Bloomberg News

Drax Plunges After U.K. Cuts Biomass Power Support

July 25, 2012

Drax Plunges After U.K. Cuts Biomass Power Support

A truck arrives at the Drax Group Plc.'s power station in Selby. Photographer: Chris Ratcliffe/Bloomberg

Drax Group Plc (DRX), owner of the U.K.’s largest coal-fired power station, fell by a record in London after the government offered less financial support than expected for a switch to burning low-carbon fuel.

Drax, based in Selby, northern England, dropped 76.5 pence, or 15 percent, to 442 pence, the biggest decline since the company started trading in 2005.

The U.K. government today published proposals for so-called renewable obligation certificates, or ROCs, a system to reward generators for switching to low-carbon power. Burning biomass, or wood and other plant matter, together with coal in a process known as co-firing will get fewer certificates a megawatt-hour than initially proposed. Fully converting plants to use biomass maintained the same support proposed last year.

“With today’s news, looking at support levels for co- firing and the levels available for biomass conversions, it’s quite clear to us the shareholder value is in doing the full conversion,” Drax spokeswoman Melanie Wedgbury said by phone.

Drax shares pared intraday losses of as much as 25 percent after the company confirmed plans to convert three of its six units to fully use biomass.

“They’re intending to go to largely biomass in the future as a result of our announcement today,” Energy Secretary Ed Davey told reporters in London. “It’s moving away from coal, which is the most polluting energy source, to biomass, which is less polluting than other fossil fuels like gas.”

Enhanced Biomass

Co-firing of enhanced biomass with coal will get 0.5 to 0.9 of a ROC a megawatt-hour, depending on the fuel mix, the government said today. That’s less than the 1 ROC proposed in an October draft last year. Support for full biomass conversions was maintained at 1 ROC a megawatt-hour in a new category.

Drax has already tested using 100 percent biomass at a single generating unit, as it seeks to become a “predominantly biomass fueled generator” in five years, it said today in a statement. The trials incurred about 20 million pounds ($31 million) in fuel-related research and development costs, according to Drax.

Chief Executive Officer Dorothy Thompson said in the statement that while the company is currently refining its previously announced 650 million pound to 700 million pound strategic capital investment plan, it remained confident of the “overall scale” of the investment proposal.

Tony Quinlan, financial director at Drax, said on a call with analysts the onsite infrastructure for the unit conversions may cost as much as 330 million pounds, a little more than under initial plans, with the balance of the investment comprised of supply chain investment and kit to reduce emissions.

Siemens Venture

Thompson, calling today a “positive day” for Drax, said on the call she was hopeful the company would reach a final investment decision on conversion of the first three units before the end of the year. The units would burn about 7 to 8 million tons of biomass a year, Thompson said.

A dedicated biomass project with Siemens Project Ventures GmbH at the Port of Immingham was “very unlikely” to go ahead with the new ROC levels for that category of plants, built solely to use biomass, she said.

Lakis Athanasiou, an independent equity analyst in London, said the key question would be whether Drax could access the 1 ROC awarded for conversions to 100 percent biomass.

“If this can be done at levels of spend already indicated by Drax then the negative reaction of the share price is massively overdone,” he said. “Only Drax will know the feasibility, cost and timescale of going to 100 percent burn on a single boiler.”

To contact the reporter on this story: Sally Bakewell in London at sbakewell1@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net


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