COMMITTEE FOR AGRICULTURE AND RURAL DEVELOPMENT
OFFICIAL REPORT
(Hansard)
Inquiry into Renewable Energy and Alternative Land Use
24 April 2008
Members present for all or part of the proceedings:
Dr William McCrea (Chairperson)
Mr P J Bradley
Mr Allan Bresland
Mr Trevor Clarke
Mr Willie Clarke
Mr William Irwin
Mr George Savage
Witnesses:
Ms Sarah Brady ) Northern Ireland Authority for Utility Regulation
Mr Iain Osborne )
The Chairperson:
I now welcome the chief executive, Iain Osborne, and the head of social environment, Sarah Brady, from the Northern Ireland Authority for Utility Regulation. It is a pleasure to have you here. I realise that you have had a busy day, as you attended another Committee meeting this morning. You are either very popular or are simply using your time profitably.
The authority was established to ensure the effective regulation of electricity, gas and water and sewerage industries in Northern Ireland. It is responsible for issuing licences to utility companies and, interestingly, it works to encourage competition in utility markets. Perhaps we will learn more about that during the presentation.
The Committee is inquiring into renewable energy and alternative land use, and I think that you will make a valuable contribution to our study. We must keep within the Committee’s remit. We are interested in hearing what you have to say, so it is over to you. Your presentation will be followed by questions from members.
Mr Iain Osborne (Northern Ireland Authority for Utility Regulation):
Thank you for your welcome. We are happy to assist the Committee with its inquiry. We thought that it would be helpful if I went through a few points, and then we will be happy to answer questions.
It is very important to have utilities in Northern Ireland that are economically, environmentally and socially sustainable. That requires partnership — no single stakeholder controls all the levers. The authority is consulting on how it ought to fulfil its responsibilities to achieve sustainable development. The policy framework within which the authority works is laid down in statute. There are a range of functions, and a couple of them have already been mentioned, which the authority must exercise with a view to delivering the statutory objectives.
The authority’s main responsibility is to consumers, but it has secondary duties relating to sustainability and promoting renewables. We deal with extremely capital intensive sectors, so there is inherently some conservatism in the way in which one approaches the physical assets, in particular, that one is dealing with. Therefore, we are aiming to protect not only the short-term interests of consumers, but their long-term interests. That requires a robust, sustainable sector, with as much competition as possible.
The Committee may wish to consider a few key topics, such as the renewables obligation and the existing support framework for the generation of renewable energy, grid access and the legal framework for heat. It may also wish to consider some of the things that we have been doing in the past few years to enhance competition and open the way to new investment in generation.
It is the authority’s view that the existing renewables obligation is a generous support measure. Iberdrola Renovables, the largest global renewables group, published data on the support that it received from different countries in 2007, and the results were interesting. Spain contributed between €72 and €78, the US contributed €81, whereas the UK contributed €114.
Several actions may be needed to support the renewables industry, but increasing the cost of the obligation is not the most obvious one. If one is focused on mitigating carbon — which is one of the fundamental drivers for supporting renewables — the obligation would be much more expensive than energy-efficiency measures. We are aware that DETI is considering proposals for banding the renewables obligation, and that raises some important issues. Banding may steer support towards less mature renewable technologies.
As regards supply security and overall investment efficiency, there is a lot to be said for creating extra incentives for dispatchable renewable technologies, such as anaerobic digesters, rather than the non-dispatchable generations, such as wind. Wind generation raises a number of technical issues, such as management of the grid, and it requires backup. Wind farms usually need the backup of a gas generator to generate energy when the wind does not blow. So there would be advantages to incentivising generation from dispatchable renewables, which are more predictable and more easily controlled and synchronised with the network.
Northern Ireland has enormous potential to participate in the renewables sector; and, in particular, there is great potential for participation from the agricultural community. We face significant grid-access bottlenecks, particularly in the west of Northern Ireland. Dispelling those will require substantial investment in the grid and a favourable planning regime.
We are concerned because, so far, it is proving controversial and difficult to build a new electricity interconnector between the systems in the North and South of Ireland. If it proves difficult to get planning permission for a new connector to run through a landscape that is not of enormous value, it will be even more difficult to get permission for one that runs through the landscapes of County Donegal and County Fermanagh. That said, most people would say that all the Northern Ireland landscapes are very precious. It will prove extremely difficult to get planning permission for the grid expansions in the west of Northern Ireland that are necessary to enable substantial growth in renewables.
I will briefly mention heat. As the gas regulator, the authority has quite a lot of experience in nurturing and building up a new fuel source. Consumers must be given confidence that when they buy into the system, and spend a lot of their own money — usually in installing a boiler and a distribution system — that they will not be ripped off. They must be reassured that their supply is not going to be bought in at a low price and jacked up without proper oversight and control.
Equally, the business investing in heat must have a legal regime that gives it confidence that it will be able to issue bills and collect money. The legal framework for heat in Northern Ireland is very deficient. It does not give clear ownership rights to heat; a clear basis for billing, or clear protection against abusive monopoly of power. I am not making a case for establishing a heat regulator; no doubt there are other ways through which that matter could be addressed. However, if we want to develop the heat sector, then a clearer legal regime is needed.
Finally, I will mention some of the things we have been doing to promote competition. The creation of the single electricity market is by far the most important development for Northern Ireland electricity since privatisation in the early 1990s. The market went live on 1 November 2007, and has gotten through its first winter, having operated broadly satisfactorily.
The single electricity market arrangement is quite different from those that were in place before, which were bilateral in character. Generators had to strike a contract with the suppliers who had the customers. We had a very strong market power at the retail sector with NIE, but, equally, we had very non-competitive arrangements in the generation sector. The SEM has swept all of that away.
There is now a pool of all of the electricity that is generated on the island of Ireland, other than that which is produced by small generators. Any generated electricity of 10 megawatts or more must be sold into the pool. All suppliers must buy their electricity out of the pool or directly from the small generator. Therefore, that immediately maximises liquidity and creates transparency in the market. The SEM is a market that can be modelled. Anybody contemplating making an investment and building an electricity generator can immediately see how the market is likely to operate. Therefore, we believe that a good number of the risks associated with building new generation capacity, whether it is renewable or conventional, have been removed.
With respect to the renewables sector, we have created a special access regime within the SEM for plants that are not setting the price. That is certainly true of wind farms and most non-dispatchable electricity generators. They are treated as base load: when the wind is blowing, they are able to serve the grid. Only in relatively unusual circumstances would a wind farm need to be constrained. Therefore, that special access regime will be substantially more favourable than the previous arrangements for new generators. Small generators can choose whether to participate in the SEM. As I said, 10 megawatts of power is the cut-off point above which one must participate; below it, one can choose to participate.
The alternative is that they can work directly with, and sell their power to, a supplier. Historically, there has been no competition for the latter service to be the partner supplier that buys the energy. In the first few months of the market, that sector has not leapt into life. However, we believe that it is potentially contestable. We expect that over the next year or two, new suppliers will compete with NIE to partner with renewable generators, to get power into the market and to take advantage of the support regime.
Finally, I will say a few words about grid connections. Earlier, I said that we are consulting on our role to promote sustainable development. One issue that we have mentioned in the consultation is grid connections. Obviously, we are aware of the fact that there are bottlenecks in the existing grid that make it difficult to connect, for example, large wind farms. There are also implications when new generators require modification and strengthening of the grid.
Some time ago, we also took a policy decision to allow generators to apply for grid connections only when they already have planning permission, which is a different approach to that in the Republic of Ireland. We believe that our approach is sensible because it gives NIE a clearer, more genuine signal about who is coming down the track. However, it, obviously, has implications. We mentioned that during the consultation. We wait to see whether people believe that that is a priority area in which more work should be done.
The Chairperson:
Thank you very much. In your written submission, the table showing the distribution of renewable obligation certificates is heavily dominated by onshore wind-power generation. Which renewable technologies offer the greatest potential for future contributions to Northern Ireland’s renewable-energy targets?
Mr Osborne:
We are professionally neutral as to the potential of different forms of generation. Our aim is a level playing field — the market itself can sort out which technologies have the most economic potential. Let me put a gloss on that slightly unhelpful response: it is quite clear that there is a great deal of wind in Northern Ireland, simply because of its geographical position. Therefore, wind power has a lot of potential. Equally, it is clear that because of the size of the farming industry — particularly the livestock industry — there are opportunities for methane digesters etc. I make those remarks as an observer. As a regulator, we aim for a level playing field.
The Chairperson:
How can family farms and rural businesses derive economic benefits from those technologies?
Mr Osborne:
There are opportunities to create electricity generation plants which can use resources that would otherwise be deemed to be waste and problematic, thereby creating value in that way, and taking advantage of the support regime to produce energy that has a value. To some extent, the barriers are the grid bottlenecks, about which I spoke, and scale. It is rare for developed countries to produce most of their energy through tiny, farm-level generation plants. Whether that means shipping rural resources to larger, central generators, or whether a way can be found to link individual plants, is still an open question. Suppliers might be willing to bear the transaction costs of dealing with large numbers of small generators on individual farms if it means that they can build a big enough portfolio for that to make financial sense.
The Chairperson:
In evidence to a previous Committee this morning, you suggested that large-scale was necessary — is that correct?
Mr Osborne:
Large-scale?
The Chairperson:
I mean large-scale groupings — large numbers of small-scale enterprises in renewable energy. Is that approach feasible?
Mr Osborne:
I do not remember commenting on that this morning. Such an approach might well be feasible, but it would be new in the developed world, where almost every country has large power stations because of the efficiencies of scale that can be achieved. I am repeating what I said earlier, slightly, but the barriers to having many small generators are partly engineering issues and partly to do with transaction costs in having to deal with many small players. The engineering issues — and I was having a conversation with one of the UFU gentlemen about this before I came in — are that if power is being generated close to the source of demand, in some scenarios that can mean that less work needs to be done on the grid because local generation and local demand cancel each other out; therefore less needs to come in from on high, so to speak.
That is the benign scenario, but it cannot necessarily be relied upon. At particular times of the day or year, the same set up might be generating more electricity than there is demand for locally, in which case the power will need to flow up into the grid. However, our grid, like all other grids in the developed world, is constructed for power to flow downwards and not upwards. A number of the components turn themselves off or blow up if they get backward flows. I am not saying that the problem is insoluble. There will, in the first case, be a research agenda, because I do not believe that people in Northern Ireland or anywhere else have fully understood the implications of backward flows; and then there will be an investment agenda to solve those problems. I am not saying that it is an insuperable barrier; I am saying that all the pieces are not in place.
Turning to transaction costs: it might well be possible for a supplier, if he can build a big enough portfolio and have a standard way of dealing with each of the small generators, to become an aggregator and develop a business that pays its own transaction costs.
The Chairperson:
How will local farms derive economic viability from participating in renewable-energy?
Mr Osborne:
Frequently, the main benefit of very small-scale generation is not the ability to sell electricity to the grid; it is that you are buying less. At farm level, a business case must be built around that. Beyond that, it may be a question of scale. As I mentioned earlier, I would not rule out the possibility of a farm-level plant being able to sell-back efficiently, but, given the costs that I have just been speaking about, farmers may find it more efficient to collaborate on a generation scheme. Some farms are quite large businesses and may be able to generate the required investment themselves, but the small farmer faces issues of scale.
Mr Savage:
You have highlighted how generating heat from renewable sources could make a greater contribution to the Government’s renewable energy targets if a better legal framework were in place. How might that framework work and what role, if any, would DARD play in progressing that?
Mr Osborne:
We have some thoughts on that, which I will share with the Committee. The first thing that I ought to say is that this is essentially a role for DETI, as the owner of the energy policy framework.
There are two key issues. One is to ensure that when someone is building a heat network they are able to build it — the provision of heat has a value, and there needs to be a clear framework around the metering of heat, as exists for electricity and gas. The metering for those two energy sources has been settled for years, but it is not entirely clear for heat at present.
Whether the heat network is in an industrial park or even in a village, the people connected to it will have made a big commitment. To disconnect from it will cost them a great deal of money. A small, local monopoly will have been created, and people will not be willing to make a commitment to connect to such a system unless they have some confidence that they are protected from the monopoly, either through general pricing rules or through some kind of regulatory regime. No doubt there are different ways that that could be achieved.
For farms in very rural locations, there may be serious limits as to how much can be done with the heat that is generated, beyond meeting the farm’s own requirement. At the moment we do not have any solution for farms that are close to business parks, villages or groups of houses, other than to keep burning oil.
This morning, I briefed the Committee for Enterprise, Trade and Investment on the painfully high prices of fossil fuels and on the fact that we cannot see any obvious reason why prices should fall. In time, oil is going to run out and carbon costs are going to rise, not fall. Therefore, heat may be an alternative option and, if it is the case that the price of oil and carbon continues to increase, it may be an increasingly economical option.
Mr W Clarke:
Will you elaborate on the need for a value-for-money review of support mechanisms in the North, which you suggested earlier?
Mr Osborne:
DETI has taken that on board and is doing a review. We are struck by the cost of the renewables obligation. As part of the SEM, we are working with the Republic of Ireland, which has a significantly less expensive feeding tariff. Nevertheless, there is also a long queue of people who are waiting to connect to their grid — enough to help them reach some fairly ambitious renewables targets. It is valid to query how much more we need to be encouraging people, when there is a big queue of people waiting to connect to the grid in Northern Ireland?
Obviously, if people have invested on the basis of a particular incentive, the Government ought not to whip out the carpet from under their feet. However, when considering future investments, it is important to question whether we are happy to be paying so much money towards support mechanisms. Certainly, if one considers that driving renewables is primarily about carbon abatement, then there are much cheaper ways to do that. It is not only about carbon abatement; it is also about removing ourselves from fossil fuels and security of supply. It may be worth paying the price, but it is a question that is worth asking.
Mr W Clarke:
The Committee had a presentation from the Ulster Farmers’ Union earlier, who were concerned about the efficiency of Kilroot power station. Around 60% of the energy is going up the chimney. Do you have any role to play in that?
Mr Osborne:
We are an economic, rather than an engineering, regulator. Ultimately, the way in which we set the SEM is that inefficient plants will find it more difficult to make money over time, because inefficiency means higher prices. There is an opportunity for people to build new and more efficient plants, and that will drive the inefficient plants out of the market. It is early days, but judging by the number of people who have announced their intention to build generating plants, I am confident that we will succeed, including with Kilroot, which is proposing to build a new gas plant.
The Chairperson:
One of our power stations is wasting a great deal of energy and money. How could that be checked?
Mr Osborne:
Economic incentives could be created for becoming more efficient.
The Chairperson:
Does anyone oversee those power stations? Surely, it is not simply a question of economic incentives. If there is a high percentage of inefficiency and wastage, who can demand that they rectify that situation?
Mr Osborne:
We lose a fair amount of energy when it is being converted. The same applies to internal combustion engine in cars as to electricity generation. If there is a good clean market and people can think of a more efficient way of doing things, they will clean up and progressively drive those who are less efficient out of the market.
There are more efficient approaches to combustion, doing it at a local level with CHP. More can be done in that area, but the total costs, including costs for grid reinforcement, must be taken into account. If all the elements are being priced appropriately, there will be one cost for more efficient operators and another cost for the less efficient operators, and the more efficient should win.
The Chairperson:
The costs mentioned in your submission to the Committee for Enterprise, Trade and Investment this morning are quite considerable. The submission states:
“our existing grid is not sufficient to connect all of this capacity, and its connection would create system operation problems to which technical solutions do not so far exist. The results of recent research sponsored by DETI and the Department of Communications, Energy and Natural Resources in the Republic of Ireland suggested that the costs of expanding renewables to 16% of production or more will be at least £2·5 billion each year across the whole all-island market. A major expansion of renewables might, therefore, insulate Northern Ireland from fossil fuel volatility and give us more control over energy costs”.
That is what I meant when I was talking about the small operator in the Northern Ireland context. If a large number of those operators across Northern Ireland came together, could they be active participants in assisting in the battle of costs? You also said that energy costs will not necessarily spiral downwards.
Mr Osborne:
That is the main message that I was seeking to deliver this morning. The Executive must do something about fuel poverty.
The Chairperson:
Farmers want to do something about it: can we equip them for that? Can they become active participants and get a financial reward for their labours? What is your honest opinion?
Mr Osborne:
One must think about the number of machines to be built, as opposed to the management expertise involved. The costs you read out are for building a large number of machines and having a large amount of grid capacity to connect them. The machines must be built by the most competent and cheapest manufacturers. There is no particular reason why the farming community should have that management expertise, but if it does, that is welcome.
Our responsibility is not to decide whether farmers, international power companies or Irish power companies should be involved: our responsibility is to maintain a level playing field and a market open to whoever has a good idea.
There is an issue of scale. Some very clever people work for the Ulster Farmers’ Union, and the farming community as a whole may be able to come up with a solution. However, I am deeply sceptical about the proposition that individual farmers could build machines that are cutting-edge. There is a need for co-operation and spreading of best practice to enable people to do things efficiently.
If the Government were to create a framework in which people would be given incentives to move into a wholly new market — one in which they do not have much expertise — I would worry about the value obtained for the public money invested, and for those individuals who invest their own money, unless they received a solid framework of support. The energy market is very different from the farming industry.
Mr Irwin:
How should the DARD support programme be structured in order to contribute to carbon reduction and encourage the use of renewable energy in rural Northern Ireland?
Mr Osborne:
The authority has no views on how DARD should provide support. My comments just now on what enables people to be successful in an energy market are relevant: knowing what you are doing is important. That might be a lesson for DARD. However, I do not have a point of view beyond that.
Mr P J Bradley:
The authority has recommended a cross-departmental approach to delivering renewable-energy programmes similar to that adopted in the EREF. Please expand on that recommendation and indicate what role DARD might play.
Mr Osborne:
As I said to the Enterprise, Trade and Investment Committee this morning, our energy policy needs to be reviewed. If the Executive have a policy objective that farmers should be playing a larger role, it is important that the overall policy framework does not ignore that objective and goes on to create a support mechanism such that the two are working against each other.
That comment is made from the high-level perspective: “systems thinking” is needed. The Executive’s objectives, whatever they may be, must be built into the whole set of policy measures. Separate programmes may be contradictory.
The Chairperson:
Why is it that, when people who produce energy seek to sell it to National Grid, the return offered is minimal, yet the cost of using energy from the grid is charged at a much higher rate?
Mr Osborne:
There are two factors: first, the price at which electricity is bought by the consumer includes the cost of the electricity and the cost to the network in metering and billing. The price of the electricity that is sold back to the grid does not include those extra costs. Therefore, it is only to be expected that the selling price would be different from the buying price.
The second factor is one that we can change and have changed. Historically, the price at which small-scale producers of electricity could sell it back to the grid required them to do a deal with NIE. The bilateral market — with very different prices under the top-up and spill regime — worked strongly against small-scale producers, who were not getting a very good return. Through the SEM, a system has been created whereby people who are getting a good deal from suppliers will continue to work with those suppliers. That, probably, is the future for a great many small-scale producers. However, if they are not happy, they can go directly to the pool and get the same wholesale price that Kilroot and Ballylumford or any of the big generators are getting.
Network costs are a fact. However, we have made changes that, I hope, will help small-scale generators obtain a fair price for their power.
The Chairperson:
Is it true that small-scale producers can only sell electricity back to the grid for power, and not for heat?
Mr Osborne:
Electricity can only be sold to the pool — I think that is what you are getting at — by the larger generators. Producers who generate less than 10 MW have the choice of selling it to a supplier or to the pool. I hope that that answers your question.
Ms Sarah Brady (Northern Ireland Authority for Utility Regulation):
I am not sure that I understand the question. We are the regulator for electricity, gas and water. We have been talking about renewable electricity being sold to the grid. I am not quite sure that I understand what you mean. A producer cannot put heat onto the electricity grid. Are you talking about the lack of district heat networks?
The Committee Clerk:
We are asking about, for example, combined heat and power, whereby the power can be converted into electricity. Is there a way of using the surplus heat generation on a wider grid?
Ms S Brady:
Most of the heat generated by the CHP process would be used on-site. Mr Osborne has already talked about the difficulties of developing heat networks on, for example, a housing estate. The builders of such a network would want security for their investment, and those connecting to that network would also want security. As Mr Osborne said, to encourage more of that in Northern Ireland would require the same type of attention that was paid to the gas industry in the early days.
Mr Osborne:
Heat is a local phenomenon, because of the physics involved. There is nowhere in the world that has a national grid for heat. There are city-wide heat grids, such as in Scandinavia, where large city-centre areas are powered by CHP, but that is as big as it gets.
The Chairperson:
We are still trying to get our minds around some of this, because it is new to many of us. However, we want to ensure that our overall objective is achieved, which I shall quote to you. It is:
“To establish the potential economic benefits Northern Ireland family farm and rural businesses could derive from renewable energy and alternative land uses relative to existing land use and agricultural practices, the potential agricultural and environmental effects of any such changes and to what degree renewable should become a focus of DARD resourcing relative to other agri-rural objectives.”
We have to try to protect the agricultural community, but we also want to ensure that farmers are being directed and encouraged by the Department to go down a particular route that is sustainable and financially viable and profitable.
Many encouraging words are forthcoming from the Department. The Committee wants to be sure where, on the graph of profitability, the curves and the straight lines are, so that people will know exactly what they are getting themselves into.
Mr Osborne:
That is a worthy goal. The energy industry is volatile. Ten or 15 years ago, oil cost $20 per barrel; now it costs almost $120. I have spent much of my career in the GB market. After market reform in 2001, many people entered the market and then, shortly afterwards, the same people exited. You must know what you are doing, and you must be well-capitalised. I am sure that there is space for new-generation investment on the island of Ireland. We have set up the market to create incentives for it and there is great potential for renewables, including for the type of generation that farms might be able to produce. It could well be attractive, but it would have to be done correctly. One can lose as well as gain.
The Chairperson:
DARD has an action plan, which it intends to implement. However, the Committee is not sure whether actions are being taken. Does the authority work with DARD to point out where the bonuses and pitfalls lie? Is everyone who is essential to the endeavour co-operating?
Mr Osborne:
Sarah, your team has contacts with DARD. How rich are those contacts?
Ms S Brady:
We do not have much contact with DARD: we work mostly with DETI and DSD.
The Chairperson:
DARD is encouraging farmers to go down this road. Surely, the authority’s input is essential? I want to encourage DARD to work with the authority, so that they get it right.
Mr Osborne:
We would be happy to work with the Department, if it approaches us. However, people who are setting up energy businesses need to source and pay for their advice. We are regulators: we are not a free advice service. It would depend on what kind of discussion DARD wants to have with us. We would be happy to work with the Department to ensure that it understands how the SEM works and to discuss the policy framework. Ultimately, working out what will fly and what will not is a question for DARD.
The Chairperson:
All the issues that you have pointed out are vital ingredients for the understanding of the industry. If DARD is going to encourage and guide people to get involved in renewable energy, it must provide the best possible advice. It is important to understand the whole issue, not just parts of it.
Mr Osborne:
Let me be clear: I would be happy to work with DARD. For the Department to be able to put forward an intelligent strategy and guide farmers, it will need commercial advice beyond that which we can give. However, we will give it what help we can.
The Chairperson:
I would appreciate that. If no one has other questions, we will conclude. I thank the witnesses for coming. The Committee appreciates your presence here and your presentation. I am sure that you will read with interest some of the other matters that have been brought to the Committee’s attention by the Department and by the Ulster Farmers’ Union. If you have comments to make on those presentations, the Committee will be delighted to hear them, whether they add to, commend or challenge that information. If there is something we need to know, please draw it to our attention. We want to understand the issue as best we can.
Mr Osborne:
We will help where we can. Thank you for the opportunity to talk to the Committee.
The Chairperson:
I welcome Mr Ian Duff, who is here to make a presentation on coppice biomass. After the presentation, members will be free to ask questions.
Mr Ian Duff:
Thank you, Chairperson, for the invitation. I am little bit surprised to be here, but if I can help you in any way I will be pleased to do so.
I will begin by giving the Committee some information on my background and experience. I qualified as an agricultural engineer and began my working life at the former Loughry College, where I became involved in the initial stages of willow harvester development — a very early attempt at we would now call a “stick” harvester. The concept was to tie bundles of willow, which could be easily picked up by the farmer with an ordinary tractor and buck rake. That was in the days when willow was seen as a crop for marginal land. As you have probably realised, it is now seen as being more of an arable crop.
After that, I spent 36 years in the Department of Agriculture and Rural Development (DARD) and retired in 2002. Since then, I have re-engaged with willow, and have organised two or three study tours for farmers, under the Concordia scheme, to see willow biomass being produced in England and Sweden. I will come back to that later. I have also helped to provide technical input into Countryside Services Ltd’s energy biomass infrastructure development scheme (EBIDS), which provides grant aid to farmers who wish to purchase harvesting equipment or build stores and driers for willow chips. That sums up my recent contact with the sector. I am very impressed by the courage and commitment of those pioneers who have gone ahead and done what they have done.
I will limit my remarks to the subjects of willow chip, woodchip and biomass, because that is my area of expertise. I have no current commercial interest in the sector, so I hope that I can be objective. The first fundamental principle is that if the production of willow biomass is going to work, it must demonstrate environmental improvement through economics. Unless the production, processing and burning of willow chip is economic, it cannot be sustained. It cannot continue on environmental benefit alone; people have to get an income from it. The second principle is that there must be enough for everyone in the supply chain, right through from the producer to the user. As you know, that has been a problem in the agriculture sector, and I have some views on that.
By way of background, as you have probably heard and know already, energy consumption in Ireland comprises 37% electricity, 34% heat and 29% transport. The heat sector has been subject to relatively little regulation compared with electricity, which seems to be the most regulated sector. About 700 hectares of land in Northern Ireland are currently being used for growing short-rotation coppice willow, and only 200 hectares are available for harvest this year, so production is still at its very early stages. Members are probably aware that this crop takes three years to grow before it is available for harvest. After one year it is cut back and then it is allowed two years’ growth.
The typical yield is 10 tons of dry matter per hectare per year, which equates to 11·5 tons of chip with 15% moisture content in normal storage conditions. Two and a half tons of chip is roughly equivalent to 1,000 litres of kerosene. On that basis, one hectare of willow will produce the equivalent of 4,500 litres or 1,000 gallons of kerosene or paraffin heating oil. Therefore, the crop can produce quite a lot of energy. It is generally harvested with 50% moisture content, which has to be reduced to 15% if it is going to be stored in chip form. Like any other organic material, such as grain, it must be dried before it can be stored. An added complication of willow chip and woodchip is that it heats very quickly when it is chipped. If it reaches 60°, it develops fungal growth, which, as we all know, is the farmer’s lung organism, and is not something that we want to encourage or allow.
It is a bulky product, and therefore not suitable for long-distance transport. No centralised marketing or distribution arrangements currently exist for this material in Northern Ireland. In contrast, in Sweden 1,250 farmers are growing the product on 18,000 hectares, and it is all marketed centrally by a federation of farmers’ co-operatives.
The difference is that in Sweden willow is burned when it is green; it is not dried at all. It is harvested and burned in large direct-heating-system boilers to supply power to towns or communities. A high proportion of willow is treated with sewage effluent to help growth and to help to process that material.
Looking objectively at where we are, we can grow the crop. We have world-leading expertise at Loughgall, with input from DARD. We can burn the crop; there are many boilers out there, mostly from Scandinavia. The problem area lies in the middle, with the harvesting and storage, and that is where the technical issues arise.
There are two types of harvester in Northern Ireland — rod harvesters, which keep the crop intact, and chip harvesters, which chop it into little pieces. We need objective, evaluated figures for the cost of the operation, as that is critical. Figures have been quoted, but we need to know the exact cost, because it is a significant part of the total cost.
A further type of harvester is available in England. We offered funding for it under the EBIDS scheme, but no contractors took it up. It is called a billet harvester, which cuts the rod into short lengths, so it does not heat to the same extent. However, it should still dry in the heap in the same way as a bundle of sticks. That system must be evaluated to find out whether the rod will survive and dry, or whether it will rot, in Northern Ireland conditions. The system works in the north of England, but it must be evaluated here. We should also consider the idea of harvesting on more marginal land in areas where willow is not grown at the moment. We would need equipment to harvest in those conditions. Those are the gaps in the harvesting process.
With regard to the gaps in the drying process, Countryside Services administered the EBIDS scheme, which was funded under Building Sustainable Prosperity through DARD. It funds 15 stores for farmers, and 11 of those will also dry the crop. We need to get a true picture of the drying costs. Figures of between £8 and £15 a ton have been quoted, but, if you do the theoretical calculations, that does not seem to be achievable. Hopefully, it will be achievable, but that must be validated.
Drying is an expensive, capital-intensive operation, with high running costs. Therefore, someone must evaluate and determine whether there are cheaper methods of drying. That must be done scientifically with mathematical modelling, not simply through look-see trials, which get us nowhere.
Getting a new sector up and running is like the classic chicken-and-egg scenario. People will not plant the crop unless they know that someone will burn it, and no one will install boilers unless there is a ready supply. To be fair to DARD, its challenge fund stimulated the 700 hectares that we have. The current grant scheme is not as generous, and you could argue that it should be increased, but the Committee should consider that matter carefully. It would be much better to suck material up the supply chain rather than try to push it up from below. If producers plant more crop, we may end up with an oversupply and a drop in price. The emphasis should be on usage. We should ensure that the material is sucked up the supply chain, establish a decent market for the product and make that system work. The other option is helpful in meeting establishment costs, but I would like the emphasis to be placed on sucking material up the supply chain.
How can we get more income? There has to be enough money for everyone in the supply chain. Remediation, of which I am sure the Committee has heard, is one way of dealing with that issue, and is widely practiced in Sweden. A couple of very good examples are under trial in Northern Ireland at the moment. Willow is able to clean and use up nutrient applied to it. Those trials offer considerable possibilities.
For example, waste from a food factory is being applied to one willow plantation, which will therefore help the nutrient and the growth of the willow. The effluent from the food factory will be treated, and the willow will go back to the boilers in the food factory. Thus, a very good, sustainable cycle is established. That sort of project is exciting and will hopefully develop. For that to happen, the regulators must have an open mind. They must evaluate and try out such projects, rather than always playing totally safe and never letting anything go ahead. We must try new things. Projects must be evaluated, and obviously they must be environmentally sustainable.
Let us consider the cost of the material and its value at the minute. To go back to the figures that I quoted earlier, 1,000 litres of kerosene costs £520 today, which is roughly 52p a litre. Some 2·5 tons of willow chip or woodchip could be bought for £85 a ton, which would be £210 in total. That leaves a margin of £310 for that equivalent amount of energy. Therefore, at this point in time, there is an attractive margin.
Why then are more people not installing woodchip boilers and getting involved in that type of project? We must accept that there is an increased risk and a high installation cost — as much as four times higher than the cost of oil installation. That quite considerable cost has to be earned back.
Another reason is that the product is bulky. There are also issues with specification, and convenience is also a factor. If I want a tank of oil, I simply have to lift the telephone. I can get oil anywhere, but it is not quite so easy to get a load of chip. Many of the good systems that exist on the continent are community-heating systems. People in Northern Ireland are suspicious about community-heating systems because they have had bad experiences in the past. That problem must be overcome.
What can be done to encourage such production? The public sector could set targets to generate a certain proportion of its heat from biomass. The private sector could encourage people to install combined heat and power plants by offering enhanced capital allowances and business-rate exemptions. The planning application process could be made easier for developments that use community-heating systems. There could even be some form of heat certificate, which could be traded for electricity.
Another idea would be to create an association that could bring suppliers together. For example, I may have a contract with a supplier for woodchip in my area. If that supplier decides to stop farming or whatever, what do I do? It would be good to have an association that could perhaps address such problems, honour commitments made by its various members, and so on.
The final and key point that I wish members to note is that farmers and the rural community must maximise their share of the income available in the supply chain. For years, farmers have been what are called “price takers”. Members will be aware of the debate about supermarkets taking the bulk of the margin and the farmers being left with a bit at the bottom. I saw that when I worked in the potato sector; it can be seen everywhere. There is an opportunity for farmers to become involved further up the supply chain, thereby maximising their return. That has been done in Scandinavian countries, such as Sweden and Finland, by what are called “farmer energy groups” or “heat entrepreneurs”. The farmers’ group sells heat to a community development, such as a school or hospital. They sell heat, rather than the woodchip or the fuel; they sell an actual service. I have seen that system working in Sweden. It has exciting possibilities, and it must be encouraged in Northern Ireland, because it has many advantages.
We went to a farm energy plant in Lundsbrunn, which is a small community of 15,000 people. It has a nursery, a primary school and sheltered housing together in one location. In 1995, the boilers of those buildings were replaced with a biomass plant and an oil boiler, which are owned and run by five local farmers. The farmers fuel the plant with woodchip, run the boilers, attend any breakdowns and, generally, have an obligation to sell the heat, and the community pays them for it. In the summer they run an oil boiler, rather than the woodchip burner, because woodchip boilers do not work well with low throughput; they need to work hard. The farmers make all the decisions. That plant has a 15-year contract with the community, and it has four years still to run, so it has been running for 11 years. Heat is supplied by burning forest-waste woodchip — not willow chip in this case — which the farmers harvest. Some woodchip is bought from other farmers, and the group pays for it by the load, but most of it is gathered by the group themselves.
The second example is a small rural school, where two farmers provided and installed a boiler to provide heat. In that case, they have what they called a “package”, which is a little shed beside the school that contains the boiler that is connected to the school’s pipework. The farmers supply the package unit, fuel it and run it. If there is any problem, they are contacted by mobile phone; it is not the school’s problem. Surprisingly, that boiler was burning grain when we visited it, but, as members know, grain also has an energy value.
Those are only two examples, but such farm energy programmes have advantages. They generate a local income stream for the farmers. Farmers, as members know, are competent in looking after equipment — they do so daily — and the work meshes with their abilities. They also have the time in winter to keep up with the peak heat demands, and derive extra income from that. There is also the social integration of farmers and community working together. That also provides protection for both parties, as the farmers know that the contract is unlikely to be broken, or reneged on, because they are part of the local community. The schemes have a lot going for them and seem to work well.
In Sweden, such schemes are encouraged by bioenergy partnerships, which provide assistance to farmers to establish an energy group, look at their options, carry out a pilot study, prepare a business plan, develop proposals and negotiate contracts. That is a big issue for farmers. They are being asked to move out of their comfort zones and into unfamiliar territory; they will need support, facilitation and encouragement to adjust. I know from speaking to growers here that there is a nursing home that would be interested in installing a biomass facility, but farmers need to know how to get in touch with the proprietor and how to negotiate a contract.
That is my overview of the uses of wood energy and biomass, and the experiences of that in Sweden.
The Chairperson:
Whose responsibility is it to sell this idea and this product?
Mr Duff:
The issue is about rural development potential, which is of benefit to communities in those areas. That is where the need should be met and driven from. As you are probably aware, this sector is a difficult one, because DARD is involved with rural communities and the Department of Enterprise, Trade and Investment controls the installation of boilers. There needs to be cross-departmental co-operation, but ultimately the driver is rural community opportunity.
The Chairperson:
You are convinced of the energy potential of woodchip. You also highlighted the technical challenges of harvesting and drying. How do you see the Government in general, and the Department specifically, helping to resolve those technical problems?
Mr Duff:
The technical issues clearly relate to, at present, the research and development of harvesting and drying. The Agri-Food and Biosciences Institute (AFBI) and the College of Agriculture, Food and Rural Enterprise (CAFRE) should be working to develop those areas. However, there is much to be said for working with pioneer farmers. This does not have to be ivory-tower research; it is working in the field.
Mr Savage:
If I heard correctly, you said that there are 700 hectares of willow in Northern Ireland, 200 of which are eligible for harvesting this year?
Mr Duff:
When they were planted, that was the approximate figure.
Mr Savage:
One of the things that you said, and which I support 100 per cent, is that farmers should be at the top of the list to be guaranteed returns, with others receiving their share thereafter. In Northern Ireland, at present, woodchip is in big competition with grain. If I owned 500 acres of willow and 500 acres of grain, wheat or barley, people would be watching carefully to see which performed better.
We need food, but on the flip side we need heat. Short-rotation coppice willow is economically volatile, and you recommended the use of remediation payments to encourage more planting. What barriers must be overcome before Northern Ireland can move towards the Swedish system, where willow farms are treated with sewage sludge from local authorities?
Mr Duff:
There are overriding concerns about the risk of pollution. The sewage must be carefully managed to prevent the oversupply of nutrients to the crop. That is what has to be technically and scientifically evaluated and proven in Northern Ireland. If it is proven that that can be done, and the way to do it is established, then it can be done in other areas. It is a non-food crop, so there are not the same health issues. However, the amount of nutrients put in and taken out still has to be balanced, because if more is put in than the crop can use then obviously it is going to go into the water, and that is not acceptable. It is a matter of learning how to manage that, to make it work, and to control it. As you say, the farmer obviously has to get a return; in my opinion everyone in the chain has to get a reasonable return.
Mr Savage:
Far too often it is the farmer who is at the bottom of the list, and I think that has got to change.
Mr Duff:
If they sell the heat, they are in a much better position, and are in control of their own destiny. The striking thing about the process of negotiating contracts in Sweden, for example, is that it is totally open; it is agreed by everyone. It has to be beneficial to the old people’s home, it has to be beneficial to the farmer, and there are clauses in the contracts stating that if the world goes up, or whatever happens, that they all know where they are going from the outset. Everyone has to get a return, including the farmer.
Mr Irwin:
If 200 hectares are available for harvest this year, and there are 700 hectares in Northern Ireland, does that mean that there has been an increase in the product in the last couple of years?
Mr Duff:
Yes, in the product that has been planted.
Mr Irwin:
Is there any particular area in Northern Ireland that it is more confined to than others? In the west perhaps?
Mr Duff:
There are quite a number of crops planted in Derry. North Antrim is probably the one area that does not have many. It is fairly evenly spread throughout the Province. There are some in Fermanagh, some in Armagh, perhaps not so much in Down, but it is reasonably well-spread.
Mr Irwin:
Two and a half tons of woodchip costs £210, whereas oil is more than £500. Is that £210 the total price of the finished product, delivered to the house?
Mr Duff:
I checked with one purchaser yesterday, and they were paying £85 delivered. In my opinion, that is not a great deal for the farmer that produced it.
Mr W Clarke:
During your research, have you come across any Government interventions in the form of awarding tradable heat credits, or other such things, for using biomass?
Mr Duff:
I have heard it spoken about, but I honestly have not seen it applied anywhere. I can see that it would be difficult. Electricity is easy to meter and so on, but heat is not. I have not seen it work anywhere.
Mr W Clarke:
Although the use of artificial driers would obviously be more expensive, there would be a faster turnover; the product could be produced in a couple of weeks. Is there a potential to do that on a communal basis? I am thinking of the example you gave of a group of farmers collectively providing energy to a school or to social housing. An additional drying facility could be added to the boiler.
Mr Duff:
Driers traditionally use proven grain-drying technology — basically, a perforated grain-drying floor. Normally that process takes up to six weeks; considering that it comes in with 50% moisture and has to be reduced to 15%, a huge amount of water has to come off that. It can then be emptied and another crop can be put in, so three loads can be processed through the harvest season, which is normally from January through to March. In my opinion it is essential that the facility be shared, and as many loads as possible processed. It could be done communally. However, none of the applications that were made through the EBIDS scheme were communal; they were all managed by individuals, although some said that they would be drying for neighbours. With the exception of one large co-op — Fane Valley, which has a large scheme in operation —most of the farm-based schemes are all for the use of farmers themselves.
Mr W Clarke:
In Finland, 20% of energy needs are met by wood. How could such a change be driven in the North?
Mr Duff:
I do not believe that that level will ever be achieved here, because Northern Ireland does not have the required amount of timber. Northern Irish farmers react positively and quickly to financial incentives. It does not take the Government to drive round bale silage, or whatever, if the benefits can be seen. If there is money to be made, it will happen. It is as simple as that.
Mr Bresland:
You specifically mentioned elements of the Northern Ireland rural development plan as having the potential to provide targeted support, and you suggested that DARD should compile a specified integrated programme of measures. Can you say a bit more about what needs to be done?
Mr Duff:
I honestly believe that what the Swedes have done cannot be bettered. They have facilitated a process in which groups come together and are helped to develop contracts, and so on. That process has worked. It seems to be a sensible way to go about it. The Northern Ireland regional development programme contains elements of lots of the things that are required — supply-chain development, diversification, and so on. It would be a matter of pulling various bits of that into a package that could be easily understood by farmers’ groups, rather than their having to do it themselves. I would like the package to be purpose-built. Whether that is possible under the legislation, I do not know.
The Chairperson:
The Swedes have developed the process to a certain level. You seem to have a clear understanding of that and believe that a competence exists. Are you, therefore, saying that rather than try to reinvent the wheel, it is better to try to replicate the good elements of that system in Northern Ireland?
Mr Duff:
The system would have to be tailored to Northern Ireland. However, matters such as contracts between heat suppliers and consumers should be sourced, adapted and made available to groups here. In that way, Swedish expertise and knowledge could be applied to our situation.
The Chairperson:
You said that in Sweden, green willow, which has not been dried, is used. Why can it not be used in Northern Ireland?
Mr Duff:
It can be used during a short period of the year. It is a matter of supply. A typical Swedish community-heating system burns sawdust, bark, forest waste and willow. The willow is fed into the burner as it becomes available. If a plant were to run totally on green willow, delivery would have to be well controlled. The green willow could not be allowed to sit because it would heat. What would happen if there were a wet week and farmers could not work? The system would become difficult to manage.
There is an argument about whether the moisture needs to be reduced to 15%. The exponents of the stick harvester will rightly say that they can reduce it to 25% or 30%. When that wood is chipped, it will last long enough to be burned before it heats. Possibilities that would reduce drying costs need to be tried out. I did not explain the stick harvester, as I assumed that you understood how it works: with the stick harvester the wood is stacked in the open air. The wind blows through it, and it dries naturally down to 25% or 35% moisture. Obviously, that is much more cost-effective.
Mr P J Bradley:
I am conscious of the questions that the Chairperson, Mr Savage and Mr Irwin have already asked. You, correctly, said that down the years farmers have been price takers, rather than, I suppose, price makers, and that the emerging biomass market provides a unique opportunity for farmers to maximise their share of the product’s value to the final user. Is it not the case that any Government involvement would wipe out the affect of market trends and leave farmers at the mercy of external forces? Do you think that farmers will have a free hand in putting a price on willow? You recommended the establishment of farm energy groups — how can the Government and the Department best facilitate such initiatives?
Mr Duff:
Facilitating involves using the expertise of rural development staff to identify facilitators who will bring together groups that will work with each other, as part of the rural development process.
As for being a price taker, if I were a nursing-home owner I would be comparing this to the price of oil or gas. That would be my bottom line. If the growers get together as a group and make a suitable contract with a nursing home, I cannot see how anyone else could muscle in.
Mr P J Bradley:
Even if the Government have some level of input?
Mr Duff:
Restricting Government involvement would be part of the beauty of a deal between the home and the growers’ group — it reduces the risk of a grant being pulled at the last minute. The deal is commercial and largely dependent on market forces. The Committee has already heard that the Government may reduce capital allowances, but most of the money will come from the market.
The Chairperson:
Who can best take the initiative of bringing together and energising the process to form such groups?
Mr Duff:
That is a good question. The initiative has to come from the willow growers. Some help is needed to bring together the users and the growers, not least because it takes three years to develop a usable product. That is where the Department, the LEADER groups, or someone used to working with rural communities come in.
The Chairperson:
The overall vision for renewable energy has to come through Government
Mr Duff:
OK.
The Chairperson:
It has to come from Government because, as we said earlier, renewable energy and alternative fuel issues cut across practically every Department. Therefore, someone, or some Government body, must take the initiative and become a driving force. Farmers have suffered and endured so much in the food industry that there is no way that they will get into this otherwise.
Mr Duff:
The use of wood energy should be sucked from the top of the supply chain, not pushed from the bottom. The driving force has to come from the user of the energy, whichever Department assumes responsibility. That is how to take a lead on encouraging the use of willow chip and other agricultural fuels.
Mr Savage:
Do you envisage the possible formation of a farmers’ consortium in a scheme that might, for instance, increase the 700 hectares to 1,000 hectares? Could you see a viable, farmer-owned and farmer-controlled business starting up from that? Obviously, other people would want to get involved when it is set up, but it would be controlled by the farming industry.
Mr Duff:
That could work, but some of the benefits of local involvement would be lost. One of the attractions of the Swedish scheme that I described is that the local community and the local growers are all working together and all trust each other. I would like to see local groups operating as a confederation as the scheme grows, so that if one local group ceases to trade the other groups could honour that commitment, as is done in the travel industry. That would give the investor confidence without the need for a large, controlling bureaucracy.
Mr Savage:
To put it another way, do you consider a group of farmers coming together on 500 hectares, for example, to be a viable proposition?
Mr Duff:
Yes, if they can grow that amount. As the Committee is probably aware, there are currently a number of groups working together in smaller areas. Members know as well as I do that the more people there are in a group, the more difficult it is to hold that group together. So there is an attraction in having several smaller groups.
Mr Savage:
There are so many businesspeople who see it as a viable product and think that the farmers can be pushed aside; however, the farmers are essential.
Mr Duff:
I agree absolutely. The heat sector is interesting. Most of the opportunities for willow chip range between 250 and 500 kilowatts, so are quite small. It would not be possible to supply power stations; their demand would be too big. There is something to be said for staying small. The co-operative in Sweden that markets all the willow chip has all its growers under contract, and I am aware of one operation in Northern Ireland that is currently growing under contract for a co-operative — I cannot recall what area that operation is based in, but I know that it is quite large. Therefore, it can happen, but, in my opinion, operations can sometimes get too big.
The Chairperson:
Do you see renewable energy as a genuine way to rescue some farmers, at a time when farm profitability is low?
Mr Duff:
It is attractive to certain farmers because the crop requires very little input — it is planted and harvested every two or three years, so it is an attractive proposition to someone who is cutting back. We have discussed how arable farmers will probably continue to grow cereals and keep their options open; however, there is a niche for renewable energy. As grain prices have changed over recent times, we have moved to the less-arable area of the country more than we had thought we would.
The Chairperson:
Thank you, Mr Duff. It has been helpful to speak to you, and we also appreciate the presentation that you sent to the Committee prior to the meeting.
Mr Duff:
Thank you.