EU opens investigation on UK support for Drax unit conversion

By Erin Voegele | January 05, 2016

On Jan. 5, the European Commission announced it has opened an in-depth investigation to assess whether the U.K.’s plans to support the conversion of part of the Drax coal power plant to operate on biomass are in line with European Union state aid rules.

A similar investigation was opened on the proposed biomass conversion of the coal-fired Lynemouth power plant in the U.K. in Feb. 2015. In early December, the European Commission announced that investigation found U.K. support for the Lynemouth conversion was in line with EU state aid rules.

The Drax unit conversion is one of eight renewable energy projects selected for the first contracts under the U.K.’s electric market reforms. In 2013, the U.K. Department of Climate Changed 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 final investment decision (FID) enabling for renewables process. In mid-December 2013, DECC announced that only 10 of those projects had been found to be provisionally affordable under the budget caps released earlier that month. The list of projects was later reduced to eight. Those projects, including the Drax biomass unit conversion, the Lynemouth Power biomass conversion, and the 299 MW biomass-fired Teesside project signed contracts in June 2014, along with five off-shore wind projects.

The European Commission has already approved state aid for seven of the eight renewable energy projects. Only the Drax conversion project is still awaiting EC state aid approval. The five off-shore wind projects were granted European Commission approval in July 2014 as part larger announcement from the commission that indicated the U.K’s Contracts for Difference (CfD) subsidy program is in line with EU state aid rules. The Teesside project was awarded approval Jan. 22, 2015, while the Lynemouth conversion was awarded approval in December 2015. 

In a statement announcing its investigation regarding U.K. support for the Drax unit conversion, the European Commission explains EU state aid rules are designed to ensure the cost of Member State support for renewable projects, such as the Drax conversion, for consumers is limited and does not give certain operators an unfair advantage over competitors.

“The Commission will now investigate further to make sure that the public funds used to support the Drax project are limited to what is necessary and do not result in overcompensation,” said the European Commission in a press release. “It will also assess whether the positive effects of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass. The opening of an in-depth investigation gives the U.K. and interested third parties an opportunity to submit comments. It does not prejudge the outcome of the investigation.”

According to the commission, if converted to biomass, the Drax unit would have the capacity to generate 645 MW of renewable electricity using wood pellets. The U.K. support would fix a certain price, known as the strike price, for the electricity generated. If the average wholesale price of electricity falls below the strike price, the Drax power operator would receive an additional payment on top of the money it earns from selling its electricity into the market. According to U.K. estimates, the project would operate until 2027 and supply about 3.6 TWh of electricity per year. The plant would require approximately 2.4 million metric tons of wood pellets per year, mainly sourced from the U.S. and South America.

In its statement, the commission indicated its preliminary analysis considered that the estimates of the plant’s economic performance may be too conservative. A positive change in operating parameters could significantly affect the project’s rate of return. At this state, the commission said it therefore has concerns that the actual rate of return could be higher than the parties estimate and could lead to overcompensation.

The commission also noted the project will require a considerable amount of wood pellets when compared to the volume of the global wood pellet market and demand from the Drax conversion project could significantly distort competition in the biomass market. The commission said it is therefore also concerned that on balance the measure’s negative effects on competition could outweigh its positive effects on achieving EU 2020 targets for renewable energy.

According to the commission, it will investigate further to see if its concerns are justified. It will give all interested parties the opportunity to express their views on these issues before finalizing its assessment.

In a statement issued in response to the EU’s announcement regarding the opening of the investigation, Drax Group plc said the commission’s action is the next step in the process for obtaining state aid approval and is in line with expectations. “Drax welcomes the opportunity to work with the U.K. government and the EC to complete the state aid clearance process,” said the company.

The commission said the non-confidential version of the decision will be published in the State aid register on the competition website under the case number SA.38760 once eventual confidentiality issues have been resolved. The State Aid Weekly e-News lists new publications of state aid decisions on the internet and in the EU Official Journal.