The warning comes as little surprise following steadily declining wholesale power prices over the first quarter due to low demand and bearish wholesale gas markets. In addition, strong wind power output has eroded value in the ROC market putting pressure on the biomass side of the business.
“We now anticipate that, unless markets improve in the coming months, full year EBITDA and underlying earnings per share for 2014 will be below current market forecasts,” the statement said.
Low weather-related demand due to the recent mild winter has left gas storage levels at record highs for this time of year, weighing on wholesale gas and power prices. At the same time record wind power output, which averaged just over 4 GW over February, has weighed down ROC prices which Drax uses to subsidise its biomass business.
But investor notes issued Friday morning suggest the weaker outlook is limited to 2014 with next year’s earnings expectations unchanged.
“We leave our 2015 projections unchanged as the main factors influencing 2014 will not necessarily repeat in 2015,” an analyst note from Deutsche Bank said. “We see a range of potential outcomes for 2015 depending on the evolution of power prices and spreads in the coming months.”
Other investor notes suggest longer-term outlooks have also received support from news that its conversion from coal- to biomass-power remains physically on track despite legal wrangling with the government over its decision to exclude a second unit in the contracts for difference (CfD) scheme.
The predominantly coal-fired generator provides around 7% of the UK’s electricity and says its transition to biomass continues to make “very good progress”. Its first unit conversion has performed well over the past year, the company said, and its 85% biomass unit has begun its phased commissioning process on schedule.
Another biomass unit conversion received the go-ahead from government late last month for early inclusion in the CfD subsidy scheme. Although the second unit expected to get the greenlight was snubbed by the government, Drax said it plans to move forward with legal proceedings against the government.
In addition, the unit remains eligible for subsidy under the old Renewable Obligation regime.
“We remain positive on Drax, on the longer-term earnings potential post transformation, but there is likely to be a short-term negative reaction today,” said RBC Capital Markets.
Drax shares traded between 680 and 690 pence over the previous week but opened Friday almost 5.5% lower at 647 pence. By 10.30 BST Drax shares were just 3.36% below its previous close.