Drax plummets as government pulls subsidies

Suzie Neuwirth
DRAX Group made the biggest losses on the FTSE 250 yesterday, after launching legal proceedings against the government’s decision to exclude one of its units from a new green support framework.

Britain’s largest coal-fired power station operator Drax expected to be eligible for early contracts for difference (CfD) mechanisms, so that it could convert its units from coal to sustainable biomass. But one of its units was rejected with little explanation, according to the company.

Shares plunged after Drax disclosed the move, closing 13.1 per cent lower.

“Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now,” said chief executive Dorothy Thompson. “We have, therefore, commenced legal proceedings to challenge the decision.” Law firm Herbert Smith Freehills is advising Drax.

The government is changing the way it supports renewable energy projects by replacing a mechanism of direct subsidy payments to a system where projects are guaranteed a minimum price at which they can sell electricity.

Drax may use the existing framework – which is seen as less lucrative by analysts – for the unit in question. Another of Drax’s units was approved for CfD support.

“We believe this move by the government will undermine market confidence in the visibility of future incentive mechanisms,” warned John Musk, analyst at RBC Capital Markets.

A Department of Energy and Climate Change spokesperson declined to comment due to the pending legal process.