Drax has announced amended terms for its deal with Iberdrola to buy 2.6GW of hydro, pumped storage and gas generation assets from its subsidiary Scottish Power for £702 million.

Following the recent suspension of the capacity market, both parties have agreed to provide up to £26 million of compensation to each other if capacity payments are not reinstated under a new risk-sharing arrangement.

All capacity auctions and payments have been halted until further notice after the European Court of Justice ruled last month that the European Commission had failed to properly establish the compatibility of the mechanism with state aid rules when granting approval in 2014.

For the assets covered by the deal, these payments are worth £36 million for the first nine months of 2019. If any of these payments are not made and the portfolio returns less than £155 million in gross profits, Drax will receive £26 million of compensation from Iberdrola.

However, if gross profits from the portfolio nevertheless exceed £165 million, Drax will pay Iberdrola 72 per cent of the difference, up to a maximum of £26 million.

“The government has stated it is working closely with the European Commission to aid their investigation and to reinstate the full capacity market regime, including existing agreements, as soon as possible,” said Drax Group chief executive Will Gardiner.

“To mitigate the risk that capacity payments take time to be restored, we have agreed revised terms which provide protection in 2019. Beyond 2019, while reinstatement of the capacity market is the most likely outcome, we considered other outcomes, the more plausible of which would still deliver returns in excess of Drax’s weighted average cost of capital.”

In the absence of capacity payments, the portfolio is expected to generate earnings before interest, tax, depreciation and amortisation (EBITDA) of between £43 million and £63 million in 2019. If the payments are reinstated, EBITDA is forecast to rise to between £90 million and £110 million.

The acquisition is scheduled to be completed at the end of this month.

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