Record Profits For Drax, As They Maximise Subsidies

By Paul Homewood

h/t Dave Ward

A green power firm was accused yesterday of ‘playing the system’ to dodge hundreds of millions of pounds in payouts to consumers.

Drax has long drawn criticism from campaigners who say its claims of producing ‘renewable’ energy from imported wood pellets are exaggerated.

They also point out that it is one of Britain’s biggest carbon dioxide polluters. And it has now been accused of manipulating the Government’s subsidies regime during the energy crisis triggered by Russia’s invasion of Ukraine.

It means households have lost out on as much as £639million since April last year, according to the news service Bloomberg.

‘It’s a racket,’ said Tory former minister Jacob Rees-Mogg. ‘Drax seems to have played the system while shipping wood from Canada to the UK to burn, which is not environmentally friendly.’

The firm’s taxpayer-backed power plant near Selby in North Yorkshire, which burns wood pellets to produce electricity, is at the centre of the row. As part of the Government’s attempts to reduce use of fossil fuels, one of its biomass units has received £1.4billion in green subsidies since 2016, which are paid for through consumer energy bills.

Under the subsidy deal agreed with ministers, Drax’s earnings at this generator are capped once electricity prices are high enough for it to comfortably make money without subsidies – and any extra cash is returned to bill payers.

Last year household bills and the price of electricity soared after Russia attacked Ukraine.

But Drax halted production at its biomass generator for weeks at a time, meaning it did not have to give money back to consumers, Bloomberg reported.

How £1.4bn in subsidies has led to record profits

Drax has received £1.4billion since December 2016 in subsidies from energy consumers to make it profitable to fuel its Unit 1 generator at its power plant with biomass.

The wood pellets burnt there are part of a bid to reduce the UK’s reliance on fossil fuels. The deal, which was signed in 2014, contained a safeguard that meant if electricity prices rose enough that the Unit 1 generator could make money without subsidies, Drax would have earnings capped.

The difference between the agreed price and the market price for electricity would be returned by household suppliers to consumers who would see their bills reduced. But when power prices rocketed last year following Russia’s invasion of Ukraine, the firm decided to slash output from the Unit 1 generator, sometimes shutting it down for weeks at a time.

Instead, it used its other generators which were not subject to the earnings cap and thus could make more profit from higher electricity prices. This meant billpayers lost out on an estimated £639million in potential bill reductions but the company’s actions were not illegal based on the agreement.

Drax also decided to sell some of the unburned wood pellets on the global market when prices were high, helping it post record profits of £731million last year.

https://www.dailymail.co.uk/news/article-12365957/Power-station-operator-Drax-furiously-DENIES-claims-used-government-energy-subsidy-loophole-avoid-paying-639m-households-height-cost-living-crisis.html

This is not quite the whole story. As I understand it, Drax have been selling power over the last year at a lower price than the assumed market price for CfDs. As a result they would have to pay back more under CfDs than they would actually have been earning.

Where they have been playing the system, however, is by maximising output on Unit 1, which is registered for CfD, when market prices were low, and now maximising output on the other biomass units which are subsidised by ROCs when market prices are high.

The latter units, of course, receive a fixed ROC subsidy of about £55/MWh, on top of the market price. It is therefore more profitable to switch generation to these when market prices are low. With a market price of, say, £100/MWh, Drax is able to earn £155/MWh on these units.

The CfD strike price for Unit 1 is currently £132.47/MWh.

Conversely when market prices were low three years ago, they were able to maximise profits by switching generation from the ROC units to the CfD one.

The switchover can be seen from data from the REF:

The RO units load factor increased from 44.9% to 56.2%, between 2021/22 and 2022/23 (4 months only – April to July 2022)

In contrast, Unit 1 loading fell from 63.7% to 32.4%.

The increase in RO output over a full year will earn about an extra £160 million in subsidy.

All perfectly above board and eminently sensible of course.

The real problem is that Drax is subsidised at all, as subsidies always distort the market.

What is very intriguing though is the Mail’s comment about high prices for wood pellets, a natural consequence of high gas prices.

It shows that biomass is not immune from global fossil fuel prices. And it says a lot when Drax is better off selling pellets on the world market than actually selling electricity!

In short, biomass is not only a highly polluting way of making electricity, worse than even coal, both in terms of CO2 and real pollutants. It is also extremely expensive.