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 power plants.
The power producer said it was considering options for its two other planned biomass plants in different locations in the UK.
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 December 31, 2011, Drax said earnings before interest, taxes, depreciation, and amortization (EBITDA) fell 15 percent to 334 million pounds, 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 analyst added.
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 generation.
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.
(Reporting by Adveith Nair and Karolin Schaps; Editing by Rhys Jones and Alison Birrane)