St Andrews University Biomass Plant Not Economically Viable
By Paul Homewood
In 2013, St Andrews University announced plans to build a biomass plant, as The Courier reported:
St Andrews University hopes to slash its energy bills and create an “economic centre in Fife” by building a £25 million “green” centre.
Rising fuel bills represent a “major threat” to investment for teaching and research, according to Scotland’s oldest university.
The proposed renewable energy project at Guardbridge would generate power through wood-fuelled biomass, then pump hot water four miles underground to heat and cool labs and residences in St Andrews.
The centre, at the site of the former Curtis Fine Papers mill, would also become a “knowledge exchange hub” and create employment.
The Scottish Funding Council is supporting the Sustainable Power and Research Campus (SPARC) project with a £10m grant.
Confirming that planning permission for SPARC was being sought, the university said that, alongside plans for a six-turbine wind power development at Kenly to the east of St Andrews, the scheme would support the institution’s bid to become the UK’s first carbon-neutral university.
The project has since received the go ahead, so I thought I would take a look at the economics. Under FOI, the University provided the Final Business Case.
As might have been expected, St Andrews was placing great emphasis on “Carbon Impact”. One reason might be the fact that they have to pay £300,000 a year under the Carbon Reduction Commitment. This is the scheme which forces all large public and private sector organisations to pay the govt for every tonne of CO2 they emit. (See here for details).
Now for the nitty gritty:
The capital cost of the scheme is £21.1 million. This is being part funded with a grant of £10 million, and the balance by a low interest loan, effectively from the EIB, at a subsidised rate of only 2%.
As we will see, without this grant and interest subsidy, the project would have been a non starter.
With interest and depreciation therefore based on only £11 million, the projected savings were:
In simple terms, in October 2014, when the ITT (Invitation to Tender) stage was taking place, there would have been no savings at all. (For some reason, they were loathe to put a figure in the cost column, but it would have meant an annual loss of £188,000).
In any proper business, the project would have filed in the bin there and then. Even under their Base Case scenario, the annual saving of £7000 would not warrant the investment.
[There appears to be an error in the Executive Summary, which gives a saving of £0.080m on heat, but then adds this to a saving of £0.1m, for extending heating system lives, to arrive at a total of £0.107m. They clearly meant £0.007m, as spelt out below]
They are clearly betting the bank on gas prices increasing rapidly in years to come, a belief that is utterly without foundation. Should universities be speculating like this?
But even at October 2013 prices, the project is still not viable, in any rational sense of the word. A saving of £392k pa gives less than a 2% ROC, and this despite a ridiculously rate of interest on the Amber loan.
Furthermore, the savings include £100k a year from paying less for the carbon reduction commitment.
If a proper rate of interest had been paid on the full capital employed, and without the skewing produced by the carbon commitment, the project would have ended up losing hundreds of thousands a year.
There are opportunities listed, which may improve savings, but there are also risks. None more so than the acknowledged need to refinance the Amber loan at 9 years. Whether there will be the political will, or the market conditions, to refinance at 2% is highly uncertain.
In any event, even given the advantageous funding, there is no economic justification at all for the scheme. Whoever has allowed this to go ahead is guilty of a criminal misuse of public funds.
Carbon Reduction Commitment
I thought I would briefly discuss this scheme. This is how the Carbon Trust describe it:
The CRC Energy Efficiency Scheme (also referred to as the ‘CRC scheme’ or ‘CRC’) is a mandatory carbon emissions reporting and pricing scheme to cover large public and private sector organisations in the UK (excluding state funded schools in England from April 2013), that use more than 6,000MWh per year of electricity and have at least one half-hourly meter settled on the half-hourly electricity market.
The scheme is managed, on behalf of the UK Government’s Department of Energy & Climate Change (DECC), by the Environment Agency (in England), by Natural Resources Wales (in Wales), by the Scottish Environment Protection Agency (in Scotland), and by the Northern Ireland Environment Agency (in Northern Ireland).
The scheme is divided into a number of phases, with each phase lasting five years. Currently, the scheme is in its second phase running from April 2014 to March 2019.
How it works
The CRC comprises three primary elements:
1. Emissions reporting requirement
Participants in the CRC need to measure and report their electricity and gas supplies annually, via the online CRC registry following a specific set of measurement rules. The CRC registry then calculates CRC emissions in tonnes of carbon dioxide (CO2) from the data submitted for each participant.
The CRC scheme applies to emissions not already covered by Climate Change Agreements (CCAs) and the EU Emissions Trading System (EU ETS).
In addition to reporting their electricity and gas supplies, organisations are required to answer a set of corporate responsibility questions and keep evidence with records of their supplies as well as other relevant information.
2. A carbon price
The scheme requires participants to buy allowances for every tonne of carbon they emit (relating to electricity and gas), as reported under the scheme.
Participants are required to buy allowances from the Government or, if available, from the secondary market each year to cover their reported emissions. This means that organisations that decrease their emissions can lower their costs under the CRC. A failure to surrender sufficient allowances will result in a financial penalty.
During phase 2 (which started in April 2014), there are two sales of allowances for each compliance year. The first sale at the start of a compliance year is based on predicted emissions at a lower price. The second is a "buy to comply" sale after the end of the compliance year at an expected higher price.
The price of the allowances for the 2014-15 compliance year was set at £15.60 per tonne of CO2 for the forecast sale and £16.40 per tonne of CO2 at the “buy to comply” sale. All future allowance prices will be published on the Environment Agency’s CRC web pages.
3. Publishing of information on participants’ energy use and emissions
The energy use and emissions of all participants are published for each compliance year as part of the Annual Report Publication (ARP), which will also report emissions from previous years for all participants.
Background to the scheme
The sectors targeted by the Carbon Reduction Commitment Energy Efficiency scheme generate over 10% of UK CO2 emissions, around 55 MtCO2. The CRC Energy Efficiency scheme aims to reduce non-traded carbon emissions by 17 million tonnes by 2027. It supports the UK Government’s objective to achieve an 80% reduction in UK carbon emissions by 2050.
At 55 MtCO2, the scheme pulls in revenue of about £800 million a year for the government. But for the public sector organisations, it is simply a merry-go-round, whereby the Treasury gives money to, say, the NHS, for them to give it back again.
However, when, as in this case, St Andrews University spends money on a scheme so as to avoid paying for its CO2, the public purse loses out.
The CRC scheme simply ends up diverting funds away from projects that would yield a decent economic benefit, and into ones that are basket cases. This is a misallocation of public money.