Drax shares fell 13.5 per cent on the government’s decision to award a contract for difference (CfD) to only one of two biomass units under development. In December, the Department of Energy and Climate Change (Decc) had provisionally rated both units as eligible for support.
The unit denied a CfD is still eligible for the existing Renewable Obligation (RO) subsidy regime, which offers less favourable terms. Biomass power generated will earn an estimated £10/MWh less under the RO than the CfD. With a CfD, biomass conversion is guaranteed £105/MWh. Under the RO, it gets 0.9 RO Certificates, currently worth £41.50/MWh, plus the wholesale power price.
Drax is mounting a legal challenge to the government decision but analysts expect the generator to press ahead with its plans under the RO if that fails. It has already converted one of the six coal burners at its 4GW Yorkshire power station to run on biomass. Chief executive Dorothy Thompson said yesterday the company remains “fully committed” to its strategy of becoming a mainly biomass-fuelled generator.
Deutsche Bank said Drax was still “an attractive proposition with scope to drive strong earnings growth over the next few years”.
Investec took a similar view, saying that while the decision added to the policy uncertainty facing all energy investors, Drax remained in a relatively strong position.
The need for reliable renewable power capacity will “eventually trump Decc irrationality”, said Investec analyst Harold Hutchinson. “As the UK’s largest ‘conventional’ plant, the country can ill afford to lose Drax.”
The reason behind Decc’s change of heart since December remains unclear. Drax said Decc’s concerns centred on the “mobilisation of capital”. RBC Capital Markets interpreted this as Drax being “a victim of its own success”, as its conversion was so far advanced it was not seen to need the extra assurance of an enabling CfD.