As we approach a winter cold spell, loading logs onto the fire and staring at our Christmas trees, spare a thought for Drax Power.
Drax is the operator of the second largest coal power station in Europe, and has an ambitious corporate strategy, based on gradually converting a number of its generating units to become predominantly a biomass-fuelled power generator reliant on wood pellets in place of coal.
Of those six units, the first was converted to biomass in May last year, and the second was completed in May this year. A third conversion is planned by summer 2016, and a fourth is being evaluated.
According to a study by Frontier Economics published in November, converting three of Drax’s units to biomass could save between £2.5bn and £3.4bn, when compared to the costs of producing power from offshore wind farms – saving consumers up to £900m, or around £30 per household during the lifetime of the projects.
However, key to these conversions is government subsidy, without which Drax’s plan is a non-starter. Its conversions are eligible for subsidy under the Renewables Obligation (RO) scheme, but Drax applied for “early bird” contracts under the government’s snappily named Final Investment Decision (FID) Enabling for Renewables process. This is the process under which the government has been allocating the first set of Contracts for Differences (CFD) under the new subsidy scheme that forms part of the Electricity Market Reform programme.
But these early bird CFDs have been on limited offer, and once allocated, future CFDs will only be granted following competitive auctions, which have now begun.
Drax was granted an early bird CFD back in April for the first conversion, which will start operations next April. But after some legal wrangling, which ended in the Court of Appeal, the government refused a contract for the second. Given the scale of the Drax operations, this was good news for many other developers and operators, anxious that Drax does not hoover up more than its fair share of the subsidies on offer.
However, this second conversion, and also the planned third conversion if that is unsuccessful in securing CFD support under the auctions, will still benefit from the RO subsidy before it closes to new capacity in 2017 and the CFD scheme becomes the only game in town.
So down but not out.
However, on Friday 12 December, in yet another example of energy policy tinkering, the government announced changes to its so-called grandfathering rules, whereby once a generating plant is accredited to receive its allocation of ROCs, the allocation is guaranteed over the lifetime of support under the scheme.
The rules are complex, but basically the government is now proposing to end grandfathering for biomass co-firing or conversions, which means that these schemes will no longer benefit from guaranteed support, and future ROC allocations will be at the mercy of future funding decisions.
Its reasoning is that more coal plants are planning to convert to biomass than it originally thought, which is going to eat into the £7.6bn Levy Control Framework – the budgetary constraint on all support schemes which impact consumer bills.
There is a 12 months grace period however, to protect generators that have invested on the assumption that the current grandfathering policy would continue. Fortunately for Drax, this will protect its second and third conversions.
But the government’s action – just a consultation it has to be said, with the consultation period closing on 26 January - must surely put Drax’s fourth conversion plans in doubt.
As a result, £300m was wiped off Drax’s share value on that Friday.
Why does this matter?
Well, putting aside for a moment the concerns of the smaller biomass developers, Drax is a big player – not only the UK’s largest coal generator, but the source of 7-8% of our electricity demand. It is the country’s largest single carbon emitter, and its strategy of moving towards biomass co-firing will make a big dent in the UK’s carbon emission reduction targets.
And it is one of the partners, alongside National Grid and BOC, in the White Rose project, which has secured public funding to develop a Carbon Capture and Storage (CCS) demonstration project in Yorkshire. This exciting project will see a standalone power plant built alongside the existing Drax station near Selby, exporting power to the grid and capturing its CO2 emissions for transportation through a dedicated pipeline to undersea storage in the North Sea.
Yes, there is controversy about burning biomass for power generation, especially when the wood pellets being burnt in Yorkshire are sourced in North America, which makes the carbon accounting and sustainability counter-claims confusing.
But few can deny that in a world which is painfully shifting towards a low carbon future, biomass generation has an important role to play, even as a “transition” technology. And with plentiful and cheap coal supplies on the world market, a successful CCS pilot would be an important step in maintaining a healthily diverse power mix, retaining coal – and gas – fuelled power plant in our national generation portfolio for years to come.
* Andrew Whitehead is the Senior Partner at Birmingham and London law firm SGH Martineau LLP.