Drax Group PLC (LON:DRX) has revised the contractual terms of its deal to buy UK power generation facilities from Iberdrola to share additional risks due to a new European Union ruling on Britain’s back-up power scheme.
Drax in October agreed a £702mln cash deal to acquire Scottish Power’s UK power generation assets from Iberdrola. The deal saw Drax pick up pumped storage, hydro and gas-fired power assets.
READ: Drax Group confirms £700mln UK power acquisition
However, the British power producer said in a statement on Monday that last month’s decision on the UK capacity market scheme had put at risk payments to plants it is buying as part of the deal and that it had agreed a risk-sharing scheme with Iberdrola as a result.
The amended deal could see Drax receive a payment of up to £26mln in compensation depending on the outcome of challenges to the EU over the ruling.
Drax said it believes the strategic merits of the acquisition remain unchanged and that the board feels there is a “compelling logic” in its move to add further flexible sources of power to its offering.
"The capacity market is a central pillar of the UK's energy policy and ensures security of supply while minimising costs to consumers. The Government has stated it is working closely with the European Commission to aid their investigation and to reinstate the full capacity market regime, including existing agreements, as soon as possible,” Drax CEO Will Gardiner 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. Beyond 2019, while reinstatement of the capacity market is the most likely outcome, we considered other outcomes, the more plausible of which would still deliver returns in excess of Drax's weighted average cost of capital.”