Shares in power station operator Drax drop 18.5 percent after the British government announces reduced support for generating electricity from co-firing biomass which it first proposed in October 2011.
In response to the biomass review, Drax says it will refine its previously announced strategic capital investment plan of 650 million pounds to 700 million pounds.
Goldman Sachs says that significantly for Drax, the ROC allowance for co-firing biomass in its coal plant is to be increased from 0.5 ROCs to 0.6 if biomass is more than 50 percent, or to 0.7-0.9 ROCs if biomass is more than 85 percent of the fuel burn. This is lower than the amount in the draft proposals last year, which was 1 ROC, the bank says.
“In our view the proposed level of ROCs for biomass raise uncertainty as to whether Drax would proceed with its investment plans to partly convert the power plant to burn more biomass. Drax has in the past indicated it could do more than 50 percent biomass burn but to go above 85 percent would in our view potential require more investment than already announced and would be on lower ROC terms than we assume (1 ROC),” Goldman says in a note.
Drax shares move lower in heavy trade, at nearly three times their 90-day daily average after less than two hours.
“Apart from the lower value from the biomass uplift, of greater concern for the shares in our view is whether Drax would continue pursuing the biomass change. With no support for the biomass transformation, the strategic value of Drax being future clean generation is also called into question,” Goldman adds.
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