The Paris climate goals require rapid decarbonisation of the global economy. As part of our 2020 climate-related engagement, we will tackle coal as it is the most carbon-intensive fossil fuel. We have been calling on electric utility companies to phase out unabated coal-fired power generation by 2030 for developed countries, and 2050 for developing countries.1
However, closure of coal-fired power comes with a social cost, as the Just Transition2 agenda reminds us. Whole communities may be reliant on their local coal power station for jobs. And financially, the potential retirement of coal plants before their scheduled date leaves companies with significant ‘stranded asset’ risk.
But some experts have called this assumption into question, pointing to the whole range of side effects and unintended consequences that large-scale land use change can bring. And investors are cautious, given the memory of the biofuels boom and bust of the late 2000s.
We visited the UK’s largest power station, Drax, to gain a better understanding of the sustainability of biomass and the practical issues involved in converting power stations. In a joint investor visit, co-ordinated by the Friends Provident Foundation, we met with senior company staff including their Head of Climate Change, and toured the power station.
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Some companies are now looking to repurpose their coalfired power plants instead of closing them, by replacing coal with alternative fuels.
Drax Group plc is the owner of the UK’s largest power station, Drax Power Station, which has a generating capacity of almost 4GW and is able to provide power to around 6 million households. It was built in the early 1970s close to the country’s northern coal mining region, and from 1974 until 2013 ran entirely on coal.
In late 2019 Drax announced its intention to be ‘the world’s first net carbon negative company’ by 2030, based on plans to introduce large-scale carbon capture and storage, working with partners National Grid and Equinor. In 2020, Norway’s sovereign wealth fund removed Drax from its investment blacklist, citing the transition away from coal.
What is involved in converting a coal plant to biomass?
The challenge in coal-to-biomass conversion lies not within the power station itself, but in the supply chain.
What is the sustainability impact?
The sustainability benefits of biomass against coal depend on a critical assumption – that the process as a whole is carbon neutral, with trees absorbing as much greenhouse gas when they grow as they release when burnt. Several academic and NGO studies have highlighted, however, that there are many reasons why this may not be the case.
One issue these studies point to is timescales. Achieving the Paris goals requires urgent action to reverse the trend in emissions in the coming decade. Burning biomass releases greenhouse gas emissions at least as high as coal, or higher due to the lower energy density; but a newly-planted tree takes many years to absorb the equivalent amount of CO2. Similarly, forest residue left in place to rot may release carbon over decades, but if removed and burnt for power, all stored carbon is released immediately.
Emissions reduction calculations also need to consider the counterfactual – what would happen if the biomass was not sold to the power industry? For instance, if new forests are planted for the purposes of supplying biomass, any CO2 savings would have to take into account the loss of CO2 stored in the vegetation that was previously there.
Finally, the concept of carbon neutrality does not consider supply chain emissions. The process of turning raw wood into pellets is energy-intensive, and the majority of Drax’s wood has to be transported by ship and rail from North America, where its main suppliers are located.
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All biomass is not equal
The journey to carbon negative
In 2019 Drax announced an ambition to be carbon negative by 2030, by removing more carbon dioxide from the atmosphere than it produces through its operations. Further to maintaining a sustainable biomass supply chain, this would involve the use of carbon capture and storage (CCS) for both its biomass and gas operations. We saw an on-site pilot unit, currently capturing one tonne of CO2 per day; the company has ambitions to scale this up to 16 million tonnes per year.
This is an ambitious agenda. Despite years of research, CCS remains at an early stage of deployment – the total capacity of all CCS facilities operating or under construction globally is around 40 million tonnes a year3, much of this in the gas and industrial sectors rather than power generation. CCS also adds cost to the power production process, and there remains significant uncertainty over government policy incentive structures as well as issues around liability and public acceptability.
However, it is clear from analysis by institutions such as the International Energy Agency that CCS is a necessary part of the effort to meet the Paris goals, particularly if the world aims for a 1.5°C future. Drax’s strategy relies on the UK government accepting this logic and putting in place policies that would make the company’s plans economically viable.
The use of biomass to extend the life of coal power stations and reduce emissions is no silver bullet, with the full lifecycle impacts of the production and use of biomass varying widely depending on the source. Managed poorly, it is quite conceivable that biomass could have more severe climate impacts than coal.
Drax gave us a compelling story about the sustainability of their sourcing policies, and we applaud their decision to announce their ambitious carbonnegative plans. Further work is still needed to explore whether energy generation from biomass is genuinely carbon neutral, and to cut supply chain emissions. We also encouraged the company to consider contingency plans in the event that feedstock costs do not fall as far as they hope and/ or government support is not forthcoming. This includes considering the potential local community impacts of different future business scenarios, using the Just Transition framework as a structure to consider the risks.
Drax clearly has put significant research and resource into selecting and monitoring its biomass sources. As investors, our wider concern is that others may not be as rigorous. Biomass as a large-scale energy source carries significant risks of negative unintended consequences. There may be a natural limit to how far biomass energy can grow as genuinely sustainable sources are taken up by first movers.
1 See Institutional Investors Group on Climate Change joint investor letter to Eurelectric (December 2018) calling for a 2030 phase-out for developing countries, and the Powering Past Coal Alliance which supports the 2030 and 2050 timescales
2 A ‘just transition’ for workers and communities as the world’s economy responds to climate change was included as part of the 2015 Paris Agreement on climate change
3 Global CCS Institute