Drax, ROCs and CFDs

By Anna Simet | May 09, 2014

Biomass Magazine has been carefully following the conversion of one of the U.K.’s most polluting coal-fired power stations to biomass since the company announced its plans several years ago. What a seemingly massive undertaking it’s been—so many pieces to the puzzle—but the company’s determination and dedication has kept them right on track according to its master plan.

Located in North Yorkshire, England, the Drax facility has a capacity of 3,960 MW, and provides seven percent of the U.K.’s power needs.

Plans weren’t always for a conversion, however.  Initially, the company planned to build three new 300-MW biomass fuelled power plants. After a couple of years of proposals and planning, however, Drax took the idea off of the table, as U.K. support shifted to favor conversions  and cofiring, rather than new construction.

So, it was back to the drawing board, where the conversion project was born. The new plan was, and still is, to repower three of its six generating units with biomass, wood pellets specifically. If you’re familiar with Drax, or if you regularly read Biomass Magazine, you probably know the story (Executive Editor Tim Portz visited Drax last April, read the article here).

The first unit was successfully converted last summer and has reportedly been operating smoothly. Recently, however, a wrench of sorts has been thrown into plans. Although the first unit was, the second unit was not selected by the DECC to receive a contract for difference (CFD), the mechanism that will take the place of Renewable Obligation Certificates, or ROCs, under the new Electricity Market Reform program, a move the DECC made to accelerate renewable power generation to ensure it meets its carbon reduction goals.

So let’s pause a minute here—what’s a CDF and ROC? In a nut shell, by law, U.K. power producers are required to sell a certain and increasing proportion of electricity derived from renewables, and ROCs have been issued to power producers according to the renewable power they produce. They’re allowed to sell or trade them to other suppliers to receive a premium, in addition to the wholesale electricity price. They have to present ROCs to demonstrate RO compliance, and of course, those who don’t comply face fines. It’s pretty similar to a U.S. renewable portfolio standard.

Soon, in a move that the U.K. DECC says will remove price volatility risk, CDFs will replace ROCs.  

As explained by Suzanne Kinney from Forest2Market:

Contracts for Difference are Power Purchase Agreement provisions. They are private law contracts between independent generators and suppliers that pay either the generator or supplier the difference between the reference price (an estimate of the market price for electricity) and the strike price (an estimate of the long-term price needed to encourage investment in a given technology). By reducing the commercial risk of price volatility, CfDs are intended to encourage investment in low-carbon power stations. When the reference price is lower than the strike price, the system will pay the generator the difference and when the reference price is higher than the strike price, the system will pay the supplier the difference.

Though Drax’s second unit had been previously marked as eligible for CFD funding late last year, to Drax’s dismay, it wasn’t one of the eight projects recently selected. So now, that conversion is on hold, as the company pursues legal action.

As previously reported by Biomass Magazine News Editor Erin Voegele, in a regulatory filing, Drax Chairman Charles Berry, said “We don't understand the basis for the decision, as nothing has changed as far as our plans are concerned between December and now. External legal advice confirms that we've a good case for challenging this decision in the courts. Accordingly, proceedings have commenced.”

What makes this story even more interesting is that on May 9, Drax—although not alone, as other European power producers are reporting similar losses— issued a full-year profit warning, reporting that it has been hit by low power prices due to the mild weather and a surge of wind power, and was expecting lower prices for ROCs.

Therein lies why Drax wants that CFD it was counting on. I should note that it is still eligible for ROCs, but again, they lack that stability that a CFD would provide.

Despite this bump in the road, Drax still insists it’s committed to the conversion, and might even convert a fourth unit.

It will be interesting to see how this pans out—you can count on us keeping you in the loop.