Drax Won’t Raise Capital Spending Plan to Convert to Biomass

Drax Group Plc (DRX), operator of Western Europe’s largest coal-fired power plant, won’t raise a spending forecast of as much as 700 million pounds ($1.1 billion) in light of plans to convert three of its six generating units to biomass.

Drax is ready to switch to mainly biomass generation after “excellent progress” on research and development, Chief Executive Officer Dorothy Thompson said today on a conference call after the company released first-half results. “The unit conversion option is something we first asked for two years ago and it is a great solution for Drax.”

The government’s decision to offer less financial support than expected for a switch to burning low-carbon fuel prompted a record 25 percent slump in Drax shares on July 25. That spurred the company to announce plans to fully convert units rather than opt to burn biomass, or wood and other plant matter, together with coal in a process known as co-firing.

“The plans may well be challenging to achieve,” Angelos Anastasiou, an analyst at Investec Securities, said in an e- mail. “We still believe that there are significant risks here.”

Drax closed up 1 percent at 475.3 pence in London.

The first unit will be converted in the second quarter of 2013, Thompson said, and the next a year later.

‘Remain Confident’

“Although our central plan is now to progressively convert three generating units fully to biomass, rather than enhanced co-firing, we remain confident in the overall scale of the total 650 million-pound -- 700 million-pound strategic capital investment plan set out in the 2011 annual report and accounts,” Selby, England-based Drax said in a statement.

Co-firing of enhanced biomass with coal will get 0.5 to 0.9 of a ROC a megawatt-hour, depending on the fuel mix, the government said last week. That’s less than the 1 ROC proposed in an October draft last year. Support for full biomass conversions was maintained at 1 ROC a megawatt-hour in a new category.

“We welcome the government’s decision,” Thompson said. “Most significantly, we have clarity on regulatory support for sustainable biomass.”

First-half earnings fell 19 percent, reflecting weak margins on contracts placed in 2011, the company said in today’s statement. Earnings before interest, tax, depreciation and amortization fell to 154 million pounds from 190 million pounds a year earlier.

Making Allowances

Profits were in line with market expectations after making allowances for 15 million pounds more in biomass research costs than expected, Thompson said. The company will spend another 5 million pounds in this area in the second half, Drax said in its statement.

The utility, whose plant is about 200 miles (322 kilometers) north of London, makes its profit largely from the difference between the price of power and the price of coal, after excluding costs for buying European Union emission permits to offset carbon-dioxide emissions.

Drax said it will pay an interim dividend of 14.4 pence a share.

“Biomass is make or break” for Drax, said Lakis Athanasiou, an independent equity analyst in London, with today’s assurance “convincing” to investors. He estimated shares will return to levels seen before the government’s ROC banding announcement.

The speed of conversion will be “constrained by how fast they can access biomass and build up the supply chain”, he said.

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