July 25, 2012 / 4:02 PM / 5 years ago

UK limits biomass subsidy rise, Drax shares slide

LONDON (Reuters) - Smaller-than-expected subsidies for burning biomass with other fuels in powerplants surprised Britain's energy markets on Wednesday, hitting shares in power firm Drax (DRX.L) which said it would review its investment plans.

Shares in Drax, which will now receive less money than first suggested for co-firing biomass in its turbines, were down almost 16 percent at 1610 GMT.

The rise in subsidies for co-firing biomass alongside fuels such as coal were 80 percent smaller than an increase given in tentative numbers announced last October, while analysts said cuts to support for wind projects were lighter than expected.

The biomass subsidies will rise next year by 0.1 ROCs (Renewable Obligations Certificates) per megawatt-hour to 0.6 ROCs for powerplants co-firing 50-84 percent of biomass, far short of a rise to 1 ROCs proposed in October.

ROCs are subsidies paid to renewable energy producers by the government at a buy-out value of 40.71 pounds per ROC for the 2012-13 period.

Drax, owner of one of Europe's most polluting coal-fired plants, said it would review investment plans worth 650-700 million pounds involving a switch to using more biomass, which produces less carbon.

Yet Drax CEO Dorothy Thompson said the fact that the government had finalised the subsidies was positive news, including the creation of a dedicated category from next year for receiving subsidies for biomass conversion plants.

"We have been given the opportunity to convert coal to biomass, which wasn't possible before."

Wednesday's drop in Drax's shares provided a stock buying opportunity, Deutsche Bank analyst Martin Brough said in a note to clients.

RWE npower (RWEG.DE), which this year fully converted its Tilbury coal plant to biomass, said it had hoped for higher subsidy levels.

Biomass conversion plants from next will receive subsidies at 1 ROCs per megawatt-hour, compared with 1.5 ROCs currently.

WIND POWER

Britain's subsidies are aimed at helping it meet targets to derive 15 percent of its energy demand from renewable sources by 2020 and reduce carbon output.

Wednesday's subsidies covering more than 30 technologies through 2017 could help support an additional 79 terawatt-hours (TWh) in renewable energy production per year, around 74 percent of what it needs to meet its 2020 green energy target, the government said.

"We've tried to strike the right balance between bringing on the investment that we need and also getting the best bang for the buck for the consumer," Secretary of State for Energy and Climate Change Edward Davey told journalists.

Wind power is central to the government's strategy and it plans to see onshore wind capacity expand to around 13 gigawatts (GW) by 2020 from 5 GW currently.

It announced a 10 percent reduction in subsidies for onshore wind farms which, while in line with a preliminary October target, surprised some investors.

They had expected a deeper cut after there appeared to be wrangling within the government on the issue earlier this year.

Onshore wind farms will receive 0.9 ROCs per megawatt-hour generated from 2013-17, down from 1 ROC currently.

It could be reduced again from April 2014 if there is a significant change in generation costs, the government said.

Offshore wind farm subsidies will fall 5 percent in 2015/16 to 1.9 ROCs and to 1.8 ROCs in 2016/17.

Despite the cuts, investors in offshore wind farms said they welcomed the clarity they will now have until 2017, when a new type of low-carbon support, so-called contracts for difference (CFDs), will come into force.

"The publication of the banding review gives us more confidence to continue our UK focus and also helps to build investor confidence," said a spokesperson for DONG Energy DOENRY.UL.

Last week the Danish company placed an order for 300 large offshore wind turbines for deployment in Britain.

The government also announced subsidies would more than double for tidal stream and wave power projects. Installations up to 30 MW will receive 5 ROCs from next year, compared with 2 ROCs currently.

"This will help Britain to turn its head start in this nascent technology into a lead in building a new industry," said Maria McCaffery, chief executive of lobby group RenewableUK.

Editing by Alison Birrane and Jason Neely

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