Drax Power Station: Biomass

In January 2024, the previous Government launched a consultation on supporting large-scale biomass generators when existing support ends in 2027. Since this Government came to office, we have carefully considered responses to the consultation and assessed the case for a new support mechanism.

Biomass currently plays an important role in our energy system, but we are conscious of concerns about sustainability and the level of subsidy biomass plants have received in the past.

The Department will very shortly publish our response to the consultation. Alongside it, I want to report on our conclusions about the role of Drax power station in Yorkshire in the years 2027 to 2031.

In coming to this view, we have taken advice from the National Energy System Operator on security of supply, analysed the effect on consumers of support for biomass versus alternatives, looked at issues around subsidy and sustainability in existing arrangements, and considered longer-term issues around decarbonisation.

First, on security of supply, we inherited a situation from the previous Government where there was no long-term planning for our energy system and its resilience. In the system we have inherited, large-scale biomass provides around 5% of our annual electricity generation, serving a specific role as a source of firm power.

To meet our needs between 2027 and 2031, we could seek to replace Drax with new gas-fired power stations, but in the timescale we have, there would be significant risks to relying on this approach. In that context, NESO has advised us that Drax plays an important role in delivering security of supply between 2027 and 2031.

Secondly, on price, we have undertaken comprehensive analysis of the costs of biomass against alternatives. Our central projections show that, on the right terms and in a much more limited role than today, biomass generation at Drax is the lowest-cost option, including when compared to gas-fired power stations, for bill payers during this period.

Thirdly, we have looked at previous arrangements for subsidy and sustainability. We believe that they simply did not deliver a good enough deal for bill payers and enabled Drax to make unacceptably large profits. At the same time, they demanded levels of sustainability that are not now in line with the latest scientific evidence or global best practice, including supply chain emissions well above the European standards. We have concluded that if Drax is to continue to play a role in our power system, these arrangements must urgently be improved going forward.

Fourthly, we have looked at issues around decarbonisation. Our finding is that there is a potential role for bioenergy with carbon capture and storage, or power BECCS, but realistically this will take time to implement and therefore cannot form the primary basis of this decision.

Following this assessment, and given the circumstances we have inherited, the clear evidence is that Drax is important to delivering a secure, value-for-money power system in the period 2027 to 2031. But we have also concluded that we cannot allow Drax to operate in the way it has done before, or with the level of subsidy it received in the past. On this basis, we have secured heads of terms that will form the basis of a very different agreement with Drax for support during the period 2027 to 2031. A summary of this agreement is included at the end of this statement. First, it will ensure that Drax plays a much more limited role in the system, providing low-carbon dispatchable power only when it is really needed.

Drax currently operates as a baseload plant, running around two thirds of the time. This means that it provides power even when other renewable sources are abundant. This must not continue in the same way. Under the new arrangement, Drax will be supported to operate at a maximum load factor of just 27%—operating less than half as often as it currently does. This will be guaranteed by the design of the dispatchable contract for difference that we have agreed. When renewable power is abundant, Drax will not generate, and consumers will benefit from cheaper wind and solar instead.

Secondly, the contract will deliver much better value for consumers. It will significantly reduce the amount paid in subsidies compared to the existing support mechanism. This new deal halves the subsidies for Drax —equivalent to a saving of nearly £6 per household per year. Furthermore, our analysis shows this will save consumers £170 million in subsidy in each year of the agreement, compared with the alternative of procuring gas in the capacity market.

The deal limits the expected rate of return for Drax to a level below that of monopolies regulated by Ofgem. But while this is our central estimate, we are not prepared to take the risk of prices soaring in response to volatile fossil fuel markets. As a result, the agreement includes a built-in windfall mechanism with rates of 30% and 60% that would claw back excess profits made by Drax. This will guarantee a much fairer deal for consumers than in the past.

Thirdly, we will introduce tough new measures on sustainability. We will increase the proportion of woody biomass that must come from sustainable sources from 70% to 100%. We will also significantly cut the allowable supply chain emissions to a level in line with the much stricter regulations currently operating in the rest of Europe, and we will exclude material sourced from primary forests and old-growth forests from receiving support payments. There will be substantial penalties on Drax if these criteria are not met.

We will go further to ensure greater confidence that these standards will be met. The Government will appoint an independent sustainability adviser to work with my Department, the Low Carbon Contracts Company and Ofgem to ensure our monitoring and enforcement measures are robust and keep pace with the science.

These measures represent a profound shift from the past on sustainability and on value for money. In this context, this is the right deal for security of supply and price in the period 2027 to 2031, given the circumstances we have inherited from the previous Government.

But nevertheless, we recognise the strength of concerns about the use of unabated biomass. It is not a long-term solution. We are determined that the next time these decisions are made, Government are not left in the circumstances we have been left in. We will do the work that was not done by the previous Administration on strong and credible low-carbon alternatives, so that we have proper options in 4 years’ time.

To help that process, we are setting up an independent review to consider how respective greenhouse gas removal, including large-scale power BECCS and direct air carbon capture and storage, can assist the UK in meeting our net zero targets and ensuring security of supply, out to 2050. Further details of the review will be shared in due course.

These steps are about fulfilling our duty to ensure security of supply and the best deal for bill payers. We have faced up to the circumstances left by the previous Government and delivered a step change in value for money and sustainability. This Government will do whatever it takes to deliver energy security and protect billpayers now and into the future.

Overview of heads of terms for a low-carbon dispatchable contract for difference with Drax Power Ltd—related to electricity generation at its Selby plant.

Government have agreed heads of terms with Drax Power Ltd for a low-carbon dispatchable contract for difference at its 2.6 GW Selby power station. The heads of terms define the commercial terms that will underpin a new contract to be finalised over the coming months.

Following advice from the National Energy System Operator as to the utility of this plant for security of supply purposes, the heads of terms for a four-year CFD was agreed that ensures Drax will provide low-carbon dispatchable electricity when the system, and in turn consumers, most require it.

The key terms are as follows:

Duration—1 April 2027 to 31 March 2031. This arrangement will commence on 1 April, the day after existing support arrangements conclude, and be limited to four years in duration.

Generation collar that caps the annual load factor eligible for subsidy at 27%. Together the strike price and the capped load factor are projected to halve the subsidy that Drax will receive during this contract period, compared against Drax’s current arrangements (under the renewables obligation and CFD). This is equivalent to savings of nearly £6 per household per year. Furthermore, Drax is obliged to generate to a minimum annual contract floor of 22%, ensuring the system, and consumers, can rely on its presence.

Excess returns mechanism on profit. This contract has been calibrated to provide Drax with a limited return over the contract period. However, should Drax make higher than anticipated profits in an extreme price scenario, a profit clawback mechanism is in place to protect the consumer.

Enhanced sustainability criteria. The CFD substantially tightens sustainability criteria. It increases the proportion of biomass that must be sustainably sourced from 70% to 100%, reduces the supply chain emission threshold from 55.6 grams of CO₂ equivalent per megajoule to 36.6 grams of CO₂ equivalent per megajoule (aligned with international best practice—for example, the EU’s RED III), and, will include provisions to exclude material sourced from primary and old-growth forests from receiving support payments.

Robust contract compliance arrangements. Should Drax not comply with the sustainability criteria, then subsidy payments for electricity generated from whole consignments of biomass generation can be revoked, and there is a termination right for repeated breaches of those requirements.

[HCWS424]