What was once Britain’s biggest coal station is now powered mainly by wood pellets and its owner, Drax Group Plc, will learn in the next few months if can complete the conversion of another unit to run on renewable fuel.
Biomass provided about 70 percent of fuel to Drax’s North Yorkshire-based plant in the first half of 2016, up from 37 percent in the same period in 2015, after the company upgraded a third unit to run on wood pellets, Chief Executive Officer Dorothy Thompson said Tuesday in a telephone interview.
Drax is counting on biomass to open doors for new growth markets as it transitions away from the coal-fired plants that the U.K. wants shuttered by 2025. Falling power prices and regulatory uncertainties have added to its challenges. The company reported Tuesday its underlying profit dropped 59 percent and revenue slipped 2 percent in the first half of the year.
“What we see is a growth of interest in the use of biomass, particularly for large-scale generation,” Thompson said. In an effort to bolster revenue, Drax is seeking long-term supply contracts with biomass generators in Japan, South Korea, Belgium and the Netherlands, she said.
Drax’s coal generation in the first half of the year fell 61 percent to 3.4 terawatt hours, compared with 8.8 terawatt hours in the same period in 2015. U.K. power generation from coal dropped to zero overnight on May 10 for the first time since at least 2009.
Biomass power generated by Drax, which supplied about 20 percent of renewables and 8 percent of Britain’s total power, is set to climb even more. Drax expects European Union approval in autumn for U.K. support in converting a third unit to biomass.
Britain’s vote to leave the EU on June 23 doesn’t pose “immediate risk” to its biomass plans, Thompson said.
“Our core business is about supplying affordable renewable power to U.K. customers,” said the CEO, who’s hedged Drax against currency risk to guard against pound depreciation. “We don’t see that being materially affected by Brexit.”
Drax stock dropped the most in a month, falling as much as 20.10 pence, or 5.7 percent at 10:25 a.m. in London. The stock has gained 43 percent this year, giving the company a 1.4 billion-pound market value.
Drax has been hurt by low power prices and is still awaiting a decision from an EU probe into whether U.K. support for the conversion of a unit to biomass would overcompensate the company. Each month’s delay in EU state aid approval for the so-called “Contract-for-Difference” contract could lead to a 10 million-pound drop in the company’s pretax profits, analysts at Jefferies Group LLC wrote Tuesday in a note.
Drax expects to save about 10 million pounds by avoiding maintenance charges on its remaining coal units in 2017, a consequence of their lower usage rates, according to Thompson.
Coal use in the second half of the year “depends on whether it’s cost effective to generate and also the degree to which we’re needed for system support,” she said. “We’ve been running a little higher than expected this summer because we’ve been called on to the system to provide stability and flexibility.”
Thompson quashed suggestions made by HSBC Holdings Plc analysts earlier this month that it consider shifting some of its power generation to natural gas.
“We’re focused on delivering good generation and growth from our core strengths,” Thompson said, adding that Drax is focused on converting coal to biomass and isn’t interested in building gas-fired generation right now.
©2016 Bloomberg News
Lead image: Biomass fuel storage tanks at the Drax power station. Photographer: Simon Dawson/Bloomberg