Budget 2011 and Environmental Taxes

Written evidence submitted by Drax Power Limited

This response does not attempt to respond to the specific questions posed by the Committee. Instead it focuses almost exclusively on the implementation of the Carbon Price Support (CPS) set out in the Budget, which will be introduced from 2013, via changes to the Climate Change Levy (CCL). This mechanism is of key interest to Drax.

ABOUT DRAX

1. Drax is predominantly an independent power generation business responsible for meeting some 7-8% of the UK’s electricity demand. It also owns Haven Power, an electricity supplier serving the needs of business customers.

2. Drax is the owner and operator of the 4,000MW Drax Power Station in North Yorkshire, which is the largest, cleanest, most modern and most efficient coal-fired power station in the UK. It comprises six 660MW coal-fired generating units; the largest and most flexible in the country. This capability means that Drax is one of the most significant providers of flexible generation and system support services in the UK which will increasingly be required to complement the deployment of the intermittent wind and inflexible nuclear generation required to meet the Government’s binding renewables and CO 2 targets.

3. Drax is also committed to playing its part in reducing its carbon footprint and hence that of UK power generation. To this end, in summer 2010 the largest biomass co-firing facility in the world was commissioned at the power station.

4. With the capability to produce 12.5% of the station’s output from renewable, sustainable biomass – equivalent to the output of over 700 2MW wind turbines – Drax is by some distance the largest renewable generating facility in the UK. In 2010, Drax produced around 7% of the UK’s renewable power, more than twice that of the next largest renewable facility.

5. With the right levels of support from Government, Drax intends to increase its renewable generation well beyond current levels, and progressively move from being a large coal generator who burns some biomass, to potentially being a large biomass generator who burns some coal. Ultimately, Drax has the potential to convert to a biomass station.

6. Drax has many concerns about the CPS. However, in the context of this particular inquiry, we would like to alert the Committee to the following key points:

KEY POINTS ON CARBON PRICE SUPPORT MECHANISM

(Mainly relevant to Questions 1, 2 and 6)

Impact on Security of Supply and a Future UK Coal Industry

7. The CPS will increase the cost of generation from high CO 2 emitting coal-fired plant. This has the potential to lead to a more rapid closure of marginal, flexible coal-fired capacity. Given that at times over the last winter the nation relied on coal for over 50% of its power, this will increasingly affect the security of UK electricity supply after 2013, which is still many years before new nuclear, low carbon or renewable plant, will come on stream to fill the gap.

8. The Government is proposing the imposition of a single CCL tax rate per tonne for all solid fuels used for electricity generation, supposedly based upon the carbon content. This methodology will disadvantage UK domestic coal versus imported coal. This is due to the typically lower carbon (and hence energy) content of UK-mined coal. Therefore, there will be a detrimental impact on UK coal producers potentially leading to the closure of more pits, in particular deep mines, and resultant job losses. There will also be an increase in carbon emissions due to the increase in transportation and also a potential reduction in security of supply from an over-reliance on imports.

9. These effects could be rectified quite easily by introducing a tax rate which more accurately reflects the actual carbon/energy content of the solid fuels used for electricity generation - in other words a rate which is calculated on the heat/ energy content of the fuel (ie. £ per gigajoule(GJ)) rather than a £ per tonne basis.

10. This GJ methodology is already well established. It is the basis on which most solid fuel is actually bought / sold in the national and international markets. Furthermore, it is also the methodology used for calculating the CO2 emissions for EU-ETS compliance purposes for fossil generators. As a result the necessary rigorous sampling and auditing processes are already in place, so there would be no material administrative burden for coal suppliers.

11. Alternatively, if HMRC / Treasury remain insistent on a CCL rate / tonne methodology, then a banded approach could be used instead of the single rate. For example, there could be 3 or 4 different rates depending on the type of coal – eg. high energy (Imported), Medium energy (British), Low energy and Reclaimed fuel.

12. Taken to its natural conclusion, a single CCL tax rate would mean that future coal plants with CCS will have to rely on imported coal when there are still abundant and economic potential supplies in the UK.

Impact on overall CO 2 Levels

13. All UK power plants participate in the European Union Emissions Trading System (EU ETS). This is a cap and trade system within the EU, which means that if there is less CO 2 produced in the UK as a result of the CPS and consequently fewer CO 2 allowances used, there are correspondingly more available for use elsewhere within the EU within the overall EU cap. There will, therefore, be no net overall reduction in emissions from the CPS.

14. Furthermore, if the CPS results in the UK importing cheaper, ‘carbon tax free’ power over the interconnectors with mainland Europe, the UK will literally export emissions. Overall, in environmental terms this may well be inefficient as some European marginal fossil fuelled plant emits as much, if not more CO 2 , than those in the UK.

Green Investment Bank (Question 7)

15. The announcement was made in the Budget that the Green Investment Bank (GIB) will be initially pre-funded with £3 billion, beginning operation in 2012-13. This is a positive step which recognises the challenge and costs of securing project finance for green investments in the current market. That pre-existing challenge has been exacerbated by the CPS which is not really ‘bankable’ as an investment incentive, as it is subject to political risk of future changes. This increases the need for a body prepared to help absorb the risk of changes in Government policy, and to lend money where conventional banks would otherwise not be prepared to. However, the level of investment required by 2020, as for example suggested by Ofgem’s Project Discovery Report, is over £200 billion. This is many times greater in size than the GIB, suggesting that the £3 billion initial funding perhaps does not go far enough and should be more ambitious if it is to make a really meaningful contribution to the overall investment challenge.

20 April 2011