Drax shares slump after court defeat over biomass subsidy

Drax Power Station
Drax Power Station
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SHARES in Drax, the UK’s biggest power station, slumped by 10 per cent today after it lost a Court of Appeal battle against the Government over its eligibility for a lucrative biomass subsidy contract.

The firm, based near Selby in North Yorkshire, is currently converting three of its six 660 megawatt units from coal to burning organic wood pellets as part of plans to transform from one of Europe’s biggest polluters to a predominantly biomass-fuelled electricity generator.

But a ruling today means it will not be able to take advantage of a new Government subsidy contract for the conversion of one of the units and will have to find an alternative funding mechanism.

The scheme, if successful, is expected to deliver massive reductions in greenhouse gas emissions from the power plant.

One unit has already been converted under the old ‘renewables obligation’ support scheme and in December its plans to convert two further units were provisionally allocated funding for the first tranche of contracts.

But the Department of Energy and Climate Change (Decc) unexpectedly told Drax in April that one of the two units did not qualify for an “investment contract”.

This was because it did not meet the key criterion, which was that without the contract there was “a significant risk” Drax would not be able to generate electricity.

In July the High Court overturned the Decc decision on the basis that it was one “no reasonable decision-maker could have made”. Mrs Justice Andrews declared the unit was eligible for an investment contract as the key criterion was satisfied.

The judge ordered Decc to “promptly” reconsider its decision in the light of her judgement.

But today three appeal judges - Lord Justice Laws, Lord Justice Richards and Lady Justice Gloster - allowed a Government appeal and set aside the High Court decision.

In the lead judgement, Lord Justice Richards said Decc had taken a “reasonable approach” to the issues raised and it was “not an appropriate case for interference by the court”.

Drax shares slumped by more than 10 per cent following the ruling today, and the Ftse 250 Index-listed company issued a statement saying it will not appeal against the decision.

Today’s defeat means it may have to fund the conversion of the third unit using the existing ‘renewables obligation’ scheme, which is seen as less secure and harder to monetise than the new subsidy contracts it was bidding for.

Drax added: “Drax will now consider its options for the full conversion of this unit, where eligibility for support under the Renewables Obligation has been confirmed.”

Welcoming the ruling, a Decc spokeswoman said: “We believe that we ran a fair and robust process and are pleased that the Court of Appeal has upheld decisions we took in respect of Drax’s Unit 3.

“We will now work with Drax to find the best outcome for its Unit 3.”

Each of Drax’s six units has a capacity of 660MW when burning coal, giving a total capacity of just under 4,000MW, making Drax the largest power station in the UK.

But the company’s aim is to transform itself from one of Europe’s biggest polluters to a predominantly biomass-fuelled electricity generator.

Drax has plans to convert three of its six generating units to burn biomass. The first of the three units was successfully converted in April, and the new biomass receipt, storage and distribution systems to support the converted units were officially launched in December.

Last month the power station reported a 15 per cent fall in first-half earnings after being hit by higher taxes on burning coal.

Drax’s dispute with the Government comes after ‘Contracts for Difference’ were brought in by the Government to replace the Renewables Obligation as the support regime for medium and large-scale renewable energy projects in the UK.

As part of the Electricity Market Reform, the Renewables Obligation is being phased out from 2015 and will close completely to new applicants at the end of March 2017. The investment contracts Drax was bidding for are an interim version of the new Contracts for Difference.

The increasing use of biomass in recent years has caused controversy, and last month a report by Decc suggested that some forms of biomass fuel are more polluting than coal.

Vicki Hird, Senior Campaigner at Friends of the Earth, said Drax’s court defeat was “good news”. She said: “Cutting down forests to burn them in power stations doesn’t make sense as a way of cutting carbon emissions, and it endangers the forests.

“Wood is dirtier than coal, and even if the trees regrow, for many years they will absorb much less carbon than they would have if left alone.

“Subsidising this practice is the opposite of what we should be doing, which is to invest in green jobs in genuinely renewable technologies and energy efficiency.”