EC to investigate UK support of Lynemouth power plant

The European Commission announced on 19 February that it is assessing whether UK plans to support the conversion of the Lynemouth coal power plant to operate on biomass were in line with EU state aid rules.

The Commission will investigate further to ensure that public funds used to support the project are limited to what is necessary and do not result in overcompensation. It will also assess whether the positive effects of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass.

The opening of an in-depth investigation gives the UK and interested third parties an opportunity to submit comments. This, the Commission, says will not prejudge the outcome of the investigation.

In December 2014 the UK notified plans to subsidise the conversion of the coal-fired Lynemouth power plant to operate on biomass. The facility would fire wood pellets to generate 420MW of renewable electricity. Under the 'Contracts for Difference' (CfD) scheme, the generator of Lynemouth will earn money from selling its electricity into the market. When the average wholesale price of electricity is below the strike price, the generator will receive a top-up payment.

It is estimated that the project would run until 2027 and supply about 2.3 TWh of electricity per year. The plant would require approximately 1.5 million tonnes of wood pellets annually, mainly sourced from the US and Canada.

In its preliminary analysis, the Commission considered that the parties' financial calculations and estimates regarding key cost parameters may be too conservative. These parameters, including the load factor of the plant (i.e. the actual electricity produced in a year compared to the maximum possible), its efficiency and the cost of wood pellets, significantly affect the project's rate of return. At this stage, the Commission therefore has concerns that the actual rate of return could be higher than the parties estimate and could lead to overcompensation.

Moreover, the amount of wood pellets to be imported from overseas is considerable, as compared to the volume of the global wood pellets market. Subsidising such a large volume of wood pellets could significantly distort competition in the biomass market. The Commission is therefore also concerned that on balance the measure's negative effects on competition could outweigh its positive effect on achieving EU 2020 targets for renewable energy.

The Commission will investigate further to see if its concerns are justified. It will give all interested parties the opportunity to express their views on these issues before finalising its assessment.

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