The Financial Conduct Authority (FCA) probe will cover the period from January 2022 to March 2024, as well as the company's annual reports between 2021 and 2023, Drax said in a statement.
Drax has received billions of pounds (dollars) in UK government subsidies, with wood pellets used in its biomass process classed as renewable, a claim disputed by environmental groups.
The company argues that its fuel is sustainable because trees absorb carbon dioxide while growing, offsetting emissions from combustion.
Shares in Drax, which trades on London's second-tier FTSE 250 index, slumped 10 percent in morning deals Thursday.
"The company will cooperate with the FCA as part of their investigation," Drax said, declining to provide further details when contacted by AFP.
The investigation follows allegations made in March by Rowaa Ahmar, a former head of public affairs at Drax, in a lawsuit for alleged wrongful dismissal.
Ahmar said Drax misled the public, the government and the regulator by promoting a sustainable wood supply, according to media reports.
According to think tank Ember, Drax is the biggest emitter of carbon dioxide in the UK.
Drax last year agreed to pay a penalty of �25 million after energy watchdog Ofgem found the group had reported inaccurate data on the wood it burned.
The government in February announced it would halve subsides to the company, starting in 2027, and require Drax to use 100-percent sustainable wood or face hefty penalties.
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