UK’s largest coal-fired power generator has shelved plans to build a dedicated biomass unit but said it is ready to invest heavily in co-firing facilities, which mix environmentally friendly biomass with coal, if enough government support is forthcoming.
Drax, (LSE: DRX) which on Tuesday reported a smaller than expected drop in earnings for the full year, pledged to invest more than £500m to burn more biomass, which uses organic feedstock such as wood chips or straws, and help reduce harmful carbon emissions.
The company plans to spend £50m this year to increase its ability to burn biomass from 12.5 per cent to as much as 20 per cent. A second expansion would require an estimated further investment of £400m-£450m to modify the plant, build storage facilities and invest in supply infrastructure. Drax could generate half of its electricity through biomass, it said.
Tony Quinlan, finance director, said the company, which has net cash of £225m, was “examining a number of funding solutions,” which analysts believe could include issuing debt.
A critical factor, however, is the level of regulatory support. The government last year proposed to increase the level of support for mixing biomass with coal, but said it would reduce support for standalone biomass plants by close to 7 per cent from April 2016.
The final outcome of consultation on the so-called Renewables Obligation Certificates, a government low-carbon scheme, is expected in the spring. While Drax can increase co-firing with the higher level of support, Dorothy Thompson, chief executive, is pushing for more.
“With a moderate uplift in the proposed level of support we could, over time, maximise the potential for producing this low cost renewable electricity,” she said.
“Drax has provided more clarity on its biomass trials and capital expenditures,” said Dominic Nash, analyst at Liberum Capital in a note. “This is significant in our view as it indicates that co-firing above 50 per cent is a possibility. This could be an important value driver later in the decade.”
Drax had originally planned to build three dedicated biomass plants in co-operation with Siemens Project Ventures for an estimated £2bn, of which it would have funded 60 per cent. However, the company said the high costs of transporting fuel to its inland site at Selby, North Yorkshire, had contributed to the decision to abandon plans for a plant there. Drax said it was still exploring options for a second plant in a different location.
The company has also been very critical of the proposed introduction of a carbon price floor from April 2013, designed to encourage the generation of low-carbon energy such as renewables and new nuclear. Burning more biomass would help reduce its carbon emissions.
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