Written evidence submitted by Drax Power
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.
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 CO2 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 biomassequivalent
to the output of over 700 2MW wind turbinesDrax 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)
UK COAL INDUSTRY
7. The CPS will increase the cost of generation
from high CO2 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
generationin 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 three or four different rates depending on the type of coaleg
high energy (Imported), Medium energy (British), Low energy and
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.
OVERALL CO2 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 CO2
produced in the UK as a result of the CPS and consequently
fewer CO2 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 CO2, than those in the UK.
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
20 April 2011