UK biomass sector expected to see annual average growth rate in capacity of 4.2% from 2014-2023; more project cancellations likely to occur unless investment environment, regulatory framework becomes more developer-friendly: Business Monitor International

Allison Oesterle

March 10, 2014 (Business Monitor International) – We have long highlighted that the investment environment for biomass developers in the UK has not been particularly favourable , especially for dedicated biomass plants - with the UK government continu ing to show a preference for conversion projects. RES's decision to halt the development of its Port of Blyth biomass project serves to reinforce this view, and also supports our rather bearish forecasts for the UK biomass sector.

It was announced in March 2014 that UK company Renewable Energy Systems (RES) will stop developing its US$500mn Port of Blyth dedicated biomass plant in Northumberland, UK, with the company citing uncertainty over UK energy policy as the underlying factor behind the decision. The CEO of RES stated that the project faces 'insurmountable investment barriers due to uncertain Government energy policy', according to the company's press release. This rhetoric chimes with our long-held views on not only the biomass industry, but the wider UK energy agenda - which is shrouded in confusion and an unclear regulatory environment ( see 'Renewables: Battle Lines Being Drawn', November 11 2013).

The UK biomass industry has suffered from wavering government support of late, and we have previously stated in our analysis that the government has shown bias towards co-firing and conversion biomass plants, as opposed to dedicated biomass projects ( see 'Bias Within Biomass Sector', October 26 2012). New guidelines for biomass projects announced in 2013 have established this viewpoint, as a cap was proposed for dedicated biomass plants under the government's Renewable Obligation (RO) programme. The government will now offer support under the RO for 400MW-worth of new biomass facilities, a significant downgrade from government's previous expectations. However, in terms of conversion plants - for example the coal-to-biomass Drax power station - the government will continue to provide incentives. In fact, Drax has agreed a GBP75mn loan facility with Friends Life, guaranteed under the government's Infrastructure UK Guarantee Scheme; although this has been thrown into question after a preliminary inquiry into the UK government's loan guarantee on the subject of illegitimate 'state-aid' was announced recently ( see 'Biomass Fuelling State Aid Debate', February 27 2014).

This is not the first time a company has decided to exit the UK biomass industry over concerns about the unstable investment environment and shaky government support. In 2013, RWE npower announced that it planned to stop its ongoing biomass conversion of the 750MW Tilbury plant in Essex. Two units (9 and 10) at the facility ceased operations in July 2013, as the company cited 'low electricity prices and a lack of funding' as the primary reasons behind the decision. Additionally, German utility EON has decided to halt its development of the Portbury Dock biomass project in the country.

Biomass Prospects Faltering

UK Total Non-Hydro Renewables Capacity By Type (MW), 2014/2023 and Renewables Project Pipeline, % of Total Capacity

These announcements support our rather bearish outlook for the biomass sector in the UK and we warn that, unless the investment environment and regulatory framework becomes more conducive to developers, we expect to see additional project cancellations as investor sentiment continues to cool. In fact, in our previous analysis we stated that we believed that companies 'hoping to develop dedicated biomass projects may abandon them altogether' - a view that is seemingly playing out. Weighing further on the outlook is the growing debate about the sustainability of biomass and the fuel's renewable energy credentials ( see, 'Burning Wood Sparks Debate', May 31 2013).

In terms of our forecasts for the sector, we expect annual average growth rates in capacity of 4.2% between 2014 and 2023, resulting in total installed capacity of 7.1GW by the end of our forecast period in 2023 - roughly 18% of the total non-hydro renewables capacity in the UK.

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