EU investigates Lynemouth CFD subsidy: UpdateOREANDA-NEWS. February 20, 2015. The European Commission is investigating whether the UK award to German utility RWE's Lynemouth plant of a contract for differences (CFD) subsidy for its coal-to-biomass conversion was in line with EU state-aid rules. The investigation is a is cause for concern in a sector heavily reliant on government subsidies.

RWE's conversion of its plant and UK generator Drax's third unit conversion are the last two renewable energy projects awaiting state aid approval for their inflation-linked ?105/MWh (\\$162/MWh) CFD subsidies. The commission will investigate to ensure that the funds used to support Lynemouth's conversion are "limited to what is necessary and does not result in overcompensation" and will assess whether "the positive effects of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass."

If the commission concludes that there is an issue with the amount of subsidy, the member state involved can offer to change its plans to make it more compatible — including potentially scaling back the subsidy. The most immediate step would not be to scrap the project, but rather to find a compatible solution.

Today's decision is "disappointing and frustrating" because it further delays RWE's ability to make an investment decision on the project, the company said. "We will be pressing for a decision as soon as possible and would hope it could be delivered within a few months," RWE told Argus. It remains hopeful that the matter will be resolved. "Once converted Lynemouth would be able to deliver around 400MW of low-carbon electricity to the grid. Using biomass for power generation will contribute to the decarbonisation of the UK, supporting the government's climate change targets and contributing to increased security of supply," RWE said. The company will consider "every possible route to making this excellent project work," it added.

The Lynemouth plant would consume around 1.5mn t/yr of wood pellets, mainly sourced from North America. The financial calculations for the project, including plant load factor, its efficiency and wood pellet costs, gave the commission cause for concern that they could be too conservative and that the rate of return could be higher than predicted.

The commission will investigate further to see whether its concerns are justified, and will give those involved the opportunity to express their views before it takes a final decision. "We cannot anticipate the timing of the investigation," an EU official said. "There are no deadlines in state-aid investigations and the length of the procedure depends on a number of factors, including the complexity of the case and the level of co-operation from the member state concerned."

The commission's investigation is a "normal part of the commission's process and we will continue to work together to help resolve its concerns," the UK's department of energy and climate change (Decc) told Argus, adding that "biomass is an important transitional and cost-effective renewable technology."

The commission declined to comment on Drax's subsidy approval, while Decc said it is in a "constructive discussion with the commission" on the matter.

The commission granted state aid approval to UK biomass firm MGT Power's combined heat and power plant in Teesside, northeast England at the end of January.