Brussels probes UK state aid for Drax power station project

By Pilita Clark and Alex Barker

Financial Times, 2014-02-25

Brussels has started a preliminary investigation into whether the UK breached state aid rules when it guaranteed a £75m loan to Britain's largest coal-fired power station to help it burn wood pellets instead of coal, the Financial Times has learnt.

The guarantee deal signed in April last year was one of the first under a £40bn scheme the government launched in 2012 to kick-start big UK infrastructure projects struggling to get finance in difficult market conditions.

It is the third time state aid concerns have arisen in relation to new UK energy projects, although at this stage it is not clear whether the preliminary investigation will turn into a full-fledged inquiry.

EU competition authorities have already launched an in-depth formal inquiry into a flagship UK energy scheme, the Hinkley Point C nuclear power station in Somerset, which is due to provide about 7 per cent of the UK's electricity.

It has also emerged that Brussels has informally warned the UK that the way it plans to support several big renewable energy projects, including Drax's biomass conversion, appears to involve heavy subsidies that may harm competition.

However, it was not known before now that the European Commission was also looking into the loan guarantee for the Drax scheme.

The deal with Drax means the government is underwriting a £75m Friends Life loan the company took out to help it convert half its Yorkshire station's generating units so they can burn wood pellets and other fuels derived from plants, known as biomass.

It triggered a state aid complaint from Friends of the Earth, one of several green bodies that question the environmental benefits of burning biomass to generate electricity, arguing it has the potential to produce more overall greenhouse gas emissions than coal.

The environmental lobby group said it believed the UK guarantee might have favoured Drax by lowering the cost of the Friends Life loan. It also said the guarantee did not appear to have been formally notified to the European Commission as it should have been.

The commission wrote to Friends of the Earth in late January, saying it had started a "preliminary investigation" into the complaint, which it had forwarded to UK authorities for a response.

A commission spokesman confirmed it was still looking into the deal but added: "At this stage it would be premature to prejudge whether this could lead to a formal state aid investigation."

A spokesman for the Treasury, which launched the guarantee scheme, said: "[The scheme] is supporting infrastructure delivery as part of the government's long-term economic plan. Clear processes are in place to ensure that any guarantees comply with state aid rules."

A Drax spokesman said the company was aware of the Friends of the Earth complaint, but it was a matter for the Treasury and the commission.

It would be a blow to the UK if a formal investigation were launched into the UK guarantee scheme.

Such schemes are generally drawn up with state aid considerations in mind and it is believed this one involved a presentation being made in Brussels to explain how it met state aid guidelines and did not distort the market.

The Treasury hailed the Drax deal as proof of the importance of the guarantee scheme last year, saying it was "critical" to the financing of the biomass conversion project and "enabled Drax to reach a wider group of investors than would have been possible without a UK guarantee".