DECC finalizes early CfDs, Drax challenges subsidy change

By Erin Voegele | April 23, 2014

The U.K. Department of Energy and Climate Change has announced it is offering investment contracts to eight renewable energy project, including three biomass projects. While the government originally said it would award the contracts to two Drax generating units, it has now cut support to one. Drax is challenging the decision.

On April 23, the DECC published its Final Investment Decision (FID) Enabling for Renewables process. According to the DECC, the investment contracts, or early Contracts for Difference (CfD), that have now been awarded set out the contractual terms on which projects will benefit from financial support. They are based on the strike prices published on Dec. 4

The selected projects include the biomass conversion of Drax Unit #1, a 645 MW facility in Selby, North Yorkshire; the biomass conversion of Lynemouth Power Ltd., a 420 MW facility in Ashington, Northumberland; and the development of the 299 MW Teesside project by MGT Power Ltd., a proposed dedicated biomass facility with combined-heat-and-power (CHP). In addition, investment contracts have been awarded for five offshore wind projects.

Last year, the DECC announced that the government had sent out draft investment contracts to a total of 16 renewable energy projects that had progressed to the next stage of the FID Enabling for Renewables process. In mid-December, the DECC announced that only 10 of those projects had been found to be provisionally affordable under the budget caps released earlier that month. The original list of 16 included six qualifying biomass projects, including the Teesside plant, the Lynemouth conversion, the conversion of two Drax units (Drax Unit #1 and Drax Unit #3), and the conversion of three units at Eggborough Power Ltd.

Conversion of the three Eggborough units was cut from the list when the DECC reduced the project pool to 10 provisionally affordable projects in December. Following that announcement, several members of the U.K. parliament advocated for the DECC to reverse its decision, arguing that a lack of government support is likely to prevent the facility’s planned biomass conversion from moving forward. Trade unions have also spoken out, asking the DECC to reverse its decision and arguing that the U.K. government is favoring carbon capture and storage over renewable energy.

The DECC’s latest announcement has further altered that list of projects, including the elimination of the Drax Unit #3 conversion.

In a statement, the DECC explained that the eight selected projects have been awarded contracts under the FID Enabling for Renewables process, allocating the first CfDs that are being introduced through the Electricity Market Reform program. Under CfDs, generators and developers receive a fixed strike price for the electricity they produce for 15 years. According to strike price information published by the DECC in December, the strike price for biomass conversion projects is £105 per MWh ($176.20 per MWh), while the strike price for dedicated biomass with CHP is £125 per MWh.

The DECC also noted that the contracts are supported by the new legislative framework introduced through the Energy Act of 2013. Additional CfDs are expected to be made available later this year and the U.K. government intends to publish additional details on the allocation process alongside its response to the January consultation on competitive allocation of CfDs soon.

Drax Group plc has announced its intent to legally challenge the DECC’s decision.

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.”

Berry also noted that while his company is clearly disappointed in the DECC’s news, it firmly believes that the early CfD provides a mechanism that will bring forward the delivery of substantial renewable power. He added that Drax must now fully evaluate the options left open to it. “One thing that we are certain of, however, is that our strategy to become a predominantly biomass-fuelled generator through converting initially three of our six generating units remain unchanged,” he said.

In a separate regulatory filing, Drax noted that support for the conversion of its Unit #3 is currently available under the existing Renewables Obligation regime. In addition, the company noted support may also be available under the enduring CfD mechanism.

In a statement, Drax Chief Executive Dorothy Thompson also stressed that the company remains fully committed to transforming its operations into a predominantly biomass fueled generator, including the conversion of three of its six units. A fourth unit may also be converted to biomass.

"Sustainable biomass provides a very reliable, flexible and cost effective renewable power source for the UK consumer.  The performance of our first converted unit, which was converted last year to burn sustainable biomass in place of coal, continues to be strong,” Thompson said.