Sunday 25 September 2016

Enda's new power plant is set to generate lots of cash - for investors

With a surplus of electricity and three obsolete peat stations already, do we really need another plant, asks Colm McCarthy

Published 14/06/2015 | 02:30

FUELLING THE DEBATE: Taoiseach Enda Kenny last Sunday announced the building of a new biomass power station in Killala, Co Mayo, with Gerald C Crotty, Chairman of Mayo Renewable Power, the promoters of the project
FUELLING THE DEBATE: Taoiseach Enda Kenny last Sunday announced the building of a new biomass power station in Killala, Co Mayo, with Gerald C Crotty, Chairman of Mayo Renewable Power, the promoters of the project

The Government last week appointed a new advisory council on climate change to be chaired by economist John FitzGerald. There were immediate queries from Opposition TDs about the independence of the new body. Happily, the Government has furnished Professor FitzGerald and his colleagues with an early opportunity to dispel any doubts on this score. Last Monday, the Taoiseach announced a new electricity-generating station for Killala, Co Mayo, trumpeted as a contribution to the attainment of lower carbon emissions. The new station, to be fuelled with imported wood, will enjoy substantial subsidies courtesy of the consumer, will contribute little to reducing carbon emissions and will employ just 30 people. It looks like a serious blunder.

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Peak demand for electricity in Ireland, typically on a cold evening in January, is a little under 5,000 MW (megawatts). Minimum demand, say on a warm night in July, can be as little as 2,000 MW. Capacity needs to be available to meet peak demand, otherwise there would be regular blackouts. Even with interconnection to Northern Ireland and Wales, it would be imprudent not to maintain capacity above peak demand, to allow for the fact that generation units sometimes fail unexpectedly. There are no hard and fast rules about the desirable margin: in Ireland, somewhere around 6,000 MW would be seen as desirable by power engineers.

At present, there is about 7,400 MW of capacity in the Republic, that is to say power stations that are capable of round-the-clock operation. In addition, there is over 2,000 MW of wind-farm capacity, available intermittently whenever the wind blows. In total, installed capacity (dispatchable plus intermittent) adds up to roughly double the level of peak demand. In addition there are plans, unless policy is changed quickly, that will see up to 3,000 MW of additional wind farms constructed over the years to 2020. Eirgrid has recently predicted that demand in that year will be no more than it was in 2007.

Ireland, in a nutshell, has a serious surplus of generating capacity and that surplus has been increasing in the years since the economic downturn began. Three modern gas plants of about 400 MW each have been commissioned since the bubble burst, along with most of the wind-farm capacity now in place. The gas plants have lost money for their owners, including the State, while the wind farms have been protected from loss through a guaranteed price regime, courtesy of the consumer.

The new plant in Killala is a private venture scheduled to cost €180m for 42.5 MW of capacity. All of the money is being put up, or borrowed from the market, by American investors. The capital cost per MW works out at about €4.25m, compared with around €1m per MW for new gas stations. There is no prospect of anybody building a new gas station, given the enormous over-capacity, and it is a fair guess that those who have recently built gas stations regret their enthusiasm.

Why then would American investors risk their own money to build an expensive, if small, power station in such an unpromising market? The answer is that they are not taking any risk at all.

The promoters expect the plant to be treated as a provider of renewable power, entitled to a subsidy regime even more generous than that currently enjoyed by wind farms.

The Killala plant will be fully insulated from the market, in receipt of a guaranteed price well above the level in the wholesale market available to unsubsidised generators. The Government press statement welcomed the project as contributing to supply security, emission reduction and job creation in Mayo. There is, given the excess capacity in the system, no contribution to supply security. The contribution to emission reduction has not been quantified, much less assessed against the costs to be incurred. The task of climate policy is not the discovery of any and every measure which might cut emissions, it is the identification of the least-cost methods of doing so.

Two solid-fuel technologies are used in the Irish generation system, peat in three Midlands stations totalling 315 MW and the Moneypoint coal station, the largest in Ireland at 900 MW. Peat has the highest per unit carbon emissions of any generation technology and the decision to replace the obsolete peat stations in the 1990s was a mistake. The peat stations are subsidised, notwithstanding their high emissions. Coal is the next worst in emission terms but has the advantage of low fuel costs. The peat and coal stations are capable of burning wood chips (so-called biomass) without heavy conversion costs. Burning biomass is regarded as a renewable technology, since growing trees absorb greenhouse gases and the technology is deemed carbon-neutral over the cycle of harvesting and re-planting.

Some environmentalists dispute this view, but it is reflected in the international climate agreements. It is feasible to convert the peat and coal stations to biomass and the options are being studied. Part-fuelling just one of the three existing peat units with biomass would save more carbon emissions than the Mayo plant costing €180m.

The Killala project is not a conversion of an existing station, already built and paid for and not adding to excess capacity. It is a new-build, adds to excess capacity and has notably high capital costs.

It appears that the Killala plant will qualify for a guaranteed price of €125 per Megawatt hour (MWh) on the grounds that it is a Combined Heat and Power (CHP) technology. The waste heat from power stations can sometimes be used for district heating or drying processes. But there is no heat load in Killala external to the proposed new plant - the project will apparently qualify for CHP status on the curious grounds that the heat will be used to dry the wood pellets. But the existing peat stations at Edenderry, Lanesboro and Shannonbridge can handle fuel at the same moisture content as biomass without modification.

There is also more biomass available in the Midlands. If Killala goes ahead it will be a base-load generator and will displace gas stations at the margin. These stations operate at marginal costs of around €50 per Mwh, versus the €125 needed to make the Killala project viable. The excess cost, which would be passed on to consumers in their electricity bills, would exceed €20m per annum.

This works out at a subsidy cost of at least €700,000 per annum for the 30 permanent jobs to be provided.

There are other oddities. The promoters acknowledge that the fuel will be imported from the United States, but it cannot be imported into Killala where the harbour is too shallow for ocean-going freighters. It will presumably come in through Foynes, or some other deepwater port for onward transport by road. It is not clear that North Connacht can easily develop alternative domestic supplies.

If this scheme goes ahead the owners of existing gas-generating stations would lose out and could object to Brussels on state aid grounds. The Commission for Energy Regulation will have to sign off on the entitlement of the project to subsidies, and of course John FitzGerald's new climate council may have something to say.

This is hardly a done deal.

Sunday Independent

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