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Drax profit warning as subsidy value falls

Drax has said that lower-than-expected subsidy prices for biomass-fuelled power plants in Yorkshire is partly to blame for a full-year profits warning.

While the company says a mild winter and spring has cut the profit it makes from generating electricity, it is also expecting lower prices for renewable obligation certificates (ROCs) it receives for using biomass.

ROCs are traded on the open market and a recent surge in wind power production has caused ROC prices to drop, affecting subsidy income for all renewable energy generators.

“We now anticipate that, unless markets improve in the coming months, full year EBITDA and underlying earning per share for 2014 will be below current market forecasts,” the company said in a market update reported by Reuters.

As MRW reported in April, Drax has also initiated legal proceedings over a change of Government policy. In December 2013, two of its power-generating units in Yorkshire were deemed eligible for investment contracts under the new Contracts for Difference (CfD) regime, designed to give investors confidence to pay up-front costs for new projects.

CfDs funds the gap between average grid electricity prices and the price for the specific low-carbon technology, and replace Renewables Obligation subsidies in 2017.

But last month energy secretary Ed Davey revealed only one unit would be offered a contract, while the other would be offered support under the existing Renewables Obligation regime. Drax’s share price dropped by more than 13%.

At the time, Drax chief executive Dorothy Thompson said: “Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now. We have, therefore, commenced legal proceedings to challenge the decision.”

According to Reuters, Drax said its first converted biomass unit has been performing well since commissioning last month and another unit has been running on at least 85% biomass fuel since the beginning of May.

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