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You are here: BAILII >> Databases >> England and Wales Court of Appeal (Civil Division) Decisions >> Drax Power Ltd, R (On the Application Of) v Secretary of State for Energy And Climate Change [2014] EWCA Civ 1153 (07 August 2014) URL: https://www.bailii.org/ew/cases/EWCA/Civ/2014/1153.html Cite as: [2014] EWCA Civ 1153 |
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ON APPEAL FROM THE HIGH COURT OF JUSTICE
ADMINISTRATIVE COURT
Mrs Justice Andrews DBE
Strand, London, WC2A 2LL |
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B e f o r e :
LORD JUSTICE RICHARDS
and
LADY JUSTICE GLOSTER
____________________
The Queen (on the application of Drax Power Limited) |
Claimant/ Respondent |
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- and - |
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Secretary of State for Energy and Climate Change |
Defendant/Appellant |
____________________
WordWave International Limited
A Merrill Communications Company
165 Fleet Street, London EC4A 2DY
Tel No: 020 7404 1400, Fax No: 020 7831 8838
Official Shorthand Writers to the Court)
Chamberlain
QC and Oliver Jones (instructed by The Treasury Solicitor) for the Appellant
Tim Ward QC, Duncan Sinclair and Daisy Mackersie (instructed by Herbert Smith Freehills LLP) for the Respondent
Hearing date : 1 August 2014
____________________
Crown Copyright ©
Lord Justice Richards :
The background: support for the generation of renewable energy
The Renewables Obligation and Contracts for Difference
Investment Contracts
"The developer is able to demonstrate to the satisfaction of DECC that:
(i) There are credible plans in place to progress the project in order to start generating electricity within the period of the First Delivery Plan, 2014/15-2018/19.
(ii) Without an Investment Contract there is a significant risk that the electricity generation to which the Investment Contract relates will not occur or will be significantly delayed.
(iii) The project is not already accredited under the RO …".
Drax's application
Phase 1
"Drax has credible plans to convert three of the six coal units at Drax Power Station to biomass. Since the beginning of April we have been running our first biomass converted unit (Drax Unit #2) ….
The conversion of this second Drax unit is technically feasible during 2014. However, this is dependent on securing the early rights to sufficient sustainable biomass delivered to Drax. However, as set out in the Justification section below, the ability to contract for sufficient sustainable biomass is underpinned by the supply chain making the necessary timely investment in capacity.
…
Fuel sourcing
We continue to make progress with our negotiation with a variety of existing producers and potential suppliers for the full volume required for the second unit conversion ….
…
Timing of second unit conversion
Subject to receipt of a FIDe CfD (by October 2013), our current plan is for this second unit (Drax Unit #3) to be taken offline for the final conversion works during Q2 2014 and start generating as a fully converted biomass unit around a month later."
"Without a FIDe Investment Contract there is a significant risk that the renewable generation from the second converted Drax unit will be significantly delayed in execution. There are a number of reasons for this. The most significant ones all relate to the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduringly competitive prices.
The contractual certainty from a private law FIDe Investment Contract will provide the necessary increased confidence, above and beyond that provided by grandfathered ROCs, that our biomass supply and logistics chain is looking for in order to make the investment it needs to guarantee delivery of sufficient volumes of sustainable biomass.
…
Under the previous RO co-firing support regime incremental feedstock volumes could have been deployed progressively with little detrimental impact on the operation or economics of the station or units. However, the execution of a full unit conversion regime requires a unit's worth of biomass to be contracted and delivered to Drax with a steep ramp up and then on a continuous, predictable and evenly phased basis …. As the biomass supply market is relatively small and immature and the necessary world-wide supply chain infrastructure does not currently exist, long term guaranteed off-take contracts with Drax and others are required to develop and support the needed upstream supply chain investment.
Delayed execution of these contracts will delay the necessary development of the supply chain and carries multiple associated risks ….
The key constraint on the timing of, and generation from, coal to biomass conversions in the UK is therefore the world-wide industrial biomass pellet supply chain. We have managed to successfully contract with the existing supply chain for the ~2.3M tpa pellet volume required for our first unit conversion …. However, this volume has effectively taken up a significant part of the available output from existing pellet plants.
The additional volume of pellets required to supply our second (and indeed third) unit is around 2.3M tpa (or ~4.6M tpa in total). This represents a very significant proportion of the total world pellet production ….
…
The needed supply chain investments are in two main areas:
- pelleting capacity … and
- the weather-protected, storage and transport infrastructure in the USA to move the pellets to Drax ….
…
In summary a FIDe Investment Contract for the second converted unit at Drax would:
- create the necessary confidence in the UK renewables support regime at both Drax and through the biomass supply chain both in the UK and elsewhere in the world to underpin the investments required;
- facilitate the signing of long-term pellet contracts in 2013 to secure the full biomass supply requirements for the converted unit;
- bring forward the upstream supply chain investments in pellet capacity and other necessary infrastructure; and
- make the contribution of the renewable generation from Drax to the HMG 2020 targets more certain and secure.
In contrast, not granting a FIDe Investment Contract would mean a potential delay of at least 18 months in execution at this crucial stage. This would risk damaging potentially fragile supply chain confidence in the UK regime and creating a hiatus that will result in higher risk and significantly more than the 9-12 months delay in waiting for a normal CfD."
"Drax can confirm that, subject to the revised timetable and the receipt of a FIDe CfD (by March 2014), the Drax second unit biomass conversion (Drax Unit #3) could be delivered within Q2 to Q4 2014."
In response to the request for clarification on when fuel supply stock build to allow full conversion needed to be complete, Drax stated:
"It is the forward contracting of biomass fuel and establishment of a supply chain itself which is more relevant to allowing unit conversion than a stock build …. In respect to forward contracting as identified in the original submission Drax will need to contract 4.6mt of biomass per year to support the fully operational capacity of the second and third unit conversions."
"What we are saying is that it is the issues with the development of the pellet supply chain that are critical to the timing of our conversions (which we have explained in detail both in our application, and in the supplementary response), and it is this issue which will cause the 15-18 months delay. Failing to act promptly will undermine our ability to place the necessary full-chain contracts for the delivery to Drax of the full volume of pellets … required for each of these converted units …."
Phase 2
"This Phase 2 application for a FIDe Investment Contract relates to Drax's conversion of a second coal unit (Drax Unit #3, the 'Unit') out of its six coal units to biomass (the 'Project').
…
If Drax is allocated an Investment Contract the Project could be delivered between 1 April 2014 and 31 December 2014. This application assumes a 'target commissioning date' that falls between these two dates ….
…
Criterion 1 – Project Deliverability
As set out in the Phase 1 application … the conversion works for the biomass conversion for the second unit is technically feasible during 2014. However, the date on which commissioning is fully feasible depends on our ability to secure a FIDe Investment Contract and early assurance that sufficient sustainable biomass can be delivered to Drax …."
The Binding Application
"As regards the Qualification Criteria, your explanation should include, for example, an explanation of how the project continues to satisfy the investment hiatus requirements [i.e. the Key Criterion]."
"Please set out the reasons why you consider in the absence of being awarded an Investment Contract there would be a significant risk that the electricity generation to which it would relate would not occur or would be significantly delayed."
"We confirm that the proposed change in the TCD will not have any potential impact on the Qualification Criteria or the Evaluation Criteria for the Drax Unit #3 project. In particular, the justification for the award of an Investment Contract was to support the need for timely investment in the development of the capacity of the longer-term sustainable biomass supply chain, which remains exactly as set out in our Phase 1 and 2 submissions."
The covering email expressed the hope that DECC could assess the change and confirm that there was no impact on the Qualification or Evaluation Criteria before the deadline for Binding Applications.
"… We confirm that subject to confirmation of these details in your binding application and the statements below, we have provisionally evaluated this change [i.e. to the target commissioning date] as not requiring a change to the project's qualification or evaluation scoring.
We have not at this stage reassessed your project's compliance with the Phase 1 Qualification Criterion 2.ii. that without an Investment Contract there is a significant risk that the electricity generation to which the Investment Contract relates will not occur or will be significantly delayed. We will reassess this criterion based on your response to Section 8 (investment hiatus) of your binding application. In this regard, we would remind you that each application will be considered individually on its own merits and that each application should therefore state clearly the reasons why the unit conversion project concerned is at risk of delay or cancellation in line with the Phase 1 qualification criterion."
"As set out in our Phase 1 and Phase 2 submissions, the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduring competitive prices is essential to support the conversion to biomass of Unit #3 and generation from that Unit.
We provided in our Phase 2 submission … the contracted and pipeline position for biomass supplies for Unit #3 …. As we have highlighted in our submissions … we are dependent on successful new pellet plant developments … to meet our overall biomass requirements. Hence our strategic decision to invest upstream in the supply chain as well as pursuing (simultaneously) a range of pipeline opportunities. Our contracted fuel position remains very vulnerable to any operational delay/hiatus in the development of new pellet plants.
The contractual certainty from a private law Investment Contract will provide the necessary increased confidence that our biomass supply and logistics chain is looking for in order to make the investment it needs to guarantee delivery of sufficient volumes of sustainable biomass to fuel the electricity generation from biomass conversion of this Unit …."
"Some of Mr Koss' comments at the meeting alerted me, for the first time, to the fact that Drax's case was now that a failure to award an Investment Contract 'wouldn't necessarily delay conversion'. I stressed the importance of explaining how a delay to generation arose, and, as far as possible, to explain why the RO alternative was not a viable one in the circumstances. I told them that the response should 'as far as possible scotch the RO alternative'. I can see from the note of the meeting that Mr Love stated – to the best of my recollection as a result of reviewing the draft letter that he had brought to the meeting – that the RO alternative was not mentioned in the letter. I reiterated that there needed to be a 'clear statement on delay', that the application would be 'heavily scrutinised' and that Drax needed to be 'very clear'. I felt this was as far as I could go so as to ensure that we remained even-handed in relation to all applicants" (original emphasis).
"In our Binding Application, as well as our Phase 1 and Phase 2 submissions and Eligibility Update of 10th March, we set out clearly the reasons why we need an Investment Contract for Unit #3. In summary, they relate to the need to secure and deliver to Drax the required sustainable biomass feedstock on the right timescales and at enduringly competitive prices in order to support the full conversion to biomass of Unit #3 and secure the future generation from that Unit. In order to do that, and given the limitations that currently exist in UK, EU and worldwide biomass pellet markets, we need the Investment Contract to raise the funding to support timely investment to develop additional capacity in the medium to longer-term sustainable biomass supply chain ….
In terms of assessing the adverse impact of not being granted an Investment Contract for Unit #3, we continue to believe there is a significant risk that this would result in a material delay in delivering the renewable generation from the conversion project at a critical time for the project ….
Our current assessment is that, if Drax Unit #3 were not awarded an Investment Contract on the current timetable in April 2014, we would then have to wait to apply for an enduring CfD before being able to proceed with further investments in the supply chain and transportation infrastructure and contracting for fuel for Unit #3 beyond the short-term. As we have outlined before, security of supply of fuel for the duration of the Investment Contract is uncertain and critical for the overall delivery and viability of the project. On the current timetable, the application process for the enduring CfD might be available in Q4 2014, however we would be very vulnerable to any slippage in that timetable, particularly as regards our ability to progress fuel contracts and pellet plant and infrastructure investments.
As described in our earlier submissions, the Investment Contract would create the opportunity to raise further funds against the UK assets of the business without putting the Drax credit rating under undue pressure, as the increased financial risk would be offset by the reduced business risk (by virtue of having some downside risk protection against power price volatility). It would also improve the confidence of third party developers and their financial backers to take on additional exposure to Drax. If we were not granted an Investment Contract this would not be the case and we would either have to (1) wait for the enduring CfD to be available (and raise funding against the UK assets on a similar basis), or (2) seek to recycle capital from/raise finance against the US assets, which would be ring fenced from the UK business and therefore similarly protect the rating, both of which would have a significant timing impact.
Moreover, under scenario (2), raising finance against our US assets would not be feasible until the first new pellet plants were operational and had at least 6 months' operational data to share with potential investors. These are not expected to be completed until Q1 2015. Similarly, we would need to demonstrate a better and longer track record on Drax Unit #2, converted to biomass under the RO, to convince funders of the viability and security of the off-take. So this scenario would therefore not be possible for Unit #3, given our latest timings, until at Q3-Q4 2015.
The Investment Contract for Unit #3 will have a State Aid CP. However, as set out in our various submissions, the importance of maintaining the crucial momentum in developing the supply chain for this second unit conversion, which has proved challenging given the unexpected delay, is crucial …. As a reminder, below is a graph of our contracted position for Unit #3 from September 2013 which demonstrates how crucial the pipeline supplies are to delivering the future generation from the project ….
[The graph (or chart) is described and considered later in this judgment.]
…
If Drax Unit #3 is awarded an Investment Contract in April 2014, we are confident that there are sufficient (a) existing pellet plant facilities to secure the necessary short-term volumes to fuel the unit, and (b) potential new pellet production developments that are viable and sufficiently advanced to secure medium to longer-term sustainable biomass for Unit #3. If Drax Unit #3 is awarded an Investment Contract, this will enable us (taking state aid risk) to proceed with our investments and contracting strategy for Unit 3 immediately after contract award, which we believe will provide a vital injection of confidence to the nascent supply chain at a critical time, and for which potential investors and suppliers have been waiting patiently for some time …."
"There is no reference anywhere in their clarification statement to the viability of accrediting under the RO. They do state that on a general basis not being awarded an IC, having been provisionally ranked equal first and deemed affordable, would result in a significant risk that generation would be significantly delayed in execution. However, all subsequent statements then related to the CfD as an alternative to an IC. Having revisited their Phase 1 resubmission under Phase 2 it is apparent that in that application they did compare the award of the IC with their equivalent position under the RO and this was taken into account in DECC's assessment and the subsequent pass against the qualification criteria ….
Overall, … the reviewer's assessment is that Drax have demonstrated Investment Hiatus compared to the alternative of securing a CfD but there is not clear evidence of the viability of them accrediting under the RO ….."
"10. The binding application for unit #3 is the same as that for unit #1. The clarification letter makes the same general statements about the need for investment contract to raise the funding to support timely investment to develop the supply chain for sustainable biomass, including investment in port and rail (UK and overseas) directly and under take-off commitments.
11. For Unit #3, Drax asserts that there would be a delay of 12-14 months to the project, apparently resulting from a delay of 6-8 months for the award of a CfD under the enduring regime, and a further delay of 6 months resulting from the loss of confidence in the biomass market if Drax failed to be granted an investment contract. Little explanation or supporting evidence is given for this delay. We are not convinced that a delay until the generic CfD regime would result in a further 6 months' delay to the sourcing of biomass fuel for Unit #3 for a period from some point in 2015 onwards.
12. Drax state that – unlike for unit #1 - they are confident that there are sufficient existing pellet plant facilities to secure the necessary short-term supplies of biomass. Drax is also confident that there are sufficient viable potential new pellet plants, sufficiently advanced, to secure medium to longer term biomass supplies for unit #3. This is expressed as being conditional on the award of an investment contract for unit #3. It is not clear whether these supplies of biomass would not be available if an investment contract was not awarded (and the unit was supported under the RO instead).
13. There is a further indication that there are sufficient supplies of biomass in the short term in the statement by Drax that they would have to wait to apply for an enduring CfD before being able to invest in the supply chain 'beyond the short-term'. This implies that short term supplies do not need any further investment.
14. Drax state that they would take 'state aid risk' and proceed with their investments for unit #3 after receiving an investment contract but before State aid approval is given. It appears from this that it may therefore be possible for Drax to make these investments on the strength of the RO support which they are currently obtaining for co-firing, and could obtain for operating as a conversion in future. They do not explain why this is not the case.
15. Significant work towards converting unit #3 and sourcing fuel has already been undertaken. As set out in schedule 3 to the binding application, the unit will be co-firing for a period up to April 2015, and the full conversion appears to be being delayed until payments under the investment contract can be made. Given that some renewable energy will be produced by co-firing, and that short term supplies of biomass do not appear to be a problem, it is not clear how much generation is likely to be delayed or cancelled."
The decision
"However, your letter and binding application do not provide a cogent explanation of the risk of delay to the generation. DECC notes that:
- It no longer appears from your submissions that the actual conversion of the Unit #3 plant itself is at significant risk of delay without an investment contract. This is in contrast to your submissions at Phase 1 and Phase 2 which indicated that conversion of Unit #3 depended on securing the rights to sufficient sustainable biomass.
- Your recent submissions do not explain in a satisfactory manner how the alleged delays in fuel supply chain investment caused by the absence of an investment contract would prevent or delay generation. For example, if Drax is making the case that, without an investment contract, Unit #3 may convert but may not operate at full capacity, your submissions do not identify the amount of generation that might be delayed or the point at which delay might occur.
- Your recent submissions do not explain why, in the absence of an investment contract, the delay referred to in your clarification letter could not be avoided by converting the plant under the Renewables Obligation (RO). This is in contrast to your submissions at Phase 1 and Phase 2 which indicated that a private law contract was important in enabling sufficient fuel to be sourced for Unit #3.
Accordingly, having carefully considered the matter, including in light of your recent submissions, DECC is not satisfied that you have demonstrated that without an investment contract there is a significant risk that the electricity generation relating to Unit #3 will not occur or will be significantly delayed."
The judgment of Andrews J
(1) the decision that the Key Criterion was not satisfied was irrational: it had always been Drax's case that Unit 3 would convert at the same time regardless of whether it got an IC; Drax had put forward the same case at each phase; and no decision-maker could reasonably have considered that the Key Criterion was not satisfied in the light of the evidence submitted; and
(2) even if the decision was not irrational, it was vitiated by procedural unfairness: Unit 3 had been passed as satisfying the Key Criterion at Phases 1 and 2, and Drax should have been given the opportunity to respond to DECC's concerns at the Binding Application stage before a final decision was made.
Reasonableness: introduction
The first bullet point
The third bullet point
The second bullet point
Conclusion on the issue of reasonableness
"87. Although a Court will not lightly interfere with a decision of this nature, particularly when such a large sum of money is involved, and despite the attractive simplicity of MrChamberlain
's submissions, I am driven to the conclusion that the Claimant has succeeded in discharging the onerous burden of proving that the decision was unreasonable in the Wednesbury sense and that none of the reasons given by DECC in the decision letter can possibly sustain it. When properly understood, Drax's application did satisfy the Key Criterion and no decision maker, properly informed, who accepted that Drax was telling the truth about the different impact on market confidence of a CfD or IC versus an RO, and about the need to build up the necessary continuous volume of supplies of biomass to fire the unit in future, could have concluded that it had failed to do so or that the information given by Drax was insufficient to satisfy him that it passed the test. "
Procedural unfairness
"91. The real problem, in my judgment, was not so much a result of deficiencies in the procedure that was adopted, as a result of the misunderstandings about Drax's supposed change of position and the negative impact that DECC's mistake about Drax's failure to deal with the RO counterfactual obviously had upon the way in which the evaluation of whether it had satisfied the Key Criterion was then carried out. For that reason, I do not consider that the second ground of challenge adds anything of substance to the first."
The judge's order
The issues in the appeal
The reasonableness issue: discussion
General approach
"The greater the policy content of a decision, and the more remote the subject matter of a decision from ordinary judicial experience, the more hesitant the court must necessarily be in holding a decision to be irrational. That is good law and, like most good law, common sense. Where decisions of a policy-laden, esoteric or security-based nature are in issue, even greater caution than normal must be shown in applying the test, but the test itself is sufficiently flexible to cover all situations."
DECC's reasoning
The issue of procedural unfairness: discussion
Conclusion
Lady Justice Gloster :
Lord Justice Laws :