Energy hunt turns to straw, woodchips

LONDON (Reuters) - Energy companies are turning to waste products including wood chips, sawdust and straw to produce light and heat, as soaring oil prices and new climate policies penalize fossil fuels and favor renewables.

Some alternative sources of energy have had a bad press recently, especially as biofuels, meant to replace gasoline, have helped stoke food prices because they are derived from agricultural crops like corn.

But soaring oil and gas prices continue to drive a hunt for alternatives, and perhaps the oldest energy source of all -- wood and solid agricultural waste called biomass -- is gaining popularity.

Climate policies especially favor biomass in the European Union, which aims to get a fifth of all its energy from renewable sources by 2020.

"All of the legislative instruments are pointing towards making it a nice place to do business for the long-term," said David Williams, managing director of UK-based Eco2, which is planning five straw-fired biomass plants powering 250,000 homes or more from 2011.

Those 500 million pound ($976.9 million) plants would burn one quarter of Britain's surplus straw, currently ploughed into the ground, and depend on proposed changes to government support, currently under legislative debate, to raise by half again their quota of tradeable renewable obligation certificates (ROCs).

That would almost double revenues per unit of such electricity compared to conventional power and lift annual return on investment in British biomass plants to about 15 percent from 6 percent now, said Williams.

"It brings burning biomass well and truly into commercial investment." Such support policies have the effect of raising electricity prices slightly for everyone.

In addition to such stand-alone plans, all European coal plants face a big hike in penalties on carbon emissions from 2013 under the EU's emissions trading scheme (ETS), and as a result they are exploring "co-firing" options burning biomass alongside coal.

Britain's biggest coal-fired power plant Drax (DRX.L) said on Monday it was planning 400 megawatt (MW) biomass power generation by 2011.

"It's commercially viable because of the EU ETS and ROCs," Drax head of environment Nigel Burdett told Reuters.

In the United States, optimism is more grounded on the prospects for more supportive climate policies under a new U.S. administration from next year, as well as soaring oil and gas prices, said U.S.-based Intrinergy, founded in 2004.

"The perception is that it is more expensive than traditional fossil fuels and that has inverted," said Chief Executive John Keppler.

"Depending on the region we're in, we typically are able to price about 10 to 15 percent below the avoided cost of fossil fuels."

Like Eco2, Intrinergy has big plans from a handful of plants now, and is targeting especially steam and heat production for industrial processes rather than electricity generation.

A potentially serious stumbling block for the biomass sector, however, is a highly fragmented fuel delivery system -- especially relying on trucks -- compared to, say, coal trains or gas pipelines.

For example, local residents have qualms about the traffic impact of Eco2's plans. The company estimates each of its planned 40 MW power plants will need 100 truck "movements" per day, or one every 15 minutes, to deliver an annual 240,000 tonnes of straw.

Burning biomass has a smaller climate impact because it only returns to the atmosphere the planet-warming gas carbon dioxide which trees and plants themselves absorbed in the recent past, and not millions of years ago as in the case of fossil fuels.

(Reporting by Gerard Wynn; Editing by Eddie Evans)