Subsidies set Drax on path to burning biomass

The Department of Energy and Climate Change (DECC) revealed long-awaited subsidies for large-scale green power generation through so-called Renewables Obligation Certificates (ROCs).

But shares in Drax lost as much as 25 per cent yesterday as the subsidy level underwhelmed investors.

Its shares eventually recovered some of their losses but closed down 76.5p at 442p, a 14.8 per cent fall.

Drax, whose coal power station in Selby, North Yorkshire, is the UK’s single-biggest emitter of carbon dioxide, will forge ahead with converting three of its six units into burning organic plant-based material. It expects this to cost £650m to £700m.

It will take a decision on converting the other three at a later date, but said it could be mainly biomass-fuelled within five years.

However, the company admitted the new subsidy regime makes a new 290 MW standalone biomass power plant at Immingham “very unlikely”.

Drax will consult with engineering partner Siemens over the “right options” for the Immingham project, known as Heron.

Drax said the new 1 ROC per megawatt hour subsidy for units converted to burn biomass allows it to commit to transforming its 4,000 MW power station.

“This is good news for Drax,” said chief executive Dorothy Thompson. “At 1 ROC it provides the necessary support we need to transform Drax into a predominantly biomass-fuelled generator. We are confident that this works for us.”

She added: “This transformation will be achieved through major capital investments at Drax and across the supply chain, securing significant numbers of jobs, primarily in the North East. We remain keen to contribute fully to the UK’s renewables and carbon reduction targets by producing low cost, reliable and flexible renewable electricity.”

Drax also revealed its combustion trials cost it £20m more than expected, as it made a loss on the biomass burned during the trials.

It expects to spend about £320m on converting the units, up to £200m on meeting emissions rules and another £100m on establishing a biomass supply chain. It hopes to have completed on-site investment by June 2014.

Drax will need seven to eight million tonnes of biomass annually, replacing about five million tonnes of coal.

Ms Thompson said she is “completely confident” Drax will be able to source the biomass. “We’ve got eight years’ biomass experience. There’s no question that there’s enough biomass.”

She said the challenge is “availability of the supply chain to get that fibre from wherever it is to Drax’s gates”.

Ms Thompson added other coal power stations considering biomass will struggle to compete with Drax’s head start. “We understand that a number of other owners of coal plant in the UK are looking seriously at biomass conversion or enhanced co-firing.

“But what we believe is that the technical and sourcing challenge to successfully achieve this is not insignificant. It’s not wide open because it requires a lot of work, expertise and a significant amount of investment.”

Conversion will not mean a unit has to use 100 per cent biomass. Instead, fuel will need to be at least 90 per cent biomass, plus up to 10 per cent of additives, which boost combustion and efficiency.

Enhanced co-firing of biomass with coal will earn subsidies ranging from 0.6 to 0.9 ROCs.

This support level was queried by Investec analyst Angelos Anastasiou. He said: “The subsidy for lower levels of co-firing is disappointing, and we believe that the revised plans may well be challenging to achieve. We have reduced our target price to 425p from 498p, and continue to remain somewhat wary.”

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