Carbon emission costs eat into profits at power supplier Drax

COAL-fired power producer Drax posted a fall in half-year profit yesterday, as the company began paying a Government-imposed minimum price for carbon.

It said earnings for the first half of the year fell 22 per cent, as it converted one of its generation units to biomass and the costs of emitting carbon more than doubled.

For the first time, Drax, which is based near Selby, has been fully exposed to prices for European Union carbon permits, which most EU utilities must pay for in full in the current 2013-2020 phase of the emissions trading scheme.

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Drax, the operator of one of Europe’s largest coal-fired power stations, must also pay an extra carbon cost imposed by the Government in April. It said earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to £120m ($184m) for the six months ended June 30, down from £154m a year ago.

“We are investing significant capital this year and next to transform our business, with earnings during this period impacted by the increasing costs of carbon,” chief executive Dorothy Thompson said.

Drax said it had to pay £70m for EU carbon allowances through the emissions trading scheme, which ended free allocation to utilities in its current phase, almost double the £38m it had to pay last year for the permits.

Meanwhile, a carbon floor price introduced by the Government on April 1 cost Drax £14m up to the end of June, the company said.

The current tax, at £4.94 per tonne, is in addition to each power firm’s obligation under the EU carbon market, and is set to rise to £9.55 next year and £18.08 in 2015.

The power generator spent £138m in the first half of the year on fixed assets, up from £90m a year ago, mainly for facilities to ship and store wood pellets.

Drax plans to convert a second 660MW unit to biomass next year, with a third possible in 2017, depending on Government incentives and the availability of wood that can be certified as sustainable. However, the extra costs of carbon and infrastructure were offset partly by lower costs for coal, driving down fuel costs.

Shares in Drax rose yesterday as investors responded calmly to the fall in profits, which was in line with the company’s expectations.

Drax said it hoped to increase the amount of electricity generated by its converted biomass unit, which only operated at 57 per cent of capacity due to disruption in wood pellets supply.

It said the investment in permanent transport and storage facilities would ensure a steady flow of supply of biomass which is sourced mainly from North America and eastern Europe.

Wood pellets have to be moved in much bigger quantities than coal, which has prompted Drax to build large inflatable domes at its power station to store biomass.