Epsilon Archive for Student Projects

Abstract

The bio energy industry provides interesting investment opportunities due to several factors including; a strong political will to increase renewable energy production, favourable financial returns and opportunity to benefit from available governmental grant schemes and subsidies. Biomass is also to a large extent an untapped resource that offers opportunities for greater exploitation. However, there are obstacles for an expansion of the bio energy industry such as logistical and technical issues as well as relatively long investment horizons (as a result of high capital costs).

This thesis examines and compares the investment situation facing the Swedish, German and UK bio energy sectors through; literature studies, qualitative interviews and country specific calculations of maximum feedstock (i.e. wood) paying capabilities (WPC’s) for relevant technologies. The three thesis included countries are interesting to compare from an investment perspective as they differ regarding biomass resources, established technologies, implemented governmental incentive schemes for renewable energy sources etc.

Thirteen interviews consisting of one phone conference with more than one person interviewed, one personal meeting and eleven phone interviews form the base for the empirical material. The persons interviewed are either generally knowledgeable of the bio energy sector as a whole or associated to a specific bio energy producing installations. The interviews highlight high associated capital costs, economic optimisation of feedstock supply, existing demand, access to electric and/or heat grids and governmental incentive systems as determining factors for investors in the three countries.

The thesis included countries have different ways of supporting renewable energy generation. In Sweden and the UK, government imposed quota regulations on suppliers to source parts of their electricity from renewable energy sources are imposed. These quota systems rely on certificates being handed out to producers of green electricity for each MWh of electricity produced. These certificates must then be sourced by suppliers in order for them to prove that they have fulfilled their renewable energy quota. The certificate price is set by market conditions, i.e. the relation between the number of producer awarded certificates in relation to the set quota for suppliers. In Germany a feed-in system is applied which rewards producers with a guaranteed grid access and a minimum fixed electricity price for each MWh of green electricity fed in to the grid. The German system is limited to smaller scale installations with a capacity of no more than 20 MWe and an output not exceeding 175,2 GWh annually.

The Swedish and UK quota systems are well liked by some of the as they support any installation scale and as they are market oriented systems which allows renewable energy sources to compete with traditional energy sources such as coal. Respondents however see a problem in making long term investment decisions based on fluctuating certificate prices. The German feed-in system is viewed as a stable and reliable remuneration scheme where investors know exactly what revenues they can expect from their electricity production. However, as the feed-in level is fixed producers cannot pass on increasing costs to the end consumers as is the case with variable electricity prices.

The Wood Paying Capability (WPC) calculations point towards a relatively high paying capability (SE=30,1 €/MWh, DE=45,6 €/MWh, UK=37,9 €/MWh) which is generally well above biomass prices. The relatively high WPC values indicate that there are positive profit margins on all three markets. Furthermore, the WPC results display large variations in paying capability between the three countries. These variations in turn may be explained by governmental remuneration levels being adjusted to differing structural conditions such as biomass availability and existing infrastructure e.g. in the form of district heating systems. Furthermore the WPC variations are also affected by large differences in country specific electricity spot prices and variations regarding installation associated costs utilised in the calculations. Regarding the high German WPC value, it should be noted that large scale facilities in the Swedish and UK systems may render better financial figures if the total remuneration is calculated as the German system has a capacity and output limit.

The main factors limiting the entry of new actors on the examined bio energy markets are high capital costs and logistic issues. The associated high capital costs has traditionally incurred long pay off times ranging from 15 to 25 years which has often deterred bio energy investments or steered investors towards other renewable energy sources such as wind power. Biomass is also often a scattered resource which in combination with the biomass fuels bulk and relatively low energy content makes the fuel ill-suited for long transports. However, both logistical and capital issues may be overcome by future investments in truly large scale installations through economics of scale. Regardless of scale, an optimised feedstock solutions stand out as particularly important aspect both as uncovered by the interviews and by previous research. The feedstock logistical solution determines how much fuel a facility has available and thus it limits the financially viable plant scale as well as it directly affects fuel sourcing costs. The relative importance of an optimised sourcing solution is illustrated by the fact that forest residues delivered at plant generally costs twice as much as coal delivered at plant.

Furthermore, the relative importance of the different investment deciding factors is influenced by the prevailing structural conditions on the examined markets. For example, feedstock or logistical issues are less likely to hamper investments on the Swedish market than on the UK market.