Analysing the economic impact of a renewable heat incentive
27 March 2014
Author: Des O’Toole, biomass business development manager, Coillte
The Government White Paper on Energy Policy set a target of 12% of thermal energy to come from renewable-energy sources by 2020. The renewable heat sector, however, remains largely undeveloped, having grown slowly to 5.2% (2012) mainly as a result of wood waste utilised in the timber-processing sector. Based on our current RES-H trajectory (Fig 1), Ireland’s 2020 target will not be achieved.
The introduction of a renewable heat incentive (RHI) is now essential. A RHI is a payment system for the generation of heat from renewable-energy sources similar to the REFIT scheme for electricity. Generators of renewable heat are paid an agreed rate in c/kWhr for hot water or steam which they generate and use themselves. The payment is for an agreed period and index linked.
The scheme was introduced in the UK in December 2011 and has resulted in excess of 611MW of installed thermal capacity spread over 2,895 accredited biomass installations (Source: Department of Energy and Climate Change). The resulting benefits are recycled through the UK national economy, stimulating economic activity and creating new jobs in engineering design, installation and maintenance of the biomass boilers themselves and through the associated operations and logistics required to process and supply the local biomass.
There is now an imperative for Irish industry to adopt green energy solutions. However, project economics for large-scale renewable heat investments are proving challenging. While biomass fuel, in the form of wood chip (Fig 2), is significantly cheaper than most fossil fuels, the relatively high cost of biomass boiler technology presents a significant barrier. A RHI would offset the higher capital investment required, thereby improving the project economics and encouraging the wider deployment of biomass renewable energy technologies.
The many other benefits of renewable heat are clear:
- Reducing Ireland’s reliance on fossil fuel imports, reducing our greenhouse gas emissions and improving domestic fuel security;
- Improving and strengthening the competitiveness of Irish industry by minimising carbon taxes, reducing fuel costs and protecting against fossil-fuel price volatility;
- Stimulating rural development and local job creation;
- Providing a viable outlet for our growing private timber resource and a channel to market for growers of short rotation energy crops;
- Reducing the future level of EU fines for not achieving our 2020 RES-H renewable target.
WHAT RES-H PROGRESS COULD BE ACHIEVED BY 2020?
Coillte set out to examine the following hypothesis. Would a modest RHI, focused on industrial-scale users, stimulate significant levels of economic activity and generate returns that would exceed the initial capital investment to the Exchequer?
Ireland’s 2020 RES-H target of 12% is equivalent to 4% (Fig. 3) of Ireland’s projected gross total final energy consumption. Therefore, our current RES-H shortfall of 6% is equivalent to an overall RES shortfall of 2%. According to the National Renewable Energy Action Plan, total final energy consumption in 2020 is expected to be 14,142 ktoe. Therefore, our current RES-H shortfall is 283 ktoe, which equates to approx 438MW of installed thermal capacity required to bridge the gap to our 2020 target.
Coillte is of the opinion that 438MW cannot be installed by 2020 given market constraints. These include:
- the availability of surplus domestic biomass fibre,
- actual industrial heat opportunities off gas grid and
- the required project lead-times for planning permission, Environmental Protection Agency amendments and financing.
We believe that between 120MW and 160MW of new thermal capacity in the industrial heat sector is still possible – and could be fully operational by 2020, if supports were introduced now.
IMPACT ON THE EXCHEQUER
Having analysed both the positive and negative impacts of the scheme (Fig. 4), Exchequer cash flows were analysed against a range of possible subsidies. The study focused on industrial heat users, as they are seen as having the greatest impact and ease of administration of the scheme.
Projected new installed capacity was informed by the potential of a project actually proceeding based on the impact of the subsidy on the overall project economics and payback using typical financial hurdle rates for new capital investment. The analysis was supported by data provided in a recent economic study commissioned by Irish Bioenergy Association with the support of the Sustainable Energy Authority of Ireland entitled, ‘The economic benefits from the development of the bioenergy sector in Ireland to meet 2020 targets’.
Fiscal penalties may arise as statistical transfers of renewable energy to make up the gap to our RES objective. Our analysis assumes that every additional installed MWth will offset these penalties and potentially generate a net Exchequer cost-saving.
Our analysis shows that with a subsidy of 1.5c/kWh, we could expect to secure an uptake in installed thermal capacity of between 120-160 MW by 2020, which equates to a gross RHI cost to the Exchequer of between €13.5 million and €18 million. This would progress Ireland between 0.55-0.75% points against our overall 2020 target of 16% of gross total final energy consumption, creating and supporting many new jobs.
It would provide a market for 255-340,000 tonnes of biomass annually, opening up opportunities for both private-sector forestry and energy crops. With EU fines, in the form of statistical transfers modelled in the range €30/MWh to €200/MWh, this would provide a net benefit to the Exchequer of between €9.5 million and €217 million, taking account of all of the accruing positive and negative cashflows.
It is clear, Ireland will not meet its RES-H target and at this stage it is not about avoiding penalties, it is about minimising them. Without an appropriate stimulus, this is an opportunity lost.
The investment by the Government in a RHI, focused on industrial heat users, will not only make a significant contribution to meeting our 2020 renewable targets, but makes clear economic sense. It will stimulate a new, vibrant, indigenous industry and enhance the attractiveness of Irish industry.
CASE STUDY : ASTELLAS SECURES A GREEN FUTURE WITH ‘BIOMASS’ ENERGY
Coillte is underpinning the future energy supply of one of Ireland’s leading pharmaceutical plants. Having secured a five-year biomass fuel supply agreement with Astellas Ireland Ltd in Killorglin, Co Kerry to supply the plant with all of its biomass renewable energy requirements. Now, 28 months on, Coillte is successfully delivering both ‘security of supply’ and ‘lower energy costs’.
Astellas is one of the top 20 pharmaceutical companies in the world, employing 1,600 people globally. They operate a modern pharmaceutical finishing facility in Kerry, which serves the world-wide market as the production base for the formulation and packaging of drugs used in the treatment of organ rejection in transplant surgery.
The facility was first built in the 1980s and was powered by oil-fired steam boilers. Astellas place a high value on sustainability and corporate social responsibility and, as a result, the company began to examine alternatives to oil as the main source of energy. Management at the plant prioritised their commitment to good environmental practice and, as a result, planning permission was approved in 2011 for the installation of a new 352m2 utilities building (Fig. 5) comprising a 1.6MW WEISS biomass boiler and ancillary wood-chip fuel store.
The wood-chip boiler was designed to supply the base steam demand for the facility with the existing oil boiler acting in standby mode. The project was directly managed by Astellas Ireland Ltd and was successfully commissioned in February 2012. The wood-chip storage area is divided into two sections: a delivery pit and the main bunker fuel store.
Upon demand, an overhead crane (Fig 7) collects and drops the fuel into a high-level hopper feed system, where it is fed by a push feed mechanism into the boiler. An automatic ash-disposal system cools the ash and carries it away for disposal offsite.
Coillte was selected as the preferred biomass fuel supplier for the project. Biomass feed stocks are sourced from the Kerry region.
Coillte is committed to a biomass strategy that matches renewable energy requirements with local biomass supply. All wood chip is produced strictly in accordance with quality specifications set out in I.S. CEN/TS 14961:2005. Wood chip is processed locally and delivered in moving floor trailers. Each load is moisture tested and weighed and the client is invoiced per gigajoule of energy delivered.
In today’s economic climate, Irish businesses cannot afford to ignore the high cost of energy. Natural gas is not available in the south west and many businesses are exposed to the volatile nature of traditional, oil-based fossil fuel prices. Unlike oil or gas, biomass is carbon neutral and Coillte offers long-term supply contracts at energy rates – typically 50% lower than current oil prices. For many businesses, this offers substantial annual energy savings and improves competitiveness.
Des O’Toole graduated with an honours degree in structural engineering in 1993 and subsequently carried out a postgraduate qualification in timber technology. Over the last 20 years, he has worked for both Coillte and its subsidiaries in numerous project management, operational and business development roles. O’Toole has a diploma in project management and was awarded an associateship of the Institute of Wood Science in 2001. His current role as Coillte’s business development manager has responsibility for the delivery of turnkey biomass fuel-supply solutions for industrial-scale clients.http://www.engineersjournal.ie/2014/03/27/analysing-the-economic-impact-of-a-renewable-heat-incentive/http://www.engineersjournal.ie/wp-content/uploads/2014/03/Wood-chip-1024x698.jpghttp://www.engineersjournal.ie/wp-content/uploads/2014/03/Wood-chip-300x300.jpgElecbiomass,Coillte,energy,government,renewables