SECTOR INVESTMENT
F.2.1 Underlying assumptions
The IRR analysis below assumes that the current market and policy regime is maintained and thus includes carbon on the basis of an EU ETS type mechanism, as well as access for schemes to LECs and ROCs. The table below outlines the key assumptions used in this analysis.
Table 44 – Assumptions for the cash flow model
Variable Assumption Fuel Prices DECC central scenarios
Electricity sale price Fixed at £48/MWh Uptake of scheme 100 per cent in year 1
Sizing of scheme Perfect foresight (optimal sizing) Cost of carbon
Included at £20/tonne
Electricity ROC price Constant at the buy out price (£34/MWh) Cost of heat / Heat tariff Assumed to be at £70 /MWh (in line with the
average baseline cost of heat for dwellings) LECs
Constant at current value (£4.56/MWh)
CAPEX support Assumed at zero Grid electricity generation
efficiency
45 per cent (based on gas)
Grid CO2 Marginal gas
Source: Pöyry Energy Consulting and Faber Maunsell
F.2.1.1 Overview
We have assessed 7 district heating options, 2 from each size band (1 gas and 1 renewable) and waste heat.
We have then considered the impact on the IRR of these technologies, in relation to:
changes to the implied heat tariff;
changes to other revenues streams (wholesale electricity and ‘support’ revenues, including carbon);
changes to the take-up rate; and
the impact of providing assistance with the CAPEX cost.F.2.1.2 Implied heat tariff
In reality the required heat tariff is likely to be linked to conventional alternatives, as any district heating operator would have to price the heat at or under the heat cost currently paid by customers. This link is likely to be a result of the interaction between
April 2009 PÖYRY ENERGY CONSULTING
Given the heat tariff required by the district heating it may be necessary to increase the cost of conventional heating options, to ensure competitiveness, but this may adversely affect fuel poverty (for those individual not on the district heating scheme).
Figure 45 – Heat tariff impact
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0 5 10 15 20 25 30 35 40 45 50 55 60 65 70 75 80 85 90 95 100 £/MWh IR R
Community Boiler Biomass
Large Engine Natural Gas CHP
Large Biomass Steam Turbine CHP
Waste heat
Source: Pöyry Energy Consulting and Faber Maunsell
The results predict that the majority of the options would require a heat tariff of between £50 – 55/MWh in order to earn any return (given the assumptions in Table 44). Even if a heat tariff of £100/MWh could be achieved, only the community boiler natural gas would produce a return above the 10% commercial level.
F.2.1.3 Increase in revenue for electricity
This second sensitivity looks at the impact of increases revenue streams linked to electricity generation (including sale on the wholesale market, ROCs and LECs). This sensitivity is only relevant for CHP (as they produce electricity alongside heat), and would also increases cost of conventional electric heating and small-scale renewable
counterfactuals
In Figure 46 we see that larger gas options (Medium CCGT and Large gas engine) benefit most from electricity revenue due to the ratio of electricity output to costs. The renewable (biomass) options also reach commercial rates of return but require much higher level of revenue. The community boilers and the waste heat district heating
schemes are unaffected as they either don’t produce electricity (community boilers) or the electricity revenue is already accounted for (waste heat).
Figure 46 – Electricity revenue impact 0% 2% 4% 6% 8% 10% 12% 14% 16% 18% 0 10 20 30 40 50 60 70 80 90 100 110 120 130 140 150 £/MWh IR R
Large Engine Natural Gas CHP
Large Biomass Steam Turbine CHP
Source: Pöyry Energy Consulting and Faber Maunsell
Although the chart shows that electricity based revenues of approximately £90/MWh and above lead to commercial rates of return, it is important to be cautious regarding these secondary income streams. Over reliance on revenues from other markets (i.e. not Heat) can be risky, as experienced in Denmark where the level of electricity generation from district heating CHP led to a collapse in the electricity price.
F.2.1.4 Take up risk
As shown in section 3, the take up risk (or phasing of investment) is one of the key risks faced by the developers of these schemes.
This sensitivity assesses the impact of the rate of return from capping the uptake of the schemes at various percentages while continuing to assume that the scheme had been built to meet 100% take up.
The results show that a take up of at least 40% of the assumed level is needed for any of scheme make a return, and the majority of the schemes assessed a uptake of 70% would be required for a return. Looking at the specific technology options the results suggest small-scale projects with small number of customers may be more attractive in early stages, however in reality these may hit scale constraints for funding. Again this highlights the fact that without guaranteed offtake, high risk in over-sizing the scheme
April 2009 PÖYRY ENERGY CONSULTING
Figure 47 – Assessment of take up risk
0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 10 20 30 40 50 60 70 80 90 100 Absolute take up (%) IR R
Community Boiler Biomass
Large Engine Natural Gas CHP
Large Biomass Steam Turbine CHP
Waste heat
Source: Pöyry Energy Consulting and Faber Maunsell
F.2.1.5 Capital support
This final sensitivity considers the impact of a support mechanism that reduces the upfront capital costs on the IRR. Along with take up, the upfront capital costs have been identified as a key risk to potential investors in district heating (with this type of support cost over-runs and/or construction delays will be important considerations).
These results appear to show that for an incremental subsidy of 10% across all capital costs will result in an increase of approximately 1% in the IRR. But even a reduction of 20% in the upfront (year 1) capital is not enough for these schemes to achieve a commercial rate of return.
Figure 48 – Reducing the upfront capital cost 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 0% 1% 2% 3% 4% 5% 6% 7% 8% 9% 10% 11% 12% 13% 14% 15% 16% 17% 18% 19% 20% % IR R
Community Boiler Biomass
Large Engine Natural Gas CHP
Large Biomass Steam Turbine CHP
Waste heat
April 2009 PÖYRY ENERGY CONSULTING