POWER FROM Biomass
Cutting through the green tape1 October 2006
How to pick one’s way through the legislative minefield that is the planning and permitting stages of a biomass project.
Biomass to energy projects have generally appeared to be the poor relation to wind projects. They have not generated the same degree of interest or, more importantly, funding. However, as turbine supply and consenting issues continue to dominate the wind space, and with the US wind market sucking in the available output from the world’s wind turbine makers, so developers have begun to turn their minds to biomass energy generation. Eversheds is currently advising on more biomass projects than ever before.
When acting for a developer of a biomass energy project which is being externally funded, the best piece of advice is to assume that the project is being initiated by two parties, the developer and the bank. If one takes into account bankability issues from the outset, the project will run a great deal more smoothly later on. We often advise our newer developer clients to run certain decisions past the banks they are speaking to even if the final funder has not yet been determined. More experienced developers generally will be in tune with the bank’s perspective. On the whole, if the bank is raising an area of concern, it is likely to be, although not always, of interest to the developer.
The key issues that arise on a biomass or waste to energy project follow the life of the project, from grants through consenting, construction and funding.
DTI grants, whether for R&D projects or capital projects, usually give rise to two principal issues, namely, claw back and risk isolation. Care needs to be taken in understanding what has to be delivered and by when, and the reporting requirements, as failure to comply may precipitate claw back. The EU can require the UK government to recover sums paid if the funds utilised are EU sourced. Exceptions to claw back, eg if the project is no longer economic or technically feasible, will be important. The DTI is wise to the limitation of special purpose vehicles (and now tend to look for parent company guarantees) and may require group ventures to back up any claw back liability. Collaborative projects can also create joint and several liabilities which will need to be catered for.
In addition, it will also be important to understand early on whether or not the funding is EU sourced as this will require, what can often be timely notification to the EC and the level of funding available will increase if the SPV qualifies as an SME (small to medium enterprise).
The capacity of opposition groups to misunderstand emissions issues, even on a wood-burning facility, should not be underestimated. They will apply pressure on local councillors (the elected members of local government) and anyone else with clout who is prepared to listen. Obtaining planning permission on schedule is obviously critical to overall project timing.
In addition, local councils may seek to control delivery routing under a Section 75 agreement. This is a key area of potential public opposition, depending on the quality of the local road network.
Noise control conditions, depending on the proximity of residential property, can also be an issue.
The applicability of the Waste Incineration Directive in this area will depend on the nature of the fuel. If it does apply, eg if the biomass source is poultry litter, the developer and funders will be concerned about the level of capital expenditure necessary to ensure compliance. If it is a brownfield site, ground contamination will need to be addressed under the property arrangements and in relation to planning permission.
Again using poultry litter as the example source, transportation will need to be covered to minimise odour and the risk of bio-contamination. Any consent will usually contain restrictions on the percentage (by weight) of non poultry litter fuels burned at the relevant plant, the moisture content of the fuel and air emissions.
Because at present there is a small number of biomass contractors operating in a limited market with limited construction revenues, the risk allocation may be a different to what the banks are used to. There may be a learning curve that could usefully be introduced early on so that the chosen funder is comfortable with the credibility of the contractor and the likely terms of the EPC contract.
The EPC contract must confirm adequate testing procedures that are consistent with the contract conditions relating to them. In addition, it will be necessary to understand the bank’s views on performance bonds and guarantees, latent defects, limits of liability and the allocation of risk on civils works, particularly in respect of ground conditions.
It will be important to ensure that the operation and maintenance contract is with a reputable contractor and that it properly interfaces with the construction contract. A key objective will be to make sure that the plant runs efficiently and in accordance with its availability targets. Identifying whether any deviation in efficiency and availability stems from the construction or operation and maintenance will clearly be a question of fact but must be catered for as fully as possible in the contract. Issues such as responsibility for life cycle costs, availability of parts in the future and acceptance of the load will also be key.
Power purchase agreements
The principal issues are:
• the offtaker’s credit rating;
• registration issues with Ofgem;
• delivery of ROCs and the allied issues of ROC revocation and replacement;
• renewables benefits being granted to the supplier under the PPA and how these are identified and defined;
• length of the contract term;
• output forecasts for the facility;
• pricing of the various constituent parts of the output and benefits being acquired by the supplier including the ROC, ROC Recycling benefit, LEC, and other embedded benefits;
• payment terms and timing;
• termination events;
• limitation of liability and force majeure provisions.
Under the RO it is not possible to obtain ROCs where supply is made direct to a customer.
The nutrient level of certain wood fuel residues, eg coppice, is limited and generally it is not suitable as a fertiliser. Poultry litter, however, generally has a high concentration of valuable nutrients including potassium, phosphate and key trace elements. Ash supplies are often blended for specific users. Ash income is an attractive source of additional revenue if priced correctly. Whatever the fuel source, however, there should be some review of whether the ash will be classified as waste necessitating a waste management exemption/licence for the developer and farmers if used as a fertiliser.
Other key issues unique to biomass financing are:
• Signing up the fuel suppliers. It is key that a developer is able to convince the banks that the project has sufficient and secure future supplies of fuel going forward and that supplies are co-ordinated throughout the year. This will be particularly relevant if the fuel source is an energy crop with a growing cycle as it will be critical to ensure that supply chains are sufficiently linked with harvested supplies made on a continuous basis. Deficiencies in supply may, of course, be built into the financial projections.
• If the fuel source is wood grown by farmers, there may be a general reluctance to enter into formal contracts.
• Proving the technology. The technology for wood chip fuelled projects is now reasonably mature. Developers of other biomass generated projects may have a project to prove to funders. The bank will be concerned to see a track record for the technology and will carry out detailed technical due diligence. The bank will also be interested in the background of the project team, its experience with the technology and whether there is any equity backing to show confidence by those utilising it.
• Ascertaining the moisture and ash content of the supply. It may prove difficult to ascertain what is an appropriate and achievable moisture level and how this will be monitored. Coppice and forestry residues are particularly wet when harvested. A probe in one part of a bale may give a different reading to another probe in a different part of the same bale. The moisture issue applies also to poultry litter projects. And there may be issues on how many loads will be tested and what will trigger a load rejection, and what will happen to rejected loads in light of the need to maintain a regular and constant supply. The banks may be interested to understand the flexibility of the plant to deal with different moisture levels.
• Storage and collection of the supply. Unknowns and general lack of experience in storage by farmers may cause problems all round. Provisions should be built into the contracts to avoid these.
• Haulage generally, as this will be a high cost (given current fuel prices). It is usual for poultry litter fuel supply to be sourced locally. If not, the banks will be interested. The government’s stance on road hauliers to the renewables industry will also be important. In addition, the banks will want to ensure that tight procedures are secured for netting loads, avoiding spillage and clearing up following each delivery.
• Liability in terms of who will take responsibility for matters such as out of spec fuel, fo example too high moisture content, non conforming size, foreign objects. All have serious consequences in terms of output and potential damage to the plant. Again, the fuel supply contracts should cater for this.
• Price fluctuations in fuel supply.
• Obtaining gate fee fuels such as animal bedding and feathers. Many poultry litter fuelled projects rely on a substantial percentage of burn from these fuels because they improve the funding structure.
Provided the technology continues to mature and improve and funders become more comfortable with it and the risks, these projects should continue to expand. However, the key concern will always be fuel supply and all the issues associated with it. There are sub-businesses emerging which aim to provide stable and consistent biomass specifically for these projects. The success of these will hopefully go some way towards alleviating the usual fuel supply concerns.