WHAT IS NECESSARY TO PROMOTE THE DEVELOPMENT OF BIOGAS IN POLAND

WHAT IS NECESSARY TO PROMOTE THE DEVELOPMENT OF BIOGAS IN POLAND

Randy Mott, VP Polish Biogas Association

     The new government in Poland has been expressing an interest in increasing the development of biogas in Poland. This is encouraging for a variety of reasons since biogas has very significant benefits beyond simply producing electricity. These include generation of a nearly equivalent amount of heat, replacement of aging small coal-fired heating plants, increasing the nutrient uptake of organic material used as fertilizer, reducing run-off of substances that cause eutrophication of local water bodies, and reducing the cost of organic waste disposal for local residents and businesses.  Biogas also operates constantly at the same level of output and that output can even by varied to match the demand curve if there is some compensation for the extra effort to do so.

     PBA has documented that the cost-effectiveness of biogas is among the highest in the mix of renewable energy technologies because it provides these collateral benefits. For compliance with the mandatory EU RES target for 2020, biogas produces both renewable electricity and heat that both count toward the goal and at an aggregate price that is still comparable to other electricity-only technologies.

     How does Poland then get these benefits without creating the very high subsidies[1] that were used in Germany to develop the biogas sector in that country? Besides setting the support level at the appropriate level, based on real economic data, and changing the procedure used to provide support from the small auction set out in the new law to a more stable and predictable one (both discussed below), there are also several simple measures that can be taken that actually do not increase the cost burden on either tax-payers or energy end-users, but actually reduce their cost.

Cost of Biogas

     The European Commission has estimated that about 70% of the Member States do not provide sufficient support to make biogas viable in those countries.[2]  It is essential that support for biogas be based on smart policies since simply throwing a lot of money at the problem will be happen. The cost for biogas plants varies based on whether the methane recovered comes from waste-water treatment, landfills or specially constructed anaerobic digestion plants. The anaerobic digestion plants can be simple farm-based designs or more expensive plants designed to treat organic waste materials. Variations in cost include design elements to control odors (such as special waste reception halls, steel digesters with welded covers, odor control via biological and/or chemical filters) as well substrate or feedstock pretreatment via high temperature. The average cost of anaerobic digestion plants (which is the main topic of interest in Poland) has been relatively steady over the years. In 2010, the European Biogas Association set out the cost of electricity production by size of plant and those numbers are still fairly accurate:

     The Fraunhofer Institute in Germany reported that the cost of biogas in Germany in 2013 ranged from 14 to 21 Euro cents per kWhr (no breakdown by plant size).[3]  Unlike other renewable energy technologies, biogas costs are not going down: “no reduction in the specific invest­ment costs in recent years can be identified. “ Fraunhofer, supra. The critical factors in the cost of biogas are plant size, heat utilization and substrate costs.  Substrate costs include not only acquisition in most cases, but can include pretreatment, storage, dewatering, etc. The proposed Polish auction reference price for less than 1 MW is 500 PLN/MWhr. This is only 11 Euro cents compared to the cost cited above. Adding co-generation support where heat is utilized outside the biogas plant needs can add about 2-3 Euro cents per MWhr of electricity produced (based on the assumption of 120 PLN/MWhr for co-gen support).[4] These numbers are still too low to provide adequate support for biogas projects without the use of a sizable grant for the capital costs. Grant funding is limited and has been the basis for the overwhelming number of current agricultural biogas plants in Poland. This is a major reason why the number is so low.  The IEO numbers should be the assumed level of necessary support. See CITE.

Policy Changes for Biogas

     Making the support system for biogas attractive enough to obtain equity and debt financing requires some revisions. First, it is obvious that larger plants are more economic feasible and can provide a value to the public. The current arbitrary size of 1 MW for exclusion for the large auction should be raised to 2 MW. Most existing agricultural biogas plants in Poland and most in development in 2014 were over 1 MW. This reflects the economic and technical reality on the ground and should be acknowledged in the support scheme.

     Second, auctions are unattractive for small projects like biogas plants. No successful auction for biogas plants to produce electricity has been held anywhere in the world.[5] Small and medium-sized enterprises that do this projects are quite reluctant to initiate the front-end costs with no assurance that they will obtain support for the project in the end and no knowledge of what the level of support will be until just months before the auction (while their front-end expenditures must start 24-36 months before the qualification to bid can be established). Plants that are proceeding in Poland are virtually only those with grants that must be used in the short-term. Biogas projects without grants getting prepared for a future and uncertain auction are almost non-existent. 

     We expect that the European Commission will find the small auction inconsistent with the GBER regulation in that it is not “competitive” under the Commission’s rules. It is also clear that under the general state aid rules the small auction distorts competition by limiting small projects and disproportionately hurts small and medium-size enterprises. This will also adversely affect the technology mix in Poland by continue to push onshore wind and biomass co-firing at the expense of other technologies.  Some other mechanism is necessary whether it be a fixed feed-in tariff or continuation of green certificates at the option of the developer.

     Agricultural biogas plants under the current law are restricted to certain substrates, which are narrower in scope than those that are covered by the full EU definition. Poland may wish for farm-based plants to not treat sewage sludge, for example, or household food waste (since these materials require special handling and processing).  But the “other biogas” category in the new law should allow for their use as feedstock. PBA has argued for the Danish rule that allows 20% by weight of sewage sludge to be handling in an AD plant.[6] This would be a high temperature or thermophilic plant and our experts suggest 70 degrees pretreating for a hour of the material as well.[7]  Allowing sewage sludge in a limited portion as well as household food wastes would increase the prospects of biogas development in Poland. Anaerobic digestion is also the best environmental and public health management option for these materials.  This effort would also have to provide that the support for such plants would not be lowering that for “agricultural biogas plants” under the law. While some gate fees might be possible for the processing of sewage sludge and household food wastes, the market has not been established at this point in Poland to expect these fees to cover the extra cost of handling this material.  PBA suggest that “other biogas” AD plants receive the same level of support as “agricultural” plants until the market demonstrates, if ever, that a lower level of support is feasible.

     The immediate effect of a broader substrate policy would be to reduce the cost to local government and residents for sewage sludge and household food waste disposal. The alternative for smaller towns and rural areas is composting of this material under the current law and that is only a cost to residents with no off-setting revenue.  This rule would also enable larger 1-2 MW biogas plants in Poland to deal with the increasingly strict EU rules on organic waste management (including the new Circular Economy Directive). The full scope of substrates within EU definitions should be allowed in “other biogas” plants to assure the optimum development of this sector in Poland.

     PBA has also urged the Polish Government to adopt the rule that up to 2% of the feedstock can be additives such as glycerin and enzymes. These are often necessary to assure stable energy output and hence financially feasibility of the plant. Enzymes hold the promise of revolutionizing biogas in the future and should not be precluded from use in Poland. The European Commission Joint Research Center recommended this rule in its review of the technical issues in the biowaste “End of Waste” studies.

     Support by size of plant should be re-introduced. As the EBA data illustrate, there is a wide disparity in the cost of electricity production by plant size. Forcing the smallest plants to compete in an auction against 1 MW plants makes it very difficult for them to receive support. The only thing providing any prospect of support in the current law is the fact that there will be more support set aside in the small auction than there will be bids. But this violates the EU competition rules as well as provides no assurance that any smaller plants can be economically feasible.

     We are thus lead to the inevitable point that auctions cannot be used effectively or legally for this type of renewable energy.  Poland needs graduated system of support for biogas similar to that recommended in 2013 by the Institute for Renewable Energy in their report for the Ministry of Economy. “Analiza Dotycząca Możliwości Określenia Niezbędnej Wysokości Wsparcia Dla  Poszczególnych Technologii Oze W Kontekście Realizacji „Krajowego Planu Działania W Zakresie Energii Ze Źródeł Odnawialnych,” Lipiec 2013. This can be provided by feed-in tariffs fixed for the same period as now proposed in the law on auctions.

Making the Transition Effective

     However, there is a much more complex issue at work here. It is already 2016 and Poland needs to make a genuine effort to meet the 2020 deadline from the EU for RES. Any mechanism for new support for RES must realistically provide a means to assure a continuous development and commissioning of new RES sources over the next four years. We do not have this situation at this point.

     The European Commission is reviewing the Green Certificate law and will require that it be modified to meet the state aid rules in effect from 2005-2017. That means the end of some support (old hydro) and the downward adjustment of other support (co-firing biomass with coal). It also means adjustment of biogas certificates to reflect the actual costs of production.[8] These points were clearly made to the former government by the head of the Office of Competition and Consumer Protection[9] but they were ignored.  This process will require an emergency legislative act that probably can use a mark-up of the previous 2013 draft law that providing for this approach.

     Once this effort is done, which will have to be in 2016, we suggest that the new certificate system be extended to allow the orderly transition to whatever new system is to be used. For large sources, this would be an auction and for small ones (under 2 MW) it would be a fixed payment reflecting a “contract for the difference.”   PBA strongly suggests that it is necessary and appropriate to allow new projects to continue to opt for support under the revised certificate system if they elect not to participate in the new system. Continuing this approach until 2018 or even 2020 may be essential to achieve the EU-mandated 2020 target.[10]  This proposal also has the advantage of working off of a system that has been in place for many years and no new mechanisms need to be established. Rules of certificate coefficients have to be developed in any event due to the EU state aid matter.  Once this is done, it establishes a method to simply keep the system going in the transition to something else.

Conclusion

      Assuring a technology mix that capitalizes on Poland’s national resources must include a major biogas element. Biogas meets the 2020 objectives in a cost-effective manner by producing both electricity and heat that count toward the target. It also has several other benefits to farmers, consumers, and local governments. 

     To achieve these benefits, Poland needs to make sure the system of support is based on the real economics of biogas.  Rules that assure small farm-based plants are allowed to obtain fair support are critical and now absent.  A system that allows the optimum –sized biogas plants (1-2MW) is also lacking. Forcing competition in a general auction for projects above 1 MW based solely on electricity prices means no biogas can be developed over 1 MW at this point.  Restricting substrates and/or support to not use the full scope of material allowed by the EU definitions is also without any sense.  These biogas policy changes are relatively simple and their rationale is quite clear.

     The bigger and more complex picture is how to meet the 2020 target, satisfy the European Commission state aid rules, assure Poland’s own energy potential is used in an optimum manner, and provide a level of support sufficient to induce investment but not so excessive as to significantly and adversely affect energy prices.[11]  Our proposal for this problem is to use the adjusted certificate program based on costs of production, as approved by the EC, in the interim as new measures are implemented.  The revised certificate program must be done promptly to meet EC rules in any event, but it also provides a means to continue the construction of new projects in the next several years. Shifting entirely to the auctions will kill the small projects and delay the larger ones so that the 2020 target cannot be reached by any measures.   The revised certificate system can also be used to satisfy the newest state aid rules.

        PBA is happy to cooperate in any way to promote the discussion of these issues and their careful and transparent evaluation by the Government and the public.

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[1]  Germany provided from 19 to 29 Euro cents a kWhr for biogas from 2008. See Spath, THE SUCCESS FACTORS OF THE DEVELOPMENT OF BIOGAS WITHIN GERMANY - A CASE STUDY, thesis, 2013. Even with these high levels of support, many German biogas plants had financial trouble over the years. Before the 2008 changes, about half of the German plants were insolvent. Michael Kottner, Director of the German Biogas Institute, speech September 10, 2008,  Sofia, Bulgaria. Poland now proposes just 11 Euro cents kWhr in the reference price.

[2]  European Commission, “The support of electricity from renewable energy sources,” COM(2005) 627 final

{SEC(2005) 1571}, p. 8.

[3] Fraunhofer Institute,  Levelized Cost Of Electricity Renewable Energy Technologies: Study, November 2013. Support in 2012 in Germany was reduced to about 17 Euro cents per kWhr on average.

[4] There is a move to make co-generation support also awarded by auctions. This would likely spell the end to any new biogas projects, if the developer has to assume that he can successfully win support in two different auctions over a period of time before construction can commence (after incurring all of the front-end costs of the project).

[5]  The Instituto de Investigación Tecnológica in Spain 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”. Id. at p. 3.      Later in their paper after reviewing every country’s auction experiences, they conclude: “Unfriendly for small projects and actors. A major 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). … In contrast, smaller projects may need to be promoted with another instrument.[emphasis added]. Their conclusion is based on the empirical data, not simply another expert opinion. Auctions may achieve some support “optimization” for large projects, but they kill smaller projects. In fact, most auction regimes exempt up to 5 MW projects or even larger. The adverse competitive impact of auctions is especially true of biogas: the ITT study noted that many countries had no biogas projects successfully bid in their auctions.

[6]  See CEERES White Paper on Sewage Sludge; PBA Sporadyczne użycie osadu ściekowego nie powinno redukować wsparcia w zapisach ustawy o OZE, 22 września 2014; Instytut Uprawy Nawożenia i Gleboznawstwa Państwowy Instytut Badawczy, Możliwości Rolniczego wykorzystania pozostałości po fermentacji metanowej zmieszanych odpadów z udziałem osadów ściekowych, Puławy 2012.

[7] See IUNG, note 6.

[8] “As stated in point 59, 1st subparagraph, of the environmental guidelines, Member States may compensate for the difference between the production cost of renewable energy and the market price of the form of power concerned. Thus, such compensation can relate only to the extra production costs for environmentally friendly electricity production as compared to the production costs for energy based on conventional energy sources.” cited in Commission Decision of 24 April 2007 on the State aid scheme implemented by Slovenia in the framework of its legislation on qualified energy producers — Case No C 7/2005, para. 85.  In the case of certificate systems, the Commission has been consistent in requiring proportionality to actual or reasonably expected costs of production across different technologies.  See C(2010)2211, State aid No N 65/2010 - United Kingdom Amendments to the Renewables Obligation Certificates (ROCs) scheme, March 30, 2010  (“…levelised costs matching the midpoint of the predicted revenues… will therefore prevent overcompensation in the aggregate of the different producers”). Romania used a levelized cost calculation to evenly apply the green certificates for different technologies, based upon production costs for each technology. C (2011) 4938, State aid SA. 33134 2011/N– RO, Green certificates for promoting electricity from renewable sources, July 13, 2011 p. 8-9.

[9]  The head of the Office of Competition and Consumer Protection (UOKiK) communicated this to the Ministry of Economy on November 28, 2013:.    According to the OCCP, the certificate system constitutes state aid. “Detailed clarification in   regard has been presented in previous correspondence [citing June 5, 2012 and August 10, 2012 correspondence from UKOK to MG]'. Moreover, similar conclusions have been expressed by the European Commission within the framework of the ongoing process notification of the restoration of the certificate system for high-efficiency co-generation.” [referring to the Commission's May 31, 2013 opinion on co-generation certificates in Poland, S.A. 36518](emphasis added). The DG Competition that handles the state aid issue in Brussels communicated to UOKiK formally on May 31, 2013 requesting the detailed  information to determine if there was market distortion or overcompensation. This is especially relevant to the Green Certificate action by the Commission also still pending, since it asked for information about "levelized cost of production. “The compatibility of the aid with the competition rules only arises with the DG Competition if there is actually state aid. From this formal communication and the UOKiK letter to the Ministry is seems clear that there was also likely oral communication with the Commission on the issue as well. and possibly other less formal correspondence. At any rate, UOKiK concluded that the Commission believed the certificates (both co-generation and Green) were state aid. [This should be no surprise, since a nearly identical Romanian system of Green Certificates was determined to be state aid in 2011). The new law in Poland actually assumes that Green Certificates are state aid in calculating the permitted intensity of aid for each project. Article 39.2, RES Act of April 2015. See blog post.

[10]  The obligation of electricity providers to have a mandatory percent of renewable electricity in their mix is still the law and the use of certificates will be essential for them to meet this obligation. The elimination of old hydro certificates (from 2005 to date) and the reduction of co-firing support by half for the same period will cut the certificate availability and market dramatically. Large projects under the auction will not be built until 2018 or later. Most auctioned energy will not be in place by 2020 and cannot be used for compliance with the 2020 target or to reduce the electricity providers’ RES quota obligation. New sources of certificates will be essential to the orderly functioning of the energy system in Poland.

[11] Studies have shown that the auction mechanism does not generally produce a stable amount of projects at the predicted prices. While low bids may be common, these quite often lead to projects that cannot be built. There is very little confidence that what is auctioned will actually be built and when this will occur. Penalties can never be large enough to compel construction of projects that will lose money over their entire life of operation. High qualification standards and penalties combined with low reference prices often also lead to little or no bids being received.