December 3, 2018 / 7:45 AM / a year ago

Drax, Iberdrola revise plants deal after EU decision

LONDON (Reuters) - British power producer Drax Group Plc (DRX.L) has revised the terms of its deal to buy UK generation assets from Spain’s Iberdrola (IBE.MC) to ensure it gets a rebate on lost capacity payments due to a pause in a government scheme.

FILE PHOTO: A new turbine is lowered by a crane at Drax power station in Drax, northern England, February 16, 2011. REUTERS/Nigel Roddis

In October, Drax agreed to buy some UK hydro and pumped storage power plants from Iberdrola’s Scottish Power for 702 million pounds as it aims to exit coal-based production before a 2025 government deadline.

Last month, Britain had to halt a back-up power scheme called the capacity market to avoid electricity shortages pending a further investigation by European Union regulators.

The scheme pays providers for making energy supplies available at short notice to avoid shortages that might occur as coal plants close and low prices dissuade investors from building new power plants.

Even though Drax believes that the European Commission will reapprove the existing capacity market in its current or similar form, the pause has put payments to plants it is buying in the Iberdrola deal at risk.

Therefore, it has agreed a risk-sharing scheme with the Spanish firm as a result which could mean it receives a payment of up to 26 million pounds.

Under the revised terms, if less than 100 percent of capacity payments from Jan. 1-Sept. 30, 2019 are received and gross profit of the portfolio for the full year is less than 155 million pounds, Iberdrola will pay Drax up to 26 million pounds.

Similarly, if 2019 gross profit is more than 165 million plunds, Drax will make a payment to Iberdrola of up to 26 million pounds.

When the deal was originally announced, Drax expected Scottish Power’s portfolio of assets to contribute 2019 gross profit of 155-175 million pounds.

For a graphic on Drax's Iberdrola deal high doused by EU ruling, see -

“The capacity market is a central pillar of the UK’s energy policy and ensures security of supply while minimising costs to consumers,” Will Gardiner, chief executive of Drax Group said in a statement.

“To mitigate the risk that capacity payments take time to be restored, we have agreed revised terms which provide protection in 2019,” he added.

The judgement by the EU’s General Court in October annulled a decision by the European Commission, which had said Britain’s capacity market was compatible with EU state aid rules.

It could take a year or more for the capacity market to be reinstated, analysts say.

Shares in Drax (DRX.L) rose as high as 397 pence after the news but receded slightly to 392 pence by 0925 GMT.

Reporting by Nina Chestney in London and Noor Zainab Hussain in Bengaluru; Editing by Keith Weir

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