Drax Burning Magic Money Trees

Changes to strike and reference prices lead to record CfD subsidies overall and even more money for burning trees at Drax.

Introduction

The complete Contracts for Difference (CfDs) subsidy data for April have now been published by the LCCC and the results are clear. A record total of £268m in subsidies was paid to renewables generators in April 2024 as shown in Figure 1. Over £223m of these subsides went to offshore and onshore wind farms.

Figure 1 - Record Overall CfD Subsidies in April 2024

A large part of this was driven by indexing upwards of CfD strike prices and CfD contract being activated by Moray East and Hornsea 2 offshore wind farms as covered here last week. The subsides for dedicated biomass with CHP also ticked up. However, the biggest driver of the monthly increase in CfD payments was the increase in subsidies to biomass plants, and particularly Drax power plant in Selby.

CfD Strike Prices and ROC Values Indexed Upwards

As happens every April, the strike prices for Contracts for Difference (CfDs) have been indexed upwards (see Figure 2).

Figure 2 - Evolution of Biomass Strike Prices by Fiscal Year Ended (£ per MWh)

There are two biomass plants receiving subsidy through the CfD scheme. The strike price for Lynemouth was increased 4.3% to £145/MWh and the Drax strike price went up a similar percentage to £138/MWh.

Reference Prices Reduced

However, the increase in CfD strike prices is not the whole story. The Baseload Market Reference Price (BMRP) for biomass plants was reduced in this financial year, as shown in Figure 3.

Figure 3 - Evolution of Biomass Reference Prices by Fiscal Year Ending (£ per MWh)

The reference price for both Lynemouth and Drax was cut by more than half to just over £80/MWh. This is important because the subsidy received by the generators is calculated as the difference between the strike price and the reference price.

In addition, part of the Drax plant is subsidised through Renewables Obligation Certificates. The value of these certificates has increased by 9.7%, meaning Drax will now receive a certificate worth £64.73 for each MWh it generates, in addition to the market price it receives for its power.

Big Jump in CfD Subsidy per MWh

The increase in strike price, coupled with the reduction in reference price has resulted in a sizeable increase in the subsidies for burning trees. Figure 4 shows the average subsidy per MWh for both biomass plants has jumped from just over £7/MWh in March to nearly £60/MWh in April.

Figure 4 - Biomass CfD Subsidy by Month (£ per MWh)

The total subsidy paid to biomass generators in April 2024 is over £34m, nearly five times more than the £7m received in total for January, February and March 2024 combined.

More Subsidy Leads to More Generation

This more generous subsidy regime has already had a substantial impact on the amount of electricity generated at Drax as shown in Figure 5.

Figure 5 - Subsidy, Reference Price (£ per MWh) and Generation (MWh) for Drax Biomass Plant

We can see that generation (black line) was patchy during March as the subsidy per MWh was extremely low (blue bars). But when the subsidy went up at the beginning of April, generation increased almost immediately and has stayed high during the month.

Conclusions

It could be argued that it was “fair” to reduce the baseload reference price this year, because underlying fuel and electricity prices have fallen. However, a cynic might argue that it was important to incentivise Drax to generate more power, because our last remaining coal-fired power plant at Ratcliffe-on-Soar, near Nottingham is due to be closed later this year. We will need all the controllable, dispatchable power we can get to mitigate the impact of intermittent renewables.

The extra subsidies are unwelcome news for consumers, but Drax gets handsomely rewarded for burning what to it are magic money trees.

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