Drax denies use of subsidy loophole to avoid £639m payout to households | Drax

The owner of the Drax power plant has been forced to deny that it used a loophole in the government’s subsidy scheme to avoid paying almost £650m to households since the start of the energy crisis.

An investigation by Bloomberg found that the FTSE 100 company idled one of the generating units at its giant North Yorkshire power plant for much of 2022 when the energy market crisis plunged millions of homes into fuel poverty.

The report claims that if Drax had kept running the unit, which earns a fixed subsidy levied on energy bills, it would have been required to return an estimated £639m to bill payers as of last month.

Instead the FTSE 100 company was able to use a surge in the global price for wood pellets to make more money from selling them on than it could by using them to generate electricity, according to Bloomberg.

Although Drax is not alleged to have broken any market rules, a previous energy minister accused the company of acting against the national interest. The leader of the Liberal Democrats, Ed Davey, who was energy secretary when the government negotiated the subsidy deal, said: “It looks like they are acting in bad faith.”

Under the terms of the subsidy contract, which has handed Drax about £1.4bn to date, energy projects receive a fixed price for each megawatt of electricity generated.

Usually companies receive a payment levied on energy bills which tops up the earnings from the wholesale market to the agreed “strike price”. But in the past year market prices have been significantly higher than the subsidy level, requiring companies to pay the difference back to consumers.

Drax has denied that it intentionally shut its biomass unit to avoid making these payments in favour of profiting from the resale price of its wood pellets, branding Bloomberg’s investigation “false, inaccurate, and misleading”.

The company said the surging price of biomass had made the generating unit “uneconomical” to run at the agreed subsidy level, which assumed the average cost of biomass would be about $181 a tonne. In 2022 the price reached a peak of $467 a tonne.

A Drax spokesperson said: “The Russians’ invasion [of Ukraine] created unprecedented challenges to the electricity market due to constrained fuel supplies, leading to an increase in both the demand for biomass and the price of pellets.

“Given this, we had to make responsible decisions on our winter hedging to minimise risk to Britain’s energy security and our business … No serious observer of the energy system would advocate that we ought to have exposed Britain’s power grid and our business to increased risks.”

A government spokesperson said the subsidy scheme had been “hugely successful” in securing more than 26GW of new low-carbon electricity capacity since it began in 2014. They added that generation decisions are “a matter for private energy companies” and would take account of wider market conditions.