Drax, being the second biggest coal power station in Europe has a determined corporate strategy which is primarily based on gradually converting a number of its generating units in order to become a predominantly biomass-fuelled power generator that is contingent and reliant on wood pellets as replacement of coal.
Of the six-units, the first one was converted to biomass in May 2013, the second one was completed May of last year, a third conversion is intended to be completed by summer of 2016 and a fourth one is presently being evaluated.
Based on the study by Frontier Economics that was published last November, converting three of Drax’s units to biomass could potentially accumulate between £2.5 billion and £3.4 billion when compared to the cost of manufacturing power from offshore wind farms which in turn can save consumers up to £900 million or around £30 per household during the span of the projects.
The fundamental conversions is the government subsidy which without it is a total bum. Its conversion are eligible for subsidy under the Renewables Obligation (RO) scheme but the Drax applied was for ‘early birds’ named Final Investment Decision (FID) for Renewable processes. This is the process in which the government has been making good on its allocations for the first set of CFDs under the new subsidy scheme that forms part of the Electricity Market Reform programme. However, the early bird CFDs have been on a stanched offer and once allocated, the future CFDs will only be granted after the competitive auctions have commenced.
Drax was granted on an early bird CFD for the first conversion which will begin in its operations next April. The government unduly refused a contract for a second thought. Given the scale of the Drax operations, this was indeed good news for many other operators that are apprehensive that Drax will not hover up more than its fair share of the subsidies that it provides.
The second conversion as well as the third should it be successful in securing CFD support under the auctions will still benefit from the RO subsidy before it will close to a new capacity.
The government has announced to concede to the changes to its so-called grandfathering rules, whereby once a generating plant becomes duly accredited in receiving its allocation, it will be guaranteed over the lifetime of support under the scheme.
The basic rules are intricate, but basically the government is now proposing to end the grandfathering of its biomass co-firing or conversions which means that these schemes will not anymore benefit from guaranteed support as well as future ROC allocations which will be at the mercy of future funding decision.
More coal plants are now contemplating to convert to biomass that it originally thought which is going to eat into the £7.6 billion Levy Control Framework – the budgetary limitation on all support schemes which will adversely affect consumer bills.
A twelve-month grace period is provided to protect generators that have invested on the presumption that the present grandfathering policy would continue. Luckily for Drax, this will protect the second and third conversions respectively.