MPs have warned consumers may end up paying higher bills if the government rushes into providing further state support for power station owner Drax.
As part of Liz Truss’s £150bn energy bills freeze, renewable and nuclear power generators are being asked to supply electricity below current market rates.
Officials have begun to “negotiate” with generators on older wind, solar and nuclear contracts, which have benefited from windfall gains as the price of gas has soared, to persuade them to switch to newer, less lucrative deals, which lock in lower prices in return for guaranteed long-term income.
It is understood Drax, which owns the vast power station complex in North Yorkshire and is Britain’s single biggest source of carbon emissions, could also negotiate over units 2 and 3 at its plant, which receive renewable obligation certificate (ROC) payments for burning biomass wood pellets, making them eligible for the scheme.
Generators are not obliged to negotiate with the government as the scheme is voluntary. Drax has not yet confirmed whether it plans to rework its contract. It said it is “working in partnership with the government to find ways in which we can support the country during the energy crisis this winter”.
However, there are growing fears that the government is in a weak negotiating position as generators will need to be convinced to forgo high prices that are unlikely to abate for some time, meaning officials could rush into deals that later prove a poor deal for taxpayers if the spike in wholesale gas prices quickly subsides.
The thinktank Ember calculates that, from 2012 until 2027, when Drax’s ROC subsidies end, it will have collected more than £11bn in government payouts. It is understood the new contracts could stretch to between 10 and 15 years, opening up the possibility that Drax could land a further decade of state support.
The company has drawn criticism from scientists and campaigners who have argued that burning wood to produce electricity is far from green and can even increase the CO2 emissions driving the climate crisis.
Nuclear power station owners Centrica and EDF are keen to enter the initiative and have already begun talks with ministers. The initiative was formally unveiled hours before parliament was suspended due to Queen’s mourning period.
Charlotte Nichols, the Labour MP and member of the business, energy and industrial strategy select committee, said: “It is vital that the terms of these renegotiated contracts receive proper parliamentary scrutiny, as it risks locking in higher prices over the longer term and continuing excessive subsidies for technologies we are moving away from as we head towards our net zero targets.
“Such long-term financial decisions cannot simply be made unilaterally as a kneejerk response to our current energy crisis, and must be properly debated, with alternatives considered, before any decisions are made that cannot later be unpicked. Particular scrutiny needs to be given to any deal with Drax given the existing levels of government support.”
The Conservative MP Pauline Latham said: “The government is right to be looking at ways to bring down energy bills. But they should avoid locking bill payers into expensive new 15-year contracts to subsidise sources of energy with dubious environmental credentials. Instead, we should focus on building new renewables which are nine times cheaper than gas.”
The Friends of the Earth head of policy, Mike Childs, said: “During a cost of living crisis and with wind and solar power so cheap, it’s astonishing that the government is considering spending more public money on Drax.
“If the company is to receive more subsidies, the government must at the very least ensure full transparency and proper parliamentary scrutiny.”
Truss and the chancellor, Kwasi Kwarteng, have opposed windfall taxes, however the EU’s decision to impose an emergency levy may increase pressure on Truss to follow suit. The Times reported that some power generators believe a windfall tax would be better than being pushed to sign cut-price contracts.
Drax said in July that profit before tax had jumped to £200m in the first half of the year, up from £52m in the same period a year earlier, aided by high electricity prices. It upgraded annual profit forecasts, and has signed a deal with National Grid to keep its coal-fired operations open through the winter.
In the past 12 months, its stock has risen 63% to 709p, valuing the company at £2.84bn, after peaking at 831p in April.
Kwarteng said last month, when he was business and energy secretary, that the importing of wood to burn in Drax power station “is not sustainable” and “doesn’t make any sense”.
A Drax spokesperson said: “Drax is working in partnership with the government to find ways in which we can support the country during the energy crisis this winter.
“We also plan to invest £3bn by 2030 in critical renewable energy infrastructure projects, including bioenergy with carbon capture and storage and pumped hydro storage, which will support energy security as well as jobs.”
