Subsidies for the wood-burning power station in northern England -- a significant producer of electricity in the UK -- will be renewed from 2027, albeit under tighter conditions, a statement said.
Drax has received billions of pounds (dollars) in government subsidies as wood pellets used in its processes are classed as renewable, a claim disputed by environmental groups.
Under the new agreement, Drax will have a "much more limited" role in the UK's energy system, providing power only when it is needed, energy minister Michael Shanks said in the statement.
The previous arrangement "did not deliver a good enough deal for billpayers and enabled Drax to make unacceptably large profits", he added.
A new windfall measure has been added to return a percentage of profits back to consumers if they exceed expected limits.
There are also stricter sustainability measures, requiring the company to use 100-percent sustainable wood or face hefty penalties.
Drax has said that the wood chips burned in its plant are sustainable, assuring that carbon dioxide absorbed by trees as they grow compensates for the gas emitted during combustion.
According to a study published last year by the think tank Ember, Drax is the biggest emitter of carbon dioxide in the UK.
"Continuing to subsidise huge biomass imports is not a step on the road to a cleaner future, but a dirty compromise with past failures," Greenpeace UK policy director Doug Parr said Monday.
"Trees should be left to grow and not be burnt in a major subsidy-fuelled bonfire," he added.
Shrugging off the hefty reduction in taxpayer help, Drax Group chief executive Will Gardiner welcomed the renewal of subsidies, adding that the group's power station "plays a critical role in UK energy security... with enough reliable power for five million homes".
"Under this proposed agreement, Drax can step in to increase generation when there is not enough electricity, helping to avoid the need to burn more gas or import power from Europe," he said.
Drax last year agreed to pay a penalty of �25 million ($33 million) after British energy watchdog Ofgem found the group reported inaccurate data on the wood it burned.
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