1.7 Anaerobic Digestion (AD)

1.7 Anaerobic Digestion (AD) Bruno Prior Mon, 14/12/2020 - 12:49
  1. In 2005, Summerleaze bought one of the UK’s first, large anaerobic digestion (AD) plants out of administration. It had gone bust because it suffered a number of disadvantages, most of which were inflicted or exacerbated by state incentives:
    1. Its NFFO contract obliged it to take 80% animal slurry. Animal slurry produces little gas compared to most AD feedstocks, and pays no gate fee (the price paid to dispose of waste). It was irredeemably uneconomic, and yet a condition of the government’s contract. The project became economic when we broke the NFFO contract and switched the plant to take primarily food waste.
    2. It had been situated in a remote rural location (sub-optimally for sources of viable feedstock such as food waste) in order to please the government’s rural development agenda (in pursuit of grants). This also meant (significant to later government policy) that it was not viable to connect it to the gas grid.
    3. Its economic model was predicated partly on a report by a large engineering consultancy that advised that it would be able to pipe its heat to sell in the neighbouring town, Holsworthy. This was also hopelessly uneconomic, particularly in the absence of any mechanism to value low-carbon heat.
  2. Holsworthy’s economics changed rapidly after we bought it, as government efforts to stimulate the technology delivered more AD capacity than there was viable feedstock to fill it.
  3. The gate fee went from nearly half of income to a negligible contribution. That raises the energy price required to break even, which increases the cost of the subsidy required. Effectively, over-stimulation increased the cost to consumers of supporting the technology without significantly increasing the amount of energy, which was largely bounded by an inelastic resource.
  4. Governments were persuaded that this was not the case by “research” commissioned by interest groups. Particularly influential was a 2009 report by Ernst & Young for National Grid, which predicted that by 2020, biogas would make up between 5% and 18% of our gas supplies (nearly half of domestic gas).[1] In the event, it constitutes around 0.7% of our gas, and the industry is running well below the installed capacity for wont of viable feedstock even at that level.
  5. So of course, the interest groups (such as NG’s successor, Cadent) commission more “research”. Governments are persuaded that straw can yet be turned into gold, and announce plans for more alchemical policy to stimulate biogas.[2]
  6. For as long as all AD projects received similar levels of support, this was as much a public inefficiency as a commercial threat. But governments decided that they needed to skew the resource-allocation decisions in the directions they judged best, and introduced new or modified support mechanisms (FiTs and RHI) that awarded significantly different levels of support for AD depending on scale, feedstock and technology (e.g. generating electricity or feeding the gas grid).
  7. This introduced the risk that a new AD plant could setup in competition to our plants (we subsequently opened in Bishops Cleeve a second large AD plant, this time producing biomethane for injection into the gas grid) and out-compete us for the feedstock, not by being more efficient, but simply by gaming the rules invented by government after we had made our investment.
  8. Government has traditionally been careful about “grandfathering” their support promises, but governments found it impossible or undesirable to understand that these policy decisions were effectively “un-grandfathering” existing investments.
  9. A succession of governments have made the regime uncertainty so great in renewable energy that the only people who are sanguine about investment in the sector are either (a) those who do not understand the risks (amongst whom it is likely are many of the institutional investors lending on incredibly low coupons to large projects of technologies that are favoured by government but otherwise fundamentally uneconomic), or (b) those who believe they have a strong enough connection with government that they are insulated from the risk.