The empowerment of waste

Biomass may not generate as many headlines as other renewable sources of energy but those looking at it have found a sector with growth potential, an interesting revenue stream, and solid government support across Europe - especially in the UK.

Biomass may not generate as many headlines as other renewable sources of energy but those looking at it have found a sector with growth potential, an interesting revenue stream, and solid government support across Europe – especially in the UK.

Background: Biomass is the biodegradable fraction of waste – such as residues from agriculture, forestry and related industries – which can be used to produce energy, heat and biofuels. Merrill Lynch says the sector will grow an average of 5 percent over the next 10 years. But the UK market is likely to buck that trend because of its attractive regulatory environment and the fact that biomass usage is still in its infancy.

A report by the UK’s Department of Energy and Climate Change says that about 2.6 percent of electricity produced in the UK in 2006 came from biomass. More promisingly, the authority estimates that the cheapest way to meet the UK’s green energy goals is to have 30 percent of electricity and heat produced from renewable sources come from biomass by 2020.

Key advantages: “Biomass does not rely on the sun to shine or wind to blow [so] electricity generated from this source generates reliable, stable returns,” says Invicta Capital, which launched the UK’s first biomass-dedicated fund, on its website.

Yves Crit, chief executive of Belgian renewable investor 4Energy Invest, reinforces the point: “Depending on where a wind farm is located, you will maybe have it generate electricity for a quarter of a year. Biomass plants run all year round and can produce up to four times the amount of electricity produced by wind turbines.”

Key drawbacks:  There are risks to this type of investment. Christopher Gill, deputy chief executive of HSBC Special Investments, points out that technology risk has played a significant part in steering the bank’s renewable fund away from biomass investments. “To date, we haven’t been able to get comfortable with the technology risk,” Gill says. “We are interested in the sector but have yet to find a way to fit it into our risk matrix.”

Julio Garcia, an investment director with Australian fund manager Industry Funds Management, warned investors at a conference last November to make sure their planned investments in biomass have access to a steady supply of feedstock. He also warned them to look out for what type of contracts the biomass plants have in place to sell the energy they produce.

Regulatory environment: 4Energy Invest’s Crits thinks the UK offers one of the best regulatory environments for the European biomass industry. Basically, investors in UK biomass plants are looking at two revenue streams – one coming from the sale of electricity, heat and biofuels; the other from the sale of Renewable Obligation Certificates (ROCs), awarded in accordance with the amount of clean energy produced and how environmentally friendly a plant is.

The ROCs are then sold to traditional energy suppliers, which, according to the UK’s climate change goals, need to prove that 10.4 percent of the electricity they supply this year comes from renewable sources – or pay a penalty. But Crits thinks the potential for upside lies mostly in the sale of electricity. Since prices are too low at the moment and demand is increasing, he argues there is scope to raise prices to finance the construction of additional power capacity.

Recent deals:

Dec 2009: 4Energy Invest, partly-owned by KBC Private Equity, closes financing for a new €38 million co-generation plant in Ham, in Flemish Belgium.

Nov 2009: Invicta Capital launches the UK’s first biomass-dedicated fund targeting £300 million. The fund will build nine biomass plants in Scotland and hopes to raise £35 million by March in order to start building the first plant.

Nov 2009: Ambienta I, an Italian environmental fund, acquires 51 percent of French firm Alpin Pellet for €2.5 million. The firm produces biomass components used to generate heat and energy. Ambienta says the global pellet market has grown from 1.5 million tons in 2002 to over 9 million tons in 2008. It is expected to reach 50 million tons in 2020.