Dressed in overalls with “leave it in the ground” scrawled on their backs, climate protesters shovelled coal over the side of a goods train bound for the Drax power station in 2008.
It is now 14 years on from the train “hijack” and government officials are considering their own raid on the North Yorkshire power station – this time on the company’s finances.
The power giant, Britain’s single-biggest source of carbon emissions – thanks to the biomass and coal it burns – has benefited handsomely from the link between electricity prices and soaring gas prices, along with a group of nuclear plants and older solar and windfarm projects.
This windfall – evident in a quadrupling of profits – has thrust Drax and its fellow generators, which are propped up by historic subsidies, into the eye of a gathering storm.
With households and small businesses crushed by soaring bills, the government is considering options to break the link between gas and electricity prices as well as a windfall tax on electricity generators.
The plan could be one of Kwasi Kwarteng’s first acts as chancellor if, as expected, he is promoted from business secretary by the UK’s new prime minister, Liz Truss.
Germany’s decision to impose a windfall tax on electricity generators may embolden ministers to follow suit. Earlier this year, as the government imposed the Energy Profits Levy (EPL) on North Sea oil and gas operators, a similar measure was mooted for electricity generators – but was dismissed as too complex.
A further leaked Treasury analysis claimed gas producers and electricity generators could make £170bn in excess profits over two years. For most companies, precise figures on windfall profits are hard to come by.
But for Drax it is clear that the good times roll. In July, the company said profit before tax had risen to £200m in the first half of the year, up from £52m in the same period a year earlier, bolstered by high electricity prices. It upgraded annual profit forecasts, while landing a deal with National Grid to keep its coal-fired operations open through the winter.
The group’s chief executive, Will Gardiner, saw his total pay package swell more than 30% to £2.7m. In the past 12 months, its stock has risen 56% to 660p, valuing the company at £2.65bn, after peaking at 831p in April.
But the threat of a windfall tax has twice punctured the share rally and it may now face pressure to rip up the contracts for its units which burn wood pellets. Thinktank Ember calculates that from 2012 until 2027, Drax will have collected more than £11bn in government subsidies.
The shape of any potential raid on electricity generators’ profits could prove crucial for Drax and its peers. A simple extension to corporation tax – as applied to the oil giants – could prove most damaging to profits and, critics argue, investor sentiment in green energy.
Instead, the business department is reportedly scrutinising a plan which would see older Renewables Obligation Certificates (ROCs) voluntarily ripped up in favour of Contracts for Difference (CFDs).
ROCs are an anachronism from the early days of green power generation. They were first introduced in 2002, paying renewable energy producers the wholesale market rate plus a subsidy.
The scheme was closed to new entrants in 2017 and replaced with less generous CfDs, which offer electricity plants a flat rate for what they produce over 15 years. That rate is the difference between the “strike price” – an agreed price which reflects the investment in green technology – and the “reference price”, which is a reflection of the wholesale market price for electricity.
If the market price is higher than the strike price, a government entity called the Low Carbon Contracts Company ensures these savings are passed on to consumers. If the market price is lower, the LCCC makes up the shortfall. LCCC data shows that with UK power prices more than tripling in the past year, windfarms have paid back more than £360m.
Under the proposals, those with ROCs would be encouraged to switch to CfDs. The benefit to consumers could be lower bills, and for the company a guaranteed long-term income which could reassure investors.
However, the voluntary scheme could be undermined if companies decide instead to take their chances that gas prices will remain high for years. For those on ROCs with only a few years remaining, it could prove attractive, less so for those with a decade to go. Denmark’s Ørsted held the most ROCs in 2020/21, ahead of Drax, SSE and Germany’s RWE.
Although the energy market as a whole is dominated by a clutch of large players, nearly 60% of the UK onshore wind ROCs market consists of smaller developers, Bernstein analysts estimate.
The ROCs register is public: it shows everything from the Achanalt power station, a small 20 megawatt hydroelectric site in the Scottish Highlands owned by SSE, to the Four Burrows windfarm, owned by renewable specialist RES, near Truro, Cornwall.
However, the nature of each site’s contracts remain undisclosed. Many will be tied into long-term electricity supply deals typically agreed between power producers and electricity traders or suppliers. ROCs are also tradable.
For larger companies, their power is predominately hedged ahead in the futures markets (sold in advance) – meaning some are yet to see the full benefit from this year’s surge in gas prices.
RBC analyst John Musk said: “We previously saw a lot of rhetoric around extending the windfall tax to generators when the energy profits levy was originally announced. It was seen as too difficult then – and I do not see how that changes.”
However, industry watchers are confident that nuclear power stations have recorded hefty gains.
British Gas owner Centrica owns a 20% stake in Britain’s nuclear fleet, which is operated by EDF. Centrica reported operating profits of £1.3bn, and noted an 11% gain in volumes of nuclear power generated, in the first half of 2022.
It said the price achieved for nuclear power had risen from £46.5 per megawatt hour in 2021 to £110.4/mwh. Centrica had flirted with selling off its nuclear stake, but that plan was ditched last year.
EDF is also likely to have seen a fillip, however the gains may be overshadowed by the debt-laden company’s woes in France where it is being nationalised.
UK Energy Research Centre (UKERC) estimates that if 100% of eligible UK wind and solar power projects were to participate in the contracts’ revamp the saving would be £12.8bn and £180 off bills.
UKERC estimates that if its proposals were extended to units 2 and 3 of Drax, which burn biomass and receive RO payments, the collective savings would be £14.8bn a year. If all of Britain’s nuclear power stations participated, overall savings would reach £22.4bn.
Dan Monzani, managing director for the UK and Ireland at consultancy Aurora, said UKERC’s proposal could lower the price over the next two to three winters in exchange for a fixed price extending for the remainder of the stations’ technical life. “This would spread the impact of the war on Ukraine over more years,” he said.
