Drax's Coal-to-Biomass U.K. Conversion Aid Faces EU Probe

  • EU cites concerns that plant operator may be overcompensated
  • Huge demand for wood pellets may distort market, EU says

Drax Group Plc fell to the lowest in almost three weeks after the European Union said it will investigate the U.K.’s plans to support conversion of a coal-powered unit to biomass amid concerns that the aid may overcompensate the company.

The probe will focus on U.K. estimates for the Drax plant’s economic performance, which “may be too conservative” and allow the unit to make more money than envisaged, undermining its need for government help, the European Commission said. It will also examine whether the plant’s demand for some 2.4 million metric tons of wood pellets a year, mainly from South America and the U.S., would distort the market.

Drax is seeking government help to convert one of the six units at its coal plant in Selby, England, to burn wood pellets. It had already switched two units to biomass before the U.K. cut subsidies for the fuel in July. Biomass feedstock costs three times more than coal, Drax said last year.

“We have Drax as one of our key underperform recommendations for 2016,” John Musk, a utilities analyst at RBC Europe Ltd., said by phone from London. The EU is looking at “each plant on its own merits and there is a downside risk to Drax.”

Shares in the company slumped as much as 7 percent to 215.20 pence ($3.16) a share, the lowest since Dec. 16, before paring losses to 224.90 pence by 1:30 p.m. in London. Drax was the second-worst performer in the Stoxx 600 Utilities Index last year.

Drax will continue to work to complete the state-aid clearance process as quickly as possible and make the case for converting the rest of the power station, an official at the company said by e-mail.

The U.K. unit of German utility RWE AG won EU approval last year to convert its power station in Lynemouth, England, from coal to biomass. Drax shares rose more than 12 percent on Dec. 1 when the RWE decision was announced.

It was “optimistically premature” to assume the same outcome for Drax, RBC’s Musk said.

Before it's here, it's on the Bloomberg Terminal. LEARN MORE