ECEM: Next year’s RO backs Drax Power bid for CfD strike price

Drax Power has confirmed its intention to secure a final investment decision (FID) enabling contract under the UK government’s new subsidy regime for low-carbon power generation – a move that will see the generator’s second coal-to-biomass conversion unit opt out of the renewables obligation (RO).

A strike price of £105/MWh (€124/MWh), around which the looming contracts for difference (CfD) model will hinge, has been proposed for coal-to-biomass conversion projects.

“The economic choice between the two regimes is finely balanced,” a Drax Power spokeswoman said on Tuesday. “The CfD has other benefits in terms of reducing risks, particularly political risk. Provided the price is confirmed at £105/MWh and the contract terms remain acceptable, we think it would be a good option for us.”

The size of the UK’s RO for 2014/15, published by the Department of Energy and Climate Change (DECC) on the last day of September, suggested the generator’s second coal-to-biomass conversion unit would be subsidised under the CfD regime as opposed to the RO, according to one renewables analyst.

The unit will be equal in generation capacity to the single biggest chunk already supported under the RO – Drax Power’s first converted unit, which has achieved output of around 585MW – and would have placed a huge amount of ROC market-moving potential in the hands of a single generator.

But the RO headroom calculation indicated this would not be the case. “DECC tends to be fairly clued up on where generators are likely to position themselves, either RO or CfD,” the renewables analyst said. “They are in conversation with generators when compiling the RO percentage.”

Calculation

ICIS previously revealed that Drax Power was in provisional talks with DECC over the CfD option late last year ( see sister publication EDEM 29 November 2012 ).

The 2014/15 RO, covering compliance period (CP) 13, has been set by DECC at 72.3m ROCs using the headroom calculation.

This means the number of ROCs needed for suppliers to meet their targets will be 0.244xROC/MWh in England, Scotland and Wales, or a 24.4% share of the electricity generation mix.

To arrive at the headroom calculation, DECC estimates the amount of renewable electricity it expects to be generated by technology, and based on this, forecasts the number of ROCs that it expects to be issued, and adds 10%.

Therefore DECC expects around 66m ROCs to be issued during CP13.

By comparison, ICIS figures suggest 66.9m ROCs would be issued without Drax’s second unit in the scheme, or 70.2m if the unit was to be included.

The 10% headroom is intended to ensure the obligation is higher than suppliers’ collective ability to meet it, ensuring additional market value via a redistributed buy-out fund (RBF) on top of the fixed price for an ROC.

The second unit is expected to begin post-conversion power generation in the second quarter of next year, with firm plans for a third to follow by 2016, which also looks set for the CfD regime.

“We were eligible to apply for FID enabling investment contracts for our second and third units and have done so. DECC is now assessing all the applications they have received. There are no guarantees that we will be successful,” the spokeswoman said.

Had the second coal-to-biomass conversion unit been included in the relevant deployment field, the obligation would have been around 3.3m ROCs higher, assuming generation capacity at the unit of 585MW in line with Drax Power’s first coal-to-biomass conversion, and a load factor of 64% in line with DECC’s headroom calculation methodology.

The 3.3m figure would be almost 5% of the total that DECC expects to be issued across Britain.

Added to its operational unit, Drax Power alone would have been generating almost 10% of the ROC market’s total supply. Jamie Stewart