EU approves Drax's coal power plant switch to biomass

BRUSSELS/LONDON (Reuters) - Britain's largest coal power producer Drax DRX.L on Monday gained European Commission approval to convert a third power plant unit to biomass from coal, sending shares in the London-listed company to a five-month high.

A workman rides past crusher machines at Drax power station in Drax, northern England, February 16, 2011. REUTERS/Nigel Roddis

The Commission opened an investigation into government support for the project in January and concluded that it was in line with the European Union’s environmental and energy targets.

Drax is in the process of converting its coal-fired power generating plant in Yorkshire to biomass. The company announced a shift away from coal earlier this month with the acquisition of business energy supplier Opus Energy and four gas stations. The deal had been contingent on the Commission’s state aid approval.

The British government has guaranteed a minimum electricity price for Drax’s biomass project of 100 pounds per magwatt-hour (MWh) until 2027, which Drax said had not changed following the Commission’s approval.

“With the right conditions, we can do even more, converting further units at Drax to use sustainable biomass in place of coal,” Drax Chief Executive Dorothy Thompson said in a statement.

The company said it could convert its remaining three coal-burning units to biomass in the next two to three years if the government sets the right conditions.

Drax said the unit would be able to run 100 percent on biomass instead of co-firing coal in the coming days.

Britain wants to close all of its coal-fired power plants by 2025.

Shares in Drax rose to 358.9 pence a share -- their highest since July 22 -- following the announcement.

Analysts at Jefferies estimated the new contract would give Drax an earnings boost of around 50 million pounds a year but that financial forecasts would not be affected because the approval had been largely expected.

“This is a key milestone for Drax as it allows the progression of the recently announced Opus Energy acquisition,” Jefferies analysts said, who rate Drax as ‘underperform’.

Editing by Jane Merriman