The European Commission has approved a GBP100/MWh ($124/MWh) Contracts for Difference subsidy awarded to UK power generator Drax for a third 645 MW coal-to-biomass unit conversion, the EC said Monday.
The subsidy proposed by the UK government "will not result in overcompensation", the EC said, confirming that no changes to the terms of the CfD were required.
Conversion would "further EU environmental and energy targets without unduly distorting competition in the Single Market," the EC added.
The 645 MW unit would start operating as a fully converted biomass unit under the contract "in the coming days, having previously operated as a co-firing unit under the Renewables Obligation," Drax said.
The UK's CfD regime is designed to top up wholesale market earnings with a premium, up to a defined strike price -- in this case, GBP100/MWh (real, 2012 prices).
If wholesale prices exceed the strike price, the excess is clawed back by the state and consumers are reimbursed.
Drax' third unit conversion is to receive the support until 2027. It is forecast to generate 3.6 TWh/year and burn 2.4 million mt/year of wood pellets, mainly sourced from the US and South America.
Drax owns pellet manufacturing facilities in the US, producing around 1 million mt/year. It is in the market to buy distressed US facilities currently being auctioned, with the aim of doubling its own-supply capacity, it said December 6.
Dorothy Thompson, Chief Executive Officer of Drax Group, said that with the right conditions, the generator could convert further coal units at Drax to burn wood pellets. It has six units in all, totaling close to 4 GW.
The EC's investigation into the CfD, opened January 2016, found the increased demand for wood pellets to fuel the unit could be fulfilled without undue negative side-effects, and would not unduly distort competition in the market for wood-based products.
Approval of the contract was a condition of Drax' proposed GBP340 million acquisition of Opus Energy, a UK supplier to small and medium sized commercial consumers, Drax noted.
Opus is the UK's sixth largest business energy supplier with over 8% of the UK's non-domestic business supply market.
