The City made a snap judgment that Drax boss Dorothy Thompson had been stitched up over subsidies for biomass, but it is not inevitable that the power producer will lose out
Chief executive welcomes government decision that sends her share price down 15%. Strange as it sounds, that’s an accurate report of events today at Drax, the dirty power producer that aspires to be cleaner.
Dorothy Thompson, responding to the new regime for subsidies for biomass burners, was a model of enthusiasm. She appreciated the government’s extensive work in promoting sustainably sourced fuels. She expressed confidence that Drax, currently concentrated in coal, could switch within five years to become a predominately biomass fuelled plant. And she confirmed the group intends to spend £650m-£700m pursuing the ambition.
Cue a slump in the share price as the City made a snap judgment that Thompson had been stitched up. The subsidy structure wasn’t what it had been expecting. Nothing like. The government will incentivise full conversion to biomass of individual generating units; the previous guess was that partial conversion across a whole plant would be rewarded. The market spied lower subsidies for Drax and the share price fell an astonishing 25% in early trading.
But Thompson’s relaxed stance looks justified. It is not inevitable that Drax will lose out at all. Its old plan envisaged that its huge plant in Yorkshire would fire coal and biomass in a roughly even split. The revised version sees full conversion of three of six generating units. The financial outcome should be much the same since Drax reckons it has already conquered the technological challenge of full conversion to biomass. The limiting factor is infrastructure to convert peanut husks and the like into burnable biomass pellets and bring them to Yorkshire – but that was true before today and remains so.
The only real disadvantage for Drax via the new subsidy structure is loss of optionality, as financiers put it. Once a unit is converted to biomass it won’t be converted back, so there’s no fun to be had in calculating the coal versus biomass trade-off. But that’s a minor point. The market panicked about almost nothing.