Drax profits halve as UK's largest source of CO2 pays price for soaring cost of carbon credits

· £50m dividend likely despite fall in earnings · Plans to produce 500MW from sustainable sources
Terry Macalister
The Guardian,
Wednesday August 6 2008

Drax has seen its profits plunge by almost half as it pays the price for running the UK's biggest single carbon polluting power station in an era of rising CO2 prices.
Last year Drax, the owner of the 4,000 megawatt (MW) coal-fired plant in North Yorkshire, which supplies about 7% of the country's electricity, spent £11m buying CO2 emission allowances to cover its carbon pollution.
But the company has already spent £107m this year under a second phase of the European emissions trading scheme (ETS) when its allocation was reduced.
The higher cost of acquiring carbon credits helped cut pre-tax profits from £273m in the first six months of 2007 to £150m this time round and Drax admits full-year earnings will be considerably lower than before. Additional costs to the group came from the rising cost of its basic feedstock coal, which was 34% higher at £23.6 a megawatt hour.
The company, which plans to hand out £50m to shareholders in dividends despite the profit slump, is now looking to increase the amount of plant-based fuel it burns alongside coal.
The company banged the drum yesterday in favour of Britain building more coal-fired power stations despite deepening worries about climate change.
Dorothy Thompson, (below) chief executive of Drax, said the UK still needed more coal-fired generation because neither nuclear nor wind provided the kind of "variable" power that was needed for a constant supply of electricity.
"I firmly believe that long term, coal will be a key component to global energy supply," she explained .
The whole debate around coal-fired power stations has become increasingly fractious with climate campaigners protesting at the Kingsnorth site in Kent where the German-owned utility E.ON wants to build a new 1,600MW facility, with or without clean coal technology.
Thompson, whose Drax plant near Selby was the target of a similar demonstration last year, said she was convinced that "clean coal" - using carbon capture and storage - was technologically within reach. The only question remained at what price it could be done.
Despite her enthusiasm for coal, Thompson said she was looking at providing 500MW of output from a broad range of sustainable sources, up from a previous target of 400MW.
She said biomass was not as cheap as burning coal but it reduced CO2 emissions, adding: "I am confident we will earn a sufficient economic return on the investment." The technology for burning higher amounts of biomass will be ready by June 2010, later than a previous target of 2009.
The company is building a straw pellet plant in Yorkshire and considering further similar facilities, while also burning elephant grass, wood off-cuts and peanut husks.
Thompson said she would consider burning more crop-based fuels if there were not government caps on coal-fired power stations doing so. Drax has itself been looking at expanding outside of the coal arena by considering whether to buy gas-fired power stations but recently turned down the chance to buy a facility on Teesside because it was deemed too expensive.
Analysts at Deutsche Bank noted the lower financial results but said it remained positive about the future. "Drax is now facing higher prices for CO2, while receiving less free credits, following the start of phase 2 of the EU ETS. However, the outlook for Drax has improved substantially over the last 6-12 months, with higher oil prices more than offsetting the impact of higher coal prices and leading to higher forward margins for Drax," they said.
Backstory
The collapse in half-year profits at Drax, the UK's biggest single carbon polluter, is proof that the European Union's emission trading scheme (ETS) is working better. The owner of the North Yorkshire coal-fired electricity generator, run by Dorothy Thompson, pictured, saw the allocations it received under the scheme reduced, obliging it to pay more to cover its emissions.
A second phase of the ETS came into force at the start of the year, three years after the first - much criticised - phase got under way. It was widely deemed to have been far too lenient.
Installations in the energy and industrial sectors obtain a ration of free allowances and must buy any more they need on the open market, where the price of carbon has been rising. The current scheme, which runs till 2012, still covers only half of all EU emissions of CO2.