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Drax Want A Higher Carbon Price–I Wonder Why!

February 26, 2020
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By Paul Homewood

 

Drax are desperate for the carbon price to go up!. I wonder why?

 

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Great Britain’s electricity is cleaner than ever. As wind, solar, biomass and hydro continue to make up more and more of our energy mix, the power system edges ever closer to being entirely decarbonised. The GB power system has leapt up the big economies’ low carbon league table from 20th in 2012 to seventh in 2016.

But this shift to lower-carbon power isn’t owed only to growing renewable electricity capacity. A fall in gas prices has helped and importantly, government policy has ensured coal power generation has become increasingly uneconomical vs electricity produced with gas (gas and coal compete for contracts to supply power to the National Grid).

Introduced in 2013, Great Britain’s Carbon Price Floor sets the minimum price on carbon emissions. A stricter policy than the EU’s volatile EU Emissions Trading System (EU ETS) which puts a much lower price on carbon dioxide (CO2) emissions, the Carbon Price Support as the British policy is also known tops up the EU ETS. Together, they have had a significant impact. According to Aurora Energy Research, the Carbon Price Floor is a major factor in coal generation emissions falling.

In Great Britain, the Carbon Price Floor (CPF) is currently capped at £18 per tonne of CO2 and the EU ETS sits at around £5 t/CO2 – meaning power generators and heavy industry pay around £23 t/CO2 altogether. When initially formulated by the coalition government in 2010, it was intended the CPF would reach £30 per tonne by 2020 and £70 per tonne by 2030. However, the EU ETS has since fallen therefore the UK government chose to cap the carbon price support at £18 per tonne until 2020.

Now, as we reach the end of the decade, questions remain as to what will happen to this crucial mechanism post-2020. Will the government price coal off the system once and for all or will the fossil fuel make an unlikely comeback?

What is crucial for British power generators at this stage is clarity beyond 2020, when the £18 per tonne cap ends. This can allow the industry to react to future carbon pricing and prepare for whatever future scenario the government is most likely to adopt.

If the government chooses to continue decarbonising the energy system in a significant way – as it should do – coal facilities can be converted to renewable or lower-carbon units, such as biomass or gas. New interconnectors, renewable sources, storage facilities and demand-side response will also need to be installed at a greater capacity to meet the energy system’s demands.

As the amount of low carbon generation continues to grow, it will increasingly be the marginal generator. This means that power stations such as Drax’s biomass units, which run with an 87% lower carbon footprint compared to coal across their entire supply chain, could be used to meet the last megawatt hour (MWh) of demand – and this would see the carbon price having a diminishing impact on the wholesale price of power.

As has already been shown, the Carbon Price Floor is one of the most effective ways to reduce Great Britain’s electricity emissions. But to continue this impressive progress, the government needs to use it appropriately to set a path towards a decarbonised future.

https://www.drax.com/energy-policy/will-happen-carbon-price-2020/

 

Drax unsurprisingly are being rather devious here, and their concern about coal is merely a red herring. Coal power across the board will all be phased out by 2025 in the UK, because that is the law.

Their wish to see a higher carbon price is a much more selfish one.

In 2018, Drax generated 13.8 TWh from its three biomass units, which have a combined capacity of 2.6GW:

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https://www.drax.com/annual-report/strategic-2018-enabling-a-zero-carbon-lower-cost-energy-future/#chapter-1

 

This represents a capacity utilisation of 60%, which clearly is a costly underutilisation of assets.

One of the units qualifies for CfD payments, which guaranteed a price of £111/MWh for every unit of electricity produced. This means that Drax can effectively always run that unit at maximum capacity, as it can bid as low as it wants to win business, knowing that the price it actually receives will be topped up to £111.

The other two units only qualify for ROCs, as they were built before CfDs came on stream. These units receive an ROC subsidy, currently worth £48.78/MWh, on top of the value of the electricity sold.

These subsidies are worth around £800m a year to Drax.

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https://www.drax.com/annual-report/strategic-2018-enabling-a-zero-carbon-lower-cost-energy-future/#chapter-1

 

Their problem however is that gas power stations can produce power at a much lower cost than their biomass units. Whilst the CfD mechanism allows them to compete with gas, their ROC units will lose money if the market price goes too low.

Hence their lobbying for a higher carbon price, which will force gas power stations to put up their prices, and allow Drax to win back business at higher prices.

This of course will push up the subsidy they receive from ROCs, the costs of which are loaded onto bill payers.

19 Comments
  1. Ian Magness permalink
    February 26, 2020 7:00 pm

    “Power stations such as Drax’s biomass units, which run with an 87% lower carbon footprint compared to coal across their entire supply chain”
    Read that and weep. How do they get away with that blatant lie?

    • Mack permalink
      February 26, 2020 8:20 pm

      You beat me to it Ian. Goebbelesque almost in the Pinocchio stakes. I imagine that their definition of ‘carbon’ and ‘footprint’ is somewhat adrift of a definition most right thinking mortals would understand.

    • Harry Passfield permalink
      February 26, 2020 8:48 pm

      They get away with it because they are Carpetbaggers. They are out to make their fortune: supplying a utility is secondary to their plans; and they are (were) counting on power generation being nationalised – so they were making hay…etc

  2. It doesn't add up... permalink
    February 26, 2020 8:14 pm

    CFDs don’t work quite as you suggest. I spent some happy hours looking at the detailed CFD contract terms. In fact, I think some CFD renewables sellers must have spotted my work to judge from recent pricing behaviour: I suspect that some of them didn’t understand it themselves until they got zero recompense when prices went negative for several hours at a time. The nitty gritty is here:

    http://watt-logic.com/2020/01/10/negative-electricity-prices/#comment-9849

    CFD payments are capped at the CFD level, so there is no advantage to pushing prices below zero (especially when it leads to zero payment because it persists for too long), unless you have a lot of floating price purchase volume contingent on the settlement price as a trading position (speculating, nothing to do with the CFD, but using your muscle to manipulate the market). There is advantage in bleeding competitors by undercutting their marginal costs, and thus forcing them offline. Of course this means replacing power that could have cost the retailer and thence the consumer say £30-40/MWh wholesale from CCGT with power costing £111/MWh in the case of Drax, because the CFD subsidy gets passed on to bill payers.

    • February 26, 2020 8:39 pm

      I agree. But Drax can afford to go in at, say £10/MWh , well below any CCGT can afford, and still win the business. (CCGT of course have their fuel costs to pay for as a marginal cost – probably around £30/MWh)

      Nuclear are in a similar position, because their marginal costs are so low. Better to get £10/MWh than nothing at all when your marginal costs are close to zero.

  3. Graeme No.3 permalink
    February 26, 2020 8:42 pm

    As I understand they have converted 1, possibly 2, more units to burning wood.
    Since they have admitted that their CO2 emissions have gone UP it would seem that the government policy is a complete failure.

    • Allan M permalink
      February 27, 2020 12:13 pm

      I wonder why Drax can burn so much wood, when householders are to be banned from using it.

  4. Adamsson permalink
    February 26, 2020 8:54 pm

    As it takes at least 50 years for biomass to become carbon neutral and the world will end in 11 years if we don’t cut emissions why are we subsidizing Drax to burn trees?

    • Mack permalink
      February 26, 2020 10:26 pm

      Follow the money. Cui Bono?

  5. It doesn't add up... permalink
    February 26, 2020 9:11 pm

    The RO position for Drax is in several tranches. The original section is this one:

    https://ref.org.uk/generators/view.php?rid=C00083RAEN&tab=sm&returnurl=https%3A%2F%2Fref.org.uk%2Fgenerators%2Findex.php

    which gets 1 RO per MWh. So long as market prices plus the value of the RO are above marginal cost, it makes sense to operate. Even if they had sold forward at a high enough price to be comfortably profitable, if prices fall below that level then it makes sense to buy back their forward sale and shut production (of course, you have to allow for the complications of ramp up and ramp down and wear and tear etc. in more precise calculation of the economics).

    Looking at the performance of that section of the plant, it has seen varying capacity utilisations running as high as 91% when it was 1.29GW in 2014/15, down to a nominal 65.3% in 2018/19, when the capacity was uprated to 1.935GW (which may have happened part way through the period, so the figure may not be reliable) – compared with just 635MW for the CFD part of the plant

    There was also the biomass co-firing section which has now been replaced:

    https://ref.org.uk/generators/view.php?rid=R00083RAEN&tab=sm&returnurl=https%3A%2F%2Fref.org.uk%2Fgenerators%2Findex.php

    Drax also has several other projects:

    3x 299MW OCGT plants (Abergelli, near Swansea, Millbrook, Beds., ironically not far from Little Barford of August blackout fame and Hirwaun, not far from Merthyr Tydfil)

    1.8GW of CCGT at Damhead Creek on the Hoo peninsula
    up to 3.6GW of CCGT at Drax itself

    and the possibility of increasing the generation capacity by 600MW and storage by 7.2GWh at Cruachan pumped storage. https://docstore.entsoe.eu/Documents/TYNDP%20documents/TYNDP%202016/projects/P1015.pdf

    https://www.drax.com/about-us/our-projects/

    New CCGT should be capable of high efficiency output, and will likely be designed to tolerate ramping to accommodate major fluctuations in wind. OCGT will be hit by inherently lower efficiency which would ramp up its carbon costs with a higher carbon price.

    But we shouldn’t forget the toy BECCS plant at Drax, which clearly they hope to turn into another mega subsidy factory in due course.

    https://www.drax.com/about-us/our-projects/bioenergy-carbon-capture-use-and-storage-beccs/

    Indeed, that seems to be it:

    https://www.drax.com/energy-policy/the-policy-needed-to-save-the-future/

    Con ignorant politicians to give them £13bn a year of our money has to outdo even Forewind’s outrageous programmes for offshore wind.

  6. It doesn't add up... permalink
    February 26, 2020 11:04 pm

    Added a post with quite a few links. May be in spam bin.

  7. February 27, 2020 2:53 am

    The carbon market is global and without a global regulator it is a mess.

    https://tambonthongchai.com/2019/09/30/cer/

    • Chaswarnertoo permalink
      February 27, 2020 9:18 am

      Because global regulation works so well, if you’re an insane leftard. 😂

  8. February 27, 2020 12:01 pm

    Guess they ran out of the southeastern United States riverine forests to clear cut? Where were all the environmentalists chirping over that? The silence was deafening.

    Coal is biomass. It is just a bit older (from Carboniferous). It is stacks and stacks of tree-sized Lepidodendron and Calamites piling up in a swamp which over time is compressed and becomes carbonized.

    We still have relatives of those 2 main contributing genera: Lycopods as ground pines and the calamites as horsetails and scouring rush.

    • Ian Magness permalink
      February 27, 2020 3:06 pm

      “Coal is biomass. It is just a bit older”
      Brilliant Joan! I hope you don’t mind me using that?
      Regards
      Ian

    • February 28, 2020 1:41 pm

      Thank you for this informed and insightful comment.

  9. Gerry, England permalink
    February 27, 2020 2:07 pm

    Reporting today, Drax have said they will stop using coal in 2021 earlier than the government require and their share price has risen. They are being recommended as a dividend stock with a yield of 5.41%. The risk is that sanity will make a return and the taxpayer cash is turned off. Still, while Bossie Bear needs to be green to hump his Otter it is probably safe.

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