Government loan to Drax investigated

A eUROPeAN competition watchdog is probing the Government’s funding to convert a coal power station to biomass.

The Government has underwritten a £75m loan taken out by Drax to enable the firm to switch to burning wood chips rather than coal. The pledge is part of a £40bn government scheme launched into 2012 to fund infrastructure projects that struggle to raise finance. The conversion of Drax from coal to biomass would put the government on track to hit its target of closing all coal-fired generators by 2025.

But the award of state aid has triggered a european Commission investigation over fears it breaks the rules and gives Drax an advantage over its rivals. It also fears that the vast quantity of wood pellets required could distort competition in the biomass market.

The Commission said it ‘fully supports member state efforts to i ncrease the use of renewable energy and pursue eU energy and climate objectives’.

however, the eC added: ‘ At the same time, eU state aid rules make sure that the cost of such support for consumers is limited and does not give certain operators an unfair advantage over competitors.’

european officials are also wary that the project could return more than has been predicted, which would leave Drax up on the deal.

Drax (down 5.4p to 226p) highlighted that the project would be its third switch from coal to biomass and said the investigation by european watchdogs was to be expected. The Commission has already approved UK plans to subsidise the conversion of RWe’s Lynemouth power plant from coal to biomass, a move which could bode well for Drax.

The firm said: ‘Drax welcomes the opportunity to work with the Government and the eC to complete the state aid clearance process.’

The plant would be fuelled by wood pellets imported from the US and South America.