Drax gets state aid approval for third biomass unit

Drax power station has received state aid approval from the European Commission (EC) for the third unit at the plant to receive subsidies to run entirely on biomass.

The unit has been co-firing biomass and coal since it began an upgrade to enable it to burn to wood pellets in July 2015. Drax now expects to complete the conversion by the end of this week.

“The project will further EU environmental and energy targets without unduly distorting competition in the single market”, the commission said in a statement. “Moreover, the commission’s investigation into the wood pellet and wood fibre markets found that the increased demand for wood pellets to fuel the power plant could be fulfilled by the market without undue negative side-effects.”

The plant is currently using biomass to fuel three of its six units with the support of subsidies through the Renewables Obligation (RO). The third unit was awarded a Contract for Difference (CfD) through the non-competitive Final Investment Decision enabling for Renewables (FIDeR) process in April 2014.

In January, the EC launched a probe into the contract to ensure it does not result in overcompensation. Following today’s ruling (19 December) the unit will be able to shift from the RO to the CfD and receive a strike price– or guaranteed price – of £100/MWh for the power it generates. It means the plant’s capacity will be split 50:50 between coal and biomass.

“We have demonstrated how to reinvent a coal-fired power station, using an existing asset, so there are no hidden costs to the grid and it is quick to achieve,” said Drax Power chief executive Andy Koss.

The company tried to secure a CfD to convert a fourth unit to run on biomass at the same time as it was awarded one for the third, but the government deemed the unit ineligible. The company took the government court over the decision, initially finding success in the High Court before losing the case in the Court of Appeal.

“Biomass technology is proven, ready to go and ideally placed to help the country transform to a low carbon future with reliable, secure and affordable renewable power,” added Koss. “With the right support from the government, we could upgrade the remainder of the power station to run solely on biomass and provide up to eight per cent of the UK’s total electricity from sustainable sources.”

At the time of publication Drax shares had gained nearly 9 per cent over yesterday’s closing price and were changing hands for around 350p per share. 

Analysts at investment firm Jefferies said: “Achieving approval for the CfD was crucial for Drax’s economics going forward. Given the deterioration over recent years, the CfD contract will not only give earnings security but will also offer significantly higher returns than the RO based biomass units.”