Developers of UK biomass projects in the pipeline are coming to terms with the latest blow to subsidy support, following finance minister George Osbourne's decision to scrap the climate change levy exemption for renewable power in his budget on 8 July.
The cut is expected to affect projects that have already secured subsidy payments as well as those developers vying for subsidies in subsequent contracts-for-difference (CFD) rounds, likely to be held in October.
The removal of levy exemption certificates (Lecs), effective from 1 August, will mean that tax will have to be paid on renewable electricity supplied to businesses and the public sector under renewable source contracts. The value of the exemption was worth £5.50/MWh (€7.65/MWh) to renewable generators.
The announcement took the investment community by surprise, with UK utility Drax's share price falling by nearly 30pc. The government's decision was disappointing and will cut earnings, Drax said.
Drax is still assessing the impact of the change, but its initial estimate is for a reduction in earnings before interest, taxes, depreciation and amortisation (ebitda) by around £30m in 2015 and £60m in 2016, and it expects the impact to reduce after that. The value of CCL exemptions is expected to be negligible by the early 2020s.
"We are surprised and disappointed at this retrospective change to a support regime that has been in place since 2001 specifically to encourage green energy and support renewable investment," Drax chief executive Dorothy Thompson said.
This move will push some marginal projects from profit into loss and is a striking example of the government's "unfair, illogical and obsessive attacks on renewables", industry association RenewableUK said.
The government's decision could make biomass investors nervous, as it is the third blow this year to biomass projects. The UK siphoned coal-to-biomass conversions into a separate funding pot under the levy control framework, and then declined to award that pot any funds this year. And it has proposed to end "grandfathering" guarantees under the renewable obligation scheme scheme.
Scrapping the Lecs exemption cuts into the profitability for biomass burn, making the picture "bleaker," according to Simec Uskmouth Power (SUP), the owner of the 363MW Uskmouth coal-fired power plant, which plans to convert at least one of its three units to burn torrefied biomass. The company said last month that it is proceeding cautiously with its plans, banking on "some sort of subsidy" remaining available for biomass base-load power.
"The decision has no definitive effect yet, but it obviously harms the economics, making progression with the conversion — should we obtain a subsidy in the upcoming round — a little less likely," SUP said. The economics "probably would still work with the 5pc degression", but the government has made the picture "bleaker".
The effect will be noticeable in future CfD bid rounds because generators will have to take into account not receiving value for Lecs in their strike price bids. It will affect the bid that SUP is likely to submit, the company said.
This change could result in higher required strike prices in future allocation rounds, to mitigate the loss.
This latest move sounded the death knell for the country's dedicated biomass market, UK biomass developer Eco2 chief executive David Williams said. "Because it is retroactive and applies to existing projects, it could have far-reaching effects on investor confidence in the UK. It attacks historic investors as well as remaining new ones and is further indication of the war on green projects."
It is "virtually impossible" to develop biomass projects in the UK, Williams said, adding that his firm is "urgently looking for new markets". Williams sees potential for biomass burn in Spain, Poland and Romania. The market will see a general trend of investors in renewable projects going overseas, he said.
The UK hit a heavy blow to dedicated biomass projects last year when it required them to have a heat offtaker in order to receive CfD subsidies, Williams noted. "And now with this they are kicking a corpse."
crc/jd/gb
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