How Polish Biogas Policy Will Not Help Farmers

   The impetus for Polish policy supporting biogas has been almost entirely from the stand-point of agriculture (narrowly defined). The Ministry of Agriculture has been the only Ministry taking biogas seriously (the Ministry of Environment seems to forget that biogas has a critical organic waste management role). The vision of the Ministry of Agriculture (until recently anyway) was for small farm-based biogas plants averaging 250 kW in capacity. Ironically, while sacrificing every other biogas application to this vision, the current proposed law does little to help farmers get into the biogas business.

   Every serious discussion of biogas policy needs to start with how much it actually cost. The Institute for Renewable Energy documented the cost of biogas last July in their report to the Ministry of Economy using multiple sources. Their data were realistic and no one has seriously questioned their conclusions: biogas requires substantially more support than the flat value of the Green Certificate. For simplicity, I want to turn to the European Biogas Association graphic:


   The cost per kWhr for the 250 kW plant size (the size sought by the Ministry of Agriculture) is about 23 Euro cents using a broad range of European facilities. A German study in 2013 using fewer reference facilities pegged this cost at around 20 Euro cents. See Helmut Döhler and Mark Paterson, Improvement of the technical, economical and ecological efficiency of biogas production -future challenges for the agricultural engineering sector, 2013. They however, concluded:  "Despite the increase in efficiency of biogas production, due to rising production costs and the substrate components plant (biomass), is not expected to further reduce costs." See also CEERES, letter to Ministry of Economy, May 2013, reprinted by GramwZielone.  The Polish support system to date offered less 15 Euro cents in theory (counting grid sales, Green Certificates at full value, and co-generation certificates - when they were available). If farmers listened to the Ministry of Agriculture in the past, they would be bankrupt now.  

   What does the new law offer? No one knows the level of support. In fact, no one will know the reference price (maximum allowed bid) in the auctions until they are announced, only sixty days in advance of bidding, while the project developer will need to be spending money for two years before the auction in order to qualify to bid! No one except possibly the government insiders (maybe the state-owned companies?) will know what the level of support will be and have any intelligent way to plan the investment. The level will be set, we are assured by the same government that has delayed the law for four years and allowed Green Certificates to lose much of their real value, to assure that 80% of the potential bidders would "make a profit" under the reference price. That rather amorphous reassurance is even more meaningless if you look at precisely what they are asking farmers to do. First, spend about 150-250,000 PLN on technical reports and engineering support, maybe much more, without any knowledge of what the ultimate maximum auction bid will be. Then to submit the project only after a full environmental and planning approval, a building permit, and a bond is obtained. The bid must guarantee the delivery of the electricity to the grid at risk of a substantial penalty - even in years when agricultural prices might skyrocket and the cost of providing the electricity would be much higher than the bid price. So instead of selling the silage as animal feed in a boom market, the farmer would have to use it in the biogas digester sacrificing a high profit for a substantial loss. After all of this risk and money invested, the farmer is still not guaranteed to win the auction or to get any support at all.
                                                                                                 Photo: Blahoj Denmark, from Niras AS.
   If any farmers bid with 250 kW projects, without major changes in the law, they will be quite courageous or reckless depending on your viewpoint. Circumtances that could mitigate the risks are a good heat utilization (also qualifying for co-generation support) and replacement of chemical fertilizer with digestate (adding more savings to farm operations). Nevertheless, it seems that the risks are unlikely to be assumed by a smaller farmers in the proposed scheme.

   The history with auctions and biogas is not very helpful. The Instituto de Investigación Tecnológica in Spain just published a detailed review of renewable energy auction experience in every country where it has been attempted. See del Rio and Linares, “Back to the future? Rethinking Auctions for Renewable Electricity Support,” 2013. One of their major points from looking at dozens of different auction systems was as follows:
Unfortunately, these theoretical advantages of auctions come at a cost. Due to the
complexity of the bureaucratic procedures, and also to the planning required ahead,
auctions have higher transaction costs (Finon and Menanteau 2008) which, together
with uncertainties on the final price and the tendering schedule, deter participation by
smaller firms, resulting in a low degree of competition (Butler and Neuhoff, 2008), and
creating opportunities for market power. In turn, this may eliminate the higher
theoretical efficiency of this instrument. (emphasis added) Id. at p. 3.

Their recent paper reviewed every country’s auction experiences and concluded:

Unfriendly for small projects and actorsmajor empirical lesson of tenders is that they are    unsuitable for small installations and smaller actors. Competition may thus be affected. It has  been argued that some of the aforementioned factors and, namely, information failure and      difficult access to finance, have a disproportionately negative impact on small actors and, thus, that the instrument is not suitable for small actors, suggesting that smaller projects should be promoted with a different instrument (Morthorst et al 2005, Mitchell 1995). .... [1]


           
   In fact, many countries with auctions had no biogas projects qualify for support. Most countries exempt projects under 5 MW from auctions and the European Commission Guidelines recognize this issue (but set the ceiling unrealistic low at 1 MW, which is being challenged in court). The above problems exist whether there is a separate small auction or not. Clearly above 1 MW, the draft law would basically end new biogas projects in Poland. 

   The European Commission, DG Competition, may not approve auctions for biogas projects due to the these problems, which reflect competition considerations that they are legally required to enforce. Some of us will take this case to the Commission if the Polish Government persists in the foolishness of the current draft law.

   However, the question has to be asked: if the Ministry of Agriculture supports farm biogas why would they support such a system rigged to make it more difficult?  Why also one might ask would they put a 1 MW ceiling on the small auction when most existing agricultural biogas plants are larger than 1 MW? If the Ministry of Economy is truly into the idea of only supporting the optimum technologies, i.e. most cost-effective, why would they discriminate against biogas plants from 1-2 MW (the most efficient size).[2] It also is clear that price optimization on small projects does not occur in competitive bidding. See Del Rio, supra. If they want to foster investment, why has the Government switched its position again and refused to define what substrates can be used until a later administration decision? Earlier, they said this procedure would discourage investment. See PBA comments, November 2013, on how to define substrates using an EU model list.

   The new Minister of Agriculture announced that he wants biogas to play a bigger role in rural development and for rural communities. However, the draft law proposed by the Government also fails rural farm communities in major ways. It precludes biogas plants large enough to provide district heating at prices lower than coal! See PBA comments on Proposed RES Law, November 2013. It makes it economically impossible to process incidental amounts of sewage sludge (20% of volume, as done in Denmark) which can provide a far less costly solution to rural communities than composting. It precludes the use of household food wastes (which cannot be landfilled under the new rules), creating fewer options for local communities in waste management. All of these issues were put to the Government by the Polish Biogas Association, supported by the Association of Powiats, the Association of Rural Gminas, and the Gmina Association for Renewable Energy. Put kindly, we were simply ignored. Rather than following proven model of distributed rural energy in Denmark, the Government here seems hell-bent to create barriers to the policy it professes to support. The most telling point is that this is being done without any rationale, explanation or evidentiary support.

   It is time for the Ministry of Agriculture to open the dialogue to fix these issues. Listening to the biogas sector about our concerns and how to fix them would be a great start.

Randy Mott

President ("CEERES" Sp. z o.o.)
Vice President Polish Biogas Association

POLISH VERSION OF THE ABOVE ARTICLE PUBLISHED HERE: http://biogazownierolnicze.pl/aktualnosci/1959/jak-polska-poltyka-biogazowa-nie-pomoze-rolnikom


   UPDATE: January 25, 2016. The new law now more than ever appears to be difficult for biogas due to the auction. The reference price of 500 PLN/MWhr is about 11 Euro cents, when the German biogas cost of production has been, for example, 14 to 21 Euro cents. Fraunhofer Institute (2014). The new government in Poland wants to increase development of biogas and needs to look at these problems clearly. The Polish Biogas Association has prepared a detailed position paper that outlines how to improve the situation. It will be published on January 31, 2016.

   

 


[1] Biogas is the perfect example of distributed energy, where local sources of agricultural waste and products provide a local source of energy that should also be allowed to be used locally. See Mott, “Biogazownie jako wzorcowy model rozproszonej energetyki: lokalne odpady lokalnym źródłem Energii,www.reo.pl (2013).   Local, direct sale of the electricity is also imperative to achieve the best results to the economy (decentralizing electricity and lowering its price). The Ministry of Economy concerns about balancing peak and off-peak production is also contradicted by their plan to force biogas into auctions to sell at one price to the grid. Biogas can vary production output to match the demand, but cannot economically do so if forced to sell at one price. See Polish Biogas Association comments on Proposed State Aid Guidelines (Brussels 2014).


[2]  "The electricity generating costs decrease with increasing plant size and amount to about 15 to 25 Ct/kWhel." Helmut Döhler and Mark Paterson, "Improvement of the technical, economical and ecological efficiency of biogas production -future challenges for the agricultural engineering sector ," Club of Bologna (2012) http://www.clubofbologna.org/ew/documents/Doehler_KNR.pdf (enclosed). The EU Agro-Biogas project reported: "Object of this study were ways to optimize biogas production plants of various sizes and the results showed that the lowest cost per kilowatt hour of energy occur in the case of larger biogas plant with a capacity of the order of 1 - 2 MW."  EU Agro-Biogas, European Biogas Initiative to improve the yield of agricultural biogas plants," Deliverable 22 (2010). Their study looked at ways to optimize biogas production at various plant sizes and reported the lowest cost per kilowatt at the larger plants 1-2 MW.




 

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