A surprise decision by the UK government to apply only part of its new subsidy scheme to the Drax power plant conversion has provoked the company to instigate legal action.

Drax (LSEDRX) says the scheme will only support the conversion of one of its coal-fired power units to biomass, rather than two as had previously been indicated.

The government had shortlisted both conversion units for one of its Contracts for Difference scheme subsidies in December.
Dorothy Thompson
Dorothy Thompson, Drax chief executive (pictured), said she was “disappointed”. “There’s no basis on which they should be reversing that December decision,” she said. “We have, therefore, commenced legal proceedings to challenge the decision.”

Thompson added that she was pleased to have secured an “investment contract” for the other unit conversion.

Shares in the power giant fell more than 13 per cent after the announcement.

Drax, the UK’s largest single emitter of carbon dioxide, ha planned to use the conversion to reinvent itself as the country’s biggest generator of renewable electricity.

The company has embarked on a £700m programme to convert from polluting coal to wood pellets. But the plan is predicated on receiving the Contracts for Difference (CFD). CFDs guarantee generators a fixed “strike” price for the electricity they produce over a period of 15 years.

Ed Davey, energy secretary, declined to comment on the decision on Drax, saying only that the second unit conversion had failed to meet the relevant eligibility criteria.

Mr Davey said Drax might still receive a second CFD when the full scheme is rolled out later in 2014, and could also qualify for a renewable obligation certificate (ROC) – an earlier kind of clean energy subsidy that the CFD replaces.

But analysts said that a ROC would be less valuable to Drax than a CFD, and that if Drax goes for a later CFD, it could face auctions against competing technologies, leading to lower strike prices, according to the Financial Times.

Mr Davey stressed Drax had made clear it would continue with its coal-to-biomass conversion project, despite getting less support than expected. He denied the government was cooling on biomass, pointing to the fact there are three biomass projects among the eight approved for subsidies.

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