New figures released last week have revealed UK power company Drax LON:DRX is looking for new government handouts which could cost UK households an extra £12 billion.
Biomass power stations like Drax, which burn forests to generate electricity, are unlikely to reduce emissions, and in some cases may increase them, according to an influential climate think tank.
Drax already has a subsidy for its wood burning up until 2027. Recently, it has begun lobbying the British government for an extension to this subsidy. The UK government’s Biomass Strategy leaves the door open for subsidy up until 2035, which would cost £12.4 billion.
Phil MacDonald, Managing Director with the climate think tank Ember said: “We’ve already given Drax more than £6 billion in subsidies, and it’s made bills more expensive whilst probably not helping to stop climate change. Following the enormous increase in gas prices over the last few years, British people simply can’t take higher energy bills – we should be investing in clean energy which brings down bills, like wind and solar.”
Drax currently receives a mixture of subsidies across its four power station generating units, all located at the same site in Selby, North Yorkshire. Each year, Ember examines the ROCs (Renewable Energy Certificate) and CFD (Contracts for Difference) subsidy receipts from Drax’s annual report.
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To estimate future subsidy, Ember takes an average of the last five years of Drax’s annual subsidy (to account for annual variations in subsidy due to unit shutdown or new turbine installation), and uprates it each year by the most recent inflation figure (ROCs use RPI, CfD use CPI).
Ember said it believes a five year average is the most accurate way of calculating subsidy, as 2022 was a very unusual year in terms of gas price volatility, and so wholesale power price volatility.
The largest source of error in these future estimates is the future rate of inflation: if inflation falls significantly (currently RPI is 6.1%, CPI is 4.7%) then the amount of increase in the annual subsidy will be reduced. However, even if inflation fell to average 2%, Drax’s total annual subsidy would still be over £1 billion by 2031.
Ember’s calculations show that Drax has already received £6.2 billion in public subsidy. It already has an agreement with the government for further subsidy up until 2027, which will see it receiving a further £4.2 billion. Total contracted subsidy 2012-2027 already totals £10.4 billion.
If the subsidy is extended to 2030, Ember estimates Drax will receive an additional £4.6 billion. If the subsidy is extended to 2035, Ember estimates that Drax will receive an additional £12.4 billion, giving it a total public subsidy (2012-2035) of £22.8 billion.
How does Drax stack up in terms of UK emissions?
Drax biomass power station is the UK’s largest emitter. In 2022, wood-burning at Drax emitted 12.1 million tonnes of carbon dioxide (CO2) into the atmosphere. These emissions are greater than the annual emissions of many entire countries, including most countries in Sub-saharan Africa. For example, Afghanistan, Estonia and Zimbabwe all have lower annual emissions from their entire country than Drax.
Bioenergy companies do not dispute the scale of CO2 emitted by burning wood for power. However, they operate under the assumption that all emissions released are offset by the growth of new trees to replace those harvested for burning. This assumption is widely shared by the EU and the UK government. For this reason, wood is considered a ‘carbon neutral’ or emissions-free source of energy, making it exempt from carbon-taxation and eligible for significant public subsidy.
However, the reality of wood burning is far more complex than this. A large and growing majority of scientific evidence shows that burning wood for power is often not carbon neutral, and in some circumstances can be a worse polluter than coal. There is also strong evidence that wood-sourcing practices are damaging to natural forests, risking further ecological harm.
The European Academies Sciences Advisory Council (EASAC) states that using woody biomass for power “is not effective in mitigating climate change and may even increase the risk of dangerous climate change”.
Where does the wood come from?
Drax imports most of its wood from forests in the USA and Canada, via tankers crossing the Atlantic. Drax has also recently sourced wood from forests in South America and Eastern Europe. In 2022, Drax stopped importing wood from Russian forests following the invasion of Ukraine.
Despite all this Drax has been good to its shareholders. At the end of last year, as a result of record retail and wholesale energy prices, Drax reported its highest ever profits after a 101% increase on year-on-year earnings, and subsequently commenced a GBP 150m share buy-back programme. The energy company also announced an interim dividend of 9.2p/share up from 8.4p/share in 2022, with expected full year dividend up 10% to 23.1p/share from 21.0p/share in 2022 and expectations of dividend growth in 2024.
