UK State aid for Drax unit three to be investigated by EC

The European Commission (EC) has started an in-depth investigation to make sure that the planned UK subsidy contract (CfD) for a 645-MW biomass-fired unit of Drax Group Plc (LON:DRX) will be in line with EU state aid rules.

The UK based power plant is in the process of switching it’s third of six units from coal to biomass and was awarded a £1.7bn Government subsidy contract in April 2014 for the third of its six units. The contract called “Contract for Difference (CfD)”, under which it will get compensations when the average wholesale price of electricity falls below a pre-determined strike price.The contract would see Drax paid a fixed price of £105 for every megawatt-hour (MWh) of biomass-fired power the unit generated until 2027 – well over double the current market price.

Drax has already largely converted the unit in question, which now runs on about 85pc biomass. This enables it to qualify for lesser subsidies, estimated to be about £80-£85/MWh, through another scheme called the Renewables Obligation. The significantly more lucrative subsidy contract that is currently under EC scrutiny would require 100pc conversion.

Drax shares fell 5 percent after the European Commission said it was concerned that the rate of return from the subsidies “could be higher than the parties estimate and could lead to overcompensation”.

The EC said on Tuesday it wants to make sure that public funds used to support the Drax project are limited to what is necessary and do not result in overcompensation.

The third unit at Drax will operate till 2027, based on UK estimates, and generate roughly 3.6 TWh of power annually and consume about 2.4 million tonnes of wood pellets annually, which will come mainly from the USA and South America. The EC noted that the amount is considerable so demand from the Drax conversion project could significantly distort competition in the biomass market.

Drax said in a statement that the in-depth investigation 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 UK Government and the EC to complete the State aid clearance process.” 2016.01.10 /Lennart Ljungblom