The bank’s predictions come ahead of Drax’s H1 financial report on Tuesday.
Weak wholesale power prices and a steeper government carbon tax are expected to result in a 13 per cent drop in the company’s profits and a 38 per cent drop in H1 earnings.
Deutsche Bank’s analysts forecast Drax’s H1 EBITDA at £105 million from last year’s £120 million and H1 earnings at 10.7 pence from last year’s 17.3p.
A key downward driver for Drax is the UK’s carbon tax which escalates each year, cutting earnings for the largely coal-fired power generator.
The tax was implemented 1 April 2013 at a support level of GBP4.94 per metric tonne of carbon emitted, to be paid in addition to carbon allowances through the EU’s carbon market. But in April this year the tax rose to GBP9.55/mt CO2 and will rise again to GBP18.08/mt CO2 at the same time next year.
More encouragingly the company’s plans to convert its coal-fired power units to biomass are “progressing well” but could be made more difficult due to falling wholesale power prices, the analysts said.
Drax is still locked in legal wrangling with Government over its refusal to grant an investment contract for one of its two biomass conversion projects which were deemed eligible late last year.
Remaining optimistic, the analysts believe a positive outcome for both the legal challenge and for European Commission approval is “more likely than a negative decision”.
“However, significant weakness this year in wholesale power prices is a worry in our view,” the investor note added.