Drax hails biomass success

Rising gases from the cooling towers at Drax Power Station.
Rising gases from the cooling towers at Drax Power Station.
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POWER station Drax said full year earnings will be “materially ahead” of market forecasts following a better than expected performance from its first biomass unit.

The North Yorkshire company, which is in the process of switching from polluting coal to environmentally friendly biomass, said the unit has performed much better than initially hoped.

As a result contingency funds, which were set aside to cope with delays or any other problems, will be freed up to boost the bottom line.

Analyst consensus for full-year profits before the update was £203m for earnings before interest, tax, depreciation, and amortisation (EBITDA).

This has now been raised to £220m- £225m.

Drax, which is based near Selby, has developed technical solutions to deliver output of up to 600MW from a unit converted from coal to biomass.

According to the company’s data, the first unit to be converted has been operating at the 600MW level on several occasions over the last couple of weeks, raising hopes that this will be a long-term achievable goal.

Drax said the results show the benefit of moving from temporary systems to the new purpose-built facilities.

The power station said it is confident it can reach its targets for availability for the first converted unit to average at least 80 per cent for 2013

Drax said trading conditions in its markets have been good with lower coal prices boosting its coal burning operations.

The group said it has also benefited from a solid operating performance from its coal generating units.

It added that the commissioning of its new biomass delivery, storage and distribution systems is “progressing very well”.

Drax has strengthened its contracts with customers with additional power sales of 3.4TWh for 2014.

The company’s aim is to transform itself from one of Europe’s biggest polluters to a predominantly biomass-fuelled electricity generator.

It said it is making good progress with the transformation, particularly with the commissioning of the new on-site facilities for the first converted unit, which is on schedule to be complete by the year end.

It is also on track with plans to convert its second unit in the second quarter of 2014.

It added that capital investment is on schedule and budget and it now has over six months’ experience operating the largest converted biomass unit in the world.

Analysts at Deutsche Bank said in a note: “Drax highlighted continued good market conditions in recent months. The company had a solid operating performance from its coal generation units, with its first biomass unit also performing well.

“Drax has strengthened its contracted position and has now sold around 80 per cent of its power forward for 2014.

“For the fixed component of its power sales, Drax has contracted at an average achieved power price of £53.1/MWh in 2014, compared to a price of £51.1/MWh in 2013.”

Analyst Tina Cook at Charles Stanley said: “While earnings are still expected to be adversely impacted by the rising cost of carbon and significant capital expenditure in the near-term, biomass conversion has the potential to drive substantial improvement in EBITDA from 2015.

“Drax remains a higher risk utility, but with growing confidence in its ability to execute its transformational plans, we take recent share price underperformance as an opportunity to upgrade our recommendation to ‘accumulate’.”

At its half-year results Drax posted a fall in profit after the company began paying a Government-imposed minimum price for carbon.

Earnings for the first half of the year fell 22 per cent after it converted one of its generation units to biomass and the costs of emitting carbon more than doubled.

For the first time, Drax 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. Drax also had to pay an extra carbon cost imposed by the Government in April.

It said EBITDA fell to £120m for the six months to June 30, down from £154m a year ago.

Chief executive Dorothy Thompson said: “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,”

Taking a big hit on carbon allowances

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.

Drax 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 hopes to convert a third 660MW unit to biomass in 2017, depending on Government incentives and the availability of wood that can be certified as sustainable.

It said the investment in 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,

Elsewhere in Yorkshire, a Chinese energy giant is reported to be bidding for Eggborough Power Station, the coal fired plant near Selby, which supplies 4 per cent of Britain’s electricity needs.