* Company reviews dividend policy after earnings fall
* Revenue from ancillary services treble to 47 mln pounds
* Coal generation more than halves in 2016 (Recasts, adds details, CEO comments, analyst comment, share price)
By Karolin Schaps
LONDON, Feb 16 (Reuters) - Power producer Drax said it was reviewing its dividend policy after reporting another decline in annual profits on the back of weak energy prices, sending its shares down 6 percent.
As its core power production business struggled with low market prices, the company more than trebled revenue from providing back-up generation. It saw scope to grow this business significantly as rising renewable energy production requires stand-by plants to fill gaps in output.
Drax said it would pay a full-year dividend of 2.5 pence per share, down from 5.7 pence in 2015, but in line with a policy of paying out half of underlying earnings.
However, it plans talks with shareholders in coming months over a review of that payout policy.
"To us this points to a lower dividend policy long-term than current consensus expectations," said analysts at Jefferies who rate the stock as 'underperform'.
Drax reported a 17 percent fall in earnings before interest, tax, depreciation and amortisation (EBITDA) to 140 million pounds, just below analysts' forecast of 143 million pounds.
The company, which is converting Europe's once most polluting coal plant to run on biomass, made 47 million pounds ($59 million) in revenue last year from contracts with National Grid which reward it for providing back-up power. This compares with 14 million made from these services in 2015.
The contracts mean that Drax has been able to keep its remaining coal-fired power units running. It said a year ago it may have to mothball the coal units that have struggled to compete with cheaper green energy output.
"We do expect our coal plants to continue to generate at very low levels compared to historic rates but we think they will be needed to keep the system stable and secure," Drax Chief Executive Dorothy Thompson told Reuters.
Drax's coal generation more than halved last year to 6.9 terawatt-hours as its biomass units produced 65 percent of the company's output, up from 43 percent in 2015.
The British government has ordered the closure of all coal plants by 2025, a policy that Drax said will lower the value of its coal units by around 30 million pounds a year.
Drax said it needed further government incentives to convert the last three of six coal units to run on biomass. Its latest conversion, which was approved by the European Commission in December, receives a guaranteed power price of 100 pounds per megawatt-hour (MWh).
Thompson said further conversions could happen at a "significantly lower" price as costs have come down.
Drax is also expanding its energy supply business, having earlier this month completed the 340 million pound acquisition of business energy provider Opus Energy. ($1 = 0.8008 pounds) (Editing by David Goodman/Keith Weir)