July 23, 2014 11:20 pm

UK energy department reverses Drax biomass decision

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The Department of Energy and Climate Change has reversed its decision to exclude Drax Group from receiving an enhanced subsidy package to help fund the conversion of one of its coal-fired generating units to biomass.

The volte-face by the government department follows a successful legal challenge by the operator of the UK’s biggest power station to a decision by the DECC in April to exclude it from receiving a £1.3bn investment contract.

A high court decision last week upheld Drax’s complaint that the department had acted unfairly in reversing an earlier decision to provisionally accept two of the station's six generation units as eligible for new incentives to encourage a switch from burning coal to imported wood pellets and other renewable energy sources.

Though one of Drax’s six units was accepted for the enhanced scheme, the other unit was excluded in favour of a wind farm project which the company has argued offered less value to the taxpayer in meeting climate change targets.

The unit’s unexpected exclusion from the DECC's price-support scheme, dominated by wind farm operators and aimed at accelerating investment in renewable energy schemes, prompted a 13 per cent fall in Drax’s share price on the day.

Last week’s judgment left it open to the DECC to reassess whether the second unit should qualify or not for the enhanced subsidy regime. On Wednesday, the government department confirmed it now intended to award Drax an investment contract for the second unit, viewed as offering more lucrative support for biomass conversion than that available under the existing renewables obligations regime.

However, the DECC signalled it still intended to challenge the high court judgment – which criticised its procedures in eventually excluding the disputed Drax unit from the scheme – at the court of appeal.

Analysts have argued that greater financial certainty offered by enhanced subsidy contracts for both units would allow Drax, currently Britain’s biggest emitter of carbon dioxide, to accelerate its investment in switching away from fossil fuel as its main feedstock.

Final confirmation that both units can qualify for the subsidy scheme also depends on clearance from the EU that the support is in line with state-aid rules.

On Wednesday, the European Commission officially approved the contracts offered to five wind farm projects announced by the DECC earlier this year as part of wider confirmation of the UK’s right to offer subsidies to guarantee overall generating capacity into the next decade.

Ed Davey, energy secretary, welcomed EU support for his department’s subsidy policies which he said was aimed at delivering low-carbon electricity sector to the “lowest cost to consumers”.

However, a decision by the commission on whether to allow support for biomass conversion projects proposed by Drax remains pending.

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