In the last week two South Island-based businesses have announced they’re switching from fossil-fuel boilers to biomass.

It’s good news for the climate. Process heat is responsible for one-third of the country’s energy use and 8% of emissions.

In Timaru, Australian-owned McCain says the conversion of its coal boiler to a woodchip one will reduce the C02 emissions from the manufacture of its potato chips by 95%.

And French multi-national Danone says the commissioning of a $40 million biomass boiler at the company’s spray drying milk plant in Balclutha – along with a commitment to use 100% renewable electricity – will cut its CO2 emissions by 95% as well.

They’re very similar stories but there’s a key difference: more than half of the $5.6 million it cost McCain’s to convert its boiler came from the public purse, whereas Danone stumped up all of its own cash.

“Thanks to our prudent management of the economy we are able to back businesses to break free from outdated ‘business as usual thinking’, and provide opportunities for them to remain competitive under multiple potential climate futures while also curbing emissions,” energy and resources minister Megan Woods says in a press release hyping up the McCain boiler conversion.

So far the government has dished out $69 million from the Government Investment in Decarbonising Industry (GIDI) Fund for 53 industrial decarbonisation projects.

Recipients have contributed $117 million. 

“As a result of these 53 projects an anticipated annual carbon abatement of 364,127 t of CO2, and a lifetime carbon abatement of 7.46Mt of CO2, will be realised,” the press release says.

That combined spend by industry and government works out at just $24.93 per tonne of CO2 abated, and with NZUs currently trading north of $80 and expected to go significantly higher in the next few years, that looks like a good investment.

The question is, is it an investment that would have happened anyway, and if not are government handouts the most efficient way of achieving them?

McCain’s has committed to “ceasing any reliance on coal by 2025” globally and reducing its CO2 emissions by 50% by 2030. 

“Globally, McCain Foods is committed to reducing our CO2 emissions by 50 per cent by 2030, ceasing any reliance on coal by 2025, and having 100% of our plants powered by renewable electricity by 2030. This project makes a significant contribution to this target,” McCain Foods’ Regional President Australia, New Zealand, South Africa, India & China Louis Wolthers says on the multi-national's website.

So, it seems unlikely the $2,876,500 grant was a decisive factor in its decision to invest in the boiler conversion.

In 2020 the company announced it was investing in the country’s largest “behind-the-meter” renewable energy system. It’s expected to reduce emissions by 27,000 tonnes.

The massive solar-power project, estimated to reduce emissions by 27,000 tonnes of CO2 per year, was a joint project with a solar power company and a private sector solar investment company.

That lifetime abatement figure is calculated using a 20-year time frame, so the upfront cost could well be a hurdle for some businesses.

In the case of Danone, the replacement boiler is part of its global Re-Fuel programme.

The company has committed to be net zero by 2050.

“Danone’s sustainability approach includes consideration for not only our carbon footprint, but also water conservation, packaging circularity and regenerative agriculture,”  Danone’s New Zealand operations director, Steve Donnelly said.

Subsidies unnecessary: NZ Initiative 

NZ initiative chief economist Eric Crampton, a long-time critic of GIDI subsidies, said with the cost of carbon over $80 per tonne, and prices expected to keep rising, decarbonisation can make a lot of sense.

“Subsidies aren’t needed to cover it.”

“Government subsidies might be successful in speeding up some investments in industrial decarbonisation. But when they’re targeting emissions already covered by the Emissions Trading Scheme, they are not likely to be cost-effective.

“The subsidy could be paying McCain to invest in equipment that is cost-effective in reducing emissions, in which case McCain’s would have had plenty of reason to make the investment using its own money rather than taxpayers’ money. Or, the subsidy could be paying McCain to invest in equipment that isn’t cost-effective in reducing emissions, in which case the investment should not be made by anybody,” Crampton said.

“GIDI counts projects as a win if they bring forward investment by a few years and put it to the front of a company’s priority list. But that kind of shift hardly affects the path to 2050. And it introduces a broader kind of distortion where a company’s other unsubsidised projects, which could have higher overall return, become de-prioritised.”

He said if the government want a faster path than 2050 to reach net zero cutting the ETS cap more quickly makes more sense than subsidies for investments already encouraged by the ETS.

Subsidies a core part of road to net zero: Shaw

Climate minister James Shaw said projects like the McCain boiler conversion are a core part of the Emissions Reduction Plan and an important milestone on the journey to net-zero. 

“With our climate response, we are building an Aotearoa that is cleaner, safer and much more productive than it is today. Meeting our emissions goals is going to take action and changes across every sector of the economy. This kind of project – converting large-scale industrial processed to clean energy alternatives – is a great example of what can be done when Government partners with industry to make big things happen quicker.

The number of cars removed from the road is the metric favoured by those touting decarbonisation projects. The McCain boiler equates to 11,000 per year and the Danone one 10,000. 

Both projects are worth celebrating. But how much if any of those are emissions savings are down to the government subsidy is an open question.

The current GIDI funding round runs 10 November 2022 - 2 March 2023 with application forms on EECA’s website. To learn more about who is eligible visit: EECA Industry Decarbonisation.

Folllowing the publication of this article, on Nov 30 2022,  EECA reached out offering to add a fuller picture. A spokesperson pointed out that McCain's Gobal Sustainability Report only commits it to moving out of coal by 2030 not 2025 as per the quote from the companys website quoted in the story. 

As a result Carbon News submitted some written questions:

How much co-funding did EECA contribute to McCain’s GIDI project - what are the figures?

McCain’s pioneering boiler conversion project’s total cost was $5.6 million – they received $2,876,500 of contestable co-funding from the Government Investment in Decarbonising Industry (GIDI) Fund.

McCain will reduce carbon emissions by approximately 30,000 tonnes per year, that equates to taking 11,000 cars off the road.

 Why did this project receive co-funding when an emissions reduction target for 2025 had already been set?

• McCain’s global commitment to move out of coal – is for this to happen by 2030. The commitment (worded as a 50% absolute reduction in CO2 emissions Scope 1 & 2, and move out of coal to 100% renewable electricity by 2030) is published in its Global Sustainability Report from 2020. 
• In 2018/2019, McCain Timaru carried out an Energy Transition Accelerator programme with the support of EECA. This involved a review of the energy use at the McCain Timaru site, and the development of a decarbonisation plan – including energy efficiency, demand reduction activity and fuel switching. In this ETA McCain set an ‘ambition or aim’ to bring forward decarbonisation to 2025 at a site level in New Zealand. Note this was over and above the global commitment.
• This new aspiration (in line with the ETA) for Timaru in New Zealand was noted in articles including EECA’s own(published in 2020). A note too, that McCain sites in other countries may similarly have made more aspirational regional targets. 
• A condition of GIDI 1.0 co-funding was a decarbonisation plan (which in McCain Timaru’s case was the 2018/19 ETA). This involves companies setting targets that are realistic but an improvement on original targets, and planning a pathway that involves energy efficiency and demand reduction first, and fuel switching (as a next step).
• The McCain project demonstrates innovative technology that could enable system transformation at other sites. Further to the significant emissions reduction the project offered, in their project McCain have utilised a new technology (meaning it carries risk for McCain) with excellent replicability potential. The technology, called MVR, had never been used for this purpose, in this sector, in New Zealand. Without implementing the MVR tech it was identified there would not have been enough reduction in demand for steam from the boiler, for converting to woodchip to be financially feasible.
• The benefit of decarbonising through the ETA pathway work was widely recognised by the McCain global team and has been highlighted by McCain as very important in their decarbonisation journey. 
• A key criteria for GIDI Fund applications is additionality. Additionally is complex and definitions can differ depending on assumptions made with inputs. However, for EECA it means that projects will only be funded if they are unlikely to be implemented, or unlikely to be implemented until a later date, without government support.

Should government be co-funding organisations for projects that would have likely happened anyway?

• EECA’s purpose, as set out in the Energy Efficiency and Conservation Act 2000, is to promote energy efficiency, energy conservation, and the use of renewable sources of energy.
• The GIDI Fund is designed to help businesses meet an investment hurdle that is preventing or slowing down a valuable decarbonisation project from getting started. 
• It is also important to note that having a decarbonisation pathway and an improved aim for fuel switching, was a criteria for the contestable GIDI Fund 1.0.
• There are lots of reasons why businesses do not move forward with what can be considered 'commercially viable' projects on paper. Resourcing and financial constraints, for example,  prevent firms from undertaking significant decarbonisation projects. But price is not the only barrier faced by industrial firms seeking to decarbonise and firms have many other competing demands on their resources (risk appetite, internal decision making processes, sector norms) that GIDI can help to overcome.  
• Participating businesses are required to commit their own co-funding to the project, and take on all of the risks of owning and operating the new equipment and managing any cost escalation.

NB: The cost for New Zealand failing to meet its international commitment to meet GHG reductions under the Paris Agreement by 2030 (due to being required to buy international credits to meet this commitment) could be significant.

Why is co-funding needed, in addition to the ETS,  to drive emissions reductions in process heat?

• The NZ ETS is a key mechanism to drive net emissions reductions. Pricing emissions is an efficient and effective tool as part of a wider approach to ensure a cost-effective and just transition. Recent changes to the NZ ETS have been put in place to improve its effectiveness.
• We know that in some areas, lower cost emissions reductions do not occur at the prevailing ETS price due to other, non-price barriers, including:
• risks associated with adopting new or innovative technologies
• competition for capital within businesses, where economic decarbonisation projects might struggle to compete against the more attractive payback period of alternative capital investment
• even where decarbonisation opportunities are economic at prevailing ETS prices on a total cost of ownership basis, firms’ investment horizons (payback periods) for capital projects tend to be shorter and hence do not always factor in the full benefits of decarbonisation
• incumbent fossil fuel process heat plants are long-lived assets (boilers can remain in service for between 20-50 years) meaning reliance on ‘natural’ replacement cycles is likely to result in a rate of change (to low-emissions alternatives) that is inconsistent with the rate of change required to meet New Zealand’s emissions budgets.

• Funding through GIDI can help reduce the rest of the ETS price for the rest of the economy. For example, carbon price is paid on every litre of petrol that people pay for at the pump. If GIDI and other complementary measures were not used the ETS would need to keep rising across the whole of the economy, potentially to much higher levels to deliver the outcomes that are happening through GIDI and other measures.
• The Climate Change Commission recommended that relying on the ETS alone would make it unlikely that New Zealand will meet its emissions budgets. They, the Commission, proposed three policy pillars: pricing, policies to overcome non-price barriers, and policies to enable innovation and system transformation. They argue ‘international research and experience clearly show that the most effective approach… is emissions pricing that works in conjunction with companion policies that help to provide a wider range of low-emissions options.’
• Use of complementary measures can also help to enable innovation, unlock co-benefits such as health improvements, or to address distributional impacts from the transition to a low emissions economy.

Has Danone received any assistance from EECA?

• Danone recently installed a new biomass boiler at its Balclutha milk spray drying plant to replace its LPG boiler. The capital cost was fully funded by Danone. A note that the decision was made (and announced) to progress with the biomass boiler before GIDI. In an instance where it was pursued as part of GIDI co-funding – the application would have needed to meet the threshold, given the cost to run the LPG boiler in Otago comparative to a biomass (or coal) boiler. 
• EECA has had a collaboration agreement in place with Danone since 2015 and co-funded several energy efficiency initiatives including energy auditing, energy systems optimisation, and an energy graduate (currently employed at the site). EECA has also previously funded an LPG to woody biomass feasibility study with Danone.
• EECA partnered with Venture Southland to deliver a Wood Energy South project in the Southland region from 2014 to 2017, which primarily focused on overcoming market barriers to establish a cluster of wood energy users in commercial and industrial applications. The Wood Energy South project gave Danone access to information and resources which, alongside the feasibility study and support from EECA’s Account Managers, helped the company make the decision to install its biomass boiler.  
• The McCain and Danone projects are very different given the age of the sites, boilers, and fuel consumption. Abatement cost for LPG in particular is higher than coal.