Blow to Drax biomass plan as EC launches state aid investigation

UK — Drax's hopes of securing lucrative subsidies for its biomass conservion have suffered a setback after the European Commission launched a full state aid investigation over concerns the payments may be too generous.
The Yorkshire-based power plant is in the process of switching from burning coal to biomass, and was awarded a £1.7bn Government subsidy contract in April 2014 for the third of its six units - subject to state aid approval.

The contract would see Drax paid a fixed price of £105 for every megawatt-hour (MWh) of biomass-fired power the unit generated until 2027 – well over double the current market price.
Drax shares fell 5pc on Tuesday after the European Commission said it was concerned that the rate of return from the subsidies "could be higher than the parties estimate and could lead to overcompensation".

It was also concerned that the "considerable" volume of wood pellets the unit would burn each year - about 2.4 million tonnes, mostly imported from United States and South America - would be so great as to "significantly distort competition in the biomass market".
It said it had "opened an in-depth investigation to assess whether the United Kingdom's plans to support the conversion of part of the Drax coal power plant to operate on biomass are in line with EU state aid rules".

Drax has already largely converted the unit in question, which now runs on about 85pc biomass. This enables it to qualify for lesser subsidies, estimated to be about £80-£85/MWh, through another scheme called the Renewables Obligation.
The significantly more lucrative subsidy contract that is currently under EC scrutiny would require 100pc conversion.
Drax shares had been boosted last month when another biomass conversion project at Lynemouth got the green light from the EC for a comparable subsidy contract.
But Drax had cautioned at the time that its project had "different underlying technical and economic assumptions".
The EC said it believed that "estimates of the plant's economic performance may be too conservative".
Combined with its fears over market distortion, it said it was "concerned that on balance the measure's negative effects on competition could outweigh its positive effect on achieving EU 2020 targets for renewable energy".

Drax said the opening of the investigation was "in line with expectations". A spokesman added: “We welcome this announcement as the next step towards the full conversion of our third generating unit from coal to sustainable biomass.
"A positive outcome will result in half our power station running on biomass. This will improve the security of UK electricity supply and, in saving more than 12 million tonnes of carbon per year, play a critical role in helping the UK meet its climate change targets.
“We will continue to work hard to complete this State Aid clearance process as quickly as possible and make the case for converting the remainder of our power station.”

John Musk, an analyst at RBC Capital Markets said he believed that "the additional scale and greater thermal efficiency at Drax" meant it was always likely to get a lower subsidy price than Lynemouth.
He said that "the returns at £105/MWh were always too high". This had now been "brought into even more stark contrast" because earnings through the alternative subsidy option, the Renewables Obligation, had been reduced to around £80-£85/MWh as a result of falling wholesale power prices and other Government changes.
A similar in-depth state aid investigation was held into the proposed Hinkley Point nuclear plant. It was eventually approved, but with changes imposed by the EC to try to lessen the risk of the subsidies being too high.

About Drax

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