Drax Prioritized Over Eggborough for U.K. Government Aid

Dec 19, 2013 8:12 am ET

(Adds Eggborough comment in fifth paragraph.)

Dec. 19 (Bloomberg) -- The U.K. will prioritize Drax Group Plc for low-carbon power funding, the government said today, a decision that may lead to the closure of rival Eggborough Power Ltd. in northern England, putting hundreds of jobs at risk.

Three offshore wind projects by Dong Energy A/S, the biggest developer of such plans, and a joint venture by Statoil ASA and Statkraft AS were also listed today as “affordable” plans on the Department of Energy and Climate Change website.

The decision adds impetus to Drax’s drive to covert the U.K.’s biggest coal plant to run on biomass. Eggborough, which employs 800 people and provides 3.5 percent of U.K. power at peak demand, said it’s likely to close. The projects are vying for contracts that guarantee power prices, enabling investment. It’s part of the government’s plan to spur 110 billion pounds ($180 billion) of spending on power plants and the grid by 2020.

“Ten projects have been told that they are provisionally affordable under the budget caps,” the energy department said. “All are able to remain in the process until it is completed, and contracts are awarded, in spring 2014.”

Eggborough said it will shelve planned work on its Unit 2, leading to closure in September, and that the whole plant is likely to be closed subsequently. On Dec. 13, it said that its closure could may wholesale power prices up by 10 percent.

Plant Closure

“Unless a viable solution is found with government, the most likely outcome now is that Eggborough will no longer be supplying electricity to the grid beyond 2015,” said Chief Executive Officer Neil O’Hara. “Impending EU regulation and the escalating impact of the carbon price floor mean this is unfortunately the rational economic conclusion.”

Drax said it plans to remain in the process to secure a contract.

“We are pleased with the news that the government has provisionally ranked our two projects highest amongst qualifying projects,” Drax Chief Executive Officer Dorothy Thompson said in a statement. “This reflects the deliverability and cost- effectiveness of this important renewable technology.”

Drax employed 1,163 people at the end of 2012, according to Bloomberg data.

The 10 shortlisted projects were taken from a list of 16 published on Dec. 4, when the government also published budgets for the program. The available funding starts at 260 million pounds for the year through March 2016, ratcheting up to 1.06 billion pounds for the tax year ending in March 2021.

Final Decision

The projects are trying to obtain contracts under the government’s Final Investment Decision Enabling program, a temporary measure to plug the gap until it’s ready to start awarding so-called contracts-for-difference. Those guarantee a price for power sold in the future. The Energy Department today also published more details on how that program will work.

The government said it’s “minded” to make more established low-carbon technologies compete against each other for contracts. Those are: onshore wind, hydro power, solar photovoltaic panels, energy-from-waste and landfill and sewage gas. Less mature ones including offshore wind, biomass conversion and geothermal would be ring-fenced to begin with. A final decision will be made in early 2014, it said.

Carbon Program

“The government’s aim is for low-carbon technologies to compete on price with other forms of generation in the medium-to long-term,” the energy department said. Ministers intend “to move to a competitive price discovery process for all low-carbon technologies as soon as practicable.”

Even the more mature renewable technologies aren’t likely to be ready for competitive auctions against other generation forms strraight away, according to the RenewableUK lobby group.

“Auctions being introduced at the start of the regime in 2014 risks sending shockwaves through the industry,” RenewableUK Deputy Chief Executive Officer Maf Smith said today in an e-mailed statement. “Plunging onshore wind into an auction process adds more risk and could be severely detrimental.”

An offshore wind project led by SSE Plc, another by Mainstream Renewable Power Ltd. and a third by EDP Renovaveis SA in partnership with Repsol SA. all failed to make the list.

Drax beat Eggborough in the ranking of affordable biomass conversion projects. North Yorkshire-based Drax, the U.K.’s biggest power station and largest single source of carbon dioxide, has already converted one of its six units to burn biomass instead of coal, and today’s decision will allow another two units to be converted.

Lynemouth Power Ltd., another biomass conversion project, also made the shortlist, as did onshore wind projects by Beinn Mhor Power Ltd. and Ecotricity Group Ltd. A dedicated biomass plan by MGT Power Ltd. made the list.

--Editors: Reed Landberg, Randall Hackley