A new subsidy arrangement between the UK Government and North Yorkshire’s Drax Power Station has been approved, securing its role as a crucial back-up energy provider. The agreement promises substantial savings for consumers while reinforcing the UK’s commitment to sustainable energy production. Investors are taking note as this move strengthens Drax’s position in the evolving energy market.
Drax Power Station, which generates electricity by burning wood pellets classified as biomass, has received significant government support over the years due to its renewable energy designation. The new agreement, set to run from 2027 to 2031, will ensure that Drax operates as a supplementary power source, stepping in when other, cheaper renewables cannot meet demand.
The Department for Energy Security and Net Zero (DESNZ) projects that this strategy will save consumers £170 million annually. This estimate is based on a substantial reduction in subsidies for Drax over the duration of the agreement, effectively halving the financial support it currently receives.
Under the new framework, Drax will only generate electricity when absolutely necessary, a shift from its current operations, which see it active for around two-thirds of the year. Additionally, sustainability regulations will tighten, increasing the requirement for biomass fuel to be 100% sustainable by 2027, up from the current 70% mandate. Notably, Drax already meets this threshold, making the new agreement a reinforcement of existing commitments rather than a fundamental operational change.
Will Gardiner, CEO of Drax Group, welcomed the Government’s decision, highlighting the importance of the low-carbon dispatchable Contracts for Difference (CfD) framework. He noted that an independent analysis by Baringa suggests the agreement could lead to a reduction in electricity system costs ranging from £1.6 billion to £3.1 billion, particularly when compared to constructing new fossil fuel power stations.
Drax Power Station is the UK’s largest of its kind, providing reliable capacity that exceeds 80% of the output of Hinkley Point C. It plays a pivotal role in national energy security, contributing around 10% of the UK’s renewable energy supply and, during peak periods, over 50%. This equates to powering five million homes—comparable to every home in London, or the entire populations of Wales and Scotland combined.
Under the new agreement, Drax will have the flexibility to scale up generation during periods of electricity shortages, reducing reliance on gas and imported power. Conversely, when supply exceeds demand, Drax will have the ability to scale down, helping to stabilise the national grid. This adaptive approach ensures the UK maintains a secure, cost-effective, and environmentally responsible energy mix.
Drax Group plc (LON:DRX), trading as Drax, is a power generation business. The principal downstream enterprises are based in the UK and include Drax Power Limited, which runs the biomass fuelled Drax power station, near Selby in North Yorkshire.
