Drax biomass conversions: another twist in the tale

There has been yet another twist in the tale of Drax’s attempts to win fixed-price government subsidies to help convert two of its coal-fired units to run on biomass pellets.

Drax has now lost a lengthy legal battle over its eligibility for the biomass subsidies. The Court of Appeal upheld an initial ruling in April that denied the Yorkshire-based power plant a contract for converting one of its coal-fired units to burn biomass.

The company had been expected to win the ruling, after the High Court found in its favour in July. However, the Department for Energy and Climate Change (DECC) appealed the High Court’s decision.

Drax has since issued a statement to say it will not appeal against this decision, thus putting to an end a complex saga over what kind of subsidy the company will receive.

The company is expected to proceed with the conversion, which remains eligible for an existing – though less lucrative – subsidy scheme, the Renewables Obligation (RO), according to the Telegraph.

Stakes are high

Peter Atherton, analyst at Liberum Capital, said that the appeal court decision was "a surprise" and, while he thought the shares were undervalued, the negative reaction was understandable.

"Drax has staked its future on converting the majority of the station to biomass. The economics of the conversion is entirely dependent upon government subsidy," he wrote.

"The events of this year raises two concerns. First, that the UK government has cooled on its enthusiasm for large scale biomass conversions. And second that as the government juggles its various energy priorities they can act arbitrarily and unpredictably."

Harold Hutchinson, analyst at Investec, agreed that DECC's handling of the matter had "negative implications for the credibility of UK energy policy, and potentially for the cost of capital".

Writing in the Guardian, Nils Pratley said the decision of the court to find in favour of the DECC meant that there would be more uncertainty at Drax, which must now consider its options. Pratley wrote: “The disadvantage [for Drax] is lack of certainty on price, but maybe the financial risks are worth taking anyway. Clear it ain’t – but that’s today’s energy market”.

Indeed, Drax production manager, Peter Emery, had previously said the RO scheme was too unpredictable to help support investment in a long-term biomass supply chain. He also said that support under the contract for difference (CfD) scheme – which guarantees a minimum price level – was “critical” for investments.

The case

To be eligible for the lucrative CfD subsidies, Drax had to show that without the contract, there would be significant risk that the electricity generation to which the contract related would not occur, or would be significantly delayed.

Drax argued that while it could convert the coal-fired unit to biomass easily and quickly under the old RO subsidy scheme, it could only be sure of securing sufficient biomass to run the converted unit at full capacity if it did so with the CfD contract, which would enable it to sign long-term supply chain deals.

If it was forced to rely on the RO and could not secure the biomass it needed, this could lead to a "significant delay" to the amount of electricity actually produced by the converted unit, it claimed.

Drax said that its argument had remained unchanged and that DECC had therefore been unreasonable to change its mind about its eligibility.

As the Telegraph explained: the “DECC, however, said that at the time it initially deemed Drax eligible, it believed Drax was arguing that the actual conversion of the coal unit would be delayed without an early subsidy contract.”

“It subsequently became clear that Drax was in fact making its case based only on the volumes of biomass the converted unit would be able to secure to burn. DECC was unconvinced by this apparently new argument, and did not believe Drax had made an adequate case to show significant delay to its output if it converted under the existing RO scheme.”

The High Court judge who initially found in Drax’s favour said that the DECC had been mistaken by not grasping the company’s argument from the outset and that Drax’s argument did make it eligible for a subsidy contract.

But the Court of Appeal judges found that it was “perfectly reasonable” for DECC to have interpreted Drax’s initial argument as it did. The court also found that Drax had failed to show it was at significant risk of being unable to obtain sufficient supplies to run the unit at full capacity unless it secured the new early contract.

It therefore overruled the High Court and threw out Drax’s judicial review.

Fallout

Drax has already converted two of its six units to run from biomass. One of these 645 MW units will run fully on the biomass pellets, while the other will co-fire with coal.

Writing in Process Engineering, John McKenna suggested the UK government was looking to avoid subsidising biomass for a combination of environmental and economic reasons, and that by doing so had “chosen to strangle this fledgling industry to the point of death”.

However, the advantages of biomass are perhaps not as many or indeed as clear as they may seem to some. Environmental analyst, George Monbiot, for example, remains unconvinced by the viability of biomass conversions, or indeed the use of biomass as an alternative to conventional fossil fuels or renewable energy. “The idea that biomass is a universal solution which can be safely deployed on a vast scale is as misguided as Mao Zedong’s Great Leap Backwards. We clutch at straws (and other biomass) in our desperation to believe that there is an easy way out.” Monbiot wrote.

The Court of Appeal’s decision now adds further uncertainty to an already uncertain venture. Drax had bet its corporate strategy on biomass and, though the stakes are high, the bet is in danger of putting the company in jeopardy. Drax shares fell 8% after the decision was announced, having risen 4.4% on the tide of confidence that swelled before the ruling was given. With no further appeals from Drax on the cards, the next move lies firmly with the company. 

Written by Sam Dodson

Read the article online at: https://www.worldcoal.com/power/27082014/drax-loses-appeal-over-biomass-subsidy-1253/