Drax has been criticised for sourcing wood to fuel its power station in North Yorkshire from old areas that have not previously been logged - Christopher Furlong/Getty Images Europe
Ed Miliband has agreed to hand an estimated £2bn of taxpayer subsidies to a controversial wood-burning power station operated by Drax.
The biomass plant near Selby, North Yorkshire, will continue receiving support worth hundreds of millions of pounds from 2027 to 2031, it was confirmed on Monday. Drax has received £6.5bn of subsidies from the Government since 2002, with the current regime set to expire in two years’ time.
Based on current electricity price forecasts, Drax is on course to receive £530m of support in 2027 alone, according to the consultancy Cornwall Insight. Taken across the four-year period, subsidies could total more than £2bn.
The Telegraph reported on Friday that Mr Miliband, the Energy Secretary, was poised to hand Drax a multibillion-pound deal, with the Yorkshire plant seen as vital to keeping Britain’s lights on.
However, the taxpayer support has been controversial because of the environmental impact of wood-burning plants. While technically classed as sustainable, biomass still generates immediate emissions and has been blamed for fuelling deforestation.
On Monday, the Government said it had halved the subsidies paid to the company under the new deal.
However, it said the continued support was necessary to boost energy security and said it would save households money by displacing generation that would otherwise have to be done by more expensive gas-fired power stations.
The deal also seeks to limit how much Drax can generate and imposes higher standards for where wood chips are sourced. A “windfall mechanism” will allow ministers to claw back some of the company’s profits if they are higher than expected.
A government spokesman added: “We’ve introduced tough, new sustainability measures with clear, enforceable standards. Drax will need to use 100pc sustainably sourced biomass – up from 70pc – and not a penny of subsidy will be paid for non-compliant biomass.
“There will be substantial penalties for any failure to meet these strict criteria, protecting both consumers and the environment.”
The Drax power station is a biomass plant, which generates power by burning wood. Biomass, which generates more than 10pc of Britain’s electricity, is classed as carbon-neutral as trees can be planted to replace those burned for fuel and new trees absorb carbon while they grow.
However, the company has been criticised for sourcing wood from so-called primary forests, which are old, untouched areas that have not previously been logged. The National Audit Office (NAO) has raised concerns about the environmental credentials of biomass power.
Drax has said its wood pellets are “sustainable and legally harvested”.
Despite ministers agreeing subsidies only on the condition that Drax’s wood pellets are “100pc sustainably sourced”, Matt Williams, of the North America-based Natural Resources Defense Council, warned that the fresh subsidy deal raised doubts about “this Government’s commitment to the environment”.
He said: “This means more destruction of the world’s forests and the climate. Every single tree burned in a UK power station is one tree too many.
“Drax will still be handed hundreds of millions of pounds every year. It will be paid far more handsomely for burning trees than truly clean technologies like solar or wind.”
The company is being guaranteed an electricity price of £113 per megawatt hour under the contract for difference (CfD) regime, in 2012 prices. This is about £156 per megawatt hour when adjusted for inflation. The mechanism requires Drax to generate for a minimum of 22pc of the year, while capping it at a maximum of 27pc.
Tom Edwards, of Cornwall Insight, said the deal appeared to dramatically reduce the number of hours per year that the Drax biomass plant was incentivised to operate in.
He said: “I imagine that what the Government is thinking is that the plant will run when output from wind farms is low, so it will offset the need for gas plants to be used during those periods.”
Based on Cornwall Insight’s forecast for the wholesale electricity price in 2027, the company could make up to about £527m in the first year of the deal. A similar estimate was produced by Baringa, a consultancy hired by Drax.
That would potentially equate to more than £2bn if repeated over the full deal period.
However, the electricity price is forecast to fall in the following years, suggesting the subsidies paid to Drax could be even higher given it is guaranteed a minimum price.
The company could generate further profit from operating outside of the CfD’s hours, although it is not clear when the so-called windfall mechanism would be triggered.
Will Gardiner, the chief executive of Drax, said: “The Government’s low-carbon, dispatchable CfD framework for biomass, announced today, is an investment in UK energy security, which will result in a net saving for consumers and support the delivery of clean power [by] 2030.
“Drax Power Station plays a critical role in UK energy security, providing circa 10pc of all UK renewable energy and over 50pc at certain times of peak demand, with enough reliable power for 5m homes – equivalent to every home in London, or Wales and Scotland combined.
“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.”
Analysis from Baringa indicated that the agreement would result in a reduction in electricity system costs of between £1.6bn and £3.1bn, compared with if new gas-fired power plants had been built.
However, MPs on the Commons public accounts committee have raised concerns about carbon capture, warning it is a high-risk “gamble” on “unproven” technology that will have a significant impact on bills.
