The passing of Old King Coal?
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The government wants all coal-power plants in the UK to close by 2025. Can Drax's attempts to diversify save the coal-based business? Alex Marshall reports
So comprehensive has been the five-year transformation of Drax power station – one of the UK’s largest coal-fired plants – that even those opposed to burning fossil fuels are impressed. ‘For me, the interesting story around Drax is, when you look at what’s happened there compared with other coal plants in Europe, it’s unprecedented,’ says Dave Jones, power and carbon analyst at climate think tank Sandbag.
Ten years ago, the plant, near Selby, North Yorkshire, was burning almost 40,000 tonnes of coal a day in its six 660 MW capacity boilers. It emitted more than 22 million tonnes of carbon dioxide and was not only the UK’s biggest polluter, but also one of Europe’s top five. Given that, it was unsurprising when it became a focal point for protests and was the home of the UK’s first climate camp. But last year, in stark contrast, it emitted just over 6MTCO2. That is still more than 1% of the UK’s annual greenhouse-gas emissions, but Drax has plummeted down the ranking of Europe’s most polluting sites (see panel, below).
The reduction in emissions is largely a result of Drax converting three of its boilers to run on biomass, a move that requires more than seven million tonnes of wood pellets a year (the third unit converted in December 2016, after the EU approved a subsidy guaranteeing Drax an electricity price of £105/MWh until 2027).
Drax’s journey is far from complete, however. Last November, the government fulfilled a long-held promise and issued a consultation on ways to ensure coal-fired generation in the UK stops by 2025. Simple economics may halt it sooner since the UK’s carbon price floor and the low price of gas are making coal uncompetitive. That is seen, in part, by Drax’s declining profits. In 2015, its gross profit was £409m, down from the previous year’s £450m.
Drax has evidently realised time is being called on its three remaining boilers given it is spending only £10m on refurbishing them in 2017, far below the usual £25m. It is a clear reflection it expects to use these boilers only sparingly from now on.
The way forward?
Questions are being asked about the sustainability of burning biomass in the first place, with American NGOs targeting Drax because it imports so many wood pellets from the US. But could its biomass activities be hit? And what happens after 2027 when renewables subsidies are due to end? Importantly, can Drax adapt?
One solution, says Ben Caldecott, director of the Sustainable Finance Programme at Oxford University’s Smith School of Enterprise and the Environment, is for Drax to diversify as a supplier of clean energy, focusing on storage and flexible capacity. ‘It either needs to do that and make a compelling case for its future or employ a managed run-off strategy minimising capital expenditure and maximising dividends before winding down completely. I wonder whether investors would prefer the latter strategy to the former.’
Drax has already decided which of those options it is going to try. Andy Koss, chief executive of Drax Group’s power arm, says: ‘A number of investors have been asking, especially with the end of subsidies in 2027, “What are you going to do?” and “How will you move forward?”. And I think we’ve not just started to answer those questions, we’ve started to deliver on them.’
Plan A is to convert remaining coal-fired boilers at Drax to run on biomass, Koss says, as well as expand the company’s biomass supply business in the south-eastern US. It has pellet manufacturing bases in Louisiana and Mississippi and Koss hopes these will soon supply woodchips to other plants in Europe and Asia, as well as to itself. DONG Energy announced last month that it is going to replace coal at its power stations with ‘sustainable’ biomass by 2023, an indication that there are potential customers. In the UK, the 420 MW Lynemouth power plant in Ashington, Northumberland, is being converted to biomass, while SIMEC has announced plans to convert its 363 MW Uskmouth plant in south-east Wales.
In December, Drax published a strategy setting out how it would reinvent itself and move beyond biomass and coal. First, it plans to venture into gas by buying four projects totalling 1.2 GW capacity – two already with permits; two in the process of obtaining them. It hopes to win contracts for these plants in the government’s ‘capacity market’ auctions so they can be paid to provide power at times of high demand. Drax is also buying Opus Energy, an SME energy supplier, to complement its Haven Power brand that targets large businesses. Finally, it is investigating energy storage.
That range of activity is wide, but Koss says all parts of the strategy build on the company’s knowhow (Drax Group’s chief executive, Dorothy Thompson, used to run gas plants). The underlying theme is to reposition Drax as a flexible power firm. ‘It’s all about looking at how the market is changing,’ Koss says. ‘It used to be that whenever you did, a project was about the margins you could command – “What are power prices doing?”. But in future it’ll be much more about what services the National Grid needs. So clearly it needs to decarbonise the grid and we see biomass as very much part of that. But there is also the increase in intermittent generation – wind and solar – and that means there’s a growing need for plants or technologies that can keep the grid stable [by reacting to sudden changes in power demand].’
This is where the gas plants come in. The energy supply side of Drax’s business will help with that too, since its customers may be able to provide ‘demand side response’ services to the grid, where they cut their energy use at times of high demand.
Not out of the woods
Unfortunately for Drax, each part of its new strategy faces challenges, in particular the plans to convert more coal to biomass. ‘For me the biggest challenge is to convince the government that this is the right thing to do, or just actually allow us to compete,’ Koss says. Currently, the government is not allowing biomass conversions to bid for further renewables subsidies, known as contracts for difference, and government sources have told the environmentalist some civil servants feel it overpaid Drax to convert the last boiler.
However, in November 2016 the government launched a call for evidence on how it should treat biomass in future bidding rounds. Drax insists it should get contracts to convert more of its plant to biomass because it is cheaper than wind and solar schemes if you include the costs of back-up generation and new grid connections. The government has heard that argument for many years and has yet to change how it evaluates projects.
Environmental NGOs are also still raising questions around biomass by pointing out it could lead to an increase in carbon dioxide. This would happen if, say, demand for biomass increases harvesting rates in naturally regenerating forests so they are cut every 60 years rather than every 70. In that instance, emissions could be at least three times higher than coal, according to a model produced for the former Department of Energy and Climate Change (Decc). In March 2015, Decc commissioned consultancy Ricardo AEA to examine the likelihood of such scenarios, but its report has yet to emerge.
Some campaigners argue a more fundamental issue that trees take a long time to regrow. ‘The fact is burning biomass leads to an increase in carbon dioxide,’ says Adam Macon, campaign director at Dogwood Alliance, a US NGO that works to protect forests in the southern US and has campaigned against Drax’s operations there. ‘The question isn’t what can be done to make biomass sustainable; it’s whether it should be happening at all.’
Dogwood Alliance and others, including high-profile American NGOs such as the Natural Resources Defense Council (NRDC), have also questioned the sustainability of the biomass that Drax is burning. Some 48% is sawmill residues, and much of the rest consists of branches and bark that would otherwise be burned at roadsides or left to rot. Some 22% is ‘thinnings’ – trees removed to help others grow (see panel, p35). Some of that harvesting has occurred in the wetlands of the US south-east’s biologically-rich bottomland hardwood forests, and Dogwood goes as far as to claim that some areas have been clear-cut.
Koss denies all these criticisms. Drax’s sourcing policy says it cannot ‘adversely affect protected or vulnerable biodiversity’, and claims of harm ‘have been investigated’ and ‘found not to be true’. Drax’s latest annual report also points out far more wood is growing in the US south’s working forests than is removed, making the point that carbon stores are increasing as demand for biomass is rising.
Despite those points, it is easy to see the government deciding not to wade into further controversy by giving Drax subsidies to convert the rest of its plant. ‘There’s a lot of questions being asked around biomass and we’d be very surprised if the UK government awarded it more contracts,’ says Sandbag’s Jones.
Drax’s planned gas projects also face a problem, in that they need to secure 15-year capacity market contracts to allow construction to begin. The firm has yet to win any contracts and the price offered in recent auctions has been too low to make much new gas viable. However, Koss is not worried and sees it as only a matter of time before the schemes go ahead. ‘The government seem to be absolutely insistent that they need new gas plants on the system,’ he says. ‘You do need a contract, but there’s a good opportunity for [us] to get the clearing price we need.’
Longer term plans
Drax’s possible move into storage is a longer-term idea, Koss admits. The company has set up a research and development team, which is looking at all areas of the business. ‘Storage is the panacea for many people in terms of solving the big problem that you can’t store electricity. So, whether there’s something in it [for us], [it is] maybe not batteries which seem to be maturing as a technology, but some of the second-generation stuff.’
The same team is also examining how to cut biomass costs further so the plant can operate without subsidy and at how Drax can use demand-side response technologies. It is not looking at carbon capture and storage, in which Drax was heavily involved until the government dropped its £1bn competition, but Koss will not rule out a return to the technology since CCS is so important to the future of energy supplies. ‘All that work is very much linked with our strategy,’ he says. ‘We see ourselves as a business here for the long-term. How do we create long-term, high-quality diversified earnings?’
There is one other source of uncertainty for all businesses now: Brexit. So far, the impact on Drax has been small, Koss says, even though, at a time of a falling pound, it continues to import most of the material it burns from Europe or North America – in 2015, only 2% of its biomass came from the UK.
Drax buys its currency five years in advance, so it made a profit from the post-referendum fall in the value of sterling. Koss says Drax is well protected until 2021. He admits Brexit will have impacts beyond sourcing fuel, however: ‘What does Brexit mean generally? It’s uncertain. Do we remain part of the internal energy market? Do we remain part of the customs union? Of the EU emissions trading system? The UK says it’ll pull out of Euratom [the EU nuclear body], so how does that affect new nuclear? There’s lots of uncertainty and it’s difficult to make big investment decisions for the future.’
For Drax, that may not be a bad thing. ‘Of course there is a potential opportunity, because if people aren’t investing [in things like nuclear], it’s important that existing plant and operators continue to deliver,’ Koss says. He does not spell out what that means, but it is clear: if Brexit slows energy investment, the government may be forced to allow Drax to convert further units to biomass rather than risk security of supply problems. It could even allow it to carry on burning coal.
Some environmentalists may baulk if either of those things happen, but what they cannot argue about is that Drax is changing and perhaps much faster than many expected.
Drax’s emissions (MtCO2) – rank among EU’s largest polluters
44th* Estimate based on generation data.
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