* Power sales up 3 percent due biomass, better efficiency
* Drax carbon allowances purchases fall 2 pct
* Coal burn profits uncertain post 2013
* Govt biomass support review may encourage higher use (Updates throughout with details on power output, emissions, biomass)
By Karolin Schaps and Adveith Nair
LONDON, Aug 2 Drax , the operator of Britain's largest coal-fired power station, beat analysts' first-half core earnings forecasts on Tuesday with a 3 percent rise, but warned that full-year profit would fall as coal prices continue to climb.
Drax, whose coal-fired power station in North Yorkshire supplies about 7 percent of Britain's electricity, reported first-half EBITDA (earnings before interest, tax, depreciation and amortisation) of 190 million pounds ($308.9 million), compared with a Thomson Reuters I/B/E/S poll forecast of 184.6 million pounds.
"We have seen improved profits for the first six months of the year, compared to the same period last year, which are a result of a better trading environment and some attractive forward sales made in previous years," the company said in a statement on Tuesday.
Drax sold three percent more electricity over the first half to 13.1 terawatt-hours (TWh) as the producer increased output from its biomass co-firing unit at an average power price which was nearly 5 pounds higher per megawatt-hour (MWh) year on year.
The power producer started burning biomass together with coal in its plant last summer, using mainly agricultural and forestry residues such as straw, peanut husks and branches.
Lower carbon emissions from the co-firing biomass unit also meant Drax bought nearly 2 percent fewer carbon emissions allowances over the first half, while work to modernise its plants raised efficiency levels.
But the power producer warned the second half of the year will not benefit from the same level of enhanced margins, leading to full-year underlying profit coming in below 2010 levels.
"We remain cautious in our outlook for the power market and recognise that for the rest of the year we will have less benefit from strong forward margins secured in prior years," Drax said.
Analysts currently expect EBITDA of 87.5 million pounds for the second-half.
The profit for burning coal for power production is uncertain beyond 2013, Drax said, as Britain will introduce a set minimum price for carbon in April 2013 at 16 pounds per tonne of CO2, rising to 30 pounds by 2020.
"To encourage investment any incentive mechanism must be 'bankable'. That is not the case for the carbon price floor, which is to be set annually and is subject to discretion, both of which increase uncertainty for investors," said Drax Chief Executive Dorothy Thompson.
She also said the government's proposal for an Emissions Performance Standard was an "unnecessary layer of additional legislation", saying EU-wide regulation was enough to ensure low emissions.
Drax plans to replace at least half of its coal-fired power capacity with biomass to cut carbon emissions and meet government guidelines.
But current market conditions do not incentivise biomass burning enough to encourage Drax to make the full switch.
The producer's biomass unit is expected to run at around 80 percent of its full potential this year, it said.
"The execution of our plans is dependent on there being an appropriate level of support under the current renewables incentive mechanism," Drax said, saying it hoped the government's autumn revision of support levels for renewable energy from April 2013 would provide sufficient incentives.
Drax said it could reach its 50 percent biomass capacity target 3-4 years after the reviewed support tariff enters into force.
Shares in the company closed at 529 pence on Monday in London, valuing the business at just over 1.9 billion pounds.
($1 = 0.615 British Pounds) (Editing by Paul Hoskins and Anthony Barker)