Drax H1 profits take bigger than expected hit

Drax' earnings for the first half of 2014 fell further than analyst predictions as the UK government’s carbon tax continues to erode profitability for the operator of the UK’s largest coal-fired power plant.

Drax reported EBITDA at 15% below last year’s H1 result at £102 million, below analyst forecasts of a 13% hit. But Drax chief executive Dorothy Thompson referred to the fall as a “short term” issue before the generator converts to lower carbon biomass-fired power.

“Our underlying business case remains strong. In 2016, half of Drax Power Station will be fuelled by sustainable biomass, delivering 4% of the UK’s electricity. Through this transformation we will provide cost-effective, low carbon and reliable renewable power to the UK consumer,” Thompson said.

To meet this goal, the generator has invested £123 million in capital over H1 2014. This is in line with expectations andsets Drx up to meet its full year capital investment guidance of around £200 million.

More broadly the company said it will spend £650-£700 million in total between 2011 and 2017 on converting three of its units to biomass, including the required supporting infrastructure and system.

The generator is now 20% biomass, according to its H1 report, with biomass units achieving 71% load factor while its coal-burning units operated at 82% load factor.

Drax’ co-firing unit has been operating since May, burning at least 85% biomass which the company says is “performing well and in line with plan”.

The process of converting Drax’ coal-fired power units to biomass-fuelled generators has been one fraught with legal and regulatory wrangling but Thompson highlighted the company’s “positive progress” so far in a statement alongside today’s results.

“The regulatory landscape still presents uncertainties, but positive progress is being made and we hope that most of the key issues will be clarified in the coming months,” Thompson said.

Drax has been awarded an ‘early investment’ subsidy contract for one of its conversion units thorough the government’s Contracts for Difference (CfD) scheme, but launched legal action against the government earlier this year over its decision to exclude its second conversion unit from the process.

In the next few days the UK government is expected to appeal the High Court decision that the second unit should have been awarded an early CfD.

Analysts from Deutsche Bank have said they believe a positive outcome for both the legal challenge and for the European Commission approval process is “more likely than a negative decision”.