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UPDATE 2-Drax H1 profit tumbles on higher carbon costs
July 30, 2013 / 6:41 AM / in 4 years

UPDATE 2-Drax H1 profit tumbles on higher carbon costs

* Carbon costs rise 46 million pounds in H1

* Ups spending on infrastructure to improve biomass supply

* Shares gain around 2 percent

By John McGarrity

LONDON, July 30 (Reuters) - British coal-fired power producer Drax posted a sharp decline in half-year profit on Tuesday, blaming high costs of meeting carbon emissions reduction for its earnings slump.

It said earnings for the first half of the year fell 22 percent as it converted one of its generation units to biomass and the costs of emitting carbon more than doubled.

For the first time Drax has been fully exposed to prices for European Union carbon permits, which most EU utilities must pay for in full in the current 2013-2020 phase of the bloc’s emissions trading scheme.

Drax, the operator of one of Europe’s largest coal-fired power stations, must also now pay an additional carbon cost imposed by the British government in April.

It said earnings before interest, tax, depreciation, and amortisation (EBITDA) fell to 120 million pounds ($184 million) for the six months ended June 30, down from 154 million pounds a year ago.

“We are investing significant capital this year and next to transform our business, with earnings during this period impacted by the increasing costs of carbon,” Chief Executive Dorothy Thompson said in a statement.

Drax said it had to pay 70 million pounds for EU carbon allowances through the emissions trading scheme, which ended free allocation to utilities in its current phase, almost double the 38 million pounds it had to pay last year for the permits.

Meanwhile, a carbon floor price introduced by the British government on April 1 cost Drax 14 million pounds up to the end of June, the company said.

The current tax, at 4.94 pounds per tonne, is in addition to each power firm’s obligation under the EU carbon market, and is set to rise to 9.55 pounds next year and 18.08 pounds in 2015.

CHALLENGING LOGISTICS

The power generator spent 138 million pounds in the first half of the year on fixed assets, up from 90 million a year ago, mainly for facilities to ship and store wood pellets.

Drax plans to convert a second 660MW unit to biomass next year, with a third possible in 2017, dependent on government incentives and availability of wood that can be certified as sustainable.

However, the extra costs of carbon and infrastructure were offset partly by lower costs for coal, driving down fuel costs.

Shares in Drax traded up over 2 percent at 646 pence each, not far from a 2013 high of 657.50 seen in February, as investors took a sanguine view of the fall in profits, which was in line with the company’s expectations.

Drax said it hoped to increase the amount of electricity generated by its converted biomass unit, which only operated at 57 percent of capacity due to disruption in wood pellets supply.

“Logistics have been challenging,” it said in its earnings statement, adding investment in permanent transport and storage facilities would ensure a steady flow of supply of biomass which is sourced mainly from North America and eastern Europe.

Wood pellets have to be moved in much bigger quantities than coal, prompting Drax to build large inflatable domes at its power station to store biomass and buy a new fleet of larger rail wagons to move supplies of wood from ports.

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