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utILItY WeeK | 29th August - 4th september 2014 | 13 Company profile However, Drax has found that its route to becoming a low carbon champion is full is complications. The company was awarded an "early investment" subsidy contract for one of its conversion units through the government's contracts for difference (CfD) scheme. How- ever, when the government withdrew its promise of a similar subsidy for another unit, Drax launched legal proceedings. The ensuing dispute in the High Court and then the Court of Appeal filled plenty of page space in the national press and, sadly for Drax, ultimately resulted in a government victory on 7 August. This means the coal-fired unit Drax had planned for conversion later this year will have to rely on Renewables Obligation Cer- tificates (Rocs) as a source of subsidy rather than the more lucrative CfDs. Clearly this has implications for the eco- nomics of the conversion. Biomass output will get an estimated £10/MWh less with Rocs than under the CfD regime, which guar- antees biomass output at £105/MWh. Under the Renewables Obligation, Drax's second biomass conversion will get 0.9 Rocs, cur- rently worth £41.50/MWh, plus the whole- sale power price. The news caused Drax's share price to plummet 10 per cent before a slight recov- ery saw it finish a disappointing day down 8.2 per cent (see graph, opposite). Nonethe- less, Drax has so far revealed no plans to abandon the beleaguered conversion project and in the aermath of defeat in the Court of Appeal Thompson was philosophical. "The regulatory landscape still pre- sents uncertainties, but positive progress is being made and we hope that most of the key issues will be clarified in the coming months," she said. The uncertainties she refers to include a crucial pending decision from the European Union on the validity of the CfD for unit 3. The terms offered by the Department of Energy and Climate Change (Decc) for this conversion are certainly generous and the European Commission may yet decide they contravene rules on state aid. All three bio- mass programmes allocated early CfDs by the government in July could be hit by a negative decision from the Commission. This includes two biomass conversion projects and a dedicated biomass combined heat and power plant. Analysing Drax's position, policy research analyst Nigel Hawkins, says: "Undoubtedly, Drax is undergoing radical transformation, especially on the fuelling front. It does benefit, though, from a reassur- ing balance sheet, with net debt of just £38 million." Hawkins says "outstanding biomass- related decisions are key" in the short term, and in the longer run "if earnings remain weak and forward power prices ease back, investor concerns will deepen". prOjecteD timeline fOr Drax's biOmass cOnversiOns How sustainable is biomass? Behind the high-profile legal wrangling over subsidies for Drax's biomass conversions lies a broader debate on the suitability of biomass as a contributor to the UK's carbon abate- ment programme. Opponents say wood farming is unsustainable and, ultimately, carbon intensive. Drax chief executive Dorothy Thompson remains defiant in the face of such claims: "[Sustainable biomass] is the only renewable that can supply both baseload and flexible electricity at scale in the UK," she says. "It is more cost effective than many renewables and it is lower carbon than other dispatchable technologies." Nevertheless, concerns over potentially negative impacts on the environment surfaced with new vigour in July when Decc released a controversial new carbon calculator, accom- panied by a technical report that was seized upon by biomass opponents. Oliver Munnion – co-director of not-for-profit biomass awareness group Biofuelwatch – said: "[The govern- ment's] own commissioned research now shows that the wood most likely to be burned in import-reliant, big biomass power stations, such as those proposed across the UK, will make climate change worse. Decc must end subsidies for these power stations now." Even more measured commentators admit that the Decc report is troublesome for biomass advocates in the UK. Matthew Aylott, policy engagement manager at the UK Energy Research Centre, observed that "Decc appears to be conflicted over the future role of biomass in the UK energy mix" and that continuing environmental concerns are generally seeing biomass become "marginalised". He maintained, however, that biomass could still be an important technology for decarbonisation if paired with carbon capture storage. Despite the crowing of some biomass opponents, Drax is adamant that the government has not changed its view of biomass as an important contributor to a low carbon economy. Indeed, the government's own comment on the report was that it showed "in the short term, biomass can help us decarbonise our electricity supplies". The release also said "we are committed to supporting cost-effective, sustainably pro- duced biomass". Drax is confident that its policy of using offcuts of wood as well as thinnings and resi- dues that would otherwise be le to rot comes under the heading of what the government would term "biomass done well" in that it can return overall carbon savings. James Court, a spokesperson for the Back Biomass campaign group, supports this view and adds: "Most forest land in the southern US, where Drax sources much of its biomass, is owned by landowners whose land has been in their families for generations. "Decades of careful stewardship have seen growth in the region's forests of around 97 per cent between 1953 and 2007. Biomass energy is key to supporting this growth and creating stability following the collapse of the paper mill industry." Countering claims that the shipping of biomass material from America adds an unaccep- table carbon footprint to its biomass operations, Court also asserts that it is comparable to the footprint that would be created in trucking similar fuel from forests in Scotland. Hammering home the economic arguments in favour of biomass, Court concludes: "Ex- cluding biomass from the energy mix would significantly increase the cost of decarbonising our energy system – an increase estimated by recent government analysis at £44 billion." 1st Unit converted RO = 1Roc 2nd unit conversion RO/CfD = TBC Potential 4th unit conversion RO/CfD = TBC 3rd unit conversion CfD = £105 ➔ ➔ 2013 2014 2015 2016 2017 ➔ ➔ Source: Drax Half Year Results, July 2014