Drax shares fall on concern for subsidies
Comment of the Day

July 26 2012

Commentary by Eoin Treacy

Drax shares fall on concern for subsidies

Thanks to a subscriber for this article by Rebecca Bream for the Financial Times. Here is a section:
Drax said it had changed its plans in light of the government's decision, and was aiming to fully convert the plant to burn biomass, starting with three of the six boilers.

Dorothy Thompson, Drax chief executive, said: “It will take some time to develop all of the sustainable biomass supply chain, but we believe that within approximately five years Drax could become a predominantly biomass fuelled plant. We are currently refining our previously announced £650m to £700m strategic capital investment plan, but remain confident of the overall scale.”

The company added that the policy changes did not affect “in any material way” the returns Drax could earn in the future. But Mr Anastasiou at Investec said Drax was “putting a brave face on it”, and that trying to burn a higher proportion of biomass increased the risks for the company, especially in trying to secure enough fuel.

Eoin Treacy's view Whatever one's views on the complete phasing out of coal fired power capacity, there is little doubt that a reliance on wood chips for industrial power production presents some short to medium-term supply chain issues that will need to be worked through. Nevertheless, a reliance on timber does not suffer from the base load issues that affect both solar and wind generation. Drax's situation also highlights the degree to which power companies are subject to regulatory change particularly as governments vacillate on policy.

Drax dropped sharply yesterday but found support near 400p and closed near 450p. Focus is now likely to turn to the security of its more than 5% yield so next week's earnings report is likely to be instructive. While potential for an additional bounce exists, the share will need to find support at a progressively higher level, starting with the next pullback, to suggest a return to demand dominance beyond the short term.

Back to top