LEGAL SOLUTIONS TO MARKET OBSTACLES FOR
ACCELERATED USE OF BIOMASS FUEL
@All rights reserved.
Randy M. Mott1 and Ron Nawrocki2
The European Union Directive on Renewable Energy has ambitious goals for
achieving significantly higher levels of renewable energy use by 2010. There is a new
consensus to greatly increase those goals by 2020. In the generation of power and heat,
most studies show that the increased use of biomass fuel will be the principal prospective
means used to meet these objectives in many new Member States.3 The EU renewable
electricity progress report in January 2007 described biomass as satisfying 21% of the
renewable energy goals for 2010. For Poland, the number is 53% of RES-E.
From EC, “Report on progress in renewable electricity,” January 10, 2007.
Randy M. Mott, Regional Envronmental Coordinator, CEC Government
Relations, Ul. Wiejska 12, 00-490 Warsaw Poland, +48-22-628-2418., Cell +48-691-712
716
Email: rm@cecgr.com This paper is an extended version of one presented at the
“International BioEnergy Conference for Southeastern Europe,” April 25-26, 2007.
1
Ron Nawrocki, Managing Director, B. I. Solutions, Warsaw, Poland, +48-22642-5097, Email: md@bisolutions.eu
2
Biomass is “the most promising renewable energy source is biomass (in Poland,
Latvia, Slovakia, CZ, Lithuania, Hungary)” Korytarova et al. “New Targets and Policies
Required in New Member States,” ReFocus, July/August 2006).
3
2
While the cost differential for biomass fuel compared to traditional fuels is lower
than many forms of renewable energy, the differential still requires active government
policies to provide a sufficient incentive for substitution. The EU Member States have
generally opted for renewable energy quotas for electrical distributors. Since the easiest
and most readily available biomass fuel sources have largely been tapped by 2007, the
goal of increasing its utilization will depend on effective policies that create the economic
incentive to do so.
Most existing studies and reports simply refer to generic “legal and regulatory
obstacles” to more use of renewable energy, including biomass. The basic premise of
this paper is that the legal and policy instruments can only be specifically measured
against the reduction of the “avoidance cost” in not substituting fuels. Current policies in
Poland, for instance, have yet to create a sufficient incentive for more fuel switching and
have failed to address some of the market problems that impede this objective.
BIOMASS POTENTIAL
Most government reports extol an enormous potential for biomass to contribute to
replacement of traditional fuels in Europe. See the European Commission’s January 2007
“Renewable Energy Road Map.” To meet the EU’s renewable energy objectives, the
Commission estimated that biomass utilization would have to double by 2010 over 2003
levels. “Biomass Action Plan,” December 7, 2005 (COM 2005) 628 final. Co-firing of
biomass fuels in power plants and central heating plants is one of the most cost-effective
means of reducing dependence on traditional fossil fuels.
3
Despite this huge potential, the utilization
of biomass in both the electricity sector
and central heating sector is growing at a
pace unlikely to meet the projected
targets of the EU.4 Early government
projections for the 2010 mix of RES-E
have proven to be wide of the mark, but
biomass continues to be the leading
component in any plan (now 53%). See
graphic. While biomass is playing the
projected dominant role, it is not growing
fast enough to meet the RES-E targets.
Poland will hit 3% total RES-E in 2007,
while the target is
5.1%. See November 2006 ordinance.
What are the real reasons for the slower than projected growth of biomass and what steps
can be taken to address these problems?
Ministry of Economic Affairs and Labor (2005).
BIOMASS UTILIZATION ISSUES
Most of the economically available biomass was quickly absorbed in wood-related
industrial boilers.5 When oil prices hit over $50 a barrel, the obvious wood processing
and forestry wood residues were taken up by the paper, pulp, lumber and furniture
industries for use in their captive boilers. The March 2006 Polish Government Report to
the EU showed that in 2004 some 50.5 MW of the 51.9 MW in biomass installed capacity
were in “industrial power plants and industrial CHP plants.” This occurred before the
Polish laws provided penalties for failure to meet renewable energy fuel targets.6 It
means, however, that expansion of biomass in Poland in any large measure will have to
See Korytarova, supra.; EU Progress Report, January 2007. The Enterprise
Development Committee of Sejm met on November 14, 2006, and generally conceded
that the current law was not adequate to create the RES market called for by the EU
Directive for 2010. Most involved parties in Poland were surprised by the fairly upbeat
EU Roadmap Report on Poland in January 2007.
4
The industries with natural relationships in logistics, contracts and transportation
to the forestry locations and to wood processing scrap have been the first to utilize it, so
that it is not in the market in this point. This trend also occurred in Finland and Sweden,
with forestry-related industries being the first biomass users of wood products,
byproducts and waste. Ericsson, 2006, p. 32.
5
A large amount of the 2005 “bump” in RES-E was the inclusion for the first time
of Polish industrial power plants and CHPs. See “Sustainable Energy Network,” ETS
Poland Country Profile (2007).
6
4
look at less convenient and more expensive options.7 These include biomass crops,
wastes, small forest wood sources, and other less accessible sources. The newest
ordinance sets out minimal percentages of energy crops for biomass which may turn out
to be overly optimistic.
The largest source of potential biomass in the EU is projected to be energy crops,
especially perennials, which are mostly hypothetical at this point. Until the 2007 growing
season, energy crops did not qualify for CAP in the new Member States. 8 See EU Press
Release, Reference: IP/06/1243, September 29, 2006 (“The review of the energy crops
scheme has shown that it is appropriate to extend the aid for energy crops to all Member
States as from 2007 and under the same conditions.“). Even with the change, Polish
farmers get only 25% what French farmers receive for the same “energy crops.” While
annual crops have some value, experts project that perennial crops, like willow, are more
cost-effective as energy crops for electricity and heat generation.9 A perennial crop will
take four years to grow and harvest, so that none can be available until after 2010 if they
depend on CAP.
Virtually all of the EU experience with perennial energy crops is in Sweden (Ericsson,
2006), so that extrapolation of this practice to other European countries is still a largely
theoretical exercise. The cost of growing willow in Poland as an energy crop is lower
than in Sweden (Ericsson, 2006, p. 24). Polish cultivation costs are estimated to be half of
Swedish costs (€1.9 versus €4.2). Id. In total, the Polish cost of cultivation, land and risk
is €3.95 to €5 per GJ compared to the Swedish cost of €5.1 to €5.6 per GJ. The Swedish
cost is underwritten by government incentives, since the wood chip price is €4.7 per GJ
and coal is only € 1.7 per GJ. Id. Despite the potential of competitive perennial energy
crops, the cost differential to other fuels requires some government policy to equalize the
market price. See discussion of “substitution fees” below.
The Polish Government submission to the EU recognizes this fact: “…forest
biomass is primarily intended for use in the wood industry, the pulp and paper industry
and the wood panel industry.” Supra at 13.
7
Until the adjustment of CAP in 2006, many reports did not address the fact that
Poland received a much smaller degree of financial support for agriculture under the
accession agreement: ““Under the CAP EU policy Polish farmers receive 25% of the
average level of agricultural subsidies payable in the old Member States. For the year
2005 the subsidy level is expected to be at the level of 55,46 EUR/ha. …The ECOFUND
gives establishment subsidies for energy crops in the amount of 1.000 PLN/ha (250
EUR/ha) for the plantations 50-500 ha acreage, where the demand must be secured by a
forward signed contract for long term supplies of biomass produced. The support for
renewable heat depends on the priorities of financing institutions, mainly on the regional
level.” Poland Country profile EU ETS (emphasis added):
8
http://www.setatwork.eu/cp_poland.htm
“Perennial energy crops make up the single largest contribution to the long-term
biomass potential….” Ericsson, “Prospects for Bioenergy in Europe: Supply, Demand and Trade,”
9
October 2006.
5
Sweden also used an “establishment subsidy” of €100 to €330 per hectare to help
create farming of perennial energy crops (Ericsson, 2006, p. 27). Financial assistance is
available in Poland at €250 per hectare where the project is supported by a long-term
contract in hand.10 With more competitive costs and comparable potential establishment
financial support, the lag in development of the market must be explained by other
reasons, noted below.
While technically heating is covered by the Polish feed-in law, the exceptions
actually take away the impact of the inclusion. Heating by renewable energy sources is
only covered if it can be delivered at no more than 5% of the prior year’s price for “the
same volume of heat supplied to consumers from the district heat network.” Feed In
Ordinance (2204), Section 2.3.(b). After inflation, this does not leave much of a margin
to say the least. This gap in EU policy is the subject of a new proposal working its way
through the EU Parliament.
While Poland burns massive amounts of coal for its energy and allows boilers up to 5
MW to go on line with a simple registration procedure – and no air permit - if they are
burning coal, burning biomass is still treated as a special condition that requires more
precautions than the dirtier fuel it is replacing. While Article 9e of the Energy Law
provides for a seven day turn-around of request from electricity producers for a
“Certificate of Origin” on their renewable energy, the practical problems in obtaining
permission to burn biomass have meant substantial delays in obtaining approval. In
theory, “biomass” is defined by the ordinance as biodegradable material, precluding, for
instance, the use of adulterated wood with paint applied or construction debris. Despite
the relative simplicity of the Polish “biomass” definition, the process is often slow.
Switching fuels as biomass supplies change will be problematic as the system now works.
Given that boiler and feed modifications, even scales for weighing fuel entering the
boiler, may be required the relatively small penalty to the customer to pay a “substituion
fee” has obviously been appealing for many.
The other issue is pricing and long-term supplies. The easy material is accounted for.
Most waste biomass is excluded by current definitions (which seem to assume that it is
better to bury the waste than destroy it). Customers for potential biomass currently have
very high expectations over very low prices. The market has not adjusted to the reality
that new sources of biomass in significant amounts will entail higher prices to end-users.
Despite this situation, Poland had a surplus of green certificates in 2006 due to the low
level of avoidance costs through substitution fees.
Co-firing with biomass replacing a portion of the traditional coal as fuel need not
require extensive boiler modifications in some cases. However, the moisture and physical
properties of the biomass fuel can affect the boiler and the fuel feed system.
Modifications to allow co-firing with biomass fuel can range from €10 to €160 a
kilowatt. See Eriksson (2006), p. 34. Cost calculations for a producer changing to
10
Poland Country profile EU ETS
(2007 website).
6
biomass must include the producer’s direct costs for modifications and compliance with
the Energy Law, as well as the producer’s cost of the biomass.
The Polish plan, like many other national plans, depends on the quota system for
renewable electricity distributors. The power generators themselves have no
requirements. The system works only to the extent that the electricity and heat
distributors have quota requirements that they feel obligated to meet by the purchase of
more expensive “green electricity.” The distributors must incur substantial additional fuel
costs to meet the renewable percentages. Unless the system of fines and penalties is
effective, there is no mechanism to assure that any electricity or heat producer uses
renewable energy. This means the penalty system must be legally punitive to the degree
that it only pays to comply and that the system must be enforced.
The Polish system as modified in 2005 uses quotas and “substitution fees” if green
energy is not purchased by the distributor. The “substitution fee” is the same price as the
green certificate. The penalty for having neither is 130% of the price of the green
certificate. Polish green certificates (even in an emerging market with major supply
problems) were “over-produced” in 2005 and 2006. See Katarzyna MichałowskaKnap, Institute for Renewable Energy, “Wind energy development in Poland: history, main
influencing factors and future prospects” University of Technology Berlin, Wind Energy
Conference (December 2006).11 Despite falling well short of the targets in 2005 and
2006, Poland had a surplus of “green certificates,” indicating that the pricing mechanism
is ineffective. Penalties should be rare, since they can be avoided by paying the unique
“substitution fee” valued at the same price as a green certificate. The actual
Polish Green Certificates, Michałowska, “Wind Energy in Poland,”
U. of Technology, Berlin conference (2006).
This point was also made at a November 14, 2006 meeting of the Parliament’s
Enterprise Development Committee and the Polish Wind energy Association.
11
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financial incentive to use green energy is only the value of an equivalent amount of
“black energy” less the headaches and burdens of finding green electricity suppliers.
The “substitituon fee” was actually pushed by the renewable energy business
community under the assumption that it would be effective if it was the same price as the
green certificate. However, the real penalty is not the substitution fee, but the black
energy price for the same volume of energy. The statute pegs the value at the same as the
green certificate. The difference between compliance via green energy use and
noncompliance is the value of the equivalent amount of “black energy” used in lieu of
renewable energy. The Polish “substitution fee” has effectively preempted the
noncompliance penalties and is unique in the jurisdictions using a quota system. The
above graphic assumes that the RES supplier gets the purchase. If the energy user simply
pays the “substitution fee,” then there is no use of renewable energy and the producer
does not to take any risk of the performance of the biomass fuel or other renewable
source. An energy producer has little incentive to add renewable energy if the quota is,
for example, 5% and the effective penalty to his customers is 2-2.5% of their total costs
of energy. Reaarranging his pricing to adjust for this 2-2.5% would often be more
attractive than risking modifications of the boiler, uncertain supply conditions, and other
operational inconveniences. This is exactly the predominant form of behavior under the
Polish system.
Another problem is the perceptions in the regulated community where the obligation
to use renewable energy in Poland is often not understood or acknowledged. Electricity
distributors sometimes think that the deadlines are not yet in effect. One power industry
official told a biomass venture that they had until 2012 to comply, for example. There is a
critical lack of communication to both energy users and potential biomass growers. As
simplistic as this point seems, it comes up in every discussion among renewable energy
developers as one of the biggest hurdles they face.
SOLUTIONS
8
Modification of the substitution fee: The Polish Ministry needs to look at the
substitution fee as established by Article 9A, Section 2, of the Energy Law. Traditionally,
the payment of fees in lieu of using green energy was viewed as a less desirable outcome
and fees were adjusted to preclude the regulated community from following a path of
least resistance and avoiding the renewable energy obligations. Thus, even apart from
other financial incentives, like carbon taxes, Sweden charges 150% for failure to meet
quotas,12 while Poland effectively charges only 100% (which ends up being only a 3050% differential between using green energy and paying for not doing so).13 Making the
effective penalty at least the same as other jurisdictions that rely entirely on the RPS
mechanism with no feed-in tariffs makes sense.
Fixing this problem will require legislative changes. The Polish Parliament is now
considering a new renewable energy law and this issue will hopefully be revisited.
Moreover, new legislation expected to be generated by the recent developments in
Brussels on 2020 goals and on heating plants will be another opportunity to get this fixed.
Poland should simply follow the model of other countries using quota systems effectively
and eliminate altogether “substitution fees.” The penalty should be raised to 150%, the
same level as in Sweden, although without carbon taxes, the Polish financial incentive
scheme is still more mild.
Simplification of procedures: The goal should be to make it as easy to burn biomass as
it is to burn coal. This can only be achieved by providing more specific, published,
transparent definition of what is acceptable biomass. Certification of use of biomass fuels
should be accordingly simplified. The filing with the Ministry should be a pro forma
process, subject to auditing or other quality assurance procedures, but not a case-by-case
“adjudication.” Self-policing with more clearly defined and enforced penalties for false
certification submissions would accelerate the process with little or no risk of abuse.14
While this is occurring, Poland should also look hard at allowing “adulterated” biomass
which could be subjected to more review of its environmental impact. In the United
States, New York State has started a two-tier approach for unadulterated biomass and
adulterated biomass, subjecting the latter to a case-by-case review by its Air Programs
office.15 Certainly until energy crops are a more viable option, other sources of biomass
should be looked at carefully.
European Renewable Energy Council, “Renewable Energy Policy Review:
Sweden,” May 2004, p. 7.
12
The Polish substitution fees are among the most mild RPS “penalties” in the
world. In the United States, various state procedures have used penalties from 130% to
500%. See Holt and Bird,“Emerging Markets for Renewable Energy Certificates: Opportunities and
Challenges,“ National Renewable Energy Laboratory, (January 2005) Table 1.
13
See e.g. Renewable Energy Compliance Certification Forms for the State of New Jersey,
pursuant to New Jersey Code Annotated 14:4-8.4 through 8.6.
14
See Technical Workshop for Biomass Project Implementation,
June 2005, NY Public Service Commission, Antares Group Inc.
15
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More aggressive enforcement: The RES-E system in Poland may be locked into
under-performance unless enforcement actions are taken and perceived as a significant
risk to electricity distributors. Since the only incentive for power generators and heat
producers16 to use more expensive “green energy” is the insistence of the distributors,
the market will remain limited without effective enforcement and communication of
enforcement policies. This has been politically unpopular and will require more
aggressive government policies to achieve effective enforcement. It is likely that these
problems in Poland are typical of other new Member States with a post-communist
tradition of nominal environmental enforcement policies. Fairly dramatic changes in
public perceptions as well as enforcement policies are necessary.
Agricultural policy changes: There seem to be real issues on the shift in the EU-15 to
energy crops under the CAP. Where new Member States, like Poland, are only getting
25% of the CAP amounts on energy crops, it is difficult to see how the potential
cultivation of energy crops in this region can be meet the often high expectations of
government projections. The region has the potential to export energy crops within the
EU under the right conditions, which do not seem to be likely in the near future.
Feed In Tariffs and other taxes: Many experts argue that greater financial incentives
for renewable energy will be necessary for Poland and similar markets to successfully
convert from traditional sources. “Current investment support needs to be complemented
with fossil fuel taxes or other financial incentives that can change relative fuel prices and
production costs.” Nilsson et al. “Bioenergy Policy and Strategies for Poland,” 2005. It is
difficult to speculate on this issue when the existing quota system has weak financial
incentives and is not enforced effectively. More accurate evaluation of cost avoidance
(adjusting the substitution fee) and enforcement of the current quota law should lead to
substantially more biomass and renewable energy utilization. Whether these mechanism
will be able to take Poland and other Member States to the more challenging goals
beyond 2010 remains an open issue.
CONCLUSION
Poland and other newer Member States face difficult transitions to meet renewable
energy objectives in EU legislation. The RPS device is a reasonable mechanism to
provide for lower cost renewable energy at competitive prices. But meeting the objectives
for renewable market shares will require the system be effectively designed and enforced
to create the right economic incentives.
Getting heating plants to use renewables will require repeal of the provision that
limits their obligations to use renewables to no more than 5% higher prices than the prior
year. This will also have to be addressed to reach the new EU objectives for 2020.
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