The government’s move is considered as a blow to Drax’s proposals, which include modernising its Yorkshire polluting coal plant in northern England after two units were short-listed in December 2013 for investment contracts under the early contracts for difference (CfDs) mechanism.

Drax said the government has advised that it will be offered an investment contract for the third unit conversion.

The government believes the second unit conversion is no longer eligible for an investment contract, but support for conversion instead is available under the existing Renewables Obligation (RO) regime, where eligibility has already been confirmed.

Commenting on latest developments, Drax chief executive Dorothy Thompson said the company is disappointed by the government’s decision on the ineligibility of the plant’s second unit.

"Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now. We have, therefore, commenced legal proceedings to challenge the decision," Thompson said.

"Sustainable biomass provides a very reliable, flexible and cost effective renewable power source for the UK consumer. The performance of our first converted unit, which was converted last year to burn sustainable biomass in place of coal, continues to be strong."