More than two centuries after coal power helped forge the world's first industrial economy, Britain is going back to burning wood.

Drax Group Plc will spend $1 billion to turn the U.K.’s biggest coal-fired plant into western Europe’s largest clean- energy producer. The utility plans to convert one of the site’s six units to burn wood pellets by June, said Chief Executive Officer Dorothy Thompson. It intends to switch two more units to wood at a later date, investments that if completed will see it harvest a forest four times the size of Rhode Island each year.

“We see a key part of our future as converting from essentially a coal station to a biomass station,” Thompson said in an interview in London. “It will take Drax from being the largest carbon emitter by site in the U.K. to being, probably, one of the largest renewable plants in the world.”

Drax jumped as much as 13.9 pence, or 2.7 percent, to 522 pence in London. The stock, which began trading without the right to a 14.4-pence dividend today, was up 0.6 percent at 511 pence as of 10:55 a.m. local time, making it the only company to rise on the STOXX 600 Utilities Index.

Drax joins Germany’s RWE AG and Dong Energy A/S of Denmark in taking coal-fed plants away from fossil fuels as they strive to meet European Union air-pollution rules and avoid greenhouse-gas costs. The companies’ success or failure may map out a future for coal-fueled plants globally in a carbon-cutting age.

Most Polluting

Coal, the most polluting fossil fuel, generates about 41 percent of the world’s electricity, while biomass accounts for 1.4 percent, according to the International Energy Agency.

Drax plans to spend as much as 700 million pounds ($1.13 billion) through 2017 upgrading its boilers at Selby, northern England, ordering millions of tons of biomass from around the world and building facilities to store the fuel, including four silos each bigger than London’s Royal Albert Hall, a 135-foot (41-meter) high concert venue with an 800-foot circumference.

The utility has hired farmers and foresters, designed special railway carriages and is investigating building wood pellet plants in North America, Thompson said.

While burning biomass releases carbon dioxide, the EU deems the technology carbon-neutral because trees absorb emissions in a similar proportion to what they release in burning. Opponents argue that it’s hard to ensure enough is being planted to compensate for what is burned.

Growing Back

“Most companies and governments completely ignore the carbon-dioxide emissions from burning, because they say new trees will grow back and absorb all the carbon again,” said Almuth Ernsting, director of campaigning group Biofuelwatch. “In reality, it takes minutes to burn a tree and many decades for a new tree to grow back and absorb all the carbon again.”

The conversion of whole units to burn biomass marks a significant shift for Drax, which until July publicly said it was focused on ramping up volumes gradually over the next two decades, burning biomass with coal, a process known as co- firing.

The emphasis changed earlier this year when the government confidentially requested the industry’s view on full conversion.

“We decided the government must be looking at that quite seriously if they were going to ask for people’s opinions on it,” Thompson said. As a result, Drax carried out undisclosed trials to see how a unit would react to burning “exceptionally high” levels of biomass, she said.

Stock Reaction

When the government on July 25 announced incentives that rewarded full biomass conversion over co-firing, the company’s shares plunged 25 percent, with investors still unaware of Drax’s trials. The stock recovered some of its value after the executive team outlined the new strategy on a call with analysts later that day. Drax closed last month at 466 pence, down 10 percent from July 24.

“It was a really incredibly difficult and delicate situation,” Financial Director Tony Quinlan said. “We were not in a position whereby we could give the market some information to say that these unit trials were taking place because it would breach the government confidentiality.”

Drax’s current generating capacity is about 4,000 megawatts. If the conversion of half that yields 2,000 megawatts of biomass capacity, it would place Drax on a par with the biggest hydropower plants in the EU, and larger than any existing biomass plant, wind farm or solar park. Drax declined to comment about whether the converted units will replicate the existing capacity.

Interesting Investment

Drax is “an interesting investment at the current price, but there has to be a leap of faith here,” Dominic Nash, an analyst at Liberum Capital Ltd., said in a telephone interview. “They constructed a story to suit where they found themselves. This will notably impact their share price for next 18 months.”

Nash estimates Drax’s profit before tax will drop to 204 million pounds in 2018 from 248.3 million pounds in 2011. Earnings will probably rise through the end of the decade as biomass becomes increasingly profitable, he said. The company had 233 million pounds in cash at the half year and a 100 million-pound debt facility to fund its conversion program.

Thompson, who began at Drax seven years ago — a year after the plant first burned biomass — is determined to prove the company can overcome the technical risks and regain the trust of investors. Wood pellets are bulkier than coal, need to be kept dry and handled more gently. They can create dust if stored in the open. To deal with this, Drax is building silos out of plastics, foam, steel and concrete, with conveyor floors and capable of holding 700,000 metric tons of biomass.

Modify Mills

“There’s a need to modify the mills and some parts of the boiler, but not the same scale of capital cost relative to the other infrastructure and supply-chain investments we need to make,” Thompson said. Each unit will burn about 2.3 million tons of biomass annually, meaning the company will need to source 7.5 million tons of biomass by 2017.

Drax isn’t alone in seeking to convert from coal to biomass. RWE last year turned its 1,131-megawatt Tilbury facility into a 750-megawatt plant running on wood pellets. Dong Energy, Denmark’s state-controlled utility, said in April that it plans to invest about 500 million pounds to convert three of its coal- and gas-fired power plants to burning the pellets.

A typical tree plantation produces about 1 million tons of wood from 200,000 acres annually, enough to make about 500,000 tons of biomass pellets, according to RWE. Using those numbers, Drax’s annual requirement for 7.5 million tons of biomass by 2017 would need plantations totaling 3 million acres. That’s more than four times the size of Rhode Island.

Plant Design

It’s a challenge, given that collection systems are nascent, pellet plants too small and port facilities lacking. Drax is designing its biomass storage and conveyor belts in a way to minimize the risk of fire. A blaze at a wood-storage facility in February halted generation at Tilbury for four months.

As much as 30 percent of the branches, bark and thinned trees that Drax is burning is considered waste and left to rot, Thompson said. The company has secured enough material to supply its first unit and is “confident” of getting enough for the second, due online in 2014, according to Thompson. Drax is working on a strategy for the third unit, which will be converted at a later, undisclosed date, she said.

The process also has to be environmentally sustainable. Drax emits at least 70 percent less carbon burning biomass than it does burning coal, Thompson said. Companies burning biomass don’t need to buy carbon credits to offset their emissions under the EU Emissions Trading System as the fuel is considered carbon-neutral.

Carbon Emissions

Drax’s plant had more than 21 million tons of carbon dioxide output last year, the fourth-highest of any installation in the EU, according to EU-ETS data compiled by Bloomberg. Even after eliminating half those emissions, the station would remain the biggest single emitter in the U.K. and one of the 15 largest in the 27-nation bloc.

While controversy may exist, biomass will play a critical role in meeting Britain’s climate-change targets and maintaining the nation’s power supply, Thompson said. About half of Britain’s coal-fired plants are scheduled to close by 2016 and all the nation’s nuclear reactors are due to shut by 2035. The amount of electricity generated by coal-fired stations today is just under 50 percent of the total.

Drax generates about 8 percent of the nation’s electricity burning mostly coal, meaning in 2017 about 4 percent of the country’s power will come from burning wood pellets if all goes to plan. That will be baseload generation, capable of producing power 80 to 90 percent of the time, unlike wind farms, which are more variable, Thompson said.

“A lot of the infrastructure and capital is already there,” Drax’s Quinlan said. “The beauty of it is you’re taking something that exists already. You’re modifying very efficient coal-fired power stations.”

Copyright 2012 Bloomberg