European Commission investigates Drax biomass subsidy contract


Drax power station: Creative Commons/Paul Glazzard
Drax power station: Creative Commons/Paul Glazzard

The European Commission thinks the biomass subsidy deal struck by the UK’s biggest coal plant operator and the coalition government may be too generous. It has launched an in-depth investigation today to see if that proves to be the case.

It is scrutinising whether the deal breaches EU state aid rules and invites comments from interested parties.

While the commission supports renewable energy expansion, it is mandated to ensure operators are not given a competitive advantage via overly generous subsidies. The commission thinks that the contract handed to the plant by the UK government may have underestimated how much Drax could profit from the deal. It also thinks that the demand for wood pellets by the operator may distort the biomass market.

At 4GW, Drax is the UK’s biggest power station. The government notified the commission last April that it planned to subsidise the conversion of one unit of the plant to operate entirely on wood pellets via a contract for difference (CfD) allocated under the Final Investment Decision Enabling for Renewables (FIDeR) provision. That guarantees the operator a set price for its output with UK bill payers subsidising the plant if the wholesale power price drops below the so called strike price agreed in the contract.

Most CfDs are allocated by competitive auction, however the FIDeR contracts were handpicked by the government, a move that has been criticised by government spending and competition watchdogs.

The commission initially found estimates of the plant’s economic performance may be too conservative. If its analysis proves to be correct, overcompensation for Drax would distort the market as well as drive up energy bills.

As the project would require some 2.4 million tonnes of wood pellets sourced primarily for the US and South America, the commission thinks distortion of the biomass market could potentially outweigh the contribution the Drax could make in achieving EU 2020 renewable energy targets.

The commission will now see if those concerns are justified and said it will give all interested parties the opportunity to express their views before finalising its assessment.

In January 2015, the commission approved construction of the Teesside combined heat and power biomass plant. Following an investigation, in December 2015 the commission approved aid for converting the Lynemouth power plant to biomass.

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