Wasted Government Subsidy

Drax is Western Europe’s biggest coal-fired power station. It receives government subsidy through the allocation of Renewable Obligation Credits (ROC). This seems ridiculous – and is ridiculous – but there is a logic which those who focus on counting CO2 emissions find persuasive; it goes like this.

In 2011, Drax emitted 21.5 million tons of CO2. However 6% of this came from co-firing 3,500 tonnes per day of biomass (wood chips, straw and other material). It is claimed that this is enough to power 350,000 homes. Net CO2 emissions are reduced compared with what they would have been because the biomass component is renewable. There are plans to increase the co-firing of biomass to 50% saving yet more net CO2 emissions. Adding up carbon emissions, this seems like a good idea, until you do a careful the strategic appraisal.
Drax Power Station: Photo courtesy of freefoto.com

Drax management is struggling to set the strategic direction for the future because carbon now has a price, and where it was given a free allocation of carbon permits, that is now coming to an end. The price of carbon is around £8 per tonne of CO2 which would amount to an annual bill for £170m. Power generation is a competitive business; this is a significant extra cost but carbon is currently very cheap and likely to get much more expensive. No wonder the owners of Drax are trying to squeeze the system for subsidies to reduce their costs. There are plans to raise the proportion of biomass to 50%, requiring a shuttle of ships to import the huge quantities of biomass required. If the government agrees to pay ROCs, it could make Drax one of the most profitable power stations in the UK and allow it to continue operating at a profit for many years.

Drax is a monument to the old system of fossil fuel and big power stations. The economies of scale are financial; it is not efficient in an engineering sense. Smaller power stations, much closer to communities, are the future. These combined heat and power (CHP) stations squeeze maximum calorific value from the fuel and, if using locally-grown biomass, reduce the transportation overhead. Further significant improvements to the insulation of the housing stock and the 3,500 tonnes per day of biomass currently burnt by Drax could power perhaps 1 million homes.

Government subsidy should flow to support investment in small CHP and better insulation of homes. The government should make it clear that the future of Drax will be left to market forces and not propped up by government subsidy. Drax investors will understand that it is obsolescent and make the appropriate choices for its future.

6366X8GGV9P4