Drax capable of moving largely to biomass for generator fuel

The North Yorkshire-based group, which supplies around seven per cent of the UK’s electricity, wants to clean up its power generation by burning more organic plant-based matter, in a move to extend its lifespan.

Drax generated about eight per cent of its electricity from biomass during the first six months of the year, although this was below its 12.5 per cent capacity as it waits for clarity on subsidies.

Drax said this equated to around six per cent of the UK’s renewable power output, making it the UK’s single biggest source of renewable energy.

Drax, also the UK’s biggest single source of carbon emissions, yesterday reported a rise in first-half underlying earnings but warned full-year profit would fall as coal prices continue to climb.

Earnings before interest, tax, depreciation and amortisation (EBITDA) increased three per cent to £190m in the first six months of the year, while revenues were up 11 per cent at £866.3m.

Pre-tax profits climbed to £168.7m from £132.2m a year earlier.

“It’s a good half-year,” said finance director Tony Quinlan. “The plant has been operating well and that’s a follow on from last year.”

Drax said the profits increase was thanks to a better trading environment and some good forward sales made in previous years. But the generator said for the rest of the year it will have less benefit from hedged sales as these strong forward margins fall away.

Analysts currently expect EBITDA of £87.5m for the second-half.

“We remain cautious in our outlook for the power market and recognise that for the rest of the year we will have less benefit from strong forward margins secured in prior years,” said Drax.

Shares in the group edged up 0.5p to 529.5p, valuing it at about £1.9bn.

Drax said the plant had 86 per cent availability and a load factor of 80 per cent – higher even than the average load factor of a nuclear plant.

It sold three per cent more electricity over the first half to 13.1 terawatt-hours (TWh).

The generator has ambitions to build three new 290 mega watt standalone dedicated biomass plants under a £2bn investment, and fitted extra biomass co-firing capacity in 2010, at a cost of £80m.

It was recently boosted by Government’s inclusion of biomass in its Renewable Energy Roadmap. During the six months it burnt over 600,000 tonnes of biomass, as well as 4.6 million tonnes of coal.

“Drax stands ready to transform into a predominantly renewable generator; but to do so we will need an appropriate level of support under the renewables incentive mechanism,” said chief executive Dorothy Thompson.

Drax expects the first guidance on subsidies this summer, and clarity on support levels by the end of the year, with subsidies to come into force in 2013. Mr Quinlan said if subsidies were sufficient, Drax could be more than 50 per cent biomass-fuelled by 2016/17.

“We would be taking five million tonnes of coal out of the mix at Drax and replacing that with seven to eight million tonnes of biomass,” he said.

Ms Thompson added: “It would probably make us by output the largest renewable generator in Europe.”

Mr Quinlan said its spending on biomass would spell investment in Yorkshire.

“There’s a knock-on effect around the ports,” he said. “Transforming Drax to a biomass dominant business will be good for the employment prospects of Drax but also Yorkshire.”

However, Drax said Government plans for a carbon price floor posed uncertainty for investors. The UK will introduce a set minimum price for carbon in April 2013 at £16 per tonne of CO2, rising to £30 by 2020.

“To encourage investment any incentive mechanism must be ‘bankable’. That is not the case for the carbon price floor, which is to be set annually and is subject to discretion, both of which increase uncertainty for investors,” said Ms Thompson.

She also said the Government’s proposal for an Emissions Performance Standard was an “unnecessary layer of additional legislation”, saying EU-wide regulation was enough to ensure low emissions.

Drax ended the period with net cash of £198m. It also recently completed a refinancing, including a £310m revolving credit facility expiring in 2014.