AIR2-CT93-1671 Development of Standard Methodology for Intergrating Non-Food Crop Production in Rural Areas with Niche Energy Markets

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AIR Cluster I - Biomass Production : Biological Conversion : Crops for Liquid Biofuels and Biogas : Crops for Solid Biofuels : Electricity : Liquid Biofuels and Biogas : Solid Biofuels : Starch : Sugar : Thermochemical Conversion : Vegetable Oil/Fat : Wood (Lignocellulose)

	Proposal No:	AIR2-CT93-1671
	Date Prepared:	November 1999
	Source:	Final report summary 1996

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Final report summary 1996

Summary

This report describes the objectives of the Concerted Action and how they were met. It provides a summary of the development of a methodology to examine the costs of energy from non- food crops (biomass) and its application to rural niche energy markets. Results are given for current market conditions and with the application of feasible grants, other energy/economic instruments and co-firing. They indicate that, with the possible exception of specific medium scale heat examples, the final energy price for heat from energy crops is not competitive with alternative fuels in the current market. This indicates the importance of grants in the development of a stable market for energy from energy crops. It is suggested that grants should be used for market enablement whilst key technical issues are addressed. The most important technical factors are those that decrease costs and remove insecurity and uncertainties. At the end of the report a number of recommendations are provided for further work. The EC has already begun to address some of these and this action is to be applauded. Most important, from the fiscal view, is a cost/benefit analysis of grants and other energy/economic instruments.

Activities

This AIR Concerted Action successfully developed, a standard methodology to help integrate non-food crop production in rural areas with niche energy markets. The project developed and used a common methodology for comparing the costs of different energy crop production and conversion options across the six participating nations. The partners tested the methodology and ran examples in each of the two heat and one liquid biofuel niche markets. The examples demonstrated that at the current crop yields and with the current conversion technology, the delivered heat and liquid fuel from biomass were not competitive with that from fossil fuels, even in the three niche markets. It was confirmed, however, that biomass was important not only as a potential "clean" alternative fuel, but as an alternative crop for farmers which could additionally boost employment in rural communities.

Following the inclusion of grants, subsidies and co-firing options, the partners tested the extended methodology and then ran another series of examples in the selected niche markets. The main conclusions are that grants and subsidies can, in certain circumstances, make heat generation from biomass in rural areas competitive. For the liquid biofuel niche market, only a combination of tax exemption plus crop area payment reduces the liquid biofuel price to below the mineral diesel price. Grants could be used to assist in the establishment of a market for the biomass crop and facilitate the further development of conversion technologies. However, the cost of the different grants modelled is uncertain, but thought to be high. A cost-benefit analysis of introducing grants would therefore be required. Other non-monetary incentives eg. environmental benefits, political will etc, also need to be taken into account.

Results - Without Grants

Small Scale Heat Applications The small scale heat market is divided into small domestic units of under 15 kWth and the larger units up to 1 mWth. An individual's decision to utilise a small biomass burning stove tends to be dominated by the stove's aesthetic and green image rather than by investment appraisal. The buyer needs to be convinced that the stove will work reliably and that the biomass fuel will be readily available. As such, detailed cost modelling is less important. For larger systems, if planning permission, financing or complex fuel supply contracts are required, then the burden may be too great and could pose a considerable disincentive. As such, the main opportunities for biomass in the small-scale heating market are as follows:

• domestic stoves for their aesthetic and green image;
• domestic stoves where there is no natural gas supply;
• on-farm use for feed drying, space heating, etc;
• heating for small clusters of houses, large country houses or offices in rural locations.

If a biomass fuel market develops for supplying households then good information dissemination programmes will be required to educate the users to burn the biomass cleanly. Larger projects are likely to need combustion expertise and may be subject to emissions legislation. In general terms, the public tends to believe all biomass combustion, including open fires, is clean and green. However, the public will need information to guide them towards clean and efficient systems.

Medium Scale Heat Applications The medium scale heat applications also include a co-generation option, where the electrical output lies between 200 kWe and 2.5 mWe. In this size range, there are already many co-generation combustion installations in operation. These installations mainly run on cheap and convenient natural gas and fuel oil, with which energy crops must compete. Energy crops could have the advantage of being more readily available in rural and remote areas, and could be attractive in co-firing combustion applications. The choice between heat-only or co-generation depends entirely on the electricity demand and the value of that electricity versus the additional capital cost to generate electricity. In general, the medium-scale heat market examples suggest combustion plants are the best option where there is a consistent heat demand over a long heating season. In southern Europe, energy crops may be a cheaper feedstock because of the high yields resulting from a preferential climate, but are less applicable because of the shorter heating season. Co-generation schemes require a premium price for the electricity produced if this electricity is used to displace a consistent on-site demand for grid electricity. Even in niche markets, the medium-scale plants fuelled purely by energy crops are likely to produce energy which is too expensive to compete with existing market prices, the problem could be solved by grants. Indeed, existing agricultural grants are likely to make these systems viable in the short term. In the longer term, co-firing with residue materials available at zero or negative cost is probably the sustainable route to success in medium-scale heat markets.

Having chosen a crop and a conversion technology for the medium scale heat application, the importance of establishing a correct interface between the two was recognised. The following key interface issues were identified:

• fuel storage and supply logistics;
• effects of storage on dry matter loss and moisture content;
• security of fuel supply;
• delivered fuel particle size, moisture content and ash chemistry.

Liquid Biofuel Applications The liquid biofuel applications were mainly as alternative fuels for transport eg inland waterways, and not for heat or electricity generation. The niche markets are linked to liquid biofuels' green image, its biodegradability and its potential emissions benefits through reduced carbon dioxide emissions. However, it was recognised that the costs of carbon dioxide abatement are relatively high in comparison with other energy crop applications, such as heat and electricity production. It was generally agreed that Rape Methyl Ester (RME) is not a good option in terms of both economic viability and as yet, unproved environmental benefits. However, RME production will inevitably occur in Europe for some niche markets because the crop is familiar to farmers, the conversion process is straightforward and the product can be used in normal diesel engines. Perhaps the overriding reason for the commercial availability of RME in some European countries is the political will behind the fuel's development. Bioethanol has potential as a transport fuel where high yielding sugar crops such as sweet sorghum are readily available. In the same way as for the medium scale heat markets, all the liquid biofuel prices are greater than the fossil fuel price equivalent at present. However, there is a major difference in that high tax duties are applied to transport fuels. If the liquid biofuels were tax exempt then they would become competitive in the transport fuel market.

Results - With Grants

Small Scale Heat Applications Whilst there is some reduction in energy price from the use of production end grants, the greatest effect for small scale heat applications, is shown at the conversion end of the bioenergy chain. The single greatest impact is with the use of a premium price paid for the heat produced. Nonetheless, the effect of a premium price is not sufficient for heat produced from biomass to price compete with heat produced from burning mineral oil.

Medium Scale Heat Applications The reduction in farm gate price brought about by a production and planting grant, remain the same for both medium and small scale heat applications. However, the impact of these grants on the price of the energy produced is greater for the medium scale than the small scale. This is because of the economies of scale in the supply of the feedstock. However, the effect of the capital grant is less because of the greater heat output over which the benefit is spread; but the effect of the premium heat price is much greater, albeit for the same reasons. The trend indicates that the larger the heat application, the greater the impact the premium heat grant has in reducing the heat price. Quite clearly, the combination with the greatest effect is the one with a planting grant plus premium heat price. It was noted that the mineral oil price is in many cases more than, or at least comparable with, the bioenergy price, and only marginally less than the bioenergy base case, where no grants were considered. This strongly suggests that at the medium scale, biomass for heat production offers an economically viable alternative now. Short term financial support would clearly help to establish the bioenergy heat market, by ensuring that generating costs were lower than generating costs from mineral oil sources.

Liquid Biofuel Applications The production (area) payment for the feedstock eg oilseed rape, has quite an effect on the change in the fuel price, but the most noticeable subsidy is the tax exemption. Together, they represent more than a 50% cut in the price of the produced fuel. The comparison with the current alternative, derv or mineral diesel shows that tax exemption alone will not make liquid biofuels competitive with derv. It is only the combination of tax exemption and a production (area) payment that reduces the liquid biofuel price to below the derv price.

Cost/Benefit Analysis of Grants and Subsidies

The examples presented only indicated the possibility of using grants to provide support for energy crops in the current market. Although in some cases they indicated that combinations of production grants and conversion grants resulted in near market prices for energy crops, questions remained unanswered. These included the following;

• What is the aim of introducing the grant?
• What is the 'cost' of the grant?
• Who pays for the grants and who benefits from them?
• Are these national or European incentives, and are they already in place?
• Are the modelled grants compatible with existing national and/or European legislation in the biomass and renewable energy field?
• Is the political climate conducive for the use of grants for biomass and renewable energy?

To answer these questions, it was agreed that a cost/benefit analysis would be a suitable tool to follow on from this study. The benefits from energy crops are numerous and well recognised, but there is a need for them to be quantified. The benefits that were identified and where a cost/benefit analysis would be applicable include the following:

• the important development of rural infrastructure;
• potentially lower harmful impact on the environment compared with intensive conventional crop production;
• diversification of land use and hence enhanced biodiversity and beneficial landscape effects;
• development of diversity of supply in the energy market;
• local fuel production, which is more secure than relying on imports;
• establishment of niche energy markets to provide the 'demand' during the development ("supply') of energy crops and conversion technologies.

Other Issues

These benefits may be considered sufficient to justify the cost of the grants or other under consideration. In addition, other issues were also raised for consideration in the future and are listed as follows.

• The timing of the grant may be as important as its financial value, particularly when cash flow is considered. For example, a farmer may regard a one-off establishment grant in the year when he faces greatest pressure on his cash flow as more useful than a series of payments spaced over a number of years.
• In the long term, costly grants on their own will not make energy crops attractive in a competitive market. The long term aims of grants need to be established. Work to improve biomass yields and crop resistance to disease must be undertaken in parallel with grant-support. This has the aim of decreasing the basic cost of the fuel and thus the long term dependence on grants and other support mechanisms. Examination of the requirements of conversion technology, and improvements in conversion technology should also aim to decrease costs. Ultimately these developments should aim to provide for competitive energy crops and a stable market.
• The issue of who pays for the grant may be important. For example, tax exemptions for liquid biofuels could be paid for from central government funds or from levies on motorists. In addition, grants for energy crop production, albeit from central European coffers (FEOGA/EAGGF), may help alleviate the current financial burden of the Common Agricultural Policy (CAP) which typically supports main stream agricultural production.
• The effects of the grants on rural markets need to be examined in detail. Grants for energy crops may help halt the trend of rural depopulation, by providing an additional income stream to farmers. This is turn, will have a multiplier effect on rural services such as schools and shops, and ultimately will help maintain a rural infrastructure.

Conclusions

The examples examined using the extended methodology indicated that the proposed grants were frequently insufficient to allow energy crops to compete in existing energy markets. The effect on the medium-scale heat market was most promising; a number of examples demonstrated near market prices when combinations of production and conversion grants were considered. There were no examples of competitive prices for the small scale heat market, although it was agreed that at small-scale other factors may become important, particularly in remote areas and islands. Nonetheless, other factors such as environmental benefits and the security of local feedstock supplies, need to be taken into account. These issues will only become significant in the biomass to energy debate if the political will exists to introduce them. Attributing monetary values to these factors could form part of a further comprehensive cost/benefit analysis, which embraces environmental economics and socio-economic skills and analyses. The main conclusions from the study of the effect of grants or energy/economic instruments on the final energy price are listed below:

• It is clear from this analysis that grants and other energy/economic instruments can, in certain circumstances, reduce the final price of the energy produced from biomass resources. This could result in a competitive price for eg. heat from energy crops, which will assist in the establishment of a market for the crops.
• Where the grant is applied will depend on whether the impetus is from the market (demand) side or from the production (supply) side. The production side is already heavily subsidised, but it could present an opportunity for directing expensive main stream agricultural support towards less intensive alternative crop production.
• Energy crops will be most competitive where the current cost of energy production is greater than average. This clearly points to rural and remote areas, where transmission costs and access are more difficult. Whilst some niche markets in rural areas have been identified, there needs to be a further inspection of these markets. Typically, islands in Greece and remote rural areas in Portugal, Ireland and the UK are obvious candidates, whilst specialist niche markets in the Netherlands eg. glasshouses, and Germany eg. specialist heating plants, require closer examination.
• The ultimate aim of grants and subsidies should be to provide a support mechanism for market development during the development phase of energy crops, infrastructure and conversion technologies. It is not intended that grants should feature as long term support either for alternative crop production or for renewable energy generation.
• The cost of the modelled grants is uncertain, but thought to be high. As such, there is a need for a cost/benefit analysis. This will allow all factors to be taken into consideration and better informed judgement can be made. It is not until an in depth analysis is undertaken that the full cost of any financial support mechanism can be assessed.
• Linked to the above, the non-pecuniary factors eg. the social and environmental benefits need to be clarified. Whether these factors have a role to play in the biomass field will strongly depend on the political will which could be introduced from a number of different angles, including the alternative land use debate, the environmental benefits and the energy argument for renewable sources of energy. Clearly, the reduction in environmental 'damage' from displacing fossil fuels with biomass fuels is an important element in the environmental debate and should not be underestimated.
• Many uncertainties surrounding biomass as a fuel eg. familiarity of the fuel, handling problems, new conversion technologies, could be overcome with demonstration projects. This will provide understanding of the issues involved and will create a stable market which, in turn will stimulate investment.

Recommendations for Future Research and Development

Recommendations for future research are split into two broad areas: technical and non-technical. Reducing the technical uncertainties will provide confidence to those engaged in energy crop production and conversion.

Technical Aspects

• Overcoming the uncertainty of supply, by developing pest and disease resistant energy crops. This will also allay any concerns held by the agricultural sector on the long term viability of 'new' crops.
• Improving energy crop yields by selection of the most productive varieties with the most appropriate cultural practices according to regional agro-climatic differences.
• Developing a smooth delivery chain by co-ordinating storage facilities both on-farm and at the conversion plant. A logistics Study Would help overcome tile problems of co-ordinating a discreet feedstock production period (supply) with a continuous energy generation period (demand).
• In conjunction with above determining the most suitable transport route which minimises loss of feedstock due to handling and minimises disruption to local communities through increased traffic is very important. Tills could feature as part of tile logistics study.
• Full examination of alternative feedstock supplies eg. agricultural processing residues, as a combined feedstock.
• Improving conversion efficiencies of existing eg. boiler, and new eg. gasification technologies. This will help confidence of developers who are interested in promoting biomass systems.
• Improving current knowledge on the emissions from biomass conversion technologies and disposal of unwanted by-products. This will enhance the environmental argument for biomass energy systems. These last two points would require a technical study and perhaps a demonstration project.

Non-technical Aspects

• The biggest concern is the financial viability of biomass energy systems. The analysis during the project has shown that in the short term, biomass is not competitive at the chosen scales and in the chosen markets. Grants are attractive and help the economic situation by reducing energy production costs to levels comparable with current conventional fuels. It has also been shown that grants are not sustainable over any period of time longer than the short term, and that the total 'cost' of the grant needs to be determined using cost/benefit analysis.
• Familiarity of using unconventional fuels needs to be addressed. Whilst the benefits from using renewable energy resources are widely recognised, all the implications need to be fully appreciated. This will naturally assist in the promotion of biomass to energy systems and could be achieved by the use of demonstration projects.
• The disruption to existing energy supply lines may cause concern to both generators and consumers. Again fears could be allayed by the use of correct information packages, illustrating the benefits of using a renewable energy resource compared with a non-renewable (fossil) resource.
• Clear guidelines on the planning of a biomass conversion plant need to be in place. Currently, the development and construction of renewable energy plants within the partner countries are subject to inappropriate planning legislation. Correct legislation needs to be place for the smooth passage of planning applications.
• Appropriate enabling legislation which will promote the use of biomass as an alternative source of energy. This could include laws which actively promote and seek energy production from biomass sources. Improving the public opinion of biomass by raising it's profile at relevant pressure groups and farming associations. Support for biomass as an alternative fuel will be strengthened if it is demonstrated from both the supply side (farmers) and the demand side (consumers).