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Commission gives green light for Drax CfD contract

The European Commission (EC) has concluded that UK support for the conversion of one unit of the Drax power station from coal to biomass complies with EU state aid rules.

A view of the wood pellet storage silos at Drax Power.

A view of the wood pellet storage silos at Drax Power.

In April 2015, the UK notified the European Commission (EC) of its plans to grant state aid for the conversion of one unit of the Drax coal-fired power plant to biomass. The unit will have 645 MW of electrical power capacity running exclusively on wood pellets. The UK Government intends to support the project with a premium paid on top of the market price of the electricity generated, known as “Contract for Difference” (CfD). The project will receive the support until 2027 and, according to UK estimates, will generate about 3.6 TWh of electricity per annum. The unit is expected to use approximately 2.4 million tonnes of wood pellets per annum, sourced mainly from the US and South America.

In 2016 the EC opened an in-depth investigation, which included feedback from “interested third parties”, to ensure that the proposed CfD would not lead to overcompensation and undue biomass market distortions. The EC has now concluded that the planned premium will not result in over compensation nor will it lead to undue distortions of competition in the market for wood-based products.

Instead it found that the increased demand for wood pellets could be “fulfilled by the market without undue negative side-effects” and that the project’s contribution to increasing the share of renewable energy produced in the UK “outweighs any potential distortions of competition that could be triggered” by the government support.

– We are pleased the European Commission has completed its review of the contract and approved it in line with our expectations. We now look forward to fully converting the unit to run on sustainable biomass, said Dorothy Thompson, Chief Executive Officer of Drax Group in a statement.

EC finds that increased demand for wood pellets could be “fulfilled by the market without undue negative side-effects”.

EC finds that increased demand for wood pellets could be “fulfilled by the market without undue negative side-effects”.

According to Drax the unit will commence operating as a fully converted biomass unit under this contract in the coming days, having previously operated as a co-firing unit under the Renewables Obligation. The strike price remains £100 (≈ EUR 119) per MWh in 2012 price terms and there are no changes to the terms of the contract.

Thompson also said that “with the right conditions” Drax could convert further units from coal to biomass and through “rapid response gas projects plug the gaps” created by intermittent renewables.

The EC approval was also a condition of the proposed Drax acquisition of Opus Energy, an independent UK energy supplier announced earlier this month. The EC announcement represents “a positive step” towards the completion of this process.

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