Shares of North Yorkshire power generator Drax Group rose as much as 4% on Monday after it revealed a heads of terms agreed with the UK government for operation of Drax Power Station (DPS) post 2027.
The UK government has agreed controversial new subsidies for the biomass-fired power plant — which has attracted criticism due to concerns about the sustainability of its fuel.
Drax said a deal had been reached with the government for a so-called strike price of £113 a megawatt-hour at its four biomass units.
Analysts said the arrangement means Drax will run the plant less often, but should allow it to keep the units running beyond 2027, when current agreements expire.
The UK’s Labour government said the new deal with Drax would halve subsidies for the domestic power producer over the 2027-2031 period, saving consumers money while also ensuring the group uses more sustainable sources of woody biomass.
The government said that under the new agreement Drax would play a more limited role in the UK system, providing low carbon dispatchable power only when it is “really” needed.
The government said the company will be required to switch to using 100% woody biomass from sustainable sources, up from 70%, adding that it believed the new deal would save consumers £170 million in subsidy each year of the agreement compared with the alternative of procuring gas.
“Today the UK Government has published a statement which sets out the key elements of a non-binding heads of terms for a low-carbon dispatchable CfD (Contract for Difference) agreement for DPS,” said Drax.
“The statement proposes a CfD mechanism with a strike price of £113/MWh (2012) indexed to UK CPI.
“The CfD is available to all four biomass units at DPS, with an aggregate collar of c.6TWh pa (and a minimum of c.5TWh pa) and a four-year term from Apr-27 to Mar-31.
“Under the proposed agreement DPS will sell c.6TWh of power annually against a season ahead reference price (as per the current CfD scheme) and then seek to maximise generation from its four units at times of high demand and reduce generation at times of low demand, using the station’s flexibility to support UK energy security.
“The proposed agreement also allows for system support and ancillary services …
“Subject to the required Parliamentary procedures – including the passage of the requisite Statutory Instrument and the completion of the Subsidy Control process – and agreement of a final contract, Drax will keep all four units operational beyond March 2027, supporting UK energy security, while continuing to develop options for long-term investment, including BECCS and data centres.
“The proposed agreement also anticipates a tightening of biomass sustainability requirements. Drax supports these developments and will continue to engage with the UK Government on the implementation of any future reporting requirements.”
Drax Group CEO Will Gardiner said: “The Government’s low-carbon dispatchable CfD framework for biomass, announced today, is an investment in UK energy security, which will result in a net saving for consumers and support the delivery of Clean Power 2030.
“Analysis from Baringa indicates the proposed agreement will result in a £1.6-3.1 billion reduction in electricity system costs, versus the construction of new fossil fuel power stations, and Government has concluded today that Drax offers the lowest cost option for bill payers during this period.
“Drax Power Station is the UK’s largest power station and provides secure capacity equivalent to over 80% of Hinkley Point C. The power station plays a critical role in UK energy security, providing c.10% of all UK renewable energy and over 50% at certain times of peak demand, with enough reliable power for 5 million homes – equivalent to every home in London, or Wales and Scotland combined.
“Under this proposed agreement, Drax can step in to increase generation when there is not enough electricity, helping to avoid the need to burn more gas or import power from Europe, and when there is too much electricity on the UK grid, Drax can turn down and help to balance the system.
“The size, flexibility and location of the power station makes it important for UK energy security and the proposed agreement helps protect the jobs and skills of today and the future, creating options for billions of pounds of investment in growth across Britain, including the development of large-scale carbon removals and data centres.”