Drax Want A Higher Carbon Price–I Wonder Why!

By Paul Homewood

Drax are desperate for the carbon price to go up!. I wonder why?

Great Britain’s electricity is cleaner than ever. As wind, solar, biomass and hydro continue to make up more and more of our energy mix, the power system edges ever closer to being entirely decarbonised. The GB power system has leapt up the big economies’ low carbon league table from 20th in 2012 to seventh in 2016.

But this shift to lower-carbon power isn’t owed only to growing renewable electricity capacity. A fall in gas prices has helped and importantly, government policy has ensured coal power generation has become increasingly uneconomical vs electricity produced with gas (gas and coal compete for contracts to supply power to the National Grid).

Introduced in 2013, Great Britain’s Carbon Price Floor sets the minimum price on carbon emissions. A stricter policy than the EU’s volatile EU Emissions Trading System (EU ETS) which puts a much lower price on carbon dioxide (CO 2 ) emissions, the Carbon Price Support as the British policy is also known tops up the EU ETS. Together, they have had a significant impact. According to Aurora Energy Research, the Carbon Price Floor is a major factor in coal generation emissions falling.

In Great Britain, the Carbon Price Floor (CPF) is currently capped at £18 per tonne of CO 2 and the EU ETS sits at around £5 t/CO 2 – meaning power generators and heavy industry pay around £23 t/CO 2 altogether. When initially formulated by the coalition government in 2010, it was intended the CPF would reach £30 per tonne by 2020 and £70 per tonne by 2030. However, the EU ETS has since fallen therefore the UK government chose to cap the carbon price support at £18 per tonne until 2020.

Now, as we reach the end of the decade, questions remain as to what will happen to this crucial mechanism post-2020. Will the government price coal off the system once and for all or will the fossil fuel make an unlikely comeback?

What is crucial for British power generators at this stage is clarity beyond 2020, when the £18 per tonne cap ends. This can allow the industry to react to future carbon pricing and prepare for whatever future scenario the government is most likely to adopt.

If the government chooses to continue decarbonising the energy system in a significant way – as it should do – coal facilities can be converted to renewable or lower-carbon units, such as biomass or gas. New interconnectors, renewable sources, storage facilities and demand-side response will also need to be installed at a greater capacity to meet the energy system’s demands.

As the amount of low carbon generation continues to grow, it will increasingly be the marginal generator. This means that power stations such as Drax’s biomass units, which run with an 87% lower carbon footprint compared to coal across their entire supply chain, could be used to meet the last megawatt hour (MWh) of demand – and this would see the carbon price having a diminishing impact on the wholesale price of power.

As has already been shown, the Carbon Price Floor is one of the most effective ways to reduce Great Britain’s electricity emissions. But to continue this impressive progress, the government needs to use it appropriately to set a path towards a decarbonised future.

https://www.drax.com/energy-policy/will-happen-carbon-price-2020/

Drax unsurprisingly are being rather devious here, and their concern about coal is merely a red herring. Coal power across the board will all be phased out by 2025 in the UK, because that is the law.

Their wish to see a higher carbon price is a much more selfish one.

In 2018, Drax generated 13.8 TWh from its three biomass units, which have a combined capacity of 2.6GW:

https://www.drax.com/annual-report/strategic-2018-enabling-a-zero-carbon-lower-cost-energy-future/#chapter-1

This represents a capacity utilisation of 60%, which clearly is a costly underutilisation of assets.

One of the units qualifies for CfD payments, which guaranteed a price of £111/MWh for every unit of electricity produced. This means that Drax can effectively always run that unit at maximum capacity, as it can bid as low as it wants to win business, knowing that the price it actually receives will be topped up to £111.

The other two units only qualify for ROCs, as they were built before CfDs came on stream. These units receive an ROC subsidy, currently worth £48.78/MWh, on top of the value of the electricity sold.

These subsidies are worth around £800m a year to Drax.

https://www.drax.com/annual-report/strategic-2018-enabling-a-zero-carbon-lower-cost-energy-future/#chapter-1

Their problem however is that gas power stations can produce power at a much lower cost than their biomass units. Whilst the CfD mechanism allows them to compete with gas, their ROC units will lose money if the market price goes too low.

Hence their lobbying for a higher carbon price, which will force gas power stations to put up their prices, and allow Drax to win back business at higher prices.

This of course will push up the subsidy they receive from ROCs, the costs of which are loaded onto bill payers.