Drax hits back at claim it cut production at biomass unit to avoid £639m customer payout
Drax has denied a claim that it shut down production at one of its biomass generators to avoid returning money to customers under a government agreed contract.
The power group slashed production at one of its biomass plants last winter, which was taxpayer backed with a revenue cap, and instead shifted generation to the rest of its facilities to maximise profits amid record energy bills, according to a new report from Bloomberg.
A generator, called ‘Unit 1’ at the company’s massive power plant in Yorkshire, which burns wood pellets to provide energy, has received £1.4bn in green energy subsidies over the past seven years – with the government aiming to reduce to UK’s reliance on fossil fuels.
These subsidies contained a consumer safeguard, which stated that if electricity prices ever increased enough that Unit 1 could comfortably make money without subsidies, its earnings would be capped, requiring the company to send extra cash back to energy suppliers, who would then reduce what they charge customers.
The arrangement is known as a contracts for difference (CfD) scheme, and operates widely in the UK’s offshore wind industry.
Bloomberg reported that when bills rose, Drax lowered production at Unit 1 for weeks at a time, with its analysis of power market records suggesting that bill payers lost out on as much as £639m from Drax’s decision making.
Meanwhile, the company sold some of its biomass pellets at high prices on the open market, according to its public statements, with Drax posting a record £731m in earnings last year – nearly double its 2021 income.
There is no suggestion this was in contravention of the deal agreed with the government.
Drax has denied the claim that it cut production to avoid returning money to customers, describing the Bloomberg report as “false, inaccurate and misleading.”
A spokesperson told City PM that the company was a net buyer of pellets during this period to enable the plant to “to generate baseload power to keep Britain’s lights on” and was the “single largest generator of renewable electricity in the country last year.”
“No serious observer of the energy system would advocate that we ought to have exposed Britain’s power grid and our business to increased risks,” they added.
Drax argued it had to make responsible hedging decisions last winter to help secure energy supplies for the UK and support the business following Russia’s invasion of Ukraine, which “created unprecedented challenges to the electricity market due to constrained fuel supplies, leading to an increase in both the demand for biomass and the price of pellets.”
This included operating generators that were already hedged for the period, which were supported by legacy contracts, known renewable obligation (RO) units.
The spokesperson explained: “Our RO units were already hedged for the period, so we took the responsible decision to preserve supplies for winter 2022 by not hedging the now uneconomical CfD unit. We kept the CfD unit in reserve, available to either cover an unexpected outage of one of our other units, or to be dispatched in times of system stress. The unit did run in line with its availability when system margins were tight and prompt prices made it economical.”
Responding to the Bloomberg report, a government spokesperson said: “CFDs are private law contracts between the generators and the Low Carbon Contracts Company. Generation decisions are a matter for private energy companies and would take account of wider market conditions.”