25th Sep 2015 09:48
LONDON (Alliance News) - Drax Group PLC on Friday said it will pull out as a partner of the consortium developing the White Rose carbon capture and storage project but said it is still mulling converting a fourth coal unit into a biomass unit despite recent government changes to renewable energy subsidies.
The FTSE 250-listed company said it "remained committed" to fulfilling the front-end engineering and design work on the carbon capture and storage project, but said once completed, it will not invest any further funds into the project and will withdraw as a partner.
The White Rose project is led by Capture Power Ltd, a consortium of Drax, Alstom and BOC, which is aiming to develop a project capable of of capturing up to 90% of carbon emissions from a new coal-fired power plant and storing it underneath the UK North Sea.
The coal-fired power plant to be used in the project is on a site owned by Drax, and the project is expected to be completed within the next six to twelve months.
"Drax today announced it remained committed to fulfilling its current work on a carbon, capture and storage feasibility and technology development project (FEED), but once completed, would not be investing further and will withdraw as a partner of Capture Power Ltd," said Drax.
"We remain fully committed to completing what we?ve signed up to ? the completion of a study into the feasibility and development of world leading technology that could result in dramatic reductions in carbon emissions produced by power stations and heavy industry," added Pete Emery, operations director of Drax's CSS operations.
Drax has also confirmed that while at that point it would cease to commit further investment, it will continue to make the site owned by Drax, along with the infrastructure at the power plant, available for the project to be built.
Emery said the decision was based "purely on a drastically different financial and regulatory environment" and said the company "must put the interests of the business and our shareholders first".
He said Drax will "focus on the areas which we can deliver best value", particularly working with government to explore the potential for converting a fourth generating unit to run on sustainable biomass.
Drax has already converted two of its coal-fired units into biomass units, which run off wood pellets rather than dirty coal, and it is in the process of converting a third unit. However, the company's move to biomass has been recently hit by government decisions on renewable energy.
Back in July, Drax Group said it would be hurt by changes to the UK climate change levy in the second half of 2015 and said earnings before interest, tax, depreciation and amortisation would be GBP30 million lower in the second half due to the changes made to the climate change levy, and GBP60 million lower in the whole 2016.
The Climate Change Levy is a UK government subsidy paid to companies that generate electricity from renewable sources that was introduced back in 2001, but has recently been scrapped by Chancellor of the Exchequer George Osborne, who called the levy "out-dated".
The aim of the levy was to improve energy efficiency and increase demand for renewable energy. However the government decided to scrap numerous subsidies as the cost to the government's wallet is substantially higher than what was budgeted for.
In retaliation, Drax teamed up with wind-farm operator Infinis Energy PLC and initiated proceedings for a judicial review of the notice period given by HM Treasury for removing the exemption from the Climate Change Levy for electricity generated from renewable sources.
The pair claim they were only given 24 days notice, which was not an "appropriate notice period".
"The companies ask the court to consider a reasonable and proportionate notice period for withdrawal of such renewable support," said the companies at the time.
In October, the UK Department for Energy and Climate Change is due to allocate new Contracts-For-Difference, but there are doubts that any new allocations will be made.
The Contracts-For-Difference, introduced in 2013, is a private law contract that allows an electricity generator to be paid the difference between the strike price ? a price for electricity reflecting the cost of investing in a particular low-carbon technology ? and the reference price ? a measure of the average market price for electricity in the market.
The absence of Contract-for-Difference allocation could prompt a lesser degree for biomass conversion, which is a large element of Drax Group's strategy.
Drax shares were up 2.9% at 247.10 pence per share, one of the best performers on the FTSE 250.
By Joshua Warner; [email protected]; @JoshAlliance
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