With the imposition of the Climate Change Levy (CCL), the UK government threw a spanner in the works for Drax Power as it continues its shift from coal to biomass. Beyond fighting for a more lenient schedule for the CCL exemption’s expiry, what’s next for the massive power plant, which provides around 8% of the UK’s electricity?
Drax power station has been a lynchpin of the UK’s energy generation portfolio for decades. The plant, which was opened in 1974 and extended in the mid-1980s, has a generating capacity of nearly 4GW and meets around 7-8% of the country’s total electricity needs.
Drax is also the UK’s biggest single source of carbon emissions, with an annual CO2 bill of more than 20 million tonnes. The plant’s operator, Drax Power, has been working to improve its environmental performance by gradually making the switch from coal-fired generation to biomass. The operator announced a £700m project to convert three of its six generating units to biomass in 2012, with two of the three units now converted and the third set to complete its upgrade in 2016.
The company touted its biomass conversion process as the largest decarbonisation project in Europe, with properly sourced biomass decreasing carbon emissions by around 86% when compared to coal-fired generation. In June this year, Drax announced that, a decade after beginning the process of biomass co-firing, it was set to save its 20 millionth tonne of CO2.
Drax’s 2013 annual report pegged the plant’s yearly emissions at around 20.6 million tonnes, down from 22.1 million tonnes in 2007 as a result of the introduction of biomass, and with the fully converted units now rolling out, the savings are set to increase. Drax expects to hit its 50 millionth tonne saved within the next two and a half years.
The UK’s new Conservative majority government threw a spanner in the works for Drax on 8 July, when Chancellor George Osborne announced the end of the Climate Change Levy (CCL) exemption for renewable electricity producers, with the exemption set to expire on 1 August, less than a month later.
The move sliced off a significant chunk of revenue for the plant’s biomass operations; Drax noted that the exemption’s expiry would cost the company £30m in 2015 and £60m the year after. The announcement also shaved 30% off Drax’s share price.
“We are surprised and disappointed at this retrospective change to a support regime which has been in place since 2001 specifically to encourage green energy and support renewable investment,” said Drax CEO Dorothy Thompson hours after the announcement.
Drax spent the rest of July lobbying the government to have the date of the CCL imposition pushed back to a significantly later date, but to no avail. The exemption expiry went ahead at the beginning of August. Neil Woodford, whose Woodford Equity Income Fund is one of Drax’s main investors, was particularly scathing of the move.
With scientific concern rising that biomass may well increase emissions, its future must be built on facts not fantasy.
“The government has been delivered an enormous source of cheap renewable and dispatchable energy,” Woodford said. “By contrast, the government has, in abolishing the Climate Change Levy [exemption], gone back on its commitment. Not for the first time, it has pulled the rug from underneath the feet of Drax and its shareholders.”
On 2 September, having failed to convince the government to push back the CCL deadline, Drax announced that the company, along with onshore wind and landfill gas developer Infinis Energy, is initiating court proceedings against the government, demanding a judicial review into the CCL decision and asking the court to “consider a reasonable and proportionate notice period for withdrawal of such renewable support”.
Few other details about the court action have emerged at the time of writing, and it remains to be seen whether Drax and Infinis Energy can force the government to adopt a more forgiving schedule for revoking renewables’ CCL exemption. Beyond its short-term actions against the exemption expiry, how does Drax plan to secure its long-term future?
One of Drax’s saving graces in the wake of the CCL announcement was the continued support of the Woodford Equity Income Fund as a keystone investor. Indeed, Woodford reported that his fund had even “added modestly to the [Drax] holding at a very depressed share price level” during July.
For Woodford, the strategic importance of Drax power station, and biomass energy more broadly, to the UK makes it a smart long-term investment, as he explained in December 2014, during a month when the government announced a review of biomass subsidies.
“Drax’s underlying investment case to become a predominantly biomass-fired generator remains secure, despite potential changes to the regulatory regime,” Woodford wrote in a blog. “Biomass conversion projects such as Drax are helping the UK to meet its legally binding carbon reduction targets in a cost-effective manner, while ensuring security of supply. No other renewable generation technology offers these combined benefits. For these reasons, we believe Drax remains a strategically important asset in the UK electricity sector and are confident of its ability to generate attractive returns for shareholders in the future.”
“By contrast, the government has, in abolishing the Climate Change Levy [exemption], gone back on its commitment. Not for the first time, it has pulled the rug from underneath the feet of Drax and its shareholders.”
Woodford’s steadfast support has been matched by Drax’s commitment to doubling down on the benefits of biomass, especially in the weeks after the government’s CCL announcement. As well as considering the possibility of converting a fourth unit to biomass by 2019, chief executive Dorothy Thompson has been mounting a particularly visible PR campaign in recent weeks, arguing that biomass is the ideal technology to solve the energy ‘trilemma’ of supply security, decarbonisation and – perhaps most importantly in the current climate – value for money.
“Our sector is still adjusting to a new reality in which cost trumps everything,” wrote Thompson in an editorial for Business Green. “Indeed we at Drax have already felt the effects of this change in approach. However, efforts to decarbonise can still be compatible with economic prudence. Drax’s biomass conversion proves this – it is delivering reliable, low carbon, affordable power and thereby justifies its crucial position in a sector where cost is now king.”
Certainly the company still has some ground left to cover before it can claim victory in the biomass debate. Questions still remain about the technology’s carbon credentials, most notably over accusations of unsustainable forestry practices in the sourcing of wood pellets to burn in Drax’s biomass units. The company relies on pellets imported primarily from the southern states of the US, and has invested heavily in pellet processing and export facilities in Louisiana and Mississippi.
Despite Drax’s assurances that the vast majority of its wood is sourced from sustainable waste sawmill residues, forest residues and thinnings, US environmental groups such as the Dogwood Alliance and the Natural Resources Defense Council are still alleging that UK biomass importers are complicit in more frequent clearcutting and other forestry issues in states that supply them. Given the importance to biomass’s environmental case of maintaining healthy forests to reabsorb carbon emissions and close the carbon loop, stronger transparency and accountability in the supply chain – along with a robust and forthright response to critics – will be an important factor in the ongoing viability of UK biomass.
DECC has developed a tool that will help developers calculate the sustainability of biomass feedstock imported from North America.
Looking further into the future, Drax’s next big investment beyond the power station’s biomass conversions is the £500m White Rose Carbon Capture and Storage (CCS) Project, which it is pursuing with project partners Alstom and BOC. The project, which is expected to get the governmental green light later in 2015, involves the construction of a next-gen coal-fired plant with biomass co-firing next to the main Drax plant, equipped with CCS technology. The 448MW plant would be able to capture 90% of its CO2 emissions, around two million tonnes a year, to be stored under the North Sea via a new National Grid pipeline, which will be large enough to transport captured carbon from the main Drax plant if the technology comes into play there in the future.
So despite the rather grim news delivered in 2014 and 2015 on biomass support in the UK, there are opportunities as well as pitfalls waiting for Drax in the months and years ahead. The company has placed a billion-pound bet on biomass so its fortunes will rely, to a large degree, on the growth of the wider biomass market. If that debate can be convincingly won, Drax is still as well-placed as anyone to capitalise on the resulting openings and haul itself to the forefront of the reliable, affordable green energy surge.