Drax confident biomass stations will be built despite subsidy hitch

Drax chief executive Dorothy Thompson said she would be "absolutely stunned" if the three plants were based anywhere else than the UK.

Earlier this week Selby-based Drax warned that unless the Government reverses its decision to limit subsidies, it could take the 2bn project abroad.

Yet analysts believe that the Government will change its mind and back Drax's plans, which have the support of various independent reports.

The company is due to make the final decision on the three plants, which will burn organic matter such as wood cuttings and peanut husks to create electricity, by the end of the year.

Ms Thompson said that "regulatory certainty" is needed if the company is to put forward a watertight investment case for the three plants.

Two sites have already been agreed at Immingham and the company's Selby base in North Yorkshire.

A third plant is yet to be decided, but Hull is seen as the likeliest candidate.

The firm's Selby coal-fired plant is thought to be one of Europe's biggest polluters.

The biomass plans are seen as vital to offset the impact of a huge rise in operating costs in 2013 when the company must buy all of its carbon permits to burn coal.

Biomass plants currently only have subsidy levels guaranteed up to 2013 – unlike other forms of renewable energy such as wind, which have certainty for 20 years. The Department of Energy and Climate Change (DECC) is reviewing the subsidy regime on biomass and will make a statement by the end of March.

An improved subsidy regime is likely as biomass is forecast to provide almost a third of the 15 per cent of UK energy needs due to come from renewable sources by 2020 under Government targets.

Drax's biomass business is seen as a key area of growth for the company.

The group reported a sharp fall in full-year profits yesterday as a result of lower power prices and demand.

Drax said 2009 pre-tax profits fell 64 per cent to 158m on revenues 16 per cent lower at 1.47bn.

The group's shares fell 1.4 per cent to close the day down 6p at 410.8p.

A slump in gas prices and relatively stable coal costs have made coal plants less profitable over the last year, but Drax expects the situation to improve.

"Last year the commodity markets in which we operate yielded weak margins for coal-fired generators," said Ms Thomp-son.

"Weak commodity prices for coal generators persist and we are therefore particularly pleased with our decision to accelerate our hedged position for 2010, with Drax now virtually fully hedged at higher average margins than for 2009."

Drax has secured contracts for between 2010 and 2012 at better spreads to 2009.

"We start 2010 with more certainty over the earnings for the year," said Ms Thompson.

Drax has also agreed an additional 300-megawatt baseload power sales agreement with Centrica, the owner of British Gas, for the five years up to September 2015.

The lower prices have squeezed the company's "dark green spread" – the margin it earns over the costs of coal and carbon dioxide emissions permits, although Drax partly offset this by locking in higher forward prices early last year.

The firm expects to see narrow margins remaining during 2010 after a collapse in global gas prices, although in time spreads should recover as older power stations are retired.

Rollercoaster ride for the dividend

Drax, ranked as Yorkshire's second biggest PLC, offered the region's biggest dividend payout last year and was the 40th largest payer in the UK market.

Drax paid a final dividend of 38.3p last year, up from 9.9p the previous year.

Yorkshire's biggest company, Bradford-based supermarket chain Morrisons, was the 44th largest payer in the UK market.

Analysts believe that Drax will continue to offer one of the best PLC incomes despite the sharp fall in dividend announced yesterday

Drax said it would pay a dividend of 9.6p a share for the year.

The company is owner and operator of the Drax coal-fired power station in North Yorkshire, which produces up to 4,000 megawatts of electricity, around seven per cent of Britain's electricity needs.

Drax floated on the London Stock Exchange in December 2005 at 500p and, having risen to almost 11 in 2006, the shares have drifted back down.