Drax follows Centrica in issuing profit warning

Power station operator blames warm weather for hitting energy demand and lowering electricity prices
Drax follows Centrica in issuing profit warning
Drax power station near Selby, North Yorkshire. Photograph: Anna Gowthorpe/PA


It blamed warm weather for hitting energy demand and lowering the price of electricity and said it had also been hurt financially by the falling value of its renewable energy subsidies.

But Drax is in the middle of converting half of its boilers to the more carbon-friendly biomass – or wood pellets – for which it receives renewable obligation certificates (ROCs), a form of subsidy which has no fixed price and is traded on the open market.

However, those subsidies are becoming less valuable because so much wind-generated power has came on to the wholesale power system in the UK - watering down the value of each ROC. It came after Centrica, the owner of British Gas, warned on Thursday that a mild winter, a loss of customers and a variety of other problems meant it would undershoot the profit expectations of the City this year.

Drax operates a power station near Selby, North Yorkshire, which in its original form as a near 4,000 megawatt coal-burning plant was the UK's largest single emitter of carbon dioxide.

Angelos Anastasiou, analyst at Whitman Howard, said Drax profits could fall to £210m for 2014, which would be 20% lower than the most optimistic analysts' forecasts. Last year, the company reported profits of £230m, down 23% on 12 months earlier.

Peter Atherton at Liberum Capital said lower wholesale power prices were good for the consumer in the short term but meant companies such as Drax and Centrica would have less money to invest in the UK's energy sector, which needs modernisation.

Drax said it had just raised an extra £100m through a private placement with various funds managed by M&G Investments to strengthen its balance sheet.

The company reiterated that it had launched legal proceedings against the government for excluding part of its biomass programme from a special subsidy regime known as contracts for difference. These give a set price for low carbon electricity rather than the variable price available under the ROC scheme.

"Legal advice confirmed that Drax has a good foundation to challenge the government's decision," Drax said.

Despite Friday's profit warning, Drax said it was fully committed to completing its conversion programme which remains on time and budget.