23 February 2015 2015 04:56 AM GMT

European Commission to Investigate UK Aid to Biomass Project

The European Commission has opened an in-depth investigation to assess whether UK government plans to provide financial aid to support the conversion of the Lynemouth coal-fired power plant to operate entirely on biomass were in line with European Union state aid rules.

The 400-megawatt coal-fired power station in Northumberland was originally run by Rio Tinto Alcan but was sold to RWE npower in 2013. In December 2014, the UK government notified plans to subsidise the conversion of the plant to operate on biomass. The plant would have the capacity to generate 420 megawatts of energy running exclusively on wood pellets.

The Commission will investigate if public funds used to support the project are limited to what is necessary and do not result in overcompensation. It will also assess whether the positive effects of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass.

The opening of an in-depth investigation gives the UK government and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.

The UK government approved plans to provide support to the biomass project in the form of a so-called “Contract for Difference” fixing a certain sales price for the electricity.  This means that the generator of the Lynemouth power plant will earn money from selling its electricity into the market.

When the average wholesale price of electricity is below the strike price, the generator will receive a top-up payment. According to UK government estimates, the project would operate until 2027 and supply about 2.3 terawatt-hours of electricity per year. The plant would require approximately 1.5 million tonnes of wood pellets per year mainly sourced from the United States and Canada.

In its preliminary analysis, the Commission considered that the parties’ financial calculations and estimates regarding key cost parameters may be too conservative. These parameters, including the load factor of the plant, its efficiency and the cost of wood pellets, significantly affect the project’s rate of return. The Commission said it has concerns that the actual rate of return could be higher than the parties estimate and could lead to overcompensation.

Moreover, it added, the amount of wood pellets to be imported from overseas is considerable, as compared to the volume of the global wood pellets market. Subsidising such a large volume of wood pellets could significantly distort competition in the biomass market.

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