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The government plans to change its existing renewables support mechanism so that funding levels for new and expanding biomass projects will no longer be guaranteed over the accreditation period.
The Department of Energy and Climate Change (Decc) opened a consultation on Friday proposing that new coal to biomass conversion projects, or expanded co-firing projects, will “no longer be covered by our policy to maintain their levels of support” under the Renewable Obligation (RO) scheme.
A spokeswoman for the department said this means the government could in future act to reduce the amount of support available, if biomass deployment exceeds expectations. Under the current ‘grandfathering’ regime developers are assured of steady support level.
However, the government has included in its proposals a 12 month grace period to take into account the position of generators who have made investments on the basis that the current ‘grandfathering’ policy would continue.
In addition, government said its new Contracts for Difference (CfD) support regime will not be affected.
The surprise move from Decc caused shares in the UK’s biggest biomass generator Drax to slip nearly 10 per cent Friday morning to 503 pence per share, with analysts at RBC Capital warning that the move increases uncertainty while undermining investor confidence.
“While this creates yet more uncertainty on Drax and will, we believe, further undermine investor confidence, the only ‘real’ damage here is the loss of a potential fourth unit conversion,” RBC Capital said in a note Friday morning.
The generator’s first and second coal to biomass conversion units will be unaffected, having converted fully to biomass in May 2013 and May 2014 respectively.
The third conversion unit is currently waiting for clearance from the EU for CfD support but in the unlikely event that these plans were rejected and Drax opted to use the RO scheme it would fall within the one year grace period, RBC Capital said.
“Unit four can convert if it wants but there will be no grandfathering of the RO and no guarantee that Decc will not reduce bandings or remove the RO altogether at a future date,” RBC Capital added.
Decc said its proposals are designed to “help give government flexibility in deciding future allocations of funding” in order to “protect bill payers from extra costs”.
The consultation will close on 26 January 2015.
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