A finding that you submitted dodgy data to the regulator on where your wood pellets come from sounds like very bad news if, like the biomass power generator Drax, you are the lucky recipient of £500m-plus of subsidies every year and are trying to keep the handouts flowing beyond their scheduled end date of 2027.
But shares in Drax did not collapse on Thursday. City analysts judged that the end of Ofgem’s investigation represented an excellent development for the company – “a clear positive”, said RBC, and “a positive read-across” for the chances of getting a new contract with the government, thought Jefferies.
Why? Well, Ofgem’s conclusion contained the critical words “technical in nature” to describe the reporting failures from a Drax forestry operation in Canada. The regulator also said it did not find evidence to question the sustainability of Drax’s biomass. And the bad data “would not have impacted the level of subsidy Drax received under the RO [renewable obligations] scheme”.
Thus a £25m penalty, a mere 1% of Drax’s stock market value, is almost irrelevant. The company will also have to pay for an external audit of its wood pellet supply chain to prove the accuracy of its future reporting, but that’s not an onerous condition.
Is it off to the races, then? Is Drax now looking good for those 2027-30 subsidies, the ones that would tide it over so that it can pursue the bigger prize of yet more subsidies to install carbon capture technology at its North Yorkshire plant that generates 4%-5% of the UK’s electricity?
Well, before Drax is promised a penny extra from billpayers, Ed Miliband, the energy secretary, should commission a properly independent review of the business model of burning wood pellets to generate electricity. It should cover both the environmental impact, the focus of intense campaigning, and the stupendous subsidies.
By way of reminder, the wood and sawdust is collected in places as far away as Canada and the southern US; it is then shipped across the Atlantic expensively – you have to ensure the stuff doesn’t ignite en route – then it is burned in the UK, where, according to a critical report from the climate thinktank Ember, it accounted for nearly 3% of the country’s carbon emissions last year.
The company’s defence is also well-known by now: the electricity counts as “carbon neutral” because the trees that are felled absorb as much carbon dioxide while they grow as they emit when they are burned. Plus, the bulk of the pellets are shavings that would otherwise be sent to landfill or emit carbon as they degrade. And the Intergovernmental Panel on Climate Change backs the process as long as the biomass is sourced sustainably, as Drax regularly points out.
One can see both sides of the technical argument about carbon, even if the elaborate international supply chain required to get pellets to Yorkshire seems to defy common sense. But the subsidies – an estimated £7bn for Drax since 2012 to get it off coal and into biomass – are something else.
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The plant’s advantage is that biomass is a source of dispatchable generation – the energy is always there when you need it. And its location is strategically important for the grid. Yet are expensive foreign wood pellets really the best the UK can do? Replacing 4% of generating capacity would not be easy or subsidy-free but, at this point, one would like to see properly costed clean alternatives. The expense of supporting Drax’s bizarre operation looks extreme.
On the face of it, the company, if it wants to pursue the next-generation game of burying its carbon output under the North Sea, should be told to pay its own way in the interim. Subsidies for 2027-30 look hard to justify. If Miliband disagrees, let him explain the arithmetic of how bills will be lowered.