Power station operator Drax Group PLC (LON:DRX) got an early Christmas present today from news that the European Commission has finally approved a key subsidy contract from the UK government.
The FTSE 250-listed group has been trying to secure approval for the contract for difference (CfD) for most of this year, a deal which supports the conversion of one of its coal-fired units to running on biomass.
The CfD was due to be awarded earlier on in the year, but was delayed after the EC launched an investigation over concerns that it may be too generous.
READ: Drax continues diversification ...
Approval of the CfD contract was a condition of Drax's recently proposed acquisition of business energy supplier, Opus Energy.
The subsidy deal will see Drax paid a fixed price of £100 for every megawatt-hour (MWh) of biomass-fired power the unit generates until 2027 – well above current market prices.
Drax said today that the CfD’s strike price remains £100/MWh and there are no changes to the terms of the contract.
In reaction to the news, Drax shares were up nearly 8%, or 25.6p to 349.6p in late morning trading.
Dorothy Thompson, Drax’s chief executive officer, said: “We are pleased the European Commission has completed its review of the contract and approved it in line with our expectations. We now look forward to fully converting the unit to run on sustainable biomass.”
Thompson added: "Our plans for greater diversification will deliver a package of reliable, affordable electricity to the UK's households and businesses."
Ahead of today’s news from the EC, French broker Societe Generale had already upgraded its stance on Drax to 'buy' from 'hold' this morning, and increased its target price for the stock to 415p from 270p.
Analysts at SocGen concluded: “While the Drax share price has increased by 17% (47p) since the 6 December announcement, we believe final CfD State aid confirmation should drive a further share price increase given the over 100p potential value accretion (and wider group benefits).”
New Opus ...
Earlier this month, Drax revealed it will pay £340mln for Opus, the UK's sixth biggest business energy provider, which supplies electricity and gas to more than 260,000 UK locations.
The group said the acquisition will enhance its retail offering by combining the leading "challenger" small and medium enterprise business supplier with the strength in the industrial and commercial market of its existing unit, Haven Power.
The combination of Opus with Haven will create Britain's fifth-biggest business energy retailer.
The Opus deal was unveiled at the same time as Britain's largest coal power producer also announced the purchase of four gas stations in a continued move away from its coal legacy
Drax, whose huge power plant in Yorkshire was once Europe's most polluting coal plant, has been converting its coal-fired station to biomass, but a government decision to cut subsidies for renewable energy has hampered this strategy.
This triggered a strategic review last year by the group, with today’s announcements showing the power producer shifting its focus to supplying energy to end-consumers and providing back-up electricity to complement growing wind and solar power output.
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