The Scottish Parliament - Environment and Rural Development Committee Report

4th Report, 2006 (Session 2): Inquiry into developments in the biomass industry

To consider and report on matters relating to rural development, environment and natural heritage, agriculture and fisheries and such other matters as fall within the responsibility of the Minister for Environment and Rural Development.

Sarah Boyack (Convener)
Mr Ted Brocklebank
Rob Gibson
Richard Lochhead
Maureen Macmillan
Mr Alasdair Morrison
Nora Radcliffe
Mr Mark Ruskell (Deputy Convener)
Elaine Smith

1. On 14 December 2005 the Environment and Rural Development Committee agreed to conduct a short inquiry into developments in the biomass industry. The Committee had considered issues relating to energy from biomass as part of its previous inquiry on climate change in 2005.¹

2. In that inquiry the Committee noted a number of issues. The development of forestry has to be very carefully planned due to the risk of increasing emissions through disturbance of high-carbon soils. However, forestry in Scotland has a distinctive and significant potential role in reducing climate-changing greenhouse gas emissions through sequestering carbon during the growth cycle, and through forest products being used as low carbon renewable energy fuels. Despite this potential there appeared to be no clearly explained objectives for the target for forest growth. The Scottish forest estate covers 17% of the land, well below the EU average. A target of achieving 25% coverage by 2050 has been set, but with no clear link to the outcomes this might achieve in terms of emissions reduction or other objectives. Planting is well below the rate needed to achieve that 25% target. The Committee recommended that much greater political priority should be accorded to the role of forestry in addressing climate change, and recommended that the review of the Scottish forestry strategy should address climate change considerations comprehensively.

3. The Committee also concluded that large reductions in Scottish emissions require change towards lower-emission methods of generating energy. All the available technological areas – including biomass – will be needed if Scotland is to meet its target of 40% of electricity demand to come from renewable sources by 2020. However, electricity only accounts for around 18% of energy demand, while water and space heating is approximately 80% of household energy usage. There are, at present, no targets for renewable heat generation.

4. Each renewable energy technology has its own range of potential economic, social and environmental impacts. The Committee recommended that the Executive must, therefore, work with the UK Government to produce urgently an energy strategy that provides a clear vision of the energy generation mix required to meet emissions reduction targets, and a clear route map towards achieving that mix. Action to develop renewable sources further must not wait for technological development, and the Committee recommended that the Executive should look to establish appropriate incentives.

5. The Committee has also considered related issues in its work on rural development and on reform of the Common Agricultural Policy.² The Committee noted the economic and employment role of forestry in rural development, and the potential development of agricultural crops suitable for biomass energy. The Committee emphasised the need for development of appropriate economic incentives for the growth of forestry. It was disappointed to note the lack of integration between standard agricultural activity and forestry, and of climate change considerations into either policy area.

6. The Committee decided to pursue the current inquiry to examine in more detail the development of biomass energy, as a follow-up to the Committee's previous inquiry work, and with particular reference to the review of the Scottish Forestry Strategy. Matters of energy policy are reserved, and the development of renewable energy as a whole has been considered previously by the Enterprise and Culture Committee. The Committee, therefore, sought to focus on how agricultural and forestry policy could support the development of biomass.

7. The Committee sought to concentrate on issues relating to solid fuel from forestry and agricultural products, rather than energy from waste, liquid biofuels, etc.

8. The Committee issued an open call for written evidence and received 14 responses. The Committee also took oral evidence over three meetings in February and March 2006, hearing from a range of witnesses including representatives of forest industries, environmental groups, land managers and farmers, energy companies and local authorities and enterprise agencies. The Committee concluded the evidence programme by hearing from the Forestry Commission Scotland and the Deputy Minister for Environment and Rural Development. Many of these oral witnesses provided written evidence and supplementary material. The Committee is grateful to all those who provided written or oral evidence. All the evidence received is published on the Committee’s web page.

9. A number of recent reports have emphasised what is achievable relatively quickly and easily through biomass development. The Forum for Renewable Energy Development in Scotland (FREDS) published a report in January 2005 on 'Promoting and Accelerating the Market Penetration of Biomass Technology in Scotland',³ concluding that biomass could supply at least 450MW of electricity in Scotland. The report suggested that a funding gap existed for this technology, and made a number of recommendations on wood fuel supply, demand, infrastructure and regulation. That study focused on biomass for electricity and combined heat and power, as support for biomass as a heat source was due to be examined at a UK level.

10. In June 2005 the Sustainable Development Commission in Scotland (SDCS) produced a report entitled ‘Wood Fuel for Warmth’.⁴ This aimed to be a contribution to the reviews of Executive strategies on climate change, sustainable development, forestry and energy. In exploring the scope for biomass the report concluded that wood fuel heating could make a significant contribution to cutting carbon emissions while providing rural employment and reducing fuel poverty.

11. Evidence to the Committee also highlighted the potential of biomass, centring on four main themes.

12. Firstly, woody biomass was universally accepted by witnesses to the inquiry as an attractive and available renewable energy fuel. It has particular potential in Scotland, which has a substantial existing and expanding resource that can be accessed for wood fuel almost immediately. 60% of UK forestry is in Scotland. It is estimated that up to four million tonnes of wood fuel could be produced in Scotland each year, enough to ensure that biomass could supply over 10% of heating demand.⁵ Increasing the use of biomass will therefore contribute to the security of energy supply. It is also estimated to be the cheapest renewable energy generation technology per installed kilowatt of energy.⁶

13. Secondly, wood-fuel heating could make a significant contribution to cutting carbon emissions. Carbon absorbed by trees during the growth cycle balances that emitted when the fuel is burned, so that biomass is regarded as carbon neutral. Evidence from the SDCS indicates that using biomass could reduce emissions by up to approximately 90 per cent on a like-with-like comparison with traditional fuels. It stated that Scotland’s readily-available wood resources could supply between 5 and 11 per cent of domestic space and water heating requirements – reducing carbon dioxide emissions from domestic heating by up to 23 per cent.⁷ The Scottish Forest Industries Cluster stated that wood fuel has the best carbon dioxide offset of any renewable energy source, and could readily save one million tonnes of carbon dioxide a year by 2020.⁸

14. Thirdly, a number of witnesses highlighted the potential contribution of biomass to reducing fuel poverty, particularly in areas off the mains gas network where comparatively expensive fuel options such as oil or LPG are commonly used. The cost of wood fuel varies depending on the amount of processing and transport required. Prices of oil and gas are currently volatile and rising sharply. The long-term trend is unpredictable. However, Highland Wood Energy estimated that heating using wood chip can already be more than 50% cheaper than heating with oil or other fossil fuels.⁹

15. Fourthly, biomass offers the potential of providing employment opportunities and the development of clusters of local economic activity, often in rural areas. The FREDS biomass energy group report estimated that investment in the industry for electricity alone could create 2,000 new jobs by 2020 in areas such as forestry, wood processing and manufacture and installation of biomass systems. Further jobs would be created if the industry focused on heat generation as well. Biomass production also offers the possibility of valuable diversification opportunities and new markets for existing forestry and farming businesses, in addition to initial construction jobs and the stimulation of other sectors. The SDCS estimated that using wood fuel heating creates between five and ten times as many jobs as other renewable technologies.¹⁰

16. In spite of this potential, there is to date only very limited development of biomass in Scotland. Scottish Renewables estimated that there are approximately 50 community and business-scale heat-only or combined heat and power biomass systems in Scotland, and additional domestic ones.¹¹ In 2005, the SDCS estimated that there were about 50 wood fuel heat-only schemes, using 3,000 to 5,000 tonnes of biomass annually.¹² The Deputy Minister stated that, including co-firing in power stations and other industrial-scale users of biomass, about 300,000 tonnes of wood fuel is currently being used annually (although this is often using recycled or imported material). She stated that there are at least another 49 projects under development, ranging in size.¹³

17. The very clear picture presented in evidence to the Committee is of a developing, but immature, market, with a number of difficulties of confidence relating to this. These limit the extent to which a stable connection has so far been made between supplies, infrastructure and demand.

18. There is no lack of material, as outlined at paragraph 12 above. However, many witnesses emphasised that a lack of confidence in security of supply of suitably-priced wood fuel is a key impediment to the market developing at present. For example, evidence was presented of a scheme in Caithness where the price of locally-sourced wood fuel had risen from an initial estimate of £17 per tonne to over £40 per tonne, resulting in a cheaper imported alternative being sourced – with the associated increased emissions from transport. Witnesses explained that this was due to the initial specification being insufficiently precise and not including processing and transport costs, rather than a price rise as such.¹⁴ However, this example illustrates that there is evidence of the price volatility and risk associated with a developing market, and a need for consideration of how the balance between supply and demand will stabilise prices as the market develops in the longer term. If prices are seen to fluctuate significantly after the commitment to use a biomass system is made, this will have a major impact on confidence to develop the sector.

19. There is also a lack of familiarity with biomass and its qualities as a fuel, even though these are proven in other countries. The Confederation of Forest Industries noted that, in the EU15, 63% of total renewable energy comes from biomass.¹⁵ The Woodland Trust Scotland stated that 16% of total energy consumed in Sweden is generated from biofuels, principally wood.¹⁶ Scotland is very well placed in terms of natural resources to support the biomass industry. However, persistent feedback from potential users indicates scepticism about security of supply – even though supplies appear to have been readily available for the projects which exist so far.

20. The Committee also heard evidence on issues relating to some of the main supply options.

21. Evidence suggests that a considerable expansion of short rotation coppicing (SRC) of crops such as willow would be possible without losing diversity of agricultural production. Some evidence suggested that it may be more suitable to grow SRC in Nitrate Vulnerable Zone areas due to the roots taking up pollutants.¹⁷ However, these areas also tend to be the agricultural land where the Single Farm Payment is most valuable and current SFP rules do not allow the flexibility and long-term certainty to encourage change.

22. A number of witnesses suggested that the sustainability credentials of SRC are not established, and remained to be convinced that it is the best option for land use or the best focus for public funds.¹⁸ There are concerns on environmental and landscape grounds about large scale monoculture of SRC. While it may have some place in the mix of wood fuels required, it appears to be unnecessary at present as there is adequate wood supply from forestry which could supply any biomass systems.

23. At present SRC is mainly used in large electricity generation projects, driven by the incentives created by the Renewable Obligation Certificate (ROC) system. However, evidence suggested that the availability of cheap imports means that other procurement criteria need to be applied if supplies are to be sourced locally (for example, allowing procurement to specify that overall ‘minimum environmental disturbance’ will be taken into account so that a lowest-emission criterion can be considered alongside cost).

24. SRC has some attraction for farmers, but evidence suggests that the economic incentives are not sufficient to persuade farmers to switch to growing it. At present, a one-off grant of £1000 per hectare is available for farmers who switch to growing energy crops provided they have an end-user contract in place. A subsidy of €45 per hectare is also available under the Energy Crop Scheme introduced in 2004, and is, to date in Scotland, used exclusively to support oil seed rape production for biofuels.

25. The Committee received information on the project at the Tullis Russell plant in Glenrothes where, as well as other fuel sources, plans include sourcing 200,000 tonnes per annum of SRC. This amounts to the output of planting 13,000 hectares, and it aims to source from within a 50 mile radius of the plant. However, despite the economics appearing favourable compared to other crops, the interest from farmers in taking up 10-year contracts has so far been only moderate.¹⁹ For farmers to be encouraged to commit to growing energy crops requires a long-term stability and confidence as doing so affects their options to return land easily to other production, as crops such as willow have deep roots and damage field drainage systems. Making this switch also requires a confidence in future security of income that does not yet exist.

26. The issue of liquid biofuels is outwith the remit of the current inquiry, but was also raised by a number of witnesses. It is clear that there are many issues similar to those for biomass, and biofuel production can offer an important option for farmers where biomass production may not be appropriate.

27. As outlined above, resource estimates indicate that there is a plentiful supply of wood – and one which is increasing over the next 15 years at least, even on existing levels of forest cover. Evidence suggests that a significant portion, perhaps up to half, of existing forestry is unlikely to be economically viable for timber or even pulp markets, given reductions in timber prices in recent years.²⁰ Developing wood fuel heating as an outlet for this resource offers the potential to improve the economics of forestry significantly.

28. Focusing on wood fuel can turn a waste problem of brash and lop-and-top product into a cash crop. At present 30% of the tree is estimated to stay in the forest after harvesting in Scotland, while other countries have well-developed systems for using the whole crop effectively.²¹ The Tullis Russell project is negotiating with the Forestry Commission for a supply of this material, but this is regarded as innovative and is not yet established.

29. A wood fuel market can also provide a stimulus to use low value timber products effectively. Evidence to the Committee indicated that it can tip extraction into being economically viable where it might not otherwise have been, particularly if it is for local markets (e.g. local wood fuel markets making extraction on islands such as Mull and Islay viable so that the costs of shipping the higher quality timber are then subsidised and more likely to be sustainable).²²

30. Biomass can also provide an economic incentive for more active forest management, such as regular thinning of forests. Evidence suggests that this will have a wide range of associated environmental and social benefits, and will be welcomed by all as it enhances the value of the end crop plus offers an intermediate economic and social benefit. The added income of wood fuel production can also allow existing under-managed woodland to be productive, including broadleaf and high nature-value forestry that is under-managed (often on a small scale in remote areas or on farms and croft land).

31. Several witnesses stated that developing small-scale wood fuel projects would have a relatively small impact on the wood resource and would essentially piggy-back on an existing industry. This offers potential for some forest owners to square the economic circle, and move to constant cropping or consider short rotation forestry. It also offers the opportunity to diversify rural businesses. Production works well on a small scale as a lot of forestry is difficult to mechanise fully. It was suggested that this offers a very positive picture compared to the unproven economics of energy crops.

32. A number of witnesses suggested that integration of farming and forestry policy is still limited, although the Land Management Contract tier 3 schemes appear likely to offer some potential as does the possibility of creating forest crofts. However, it was suggested that the forestry strategy has previously been unclear and potentially contradictory in whether it is focusing on expansion or stewardship. Witnesses to the inquiry were united in their belief that biomass opens up a new use that needs to be fully integrated into strategies so as to change forestry management and develop different practices.

33. To date there have been no clearly-defined objectives for the target for forest growth. The current consultation on a revised forestry strategy indicates that climate change will be a key theme and that specific objectives will be included in the final version once the revised climate change programme is published. The forestry strategy consultation also talks of helping to develop a thriving wood fuel sector to reduce reliance on fossil fuels and states that the tonnage of wood produced for this market will be a key indicator.²³

34. Evidence also focused on the development of infrastructure in Scotland, so that the whole of the substantial supply chain can be established locally. Lots of evidence suggested that the local availability of appropriate wood fuel is crucial in determining the life-cycle carbon balance of the biomass - namely, whether the bulk product has had to be transported far. Given the high water content of wood – up to 50% of the cut weight – it is costly and counter-productive to transport it over significant distances.

35. However, there was evidence of a lack of the infrastructure required in Scotland to process and supply wood fuel to end users, which led to sucking in imports to meet demand. Highland Council stated that the forestry sector is willing to develop biomass but is unable to meet the initial capital investment.²⁴ Boilers and other kit are also generally manufactured abroad, although there may be some prospect of manufacturers locating in Scotland if demand increases.

36. Similarly, Scotland is suitable for growing some crops for biofuels – especially oil seed rape, but there is no local crushing facility so the processing value is lost and extra costs incurred, making it relatively uncompetitive to produce.

37. The availability of installation and maintenance skills is also considered to be an important aspect of building confidence. At present there are few skilled technicians, and a clear need exists for capacity building to mainstream the skills and bring down the costs. There are no economies being generated through competition between installers yet. Some courses have been developed, but biomass expertise has not yet been mainstreamed as an area of activity for plumbers, heating technicians, etc. HIE provided evidence of interesting training initiatives being developed in the area – such as the IGNITE programme which is being replicated from a successful project in north-east England and will cover the skills required on both the supply and demand side.²⁵

38. A lot of the evidence to the inquiry focused on how demand for biomass can be stimulated. The cost of wood fuel is regarded as comparing generally favourably with other fuel options, especially in off-gas network areas and after the recent gas and oil fuel price rises.

39. Prices of wood fuel are also relatively unstable at present, because the level of demand is still relatively low and so wood fuel is generally available when a supplier wants to clear fell for high value timber extraction. The cost of extracting wood fuel is, therefore, inextricably linked at present to the fluctuating value of saw timber.

40. The capital costs of good boiler systems are substantially higher than other boilers. To a significant extent this appears to be due to the fact that they are simply less common at present. This investment needs supported or offset by the availability of long pay-back periods for the cheaper fuel. Evidence suggests that capital grant funding makes a huge difference in encouraging people to invest in wood heating and has been essential in making it an economic option.

41. There was very strong evidence that medium to large public buildings are key drivers for the development of biomass. It may be difficult to build a cluster of wood fuel supply and processing activity around the irregular domestic demand for heat, but it can be built on the back of a heating system for a public building (such as a school or swimming pool) or a small-scale electricity and heat generation project. There were some good examples presented to the Committee of public projects driving investment, such as a 200kw wood fuel boiler system for the Mid Argyll Swimming Pool.²⁶

42. However, a number of witnesses emphasised difficulties with ensuring that PPP-based public building projects use biomass systems. This relates partly to problems of timing, as lots of projects have been commissioned in recent years, but slightly before the increased profile of biomass. Current procurement rules and investment criteria also make it difficult to secure the additional funds (or permission) to specify the inclusion of biomass now. Perth and Kinross Council stated that it also relates to problems of contract structure, and the fact that the PPP bidder cannot get public support for installation of biomass systems, but wants to control the facility and the risk and so will not allow other parties to install the systems.²⁷

43. There is also clearly a general problem of insufficient confidence yet in biomass. Concern was expressed that this opportunity of developing biomass heating through the large current programme of PPP building may be lost, locking in inflexibility for 25 years. The Deputy Minister stated that the proposed biomass action plan (to be developed after the revised climate change programme is launched) will address the role of public procurement.²⁸

44. Evidence indicates that different issues arise depending on the mix of development between energy crops and wood fuel, and large-scale electricity generation and smaller-scale heat. Pursuing certain incentives might encourage development in one direction or another, with different implications. Several witnesses argued that current policy and incentive mechanisms are geared towards generating electricity, and that this risks missing the full opportunities available through biomass. WWF Scotland argued that, while large-scale use of biomass for electricity generation (including use in co-firing with coal) may reduce emissions quickly, it may prevent the expansion of other more efficient uses of biomass in the future.²⁹

45. Some witnesses suggested that there is a place for sizeable electricity developments, which can provide a focus for infrastructure developments in an area, and a supply chain from which local heat projects can feed. However, the Scottish Forest Industries Cluster cautioned that encouraging large-scale electricity developments could create a ‘demand shock’ that would skew the market.³⁰ As Scotland’s forest resource is relatively widely spread geographically, this would also imply significant transport costs and emissions.

46. The balance of evidence was that large scale electricity generation is not a good use of timber as it may tend to displace wood from other markets, rather than develop new markets, may require considerable haulage of timber and may lead to unsustainable felling of timber. Many witnesses also stated that using biomass for electricity is about 30% efficient, whereas using it to generate heat directly is up to 80% efficient. The Scottish Forest Industries Cluster stated that renewable heat offers a greater carbon saving than renewable electricity, and on a much more efficient and cost-effective basis.³¹

47. While there is a desire to develop biomass rapidly, there was also a suggestion that there is a need to avoid trying to ‘run before we can walk’ with large-scale developments. It was also generally agreed that large-scale monoculture that might be needed to serve them does not deliver the range of benefits desired from forestry or agriculture. It is important that biomass progresses in a way which can hold the various objectives – emissions, security of supply, energy affordability and economic development – together or else the development will be skewed. Many witnesses welcomed the proposed biomass action plan and renewable heat strategy as the means to achieve a policy direction. However, the timing or likely content of this plan are not yet clear.

48. Whether biomass development delivers the hoped-for multiple benefits depends on how the whole life-cycle carbon balance is affected by the key issue of proximity of supply and demand. The emphasis in evidence was on using wood fuel locally, and adding as little as possible in terms of process energy, transport energy, etc. Handled appropriately, this can mean that biomass development is not contrary to any of the biodiversity, landscape, natural heritage and social and recreational objectives desired from forestry. Biomass development has to be planned with these in mind. A number of witnesses, therefore, also suggested linking support for wood fuel growth to some form of accreditation for the location of the planting required, and its diversity. Making such accreditation a condition may also offer a way to encourage local sourcing of supply without breaching EU state aid or procurement rules.

49. A lot of evidence focused on work to develop effective local clusters to organise a co-ordination of supply and demand and establish a reliable supply chain. Transport soaks up 45-50% of the value of timber. Evidence indicates that the economics, and the sustainability credentials, of biomass are critically related to the proximity of demand, processing infrastructure and fuel supply sources – so as to avoid transport costs and emissions.

50. Clusters are working well where established, and some good examples were presented in evidence – particularly by HIE which has been involved in supporting the establishment of seven local clusters through the Highland Woodfuel Development Programme. HIE stated that this is the only programme which aims to address the needs of both supply and demand sides in a co-ordinated way.³²

51. Evidence suggested that there are gaps in how existing clusters currently serve all areas with a potential wood fuel resource, and a need to develop more local clusters to stimulate the market. Clusters can develop around fairly small beginnings – e.g. a school or swimming pool and a small housing development. These should be identified carefully to pick up the best potential for addressing market failure and for maximising the rural development and employment impact that growth in biomass energy will have. Doing this would focus effort on where processing facilities are required. For example, Argyll and Bute Council identified the need for a facility near Oban, to avoid transport of wood fuel from Lochaber to existing wood fuel users in the area.³³ This requires the involvement of various stakeholders.

52. The Committee heard clear evidence on the contribution that biomass could make to reducing fuel poverty in rural areas and rural development. However, there was little evidence on the potential for urban areas, and this seems not to have been considered in depth. The revised forestry strategy indicates that two thirds of the Scottish population will live within 4 kilometres of a woodland of over 20 hectares by 2015, and there has been increasing public funding recently for the development and management of woodlands in and around towns.

53. The Committee also received a lot of detailed comment on the various public funding initiatives that relate to biomass. These were described as patchy and inconsistent, and providing lots of small initiatives, but no end-to-end picture.³⁴ A number of problems about the structure or criteria for the schemes were raised. There was also a very real sense of hiatus, with many of the schemes currently closed or under review.

54. In relation to agriculture and forestry support, there is concern to ensure that support for producing biomass is delivered in a coherent and co-ordinated way which encourages sustainable progress. Some agriculture schemes – such as the forthcoming Land Management Contract tier 3 – offer potential but need to allow collaborative applications to be encouraged. Witnesses also emphasised that support for this sector should not just be for growing wood fuel, but that it is important also to focus on the development of local fuel processing infrastructure.³⁵ Several witnesses argued that the opportunities offered by the shaping of the new Scottish programme under the EU Rural Development Regulation for 2007-13 are considered carefully to link into encouraging infrastructure and the promotion of biomass and energy efficiency.³⁶

55. There are some apparent ‘chicken and egg’ questions (such as people not buying biomass systems until a secure supply chain is established, but a supply chain not emerging until sufficient demand exists). However, the consensus in evidence was that the key is customers – the supply chain will emerge quickly if demand exists. There was a lot of emphasis on ‘pull mechanisms’ – for example, witnesses argued that an obligation on large steady-load public sector heat users to use renewables would give implementation a kick-start and the rest would follow.³⁷ If a local authority decides to convert 10 schools to biomass a supply chain will quickly emerge.

56. However, uncertainty was raised by witnesses about several specific grant schemes which might provide this stimulus to demand. A Department for Trade and Industry scheme at a UK level for larger projects is widely perceived to have had a disappointing impact, although it provided support to the large E.ON biomass electricity plant near Lockerbie. The scheme is currently closed and it is unclear if it is likely to open again.

57. The Deputy Minister confirmed that it is unclear as yet how the Scottish Community and Householder Renewables Initiative (SCHRI) will be re-targeted following an interim evaluation in November 2005.³⁸ The Energy Saving Trust stated that the programme has funded 37 household biomass heating systems, 12 larger scale systems and six feasibility studies.³⁹ However, there was some evidence which suggested that its contribution could be enhanced if it was more flexible. Several witnesses suggested either that it could be extended to SMEs, or possibly to PPP providers.

58. Argyll and Bute Council also presented detailed information on the operation of the Scottish Executive’s Public Sector Energy Scheme.⁴⁰ The scheme’s five-year pay-back requirement may be an issue which prevents it being used to the full. It appears designed for short-term and small-scale measures such as fitting low energy bulbs, efficient control systems, additional insulation, etc. There seems to be confusion as to whether it will fund larger investment, and whether it will accept bids in respect of renewable technology. If bigger projects are to be accepted, then evidence suggests the five-year pay-back period is not sufficiently flexible to recognise the different pay-back periods that different buildings and systems will have. Timeframes for return on capital investment are clearly very important for value-for-money decisions relating to biomass. The Council stated that there are no other specific funds for supporting the capital costs of retrofit of public buildings, which has the potential to be a significant example through which the public sector can lead the development of biomass.

59. The Renewables Obligation system is the main policy mechanism to support the increase in renewable electricity generation. It encourages the use of energy crops at present, but witnesses indicated that forthcoming staged reductions in the certificates that can be produced from co-firing limits the extent to which it can be a focus for longer-term sustainable biomass growth. Many witnesses also emphasised that it focuses on electricity, and suggested that a renewable heat obligation should be considered. The Executive has indicated that it is currently considering how best to provide additional support and has invited views on how a revised renewable obligation scheme can stimulate the growth of the biomass sector.

60. Apart from detailed comments on specific schemes, the main point raised by witnesses was the need for coherence in the funding mechanisms available to put support into the most effective part of the industry to seed the market.

61. The Committee acknowledges that the development of biomass offers a range of significant benefits. Many studies have identified its potential and the opportunity to stimulate a significant development fairly quickly. The only down-side presented in evidence is the risk that investment is directed in inappropriate or unsustainable directions. However, the development of the biomass industry is currently at a major pressure point.

62. There is a lot of good work already established. The necessary knowledge base exists. Other countries have achieved substantial biomass industries. There is now a significant and urgent need to give much higher priority to developing the industry in Scotland. The benefits are readily available but need to be secured. The problem is one of market failure at specific points, indicating a requirement for more intervention if it is to develop to its potential. There are generally agreed multiple benefits if the market can be made to mature quickly.

63. However, there is also a problem of policy hiatus. The correct policy measures are needed to realise the potential of biomass. This needs to happen right now if biomass is to contribute to meeting medium term emissions targets, as well as other objectives. The Committee believes that there are three urgent priorities: strategic direction, policy co-ordination and revised support mechanisms.

64. The publication of a revised Scottish climate change programme is expected in March. This will develop the devolved approaches to achieving the UK’s targets under domestic policy and international obligations for reducing greenhouse gas emissions, and will also develop distinctive Scottish emissions reduction targets for the first time. The Executive has also made a commitment to develop a biomass action plan and a renewable heat strategy as part of that programme.

65. The Scottish Forestry Strategy was published in 2000 and is currently under review. A draft revised strategy was issued for consultation in March 2006, with a view to a final revised strategy being agreed in summer 2006.⁴¹ The Executive has recently been conducting a review of its agriculture strategy. A revised document was published in March, including commitments to evaluate and monitor agriculture’s response to climate change and to promote research into the commercial viability of alternative crops and biomass.⁴²

66. The Executive has also announced the reconvening of the Forum for Renewable Energy Development in Scotland (FREDS) biomass study group to examine renewable heat. There is also a wider review of energy policy at a UK level.⁴³

67. The current policy review context therefore provides a cross-roads for many policy initiatives. There is an apparent problem of policy responsibility being spread across different departments. The opportunity of fully integrating the various current policy reviews does not yet appear to have been taken. As yet there is also no overall renewable energy strategy.

68. It is clear that we have a unique opportunity to stimulate the development of biomass in an appropriate, co-ordinated and decisive way. In its climate change report, the Committee recommended that the Executive should develop a set of clear and challenging benchmarks to provide a detailed route map to guide action towards the long-term emissions-reduction targets. It is essential that public sector agencies, businesses and individuals know what is expected of them. Linking the revised climate change strategy and a renewable heat strategy is a key opportunity to provide that. This opportunity must be grasped. The Committee recommends that a comprehensive biomass strategy is produced urgently.

69. A strategy should address the range of issues identified by the Committee. It must specify the desired mix between large-scale electricity generation and smaller-scale heat, and between energy crops and wood fuel. The strategy should ensure that the whole development is sustainable and delivers the multiple benefits of security of supply, emissions reduction, fuel affordability and economic opportunities. It should also link these to the wider public benefits to be gained from actively-managed woodlands. The strategy should also address the synergies between biomass and other renewable energy technologies (such as biofuel production) in a co-ordinated way. Above all, it must focus on the development of appropriate local scale clusters of activity. The opportunity to identify appropriate regional or local options and approaches can be maximised if the strategy is approached co-operatively with local enterprise companies and local authorities.

70. As well as strategic direction, the Committee considers that this is an ideal opportunity to address a range of related policy issues which will have an impact on the development of biomass. Examination of the biomass industry has brought together many issues that the Committee has considered previously in different contexts.

71. Several aspects of the regulatory framework – including planning and waste management - are key to ensuring appropriate investment in the right place. There is no evidence yet that these regulatory issues are being addressed in a co-ordinated way. The Committee has considered the issue of waste regulation in a number of contexts and sought information on how the waste management licensing regime can operate in a way which does not discourage the positive recycling or other use of products which might sometimes be regarded as waste. The Committee recommends that the Executive must continue to press for this to be simplified at all levels of operation.

72. There are also building standards issues relating to the storage and burning of wood fuel in urban areas, and the types of biomass systems which are approved.⁴⁴ All aspects of how biomass can be encouraged in urban areas should be explored, particularly given the importance of developing clusters of supply and demand in close proximity. The Committee urges the Executive to explore the potential of biomass heating in urban areas, and not to confine its expectations to rural areas.

73. How the structure and funding of PPP projects can allow for the inclusion of renewable energy projects, such as biomass systems, must be resolved urgently. Failure to do so will undermine the central role that public procurement can play in helping the market to mature. The Committee has raised this issue previously and is frustrated at the lack of progress. There is now a very real sense in which time is critical. If the current range of PPP projects cannot consider this option, not only will the opportunities of biomass be missed but the emissions legacy of a significant portion of Scotland’s public sector estate will be set for a generation.

74. The Committee strongly urges the Executive to use the current review of procurement to ensure that this is addressed. The contract conditions and funding arrangements for PPP projects must ensure that biomass can be a realistic option. The Executive must also examine urgently how it can make funding available to ensure that as many as possible of the PPP contracts which have been specified but not yet delivered can also still consider biomass systems.

75. Guidelines on procurement are required for schools, hospitals and publicly funded buildings and projects to consider biomass. This will provide a major stimulus. Policy support for using biomass as an alternative to oil or gas-fired systems for housing developments would be another way to stimulate the market as suggested by the SDCS and to help biomass move from pilot projects to mainstream activity. Planning guidance which supports consideration of biomass installations is central to building confidence. The current review of NPPG6 (on renewable energy developments) should be used to examine some of these issues.

76. More generally, the Executive should examine urgently how public procurement rules can rigorously apply criteria (such as purchasing wood fuel from accredited local sources) which will avoid unnecessary emissions. This issue arises across a whole range of sectors and not just biomass.

77. The Executive must tackle all these issues urgently or any stimulus to biomass development risks being hugely undermined. A forum such as FREDS could provide the opportunity to seek solutions to many of these issues but does not yet include a wide enough range of stakeholders.

78. The need for policy co-ordination is emphasised most in relation to the various funding support mechanisms available for biomass. There is clear evidence of the issues which emerge when a market is immature. Market failure is stopping coherent local supply chains coming together.

79. There is universal support amongst witnesses to the inquiry for a capital grant scheme that will create demand by subsidising the cost of installing systems. That has also been the main thrust of all the significant studies on biomass in recent years. However, support mechanisms are currently patchy and unsatisfactory.

80. The Committee accepts that investing in an immature market has to be very carefully targeted to ensure value for money and addressing the key points of market failure. Evidence to the Committee emphasised the need for this to be carefully targeted. However, without support – at least in the initial stages – the risk is that those projects which do exist may gravitate towards the cheapest options which may be unsustainable import-based ones. This would risk fatally undermining the establishment of a coherent supply chain and viable cluster of activity.

81. The Committee recommends that now is the time for significant support for biomass to be an urgent priority. This need not be a huge cost if it is designed well to seed the market at the right point. Most witnesses agreed with the Sustainable Development Commission Scotland’s view that it is a question of investing over a five-year period to kick start the industry and get it over a hump of investment that is required.⁴⁵

82. The Scottish Forest Industries Cluster cited research that indicated that a suitable grant scheme should cost no more than £18 million in total up to 2010.⁴⁶ Bidwells suggested that a five-year grant scheme offering capital assistance of up to 50% for biomass heating (or combined heat and power) schemes, funded at £5-6 million per annum, would be sufficient to deliver a vibrant new industry for Scotland.⁴⁷

83. Rather than focus on the detailed criteria of the various individual schemes currently available, the Committee believes that the current situation demands a new comprehensive and flexible approach. A simplified capital grant scheme that is well-structured and resourced and is widely available must be developed urgently. It must focus on heat rather than electricity and should support the development of local supply chains. It must be flexible enough to encompass domestic, commercial and public sectors, including the issues raised by public procurement and retro-fit of biomass to public buildings.

5. Work programme (in private): The Committee considered its future work programme and agreed—

Inquiry into developments in the biomass industry: The Committee took evidence from—

Apologies were received from Richard Lochhead, Mr Mark Ruskell (Deputy Convener) and Elaine Smith.

Inquiry into developments in the biomass industry: The Committee took evidence from—

1. Items in private: The Committee agreed to take item 6 in private, and also agreed to consider a draft report on the biomass inquiry in private at subsequent meetings.

6. Inquiry into developments in the biomass industry (in private): The Committee considered the evidence received to date for this inquiry and agreed to consider a draft report at its next meeting.

Also present: Rhona Brankin (Deputy Minister for Environment and Rural Development), John Farquhar Munro, Dr Elaine Murray and Mr John Swinney.

Inquiry into developments in the biomass industry (in private): The Committee considered and agreed a draft report and agreed arrangements for its publication.

¹ Environment and Rural Development Committee, Report on inquiry into climate change, 5th Report, 2005

² Environment and Rural Development Committee, The implementation of the reform of the Common Agricultural Policy in Scotland, 7th Report, 2004

³ Forum for Renewable Energy Development in Scotland Biomass Study Group, Promoting and Accelerating the Market Penetration of Biomass Technology in Scotland, Scottish Executive (2005)

⁴ Sustainable Development Commission in Scotland, Wood Fuel for Warmth, SDC (2005)

⁵ Written submission from the Scottish Forest Industries Cluster

⁶ Written submission from the Scottish Forest Industries Cluster

⁷ Written submission

⁸ Written submission

⁹ Official Report, 1 March 2006, Column 2776

¹⁰ Written submission

¹¹ Written submission

¹² Written submission

¹³ Official Report, 8 March 2006, Column 2829

¹⁴ Official Report, 8 March 2006, Column 2814

¹⁵ Written submission

¹⁶ Written submission

¹⁷ Official Report, 8 March 2006, Columns 2810-11 and written submission from Highlands and Islands Enterprise

¹⁸ For example, see Official Report, 22 February 2006, Column 2755 and written submission from the Confederation of Forest Industries

¹⁹ Supplementary written submission from the Scottish Coal Company Ltd

²⁰ Written submission from the Woodland Trust Scotland

²¹ Official Report, 22 February 2006, Column 2753

²² Official Report, 1 March 2006, Columns 2782-3

²³ Draft revised Scottish Forestry Strategy, Forestry Commission Scotland (2006), pages 27 and 32

²⁴ Written submission

²⁵ Official Report, 8 March 2006, Column 2815

²⁶ Written submission from Argyll and Bute Council

²⁷ Official Report, 8 March 2006, Column 2805

²⁸ Official Report, 8 March 2006, Column 2831

²⁹ Written submission

³⁰ Official Report, 22 February 2006, Column 2761

³¹ Written submission

³² Written submission

³³ Official Report, 8 March 2006, Column 2816

³⁴ For example, see Official Report, 1 March 2006, Columns 2779-80

³⁵ For example, see written submission from the Scottish Crofting Foundation

³⁶ For example, see written submissions from Perth and Kinross Council and Argyll and Bute Council

³⁷ Official Report, 1 March 2006, Column 2785

³⁸ Official Report, 8 March 2006, Column 2834

³⁹ Written submission

⁴⁰ Official Report, 8 March 2006, Column 2812 and supplementary written submission

⁴¹ Draft revised Scottish Forestry Strategy, Forestry Commission Scotland (2006)

⁴² A Forward Strategy for Scottish Agriculture – Next Steps, Scottish Executive (2006)

⁴³ Our Energy Challenge: securing clean, affordable energy for the long term, consultation document, Department for Trade and Industry (2006)

⁴⁴ See, for example, written submission from 3G Energi Ltd

⁴⁵ Written submission

⁴⁶ Written submission

⁴⁷ Written submission