"Fourteen Five"! Where will the biomass power generation industry go?



A piece of paper caused a stir

According to the news on the website of the Ministry of Finance on October 20, the Ministry of Finance, the National Development and Reform Commission, and the National Energy Administration issued the Supplementary Notice on Matters related to the "Several Opinions on Promoting the Healthy Development of Non-water Renewable Energy Power Generation" (Caijian (2020) No. 426) (hereinafter referred to as the "Supplementary Notice"), with only 1408 words in full.

However, a brief "supplementary notice" has aroused the concern of the entire biomass power generation industry, and investment institutions and biomass power generation companies even feel that they have been "driven into the ice." So, what exactly does the Supplementary Notice say? The story starts much earlier.

According to the "supplementary notice", biomass power generation projects not only include agricultural and forestry biomass power generation projects generally considered in the industry, but also include waste incineration power generation projects and biogas power generation projects, so the coverage of this "supplementary notice" has greatly increased, after all, the attention of agricultural and forestry biomass power generation projects can not be mentioned in the same day as waste incineration power generation projects.

In fact, the news of the decline of subsidies in the biomass power generation industry, about two or three years ago, has triggered discussions in the industry, all kinds of rumors, and even some people say that the central financial subsidies will be cancelled in the next two to three years.

Until January 20 this year, the Ministry of Finance, the National Development and Reform Commission, and the National Energy Administration jointly issued the "Several Opinions on Promoting the healthy Development of Non-water renewable Energy power generation" (Caijian (2020) No. 4) (hereinafter referred to as No. 4), which really gave the industry enterprises to eat a reassuring.

No. 4 paper is only in principle to improve the current subsidy methods, improve the market allocation of resources and subsidy decline mechanism made statements, and did not substantially cancel biomass power generation project subsidies, because better than the industry expected, so No. 4 paper did not cause a fierce reaction in the industry.

When companies in the industry think that this matter has come to an end, they did not think that the "supplementary notice" was released, and a stone stirred up thousands of waves. According to the "subsidy Notice", the upper limit for biomass power generation projects to enjoy subsidies is "82,500 hours of reasonable utilization of the whole life cycle" or "15 years from the date of grid connection."

In other words, if the current level of operation is more common, that is, 7,500 hours per year, a single project can only enjoy 11 years of subsidies; Or to enjoy the full 15 years of subsidies, a single project can only be utilized for 5,500 hours a year, or 230 days a year.

At the same time, the Supplementary Notice also clearly stipulates the calculation method of project subsidized electricity, that is, "Subsidized electricity of the whole life cycle of the project = project capacity x reasonable utilization hours of the whole life cycle of the project". Among them, the project capacity is determined at the time of approval (filing) shall prevail, and if the actual project capacity is less than the approved (filing) capacity, the actual capacity shall prevail. That is to say, the way for enterprises to generate more electricity and earn more electricity price subsidies through "overissuing" within the specified time is blocked.

Can biomass power projects still make money?

After the issuance of the Supplementary Notice, the first reaction of the industry is, will the biomass power generation project still make money? To answer that question, we need to do some math.

Taking the relatively good profitable waste incineration power generation project as an example, in order to enable readers to simply understand, we only make a rough estimate here, and finally hope to draw the conclusion that how many years can a waste incineration power generation project recover the investment and the return rate of the whole life cycle of the project is.

First of all, on the investment side, according to the usual investment intensity of the current waste incineration power generation industry, we set the investment amount of a ton of waste to 400,000 yuan, then the total investment amount of a project of 1000 tons/day is 400 million yuan. According to the prevailing standard, 30% of the total investment is funded by the enterprise's own funds, that is, 120 million yuan, and 70% is financed by bank loans, that is, 280 million yuan. We assume that the loan interest rate is 4.9%, and the repayment starts from the first year of production, and the equivalent amount is repaid in 15 years.

Secondly, at the operation end, we still continue the above annual utilization hours of 7,500 hours (312 days), the power generation per ton of garbage into the plant is calculated according to 280 KWH/ton, and the waste disposal fee is calculated according to 80 yuan/ton, etc. If the production cycle is not considered, it can be calculated that the main business income of waste incineration power generation enterprises is about 86 million yuan per year.

What about the cost? For simplicity, assume that the annual operating cost (including consumables, spare parts, etc.) is 8 million yuan, the management cost is 8 million yuan, and the financial cost is estimated to be about 38 million yuan.

In this way, we can roughly calculate that the annual after-tax net profit of the first to 15 years of the operation period of the waste incineration power generation project is about 24 million yuan, from the 16th to the 28th year (assuming that the franchise period is 30 years, the construction period is 2 years), there is no longer a financial cost, and the annual after-tax net profit is about 52 million yuan.

According to the above calculation, without considering the cancellation of electricity price subsidies, it will take 16 years for waste incineration power generation enterprises to recover their investment, but if you consider the factors such as the production cycle, the cost of rising costs, and the cost of periodic large-scale maintenance, it is expected that it will take about 18 years to recover the investment.

For agricultural and forestry biomass power generation projects, the situation seems to be more severe, although the total investment of such projects will be lower, generally about two to three hundred million yuan, and the benchmark price is higher than the waste incineration power generation project, but agricultural and forestry biomass power generation projects need a huge amount of fuel costs, that is to say, not only there is no waste disposal fee in terms of income, In addition, the cost also increases a lot of fuel acquisition costs, especially in some regions, the fuel market competition is fierce, and the fuel cost is high.

At the same time, because agricultural and forestry biomass power generation projects generally use circulating fluidized bed technology, whether it is the effective use of hours or energy conversion rate, there is a certain gap compared with the use of grate technology waste incineration power generation projects, and the cost of inspection and maintenance will be much higher than the waste incineration power generation project. Taking the above factors into account, the cycle of investment recovery of agricultural and forestry biomass power generation projects is at least not shorter than that of waste incineration power generation projects, and even longer.

It should be emphasized that the above calculation does not take into account the elimination of the tariff subsidy in the 12th year. If this factor is taken into account, the recovery period will be extended by another two years, that is, 20 years. This means that only eight years are really "earning money", the annual after-tax net profit of 35 million yuan, the total return of 280 million yuan, the internal rate of return (IRR) of the whole investment of the project has plummeted from about 7% before the New Deal to about 4.9%. Although the above calculation is relatively simple, but enough to explain the problem, IRR4.9% means what, needless to say.

Where will the biomass power generation industry go?

The issuance of the "Supplementary Notice" may announce the end of the golden age of the biomass power generation industry. The New Deal has become a fact, so how will the biomass power generation industry go in the future, and how should enterprises respond? We may wish to make a forecast from the three levels of policy, industry and enterprise.

Policy level

The purpose of various policies introduced by the state is to regulate and guide the healthy development of the industry, and not to kill a certain industry with one stick. Therefore, we have reason to believe that the relevant departments will introduce supporting policies to make the industry glow with new vitality, and there are two aspects of policy worthy of everyone's expectation.

First, Article 4 clearly points out that "the price authorities will improve the price formation mechanism of waste incineration power generation in a timely manner according to the development needs of the industry and cost changes." On September 11, the National Development and Reform Commission, the Ministry of Finance and the National Energy Administration jointly issued the "Implementation Plan for Improving the construction and operation of biomass power generation projects" (Development and Reform Energy (2020) No. 1421) pointed out that the benchmark price of waste incineration power generation projects in 2020 continued to be determined as 0.65 yuan, which has been implemented for many years. The benchmark price of agricultural and forestry biomass power generation projects is still 0.75 yuan. We may be able to look forward to 0.65 yuan of waste incineration power generation project on-grid benchmark price can be increased in the future.

Second, the "Supplementary Notice" clearly points out that after the biomass power generation project has been connected to the grid for 15 years, regardless of whether the project has reached the full life cycle of subsidized electricity, it no longer enjoys the central financial subsidy funds, and the green certificate is issued to allow participation in the green certificate transaction. At the same time, article 4 also puts the "full implementation of green power certificate trading" in an important position.

On January 18, 2017, the three departments of the National Development and Reform Commission, the Ministry of Finance and the National Energy Administration jointly issued the "Notice on the Trial issuance of renewable energy green Power Certificate and Voluntary Subscription trading System" (Development and Reform Energy [2017] No. 132), marking the start of the green power certificate (hereinafter referred to as green certificate) trading system. However, the document makes it clear that the green certificate is a voluntary subscription without any mandatory rules, and because it is just starting, the document also makes it clear that the green certificate cannot be sold again after the subscription. As of November 25, 2020, there is a huge difference in the number of green certificates issued, listed and trading volume (see Table 1), and the income brought by green certificate transactions is not enough to make up for the gap after the cancellation of subsidies.

No. 4 civilization confirmed that "since January 1, 2021, the implementation of green power certificate trading under the quota system, while studying the priority power generation rights of coal-fired power generation enterprises, priority protection of enterprise coal imports and other links with green certificates, continue to expand the scale of green certificate market transactions, and promote green certificate transactions through a variety of market-oriented ways."

This paragraph released a lot of information, summed up in three: first, the green certificate will be expanded from the current only onshore wind power and photovoltaic power generation (excluding distributed photovoltaic) to the entire field of non-water renewable energy power generation, biomass power generation will be included; Second, the green certificate will become the coal power generation enterprises must buy products, which to a large extent will make the green certificate transaction income as an alternative source of electricity price subsidy income, for biomass power generation projects, this is the most substantial positive; Third, green certificates may gradually become securities, which can be traded in a variety of ways. If the country can introduce substantive policies as soon as possible, or will save the biomass power generation industry in water and fire.

We can also expect substantial policies for agricultural and forestry biomass power generation and biogas power generation, such as relevant policy requirements for fuel supply and supply prices.

Industry level

Before the introduction of substantive supporting policies, it is believed that there will be some biomass power generation enterprises "can not carry", which will bring a series of changes in the industry.

The first change is that "untenable" enterprises, especially private enterprises, want to exit. IRR4.9% will make private enterprises more aware that investing in the biomass power generation industry is no longer the best choice, so the sale of biomass power generation assets will become more and more "popular", many of which are high-quality assets. I recently heard that some large and medium-sized enterprises want to sell such assets as a whole.

The second change that follows is that the industry will become more concentrated. Whether it is investment, construction, or operation, the attributes of economies of scale in this industry are relatively strong, so if leading enterprises want to further reduce costs and increase efficiency, the acquisition of relatively high-quality assets at a reasonable price will become a choice.

The third change is that the industry's leading enterprises will become more and more united, and reverse the promotion of the total investment of the upstream and downstream participants in biomass power generation, construction standards, garbage disposal fees, agricultural and forestry waste acquisition prices, and so on, gradually return to rationality.

As we all know, due to the extremely fierce market competition, the major participating enterprises in the biomass power generation industry have not been very "united", which gives the owners continue to increase the total investment, construction standards and other requirements at the same time constantly reduce the cost of garbage disposal opportunities, but also gives the fuel supply side to hoard the opportunity to increase fuel prices. Although this situation has eased in the past two years, the author believes that the introduction of the New Deal will accelerate the return of all participants in the industry to rationality, form a positive interaction, and promote the more standardized and healthy development of the industry.

Enterprise level

No matter how the industry changes, for enterprises with strong subjective initiative, there will be effective means to cope with change. The author expects that the means to deal with this New Deal mainly have the following four aspects.

First, standardize operation. On the one hand, enterprises will spare no effort to reduce costs, reduce all unnecessary expenses, reduce redundancies; On the other hand, the enterprises will be more careful to balance the relationship between the amount of waste disposal, power generation and equipment loss, blindly pursuing super burning, blindly emphasizing the number of continuous operation hours will become a history, and according to the equipment performance requirements of the shutdown and maintenance, strengthen equipment maintenance will be more and more attention by enterprises.

Second, technological upgrading. With the current technology, it is increasingly difficult to reduce costs. For example, under the current domestic mainstream process technology route, a two-furnace two-machine waste incineration power generation project needs 70 or 80 people no matter how careful the budget, while Western European countries of the same scale only need about half of the people. Although there is a difference in management level, but more important is the difference in technology. Therefore, in order to further reduce costs and increase efficiency, enterprises will pay more and more attention to the improvement of technology.

The third is vertical extension. On the one hand, the New Deal will force enterprises to extend the value chain, the most important thing is to have their own general contracting qualifications and capabilities, after all, the reasonable use of policies to earn project profits will greatly increase the return level of the whole life cycle of the project. On the other hand, enterprises will extend the industrial chain upstream, such as the expansion of the whole chain from waste incineration to waste "collection - storage - transportation - sales", in order to partially disperse the profit risk of a certain link.

Fourth, horizontal extension. In fact, this is already a common choice for industry enterprises, from agricultural and forestry biomass power generation, waste incineration power generation to a broader field of solid waste expansion, such as kitchen, general industrial solid waste, hazardous waste, resource recycling and so on.