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Energy challenge: will Drax conversion project receive state aid?

Challenge: will Drax conversion project

The United Kingdom is going on converting its coal-fired power plants to biomass in accordance with its green energy policy. In this context, Lynemouth power station has received the European Commission's approval to conduct coal-to-biomass conversion recently. Furthermore, Drax power station, which has already started to convert its units, is waiting for the further European approval.

Lynemouth conversion project is approved

The German utility company RWE acquired Lynemouth coal-fired power plant in 2012. After having bought this power station, RWE announced that Lynemouth was to be switched to biomass. According to this plan, power plant, situated in Northumberland, will be able to generate electricity in amount of 420 megawatt while being driven only by wood pellets. It is also expected that it will take 18 months to conduct converting operation at Lynemouth.

After having carried out an investigation concerning the appropriateness of governmental subsidies, the European Commission came to conclusion to approve the conversion plan. It was also accepted that the project would be receiving state aid until 2027, which would be backed by the Britain's contract for difference scheme. This news has caused the rise of RWE shares by 8.5 per cent almost immediately.

Drax's chances to gain state aid increased

In these circumstances, Drax power station chances to get approval for conversion have increased. Three of six units have been switched from coal to biomass, so, an approval for the fourth unit coal-to-biomass conversion is required at present.

Drax shares rose by 19 per cent after the UK approved state support in May 2015 in order to convert the third unit. However, it is estimated that Drax shares will fall by 50 to 80 per cent in case it does not receive governmental approval.

Angelos Anastasiou, analyst at Whitman Howard underlines that Lynemouth conversion project is quite similar to the biomass conversion of Drax's third turbine, which has also been supported by the UK's contract for difference. That is why it is considered that the approval of Lynemouth power station is connected with high chances for the approval of the same project for Drax. However, a Drax spokesman noticed that these two projects contain different technical and economic conditios.

Nevertheless, a wide range of investors also believes that Drax conversion plan is to be approved since the government of the United Kingdom has taken a decision to close all coal-fired power plants by 2025 in order to replace them with biomass-fired ones.

Concerns touching the approval of Drax conversion project

However, there some concerns that this project will not gain governmental approval. The reason is that Drax power station is 50 per cent bigger in comparison with Lynemouth. It mean that the European Commission is to carry out an investigation, whether Drax's fourth unit conversion is to distort competition in the pellet market.

A decision expected is to be taken during the second round of CfD (contract for difference) auction, which will be held in 2016. After the first round of this auction 17 wind projects were awarded for CfD subsidies. Still, it is not clear, whether a biomass project will be able to take a part in the second round. However, Andy Coss, chief executive of Drax Power, is convinced, that the plan for Drax coal-to-biomass conversion is to become the most competitive participant.

In summary, Lynemouth power station, placed in Northumberland, has already received governmental approval in order to conduct its coal-to-biomass conversion, which will be backed by the UK's contract for difference scheme. It means that the likelihood of Drax conversion project has increased. It is expected that Drax power station will receive subsidies in order to convert its fourth unit in 2016.

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Energy challenge: will Drax conversion project receive state aid?

  

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Views: 1546 Added: 23-12-2015