Drax Shares Plunge After U.K. Scraps Climate Levy Exemption

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Drax Group Plc, the utility converting the biggest U.K. coal station to burning wood pellets, plunged to its lowest ever after the government said clean power will have to start paying a climate-change tax.

The stock tumbled 28 percent in London to the lowest since it started trading in 2005. Chancellor of the Exchequer George Osborne said renewable energy that includes power from biomass will no longer be exempt from the Climate Change Levy. He made the comments in his budget statement in Parliament on Wednesday.

Drax draws government support for its plants, whose wood pellets are considered a renewable fuel. The change may cut revenue for clean-energy generators by as much as 5 percent, said John Musk, an analyst at RBC Capital Markets LLC. Goldman Sachs Group Inc. estimates Drax earnings may drop as much as 50 million pounds ($77 million) before interest and tax.

“When you float that loss of 5 percent revenues down to the bottom line, it multiplies up, and you’re looking at something that is a significant hit to valuation,” Musk said.

Shares of Infinis Energy Plc, a Northampton-based developer of clean power listed in London, also slumped 8 percent to the lowest since November 2013. Drax said it was upset about the decision, and a renewable energy group said it would ask the Treasury to reconsider.

Drax Reaction

“We’re displeased with this retrospective change to a support regime that was there to encourage green energy and which would have underpinned many renewable investment decisions,” Andrew Brown, a spokesman from Drax, said by phone.

The levy was introduced in 2001 as a tax charged on energy used in business. The intention was to encourage businesses to cut greenhouse-gas emissions. Different rates are charged for different fuels based on their energy contents, and one of the main elements of the package was total exemption granted to renewable energy sources.

“Now we have a long-term framework for investment in renewable energy in place, we will remove the out-dated climate-change levy exemption for renewable electricity that has seen taxpayer money benefiting electricity generation abroad,” Osborne said in the House of Commons.

Drax already has converted two of its six units to burn biomass. It plans to bring a third unit online by 2016. Removal of the levy, an indirect subsidy for clean power, would result in renewable energy generators losing as much as 6 pounds per megawatt-hour they produce.

Industry Critics

The move is garnering criticism from the renewable energy industry that says it will undermine investor confidence and make investment in fossil fuels more attractive. The government last month also said it plans to cut-off new onshore wind farms from a subsidy program a year early.

“We’re suddenly looking at a substantial amount of lost income for clean energy companies which was totally unexpected,” Gordon Edge, director of policy for RenewableUK, an industry lobby group, said. “For example, Levy Exemption Certificates account for just over 6 percent of onshore wind generators’ revenues,” he said.

The exemption to the levy will be removed from Aug. 1, and there will be a transitional period for suppliers to claim funds on clean electricity generated before that, according to a statement covering details of the decision on the government’s website. It plans to consult with companies on an “appropriate” length for the transition.

The industry was expecting the government to announce a review of the levy control framework, James Court, a spokesman from the Renewable Energy Association, said by phone. That may now happen with the spending review due later this year, he said. The framework caps the maximum annual spend on assistance to renewables through to 2021 and it’s expected to rise to 7.6 billion pounds by the turn of the decade.