UPDATE 2-Power producer Drax H1 earnings hit by UK carbon tax

Tue Jul 29, 2014 6:05am EDT

* Carbon tax costs rise to 49 million pounds in H1

* Three of six units to convert to biomass by 2016

* Fourth unit could also be converted

* No likely impact from any potential Russian coal disruption (Adds details on biomass, court case and background)

By Susanna Twidale

LONDON, July 29 (Reuters) - British power producer Drax Group Plc reported a 15 percent fall in first-half earnings, hurt by the increasing cost Britain's carbon tax.

Operator of one of Europe's largest coal-fired power stations, Drax said earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to 102 million pounds ($173 million) for the six months which ended June 30, from 120 million a year earlier.

"In the short term, the increasing cost of the UK carbon tax drove EBITDA down year on year," Chief Executive Dorothy Thompson said in a statement.

The utility warned in May that full-year EBITDA and earnings per share would come in below market forecasts and said on Tuesday this outlook remained unchanged.

Britain's carbon tax came into effect in April 2013 and was designed to spur investment in low-carbon power generation and switching to cleaner fuels.

The tax almost doubled to 9.55 pounds per tonne in April 2014 from 4.94 pounds a year earlier and will rise again to 18.08 pounds in April 2015 where it will stay until the end of the decade after Britain's finance minister announced a freeze in this year's budget.

It cost Drax 48.6 million pounds in the first half of 2014, up from 13.7 million pounds during the corresponding period last year, the results showed.

BIOMASS

In a bid to reduce carbon costs, Drax plans to convert three of its six coal-fired power generation units to use biomass by 2016 and is planning to later convert a fourth unit.

One was unit converted last year, and the other two conversions are planned for next year.

The company has sought government funding to help pay for the cost of conversions, with the first unit receiving support under the so-called renewable obligation (RO) scheme.

As a part of extensive reform of Britain's electricity market the government is changing the way it supports renewable energy projects by replacing direct subsidies with a contracts-for-difference (CfD) system whereby qualifying projects are guaranteed a minimum price at which they can sell electricity.

In April the government said it would back conversion of one of Drax's unit under the CfD scheme but rejected the application for the second unit to be included.

However, Britain's High Court in July decided the utility had fulfilled all the key criteria set out by the government at the time of making its application.

The Department of Energy and Climate Change (DECC) is appealing the court decision and Thomson said in a conference call on Tuesday the hearing was likely to take place on Aug. 1.

"We still have no idea when a final judgment will be given," she said, adding that DECC has the right to appeal any decision.

If the second unit cannot get CfD funding, Drax will try for support for the conversion under the older RO scheme, she said.

The pace of the conversion of a fourth unit would also depend on the type of government support available, she added.

CfD funding for the biomass plants must also pass European Commission state aid rules before it can be awarded.

The company said it also hopes its coal-fired units will be able to participate in Britain's energy capacity market which will be launched at the end of this year to ensure there is enough electricity generation available at all times to meet demand.

Thomson said the majority of Drax's coal comes from the United States and Colombia and that it would unlikely be affected by any disruptions in Russia coal supply.

European physical coal prices have risen over the last few weeks as the threat of a new round of U.S. and European sanctions against Russia, a large coal exporter, led traders to price in a market risk premium. [ID: nL6N0PZ68E]

Shares in Drax were little changed on Tuesday morning and traded at 691.5 pence, up 5 pence on Monday's close. ($1 = 0.5892 British Pounds) (Reporting by Susanna Twidale; additional reporting by Abhiram Nandakumar in Bangalore; editing by Jason Neely and David Evans)

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