* FY EBITDA falls 15 pct to 334 mln stg vs est of 326.2 mln
* Could expand renewable capacity with appropriate
* Continues to operate at less than installed renewable
By Karolin Schaps and Adveith Nair
LONDON, Feb 21 Britain's coal-fired power
producer Drax has scrapped plans to build a dedicated
biomass plant on its site in North Yorkshire, but said it was
ready to invest in biomass-fuelled power generation if given
appropriate regulatory support.
The company, which also reported a smaller-than-expected
drop in full-year core earnings on Tuesday, said state support
levels for using only biomass in power generation were still too
low. High costs of transporting fuel to its inland site also
contributed to the decision to abandon one of its biomass
projects, it said.
Drax had planned to build a 290-megawatt (MW) dedicated
biomass plant in cooperation with Siemens Project Ventures on
its Selby site where it owns one of Britain's largest coal-fired
The power producer said it was considering options for its
two other planned biomass plants in different locations in the
"Drax is ready to transform itself into a predominantly
renewable generator, but to do so we need appropriate regulatory
support, and to that end we look forward to the timely
conclusion of the Government's current review," Chief Executive
Dorothy Thompson said.
The British government proposed in October last year to
increase state support for mixing biomass with coal, known as
co-firing, but said it would reduce subsidies for standalone
biomass plants by 7 percent from April 2016.
While the final outcome of the so-called Renewables
Obligation Consultation is expected in the spring, Drax said a
reduction in state support for dedicated biomass made its
investment case highly challenging.
The company said it continued to operate at less than its
installed renewable biomass capacity given low levels of
regulatory support, but added it was "confident of its technical
capability to become predominantly biomass fuelled."
On a conference call with reporters, Thompson said Drax
could spend as much as 700 million pounds on biomass, subject to
appropriate regulatory support.
The company plans to invest 50 million pounds this year to
produce 20 percent of its power from co-firing biomass, up from
12.5 percent. Last year, it spent 180 million pounds more on
fuel costs, a 21.4 percent increase, mainly due to the rise in
burning uneconomic biomass.
The average fuel cost per megawatt-hour rose 30 percent last
year to 33.3 pounds as Drax burned 44 percent more biomass in
2011 than the previous year.
A BIOMASS STORY
Even given the high costs, analysts say biomass will likely
be key to the company's prospects.
"The key remains the longer term, driven by Drax's biomass
plans," Investec analyst Angelos Anastasiou said. "We believe
that Drax will not totally reveal its true position here until
the ROC banding consultation is completed probably in March."
For the year ended Dec. 31, 2011, Drax said earnings before
interest, taxes, depreciation, and amortization (EBITDA) fell 15
percent to 334 million pounds ($530 million), but beat analysts'
estimates of about 326.2 million.
The fall in core earnings was largely due to higher coal
prices, and the company said dark green spreads, the difference
between the price of power and the cost of coal and carbon,
began to drift down in the last quarter of the year.
Liberum Capital analyst Dominic Nash said increased clarity
on biomass trials and capital expenditure, was significant as it
indicated that co-firing above 50 percent was a possibility.
"This could be an important value driver later in the decade
with decreasing dark spreads and increasing bark spreads," the
Bark spreads is the difference between power price and
renewable support and the cost of biomass.
Drax, which said the introduction of the carbon price
support mechanism by the UK Government from April 2013 could
erode its competitive position in the coal-fired generation
business, added the move strengthens the case for biomass
"As an enhanced co-firing plant we see a profitable life
operating at a high load factor until 2027," Nash said. "With a
50 percent co-firing model by 2015 we believe that Drax has the
potential to deliver 7 percent CAGR earnings growth from the
post-free carbon allocation trough in 2013/14."
Shares in Drax were down about 1.27 percent at 519.5 pence
at 0950 GMT on Tuesday.