The investigation will make sure the public funds used to support the conversion project are limited to what is necessary and do not result in overcompensation.
It will also assess whether the benefits of the project in achieving EU energy and environmental objectives outweigh potential competition distortions in the market for biomass.
The Commission said it “fully supports” member state efforts to increase the use of renewable energy and pursue EU energy and climate objectives.
However, it added, EU state aid rules are in place to make sure that the cost of such support for consumers is limited and does not give certain operators an unfair advantage over competitors.
In its preliminary analysis, the Commission considered that the estimates of the plant’s economic performance may be too conservative, and expressed concern that the actual rate of return could be higher than the parties estimate, leading to overcompensation.
It also noted that the amount of wood pellets required is considerable, compared with the volume of the global wood pellets market and demand from the Drax conversion project could significantly distort competition in the biomass market.
The Commission is therefore also concerned that on balance the measure’s negative effects on competition could outweigh its positive effect on achieving EU 2020 targets for renewable energy.
The Commission will investigate further to see if its concerns are justified, and will give all interested parties the opportunity to express their views on these issues before finalising its assessment.
Analysts are still confident that the conversion project will go ahaead as planned.
Utilities analyst at Whitman Howard, Angelos Anastasiou, said that despite the Phase 2 investigation, he believes the project will be cleared and begin operating under Contracts for Difference by the summer, “a few months earlier than previously thought”.