Drax power station: subsidies halved in new agreement as Government hits out at 'unacceptably large profits'

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”.

Campaigners have decried the decision to grant more financial support, with TV star Chris Packham describing it as “absolute madness”.

Money for the subsidies comes from energy bill payers, because the electricity produced from burning wood pellets is classified as renewable, while the firm announced an operating profit of £518m for the first six months of 2024.

In a written ministerial statement, Energy Minister Michael Shanks said the amount of subsidies paid to Drax would be halved, the power plant will play “a much more limited role in the system, providing low carbon dispatchable power only when it is really needed”.

Current arrangements see Drax paid financial support of around £950m a year, however under the new deal this will be cut to roughly £470m.

He said Drax’s sustainability arrangements “must urgently be improved going forward”, and the company will face strict "substantial penalties” if this does not happen.

The Selby power station will go from 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.

The new arrangements will halve the subsidies paid to Drax and include a windfall mechanism that means that 30 per cent to 60 per cent of profits will be returned to consumers if they go above expected limits.

Explaining the decision to renew the financial support, Mr Shanks said there would be “significant risks” in trying to replace the controversial wood-burning plant with gas-fired stations, and claimed Labour had inherited an energy system with no long-term planning.

Biomass as a clean energy source has long been under dispute and the successive Government has faced calls to end financial support for companies such as Drax.

Last year, Drax agreed to pay £25m after a probe by energy industry regulator Ofgem found that the company had failed to properly report data on the types of wood it uses for its biomass pellets.

While a BBC Panorama investigation found Drax has held logging licences in Canada and used wood, including whole trees, from primary and old-growth forests for its pellets. The company has maintained its biomass is sustainable and legally harvested.

Responding to the new deal, Dr Doug Parr, from Greenpeace UK, said: “Continuing to subsidise huge biomass imports is not a step on the road to a cleaner future, but a dirty compromise with past failures.

“Trees should be left to grow and not be burnt in a major subsidy-fuelled bonfire.

“The UK’s commitment to Drax has become an albatross, a supposed asset that is looking more and more stranded 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.”

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 per cent to 100 per cent, 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.