have great difficulty in obtaining competitive market terms when their only potential customers (the electricity suppliers) are also their major competitors (the vertically-integrated generators).

The independents therefore look for an angle, while the FLBs try to deprive them of any angles and niches. Drax Power Ltd, operator of Drax Power Station, the largest coal-fired power station in the country, identified the potential of energy-crop co-firing as a possible angle while the FLBs were still trying to use their lobbying influence to change the terms of the RO to let them off the energy-crop hook. Drax engaged their local MP, John Grogan (MP for Selby), to lobby for changes to the RO rules that would allow them to get a decent price for their energy-crop co-fired output. Drax lies in Labour-heartland territory, and Mr Selby seems to have been successful in making the case for more generous treatment of energy-crop co-firing. However, the FLBs don't like such a strong differential, which would force them to change their -modus operandi-. So they are arguing, with some justification, that a differential of 0.75 ROCs/MWh exceeds the difference in costs between energy-crop and non-energy-crop co-firing, and that the result will be very little non-energy-crop co-firing (which the Government needs to balance the cost of multiple-ROC technologies like offshore wind) and possibly a flood of energy-crop co-firing, which (they say) will have impacts on agriculture and the value-for-money of the RO.

ScottishPower's emphasis on the incredible amount of land needed to switch to energy-crops should be seen in this light. You will notice that there is very little commitment in this announcement - they are only "looking to contract" farmers. What they are really doing is putting across the message that the proposed changes to the RO will have unintended and possibly harmful consequences. They are trying to influence the Government to increase the non-energy-crop band (they will push for 0.75 ROCs/MWh in the hope of getting 0.5 ROCs/MWh) and/or to reduce the level of support to energy-crop co-firing. They want people up in arms about the impact on the Scottish landscape and on supply and prices of Scottish agricultural products.

This is pure cynicism, because if you talk to them privately, they admit that the real effect will be to increase the import of energy crops, and the use of annual crops (such as maize and rape) for native production, as much as or more than the widespread plantation of SRC and miscanthus. The simple expedient will be for them to redefine crops such as palm, rape and maize as being primarily for purposes of fuel-production, with their agricultural product being redefined as the by-product. This (particularly with regard to rape) was a significant part of Drax's plan, so the FLBs have also begun to lobby to treat annual crops differently to perennials, for reasons that are far from apparent, if one excludes self-interest.

ScottishPower's announcement is a splendid example of this cynicism, typical of the approach of all the FLBs (and most other self-interested participants in the energy markets) to reform of the RO and to energy policy more generally. SP are having their cake and eating it - either their announcement changes policy so they can carry on with their non-energy-crop co-firing (in which case they will drop the farmers like hot potatoes), or it does not, in which case they have started the preparations to switch over. As the changes are expected to come into force in 2009, you will notice that the amount of time they have allowed themselves to contract the necessary energy-crops is rather less than the amount of time (2002 - 2006) that they claimed was too short to be able to bring on energy crops after the introduction of the RO.

The FLBs have whole departments dedicated to policy work and to steering policy in the direction that suits their interests. They dominate the trade associations, because, unlike the independents, they can afford the time and effort to respond to the mountains of consultation, regulation and legislation produced by government. And they dominate the Government's own advisory boards, and those of the institutions that are supposed to represent business generally, such as the CBI. Most of the members of the FLB's policy departments are intelligent, charming, and can argue persuasively that black is white if it suits their company's interests. Government policy on energy is being steered almost entirely by this advice. We no longer have an energy market, but a collection of energy interests, coordinated and supported by central-government policy-tweaking. Because the Government claims to support markets (which in reality means alliances with the major corporations), people outside industry have no idea how close we have got to Soviet-style central-planning, delivered through industrial conglomerates. People need to wake up to the fact that the rampant managerialism and corporatism dominating our polity and economy is really collectivisation by the back-door.