Drax power station (credit Drax)

Drax biomass fuel plans make rapid progress

Coal-fired power producer Drax said it has made rapid progress in its plans to switch to biomass fuel.

UK-based Drax, the owner of one of Europe's largest coal-fired power stations, secured financing at the end of last year which will enable it to go ahead with its £650 million-£700 million investment plans involving a switch to using more biomass, which produces less carbon.

"We're well underway with the construction of the delivery, storage and distribution system infrastructure to support the conversion of three of our generating units," said chief executive officer Dorothy Thompson.

The company also said that its earnings before interest, taxes, depreciation, and amortisation (EBITDA) last year slipped to £298 million, in line with expectations, from £334 million a year earlier.

"Whilst today's solid results are helpful, the market will now be very focused on the delivery and subsequent performance of the first converted unit," said Guillaume Redgwell at Liberum Capital.

Drax is converting to biomass fuel as rising coal prices squeeze its profits. 

The government finalised subsidies in July for burning biomass with other fuels in power plants, aimed at helping it meet targets to derive 15 per cent of the UK's energy from renewable sources by 2020 and reduce carbon output.

The subsidies were smaller than expected but Drax said it had received the regulatory clarity it needed to proceed with its plans.

The first conversion of a Drax generating unit fully to biomass will take place in April of this year, with the second to follow in 2014. 

However the conversion of the third unit is dependent on securing supply.

"It all depends on the speed with which we source the biomass," said Thompson.

"The quantities we're buying are very large in comparison to the overall market ... we're absolutely confident that the biomass is there, but it's about building the supply chain," she added.

Burning wood, sunflower husks or animal faeces offers steady so-called "baseload" power, giving biomass an advantage over intermittent renewable rivals solar and wind.

Scant domestic supply is just one catch to the UK's biomass plans. 

With its biomass consumption expected to rise tenfold in the next 25 years, there are also concerns the UK could be vulnerable to supply disruptions from a handful of overseas exporters in the forest industry.

Drax said net power sold increased to 27.1 terawatt hours (TWh) in 2012, its highest output ever, but at lower average electricity price which resulted in a reduction in revenue from power sales.

Thompson said she is confident the group will deliver attractive returns for shareholders despite the "significant capital" which will be invested over the next two years, while EBITDA is likely to be adversely impacted by the increasing costs of carbon.

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