Drax is the subsidy show that goes on and on | Nils Pratley
Surprise, surprise, a mighty £7bn of subsidies since 2012 have not been enough to get Drax to stand on its own feet.More bungs are required to keep the wood fires burning at the enormous power plant in North Yorkshire – this time an estimated £1.8bn from 2027-31.The energy minister Michael Shanks at least sounded embarrassed.He railed against the “unacceptably large profits” Drax has made, said past subsidy arrangements “did not deliver a good enough deal for bill payers” and vowed that that the definition of a “sustainable” wood pellet would be tightened.
But the bottom line is that the government has agreed to crank the subsidy handle once again, just at a slower rate.Why? As he didn’t quite put it, Drax has us over a barrel if we’re not prepared to use more gas to generate electricity.A renewables-heavy system needs firm, reliable power as backup.Transporting wood pellets from North America to burn in Yorkshire is deemed the solution to fill the gap.“The clear evidence is that Drax is important to delivering a secure, value for money power system in the period 2027 to 2031,” he concluded.
Secure, yes,But value for money? Really? While Drax’s plant will have a “much more limited role” from 2027, the new financial arrangements must still look splendid from the company’s point of view,Drax gets a contract for difference (CfD) – essentially a guaranteed price for its power output – that is well above the market price,Expressed in 2012 prices (because that’s the way these things are done), the CfD comes in at £113 per megawatt hour, which equates to about £155 in today’s money,At that level, it makes Hinkley Point C, which will get £92.
50 in 2012 prices, look a bargain,Add it all up and Drax thinks the power station will make £100m-£200m a year of top-line operating profits from this deal,When the alternative was cancellation of the subsidy show, that’s not a bad outcome,The stock market certainly saw the profit projections as acceptably large – the shares rose 4%,And the bonus on top is that the Yorkshire plant stays alive to chase the next round of subsidies, namely those for installing (as yet unproven) carbon capture technology in the 2030s.
Nor have there been serious repercussions from last year’s finding that Drax’s controls were not up to scratch when it came to checking the sources of wood used from Canada in 2021 and 2022.The £25m fine at the time from Ofgem was loose change.Under the new rules, the portion of “woody biomass” that must come from sustainable sources will rise from 70% to 100%, which leaves one to wonder why it wasn’t 100% in the first place if we are expected to view wood-burning as “sustainable” generation because replacement trees absorb carbon.Sign up to Business TodayGet set for the working day – we'll point you to all the business news and analysis you need every morningafter newsletter promotionDrax has led a charmed life.Its transition out of polluting coal was underwritten by bill payers.
Now, when we might reasonably expect the company to compete on price, the subsidies keep rolling because cheaper generating capacity isn’t in place.Shanks blamed “the circumstances left by the previous government”, which is probably fair.Drax has cost bill payers a fortune over the years.It is little consolation that its subsidies are going down a bit.
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Drax is the subsidy show that goes on and on | Nils Pratley
Surprise, surprise, a mighty £7bn of subsidies since 2012 have not been enough to get Drax to stand on its own feet. More bungs are required to keep the wood fires burning at the enormous power plant in North Yorkshire – this time an estimated £1.8bn from 2027-31.The energy minister Michael Shanks at least sounded embarrassed. He railed against the “unacceptably large profits” Drax has made, said past subsidy arrangements “did not deliver a good enough deal for bill payers” and vowed that that the definition of a “sustainable” wood pellet would be tightened
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