By Sarah Young and Nina Chestney
LONDON (Reuters) -The UK government and Drax have agreed a deal that will halve the energy producer’s subsidies over 2027-2031, while ensuring the group uses more sustainable sources of woody biomass, the two sides said on Monday.
Drax is Britain’s largest renewable power generator. With the help of government subsidies that run until 2027, it has converted four former coal plants to use biomass to provide around 6% of the country’s electricity.
Following a consultation on extending the subsidies, the government said it “cannot allow Drax to operate in the way it has done before or with the level of subsidy it received in the past”.
“Biomass currently plays an important role in our energy system, but we are conscious of concerns about sustainability and the level of subsidy biomass plants have received in the past,” Energy Minister Michael Shanks said in a statement, which did not disclose the exact figures of the subsidy.
Green groups have questioned whether the company’s practice of using wood pellets to produce electricity is sustainable, saying production of the pellets can contribute to deforestation.
Under the new agreement, the government said Drax should increase the proportion of woody biomass that comes from sustainable sources to 100% from 70%.
Material sourced from primary forests and old growth forests will be excluded from subsidies and Drax will be fined if it does not meet the criteria, the government added.
Drax said it already meets the criteria of using biomass from 100% sustainable sources.
The company says it only uses wood residuals or byproducts from trees primarily used for lumber, adding that demand for wood from sustainably managed forests can help to increase forest growth.
Shares in the group were up 3% in morning trade.
“Drax supports these developments and will continue to engage with the UK government on the implementation of any future reporting requirements,” the group said.
Once Britain’s biggest coal-powered generator, Drax now relies on biomass to provide baseload power.
Under the new agreement, Drax will be supported to operate at a maximum load factor of 27%, less than half of current levels, and will provide low-carbon power only when it is “really needed”.
The government said the new deal would save consumers 170 million pounds ($211 million) in subsidy each year of the agreement compared with the alternative of procuring natural gas to ensure steady supplies.
($1 = 0.8065 pounds)
(Reporting by Sarah Young and Nina Chestney; additional reporting by Susanna Twidale; editing by Kate Holton and Barbara Lewis)
