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Drax’s Annus Horribilis Continues

drax power logoIn many ways it’s been a horrible year for Drax who could be forgiven for looking forward to the end of 2014 more than most.

Following DECC’s reneging on a ‘deal’ to back the conversion of their coal units to biomass generation and their recent, and record breaking, fine of £28m for not doing a good enough impression of an energy supplier it has been an awful year. To add to that arguments and lost cases in the high court and the environmental lobbying against the green-ness of biomass, January 1st cannot come quickly enough in the search for better fortune for the South Yorkshire business.

To add insult to injury, in recent days more than £200m has been wiped of the value of Drax after the government struck another blow for biomass, once a renewable pioneering darling of the coalition, with a threat to cut the subsidy regime underpinning the industry.

The government’s announcement drove Drax to have to reconsider their conversion plans and in doing so what was once the largest coal fired power station in Europe and which still provides 7% of the UKs electricity experienced an abrupt fall in the share price.

Renewable Obligation Certificates

Under the Renewable Obligation Certificate (ROC) scheme Drax, as with all eligible generators, had received guaranteed subsidies for 20 years to facilitate the economic burning of wood waste as well as investing in the development of new plant.

Drax, having already converted 3 coal units to biomass burning in a £700m investment, claim that as a result their plans for further conversions are in doubt. Drax and other biomass generators are forecast to have received up to twice the current rate of electricity in subsidies and as a result DECC defended their decision saying:

“Market intelligence now suggests [that] deployment of biomass will be higher than origin- ally estimated . . . As a result, government needs to take action to reduce the risk of exceeding the levy control framework, which caps the cost of energy policies on bill payers.”

Given the fundamental role that subsidies play in all renewable energy and the largesse the government offer, Drax could be forgiven for thinking they have upset someone, somewhere along the line and are now paying dearly as a consequence.

Whether this represents a watershed moment in the subsidisation of renewable projects or whether this is a biomass specific policy remains to be seen. Any decision to weaken the economic argument for any renewable source however must place in doubt the ability for the UK to hit its long term renewable energy targets. Indeed unlike other sources, the loss of the consistent nature of biomass burning amid growing intermittent sources such as wind and solar mean that the UK may pay for this weakening of security of supply over the long term.