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After dropping 72 per cent since last January, Drax's share price will remain volatile in 2016, analysts at Jefferies have predicted.
The investment firm blames the generator’s poor performance over the last year on the sharp fall in UK power prices, the collapse in Clean Dark Spreads (the power price minus the cost of fuel and carbon allowances) and changes to government subsidies for biomass.
It has given a recommendation of hold and a target price of 210p, but says the stock could end up worth as little as 142p and as much as 423p.
Where it falls within that range will depend on several key factors, mostly importantly whether the European Commission approves the Contract for Difference to convert the third unit at Drax to run on biomass. Jefferies says it expects the strike price of £105/MWh to be upheld, given the outcome of the investigation into Lynemouth.
UK power prices will also play an important role, according to the firm. It predicts a continued decline given that a resurgence in gas prices looks unlikely in 2016 and renewables are expected to carry on gaining market share. However, it says prices could be pushed higher if the closure of coal generation accelerates before next winter.
Finally, how the government chooses to support biomass will be something to watch out for, Jefferies says. It foresees little chance of a fourth unit being converted under the current Levy Control Framework budget period, but the government is set to announce its budget for the next period soon and Drax may well be able to compete for a share.
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