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Coal's Surge Coaxes U.K. Utilities to Burn Wood: Energy Markets
2010-12-03 15:02:20.370 GMT
By Catherine Airlie
Dec. 3 (Bloomberg) -- The highest-priced coal in two years
is making wood pellets a viable fuel alternative for U.K. power
producers, heralding a doubling of electricity generation from
biomass in the next three years.
Using coal to make a megawatt hour of electricity in the
U.K. costs 40.25 euros ($53), compared with 39.35 euros for
wood, according to Bloomberg New Energy Finance. Prices have
been "approximately the same" since May, it said.
Pledges by Prime Minister David Cameron's government to
step up renewable energy use are stoking investment in U.K.
projects to get electricity from biomass such as tree and
vegetable matter just as coal prices surge amid rising demand
from China. Utilities plan to more than double biomass capacity
in Britain to 5,800 megawatts by 2014, enough to supply almost 6
million homes, New Energy Finance said.
"More and more coal-fed power plants need to look at ways
to increase renewable-energy production," said Pasi Laine,
president of environmental technology at Metso Oyj, a Helsinki-
based maker of equipment that turns biomass into electricity.
"Most of the existing coal-fired power boilers could be
adapted."
Benchmark coal for delivery next month in Northwest Europe
has climbed 41 percent this year to $117.25 a metric ton as of
2:30 p.m. in London, the highest since Oct. 24, 2008, according
to data compiled by Bloomberg from broker prices. Pellets have
fallen 3.2 percent this year to 123.19 euros ($193) a ton,
according to APX-Endex, an Amsterdam-based exchange that plans
to begin trading of wood contracts on its system by mid-2011.
Diminishing Returns
Power companies are turning to biomass as the profit from
coal-based electricity generation slides. Returns have dropped
about 70 percent in the past 12 months to about 2.60 pounds
($4.07) a megawatt hour, and were as low as minus 6 pounds in
March, according to Bloomberg data. Coal accounted for 28
percent of the U.K.'s electricity last year.
Essen, Germany-based RWE AG said Nov. 16 it's seeking
permission to burn wood instead of coal at its 1,050-megawatt
power station in Tilbury, England, next year. The company,
Germany's second-biggest utility, also started building a 50-
megawatt plant in Fife, Scotland, that will burn wood.
Drax Group Plc, the owner of Western Europe's largest coal-
power station at Selby, England, said in October 2009 it wants
to construct three U.K. plants fueled by organic matter. It also
plans to switch one of its 645-megawatt coal-fed units at the
Selby site to run entirely on biomass.
'Double Win'
It would be a "double win," Melanie Wedgebury, a Drax
spokeswoman, said by e-mail. "It will remove coal from the
energy mix and replace it with significant, reliable, cost-
effective and dispatchable renewable power." After an expansion
this year, the 4,000-megawatt station in Selby has the ability
to use such fuels for as much as 13 percent of its output.
The cost of burning coal includes European Union emission
allowances, which companies must buy to compensate for producing
greenhouse gases linked to global warming. Benchmark carbon
allowances have risen 17 percent this year on the ICE Europe
Futures Exchange in London.
While burning biomass spews about the same amount of
greenhouse gas into the atmosphere as coal, it doesn't require
emissions permits under the EU's cap-and-trade program because
trees and plants absorb carbon-dioxide when they are growing.
Using biomass to create electricity in the U.K. wouldn't be
profitable without a government subsidy of about 31 euros a
megawatt hour, said Irmgard Herold, a London-based analyst at
New Energy Finance. The U.K. awards so-called Renewable
Obligation Certificates to companies that process wood biomass
and other renewable forms for power generation.
Supply Limits
British generators that burn both coal and biomass are
eligible for at least half a credit for every megawatt hour they
produce. Wood pellets became profitable in May for the first
time since the country changed its renewable subsidies a year
earlier, cutting support by half for mixing coal and biomass.
Limited supply of biomass as a feedstock may deter some
companies from switching from fossil-fuel generators, said
Isabel Boira-Segarra, renewable services director at WSP
Environment & Energy, a London-based research consultant. Costs
running into "hundreds of millions of pounds" may also
discourage producers, according to Lakis Athanasiou, an analyst
at Evolution Securities in London.
"There's room for biomass for making electricity in
Britain, but there are too many uncertainties in fuel supply,"
Boira-Segarra said. "You don't have a project unless you can
prove liquidity for the feedstock in the market or secure a
long-term supply of biomass."
Feedstock Imports
While utilities require twice as much biomass as coal to
produce electricity, there's enough sustainable fuel worldwide
to power all of Britain, according to Rotawave Ltd., an
Aberdeen, Scotland-based company that sells technology to turn
vegetable matter into a material more comparable to coal.
"Britain's potential for more biomass-fed power capacity
is quite big because the feedstock can be imported" from
Russia, Scandinavia and North America, Herold said.
Biomass can be obtained from fallen branches and bark as
well as agricultural waste rather than cutting down trees. U.K.
companies can currently generate about 2,200 megawatts of power
from biomass, enough to supply more than 2 million homes.
"Biomass could become a sustainable global commodity with
a market price," Metso's Laine said.
For Related News and Information:
Stories on Drax's earnings: DRX LN <Equity> TCNI ERN <GO>
U.K. power market stories: TNI UK PWRMARKET <GO>
Top power news: PTOP <GO>
U.K. electricity prices: ELEU <GO>
--Editors: Mike Anderson, Justin Carrigan.
To contact the reporter on this story:
Catherine Airlie in London at +44-20-7073-3308 or
cairlie@bloomberg.net
To contact the editor responsible for this story:
Stephen Voss at +44-20-7073-3520 or
sev@bloomberg.net
