There is already a scandal of bad accounting at Drax, one could say mischievously. It’s the one that maintains that transporting wood pellets from North America to burn in North Yorkshire is a “carbon neutral” activity because replacement trees absorb carbon dioxide as they grow. You don’t have to be a green lobbyist to think there’s something wrong there. As the research group Ember regularly reminds us, Drax is the UK’s biggest emitter yet qualifies for renewables subsidies.
That weirdness in the methodology is one for the government to justify. The Financial Conduct Authority’s investigation is into the grittier issue of Drax’s “historical statements” about its sourcing of wood pellets. Three sets of annual accounts – 2021, 2022 and 2023 – are in the spotlight for adherence to listing rules for quoted companies and transparency disclosures.
The FCA’s poke around the thicket is very welcome because the last episode in this saga ended in unsatisfactory fashion for outsiders when the company reached a settlement with Rowaa Ahmar, its former head of public affairs and policy, who had accused the company of misleading the government, the public and the regulator over its sourcing of wood for pellets. The allegation was part of her claim for unfair dismissal at an employment tribunal.
The regulator in question was Ofgem, in charge of energy, whose investigation had reached a closely worded outcome. On the one hand, it did not find evidence to suggest deliberate misreporting or that Drax had unfairly claimed subsidies under a scheme that requires 70% of the biomass to be “sustainable”. On the other hand, Ofgem concluded that Drax “failed in complying with its profiling data obligations” from April 2021 to March 2022. The result was that the company paid a £25m voluntary penalty, or loose change in the context of £7bn of subsidies to date.
The FCA’s investigation, at least, offers the possibility of a fuller and more detailed version of events. In regulatory terms, accurate reporting to investors and the market is a very big deal. Officials will be obliged to go deep. One can understand why Drax’s shares fell 7%.
The fact of an investigation also raises a question for the government, which in February agreed heads of terms with Drax to keep the subsidies rolling from 2027 to 2031. Michael Shanks, an energy minister, grumbled about the “unacceptably large profits” Drax has made over the years but said, in effect, that the government was over a barrel and had to back a smaller deal in order to keep the lights on. Drax generates about 5% of the country’s electricity and, unlike solar and wind, its power is firm.
The point, though, is that the February deal has not yet been signed. Will ministers now wait until the FCA has concluded? “We will review the investigation’s findings when they become available,” said the energy security department, which doesn’t precisely answer the question. It ought to be straightforward: make ’em wait. The next deal involves £1.8bn of public money. When the sums are that large, surely you’d want to hear first what the financial regulator has to say on a basic question of governance.