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The UK has announced new subsidies for Drax, the country’s largest power station, despite a long-running battle over whether the wood pellets it burns for fuel are environmentally sustainable.
Drax said on Monday it had agreed a contract for difference with the government for a minimum electricity price of £113 per megawatt hour between 2027 and 2031.
The deal will mean that Drax, which supplies about 4 per cent of Britain’s electricity, is able to keep the Yorkshire-based biomass power station running when its current subsidy arrangement expires.
In a statement, the government said it had halved Drax’s subsidy and ensured that the plant would play a “much more limited role in the system”. The power station currently runs about two-thirds of the time, but will only “be supported to operate” at a maximum load factor of 27 per cent, running “less than half as often as it currently does”.
Drax’s current subsidies guaranteed it a so-called strike price of £132 per megawatt hour as of December 2023, according to the group’s most recent annual report. The company’s shares rose 5 per cent in early trading on Monday.
The new deal comes as Drax continues to face scrutiny over the extent to which the wood pellets it burns for fuel are environmentally sustainable, after regulator Ofgem found holes in its supply chain data last year.
On Monday Will Gardiner, Drax’s chief executive, said the subsidies were “an investment in UK energy security” and were cheaper than the cost of building new fossil fuel power stations to back up wind and solar generation.
“Under this proposed agreement, Drax can step in to increase generation when there is not enough electricity, helping to avoid the need to burn more gas or import power from Europe, and when there is too much electricity on the UK grid, Drax can turn down and help to balance the system,” he said.
Drax, formerly the UK’s largest coal-fired plant, now burns millions of tonnes of wood pellets. The original subsidies were designed to help it switch from using fossil fuels to biomass.
The extension will allow the plant to remain open while it installs a system to capture its carbon dioxide emissions and store them. That upgrade is expected to take until 2030.
“Closure of such large-scale biomass plants would hinder their conversion [and] have implications for the UK’s near-term security of supply,” the government said, in a consultation ahead of the decision.
Biomass accounts for about 11 per cent of power generation in the UK, but its use rests on assurances that the wood involved is from sustainably managed forests with ongoing replanting. The National Audit Office has cast doubt on the trustworthiness of the UK monitoring process.
Last August, Ofgem, the energy regulator, closed a 16-month investigation into Drax by saying the company did not have adequate data on the sustainability of the wood it imported for fuel in 2021-22 and ordered a full independent audit of its supply chain for 2023. Drax agreed to pay £25mn into Ofgem’s voluntary contribution fund in atonement.
But the regulator said the problems had been “technical in nature” and there was no evidence that Drax’s biomass was unsustainable, or that the company should not have received the £548mn in clean energy subsidies it was paid in 2023.
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