U.K. Awards Guaranteed Power Price Contracts to Drax, Dong

Apr 23, 2014 11:28 am ET

(Updates with guaranteeed prices in sixth paragraph.)

April 23 (Bloomberg) -- Drax Group Plc, Dong Energy A/S and SSE Plc will get guaranteed power prices for U.K. biomass and offshore wind plants, the first renewable energy projects to benefit from a new aid program.

A project by Drax to convert a coal-fired unit at the U.K.’s biggest power plant to burn biomass was on a list of eight that the Department of Energy and Climate Change said had won the new contracts. A second unit, that had been shortlisted in December, was excluded. Five of the projects were for offshore wind, including three by Dong, one by SSE and a venture between Statoil ASA and Statkraft AS.

The contracts are the first under a new assistance system for renewables that will guarantee the price generators will get for their power for 15 years. The government said today that the eight projects will lead to as much as 12 billion pounds ($20 billion) of investment by 2020, supporting 8,500 jobs and adding as much as 4.5 gigawatts of generating capacity.

“These contracts for major renewable electricity projects mark a new stage in Britain’s green energy investment boom,” Energy Secretary Ed Davey said in the statement. “They are a significant part of our efforts to give Britain cleaner and more secure energy.”

The government is trying to spur 110 billion pounds of spending on power plants and the grid by 2020, while meeting binding renewable energy and carbon emissions targets.

Under so-called “strike prices” announced last year, coal plants that convert to biomass will get 105 pounds per megawatt- hour of power they produce for 15 years. Offshore wind farms will get from 140 pounds to 155 pounds, depending on when they are completed. That compares with the current month-ahead price of about 41 pounds.

Biomass

Davey told reporters in London today that while the contracts announced today will add about 2 percent to power bills in 2020, the net effect of all the government’s energy policies, including efficiency measures, is to lower bills by 166 pounds in 2020 relative to what they would otherwise be.

The other projects to win contracts were a biomass conversion by Lynemouth Power Ltd. and a biomass-fueled combined heat and power plant by MGT Power Ltd. All of the projects had been included on a list of 10 that the department said in December were “affordable” under the new program, except for SSE’s Beatrice project, which wasn’t on that list.

Drax had two units included in the list in December, while only one was awarded a contract. The company said in an e-mailed statement today that the government has since told it that one of the units is no longer eligible for the contracts, and that the generator has begun legal proceedings to challenge that decision.

Drax Slides

“We are disappointed by today’s decision on the ineligibility of our second unit,” Drax Chief Executive Officer Dorothy Thompson said in the statement. “Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now. We have, therefore, commenced legal proceedings to challenge the decision.”

Drax shares today fell 12 percent as of 4:05 p.m. in London trading, the biggest intraday drop since July 2012.

At a press conference, Davey declined to outline the specific reasons for ruling out one Drax unit.

“We applied our published criteria to all the applicant projects,” Davey told reporters in London. “The decisions we announced today are based on that. It’s not like Drax doesn’t have options,” he said, referring to its eligibility for incentives under the renewables obligation program and so-called contracts for difference that will be started later this year.

Today’s contracts are precursors to the contracts-for- difference, or CFDs, that the government is completing. Under CFDs, utilities will receive a guaranteed price per megawatt- hour of power they produce, over a fixed number of years, regardless of the market price.

The exclusion of the second Drax unit may lend some hope to Eggborough Power Ltd., which said in December that its coal- fired plant may close if it didn’t secure the guaranteed prices that would allow it to convert to biomass.

DECC said that the two other projects listed in December have withdrawn from the process.

The government said it expects the contracts to be signed in May, when they will also take effect. Further contracts will be made available in the fall, the energy department said.