New subsidies have been announced for wood-burning power plant Drax (DRX.L), which the Government said would halve costs for consumers and improve sustainability.
Subsidies for the major power station in Yorkshire, which produces around 5% of the UK’s electricity, are due to expire in 2027 and ministers have announced the plant is “important to delivering a secure, value-for-money power system” from then until 2031.
But they say it cannot be allowed to operate in the way it has until now, or with the level of subsidy it received in the past, which enabled Drax to make “unacceptably large profits”.
Drax power station made ‘unacceptably large profits’ in the past (Anna Gowthorpe/PA)
In a written ministerial statement, Energy Minister Michael Shanks said Drax would switch from being a baseload electricity generator, running about two-thirds of the time, to only operating as “dispatchable power” when it is really needed, and allowing wind and solar to be favoured when they are available.
Stricter sustainability requirements are also being brought in, with “substantial penalties on Drax if these criteria are not met”, the Government warned.
The new arrangements will halve the subsidies paid to Drax and include a windfall mechanism that means that 30% to 60% of profits will be returned to consumers if they go above expected limits.
Biomass is the lowest cost option in the short term, but without extra technology to capture carbon emissions from burning wood, it is not a long-term solution, ministers said.
Drax would not be financially viable without the billions it has received in government subsidies for burning wood pellets, classed as renewable energy.
Environmental groups and campaigners have long called for an end to all subsidies for burning wood from forests and energy crops in power stations, redirecting the money to wind and solar instead.
Proponents of biomass say that it can create carbon-neutral energy because trees and other plants first absorb carbon, then are burnt and release the same carbon back into the atmosphere.
However, critics say this assumes the companies only use sustainable wood in their boilers.
Investigations by green groups have alleged that Drax has used wood from environmentally important forests around the world, but the company has said it is confident its biomass is sustainable and legally harvested.
Under the new contract for difference, Drax will be paid £113 per megawatt hour for electricity and it will be able to generate only 22-27% of the time, which Mr Shanks said would halve payments compared to the existing support regime, saving households nearly £6 a year on bills.
The proportion of woody biomass burned that comes from sustainable sources must increase from 70% to 100%, and supply chain emissions must be cut to stricter levels in line with Europe under the new arrangements.
Material from primary and old growth forests will be excluded from receiving payments.
Mr Shanks also said the Government recognised the “strength of concerns” about using unabated biomass – which does not have technology to capture and permanently store the carbon emissions it produces – and said it was not a long-term solution.
The Government is setting up a review to consider how technologies that remove greenhouse gases, such as large-scale biomass with carbon capture and storage, can meet net-zero targets.
A Department for Energy Security and Net Zero spokesperson said: “This new deal will halve the amount of support for Drax, save money on people’s energy bills and contribute to energy security.
“The deal includes a new windfall mechanism to recover excess profits and ensure fair prices.
“We’ve introduced tough new sustainability measures with clear, enforceable standards,” they said, adding “not a penny of subsidy” will be paid for non-compliant biomass.
Drax Group chief executive Will Gardiner said the new framework was an “investment in UK energy security, which will result in a net saving for consumers” and support the delivery of the Government’s clean power by 2030 goal.
He said analysis indicated it would result in a £1.6 to £3.1 billion reduction in electricity system costs, versus the construction of new fossil fuel power plants – which the Government said would also carry significant risks.
“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.
“The size, flexibility and location of the power station makes it important for UK energy security and the proposed agreement helps protect the jobs and skills of today and the future, creating options for billions of pounds of investment in growth across Britain, including the development of large-scale carbon removals and data centres, ” Mr Gardiner said.
Dr Doug Parr, policy director for Greenpeace UK, described continuing to subsidise biomass imports as “a dirty compromise with past failures”.
“Trees should be left to grow and not be burnt in a major subsidy-fuelled bonfire,” he said, warning that commitment to Drax could become more of a “stranded” asset as the energy market develops.
“The new criteria should, hopefully, limit the damage done both by restricting its operations and reforming its supply chain, but the government is still far too trusting of big polluters asking for big subsidies to decarbonise.
“We have cheap, clean power sources available, and we shouldn’t be left to gamble on schemes like this anymore.”
