Drax Plans to Spend $1.1 Billion on Biomass to Cut Emissions

Drax Group Plc (DRX) plans to invest as much as 700 million pounds ($1.1 billion) to burn more biomass at its coal-fired power plant, the U.K.’s largest, and meet emissions standards, Chief Executive Dorothy Thompson said.

The company is committed to spend 50 million pounds in 2012 to increase its ability to co-fire biomass, the executive said on a conference call today. An additional 450 million pounds is required to modify the plant, build storage facilities and develop biomass supply chains, she said.

“Expansion will need substantial investment in ports and rail facilities,” she said. “This is not be something that happens overnight.”

Drax said last year it plans to raise the amount of biomass it uses for electricity by 2013. Biomass-fueled generation, which uses organic feedstock such as wood chips or straw, gets government support in the U.K. through the award of tradable Renewable Obligation Certificates. The Department for Energy and Climate Change has proposed doubling ROCs to enhanced biomass co-firing plants.

The proposals, which are under review through March and will take effect in April 2013, award one ROC for every megawatt-hour produced, double the current rate. Drax will also invest as much as 200 million pounds to comply with European Union emissions standards, it said today in an earnings statement.

‘More Clarity’

“Drax has provided more clarity on its biomass trials and capital expenditures,” Liberum Capital analyst Dominic Nash said in a note to investors today. “This is significant in our view as it indicates that co-firing above 50 percent is a possibility. This could be an important value driver later in the decade.”

Profit before interest, tax and amortization retreated to 334 million pounds from 392 million pounds a year earlier. This beat the 325.7 million-pound average estimate of 14 analysts surveyed by Bloomberg. Sales increased 11 percent to 1.8 billion pounds.

Output from the Selby-based power producer was flat at 26.4 terawatt-hours and the plant was available more than 88 percent of the time, Drax said today. Power generation from coal-fed plants almost tripled since the end of August, according to data compiled by Bloomberg.

“The relative prices of coal and gas and weak carbon dioxide prices continued to favor coal-fired generators,” HSBC Plc analysts Verity Mitchell, Jose Lopez and Adam Dickens said in a note to investors yesterday. “We believe that commodity price fundamentals will continue to favor coal during 2012.”

Drax shares retreated 1.4 percent to 518.5 pence in London. The stock his risen 31 percent over the past 12 months, valuing the company at 1.89 billion pounds.

To contact the reporter on this story: Kari Lundgren in London at klundgren2@bloomberg.net

To contact the editor responsible for this story: Will Kennedy at wkennedy3@bloomberg.net

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