Fourth Drax unit unlikely to make switch from coal

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UK generator Drax has confirmed plans to begin burning high volumes of biomass at a third unit later this year — but warned that switching a fourth unit from coal to biomass looks increasingly unlikely, unless the government reverses course on removing subsidy guarantees from biomass conversions under its renewable obligations (RO) scheme.

The company will start "enhanced co-firing" at its 645MW unit 1 from the third quarter of this year under the RO regime, if it does not have EU state-aid clearance for its fixed-price contract for difference (CFD) subsidy. Drax will fully convert the unit in 2016 at the latest, under the RO if necessary. But the company conceded that operating the unit under the RO would be "more challenging".

The UK government is due to submit Drax's case to the EU in the next few weeks, Drax chief executive Dorothy Thompson said. The EU this month opened an investigation into whether German utility RWE's Lynemouth biomass conversion would be over compensated by its CFD award — Drax's plans were "not that different" from RWE's, Thompson said. "I confess, we are frustrated" by the lengthy approval process, she said.

This is "new territory for the EU", Thompson said, adding that the commission is cautious and keen to make the right decision. "Having seen Lynemouth referred, we expect we will be referred. The benefit of a phase 2 investigation is it would be a sound decision when they take it," she added. Drax has not had direct engagement with the EU yet, Thompson noted. The UK's Department of Energy and Climate Change said last week that they remain in "constructive discussions" with the commission on Drax and Lynemouth's state aid.

A planned fourth unit conversion is unlikely, unless funds become available under future CFD allocation rounds, Thompson said. The government has not signalled whether CFD funds would be available for biomass conversions since it awarded the initial "investment-enabling" contracts to Drax, RWE and MGT in April last year. It is now considering responses to a consultation that proposed ending "grandfathering" guarantees of RO support under the parallel scheme.

Drax aims to enter the fourth unit into the 2017 capacity market auctions — in the 2018-19 financial year — if it remains coal-fired. But even without a fourth unit, Drax is still poised to become a "predominantly biomass" generator, as coal burn falls away over the next few years under the weight of regulation and carbon taxes, Thompson said. Drax targets a 75pc load factor for its biomass units, but expects coal load factors to drop from a similar level as they increasingly focus on providing flexible generation amid greater intermittent renewables capacity, Thompson said.

In the US, Drax has produced its first pellets from its Amite facility, and is on course to start commercial operations at the end of March. Its Morehouse plant is scheduled to start up in June. The two 450,000 t/yr plants, both of which will export through Baton Rouge, Louisiana, are likely to take six months to reach full capacity.

By next year the company "may well have invested in a third facility", also feeding into Baton Rouge, Thompson said. The company has not yet finished contracting, she added.

There is economic pressure on producers with high stocks as low demand continues into the summer, Drax director of fuel procurement Matthew Rivers said. The market will remain oversupplied, with producers looking to "dump pellets" in the short term, he added.

Although it is an oversupplied market now, if any country "gets their regulation right", it could be an extra 2mn t in demand which would significantly tighten the market, Rivers said.

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