The operator of the UK’s largest power station has seen its share price slide after it posted a pre-tax loss of £83m in the first half of the year despite increasing earnings by 73%.
Drax Group, which runs a coal and biomass plant in North Yorkshire, boosted its earnings to £121m from £70m last year, due to its acquisition of the business energy supplier Opus Energy.
However, the power group made a pre-tax loss compared with the £184m profit in the first half of 2016, because of depreciation of its coal assets after the government set a target of phasing out use of the fossil fuel for power generation by 2025 and a £65m loss from currency hedging. Shares fell 4.25% to 330.8p.
Dorothy Thompson, Drax’s chief executive, revealed the company was on the verge of submitting a planning application to convert one of its three remaining coal-fired units to gas, in the hope of winning a 15-year subsidy contract for providing backup power in winter.
“We are looking at opportunities for a coal-free future,” she told investors on Wednesday, adding that the possibility of switching a unit to gas was “looking good”. Ministers have said coal must be phased out entirely by 2025 to meet climate targets.
Thompson said the company, which already generates 68% of its power from burning wood pellets, would be lobbying the new government for financial support for further conversion to biomass – something previous governments have ruled out.
In a sign of the change afoot at what was once Europe’s most polluting power station, Drax also announced it had appointed the former chief of WWF-UK to its board.
David Nussbaum, chief executive of the Elders, a group of global leaders set up by Nelson Mandela that promotes human rights and action on climate change, joins on 1 August in a non-executive role.
Thompson said Nussbaum would help the firm deliver its sustainability agenda. The company posits biomass as a source of low-carbon power, though environmentalists dispute the accounting of the fuel’s emissions.
“He’s not just someone with a deep-seated expertise in sustainability, he also has extensive organisation management and leadership experience, and is an experienced finance director as well. So he brings a lot to the table,” Thompson said.
The half-yearly results showed revenues from Drax’s retail energy unit were up from a small loss in the first half of last year to around £11m, thanks in part to its acquisition of Opus for £340m last November.
A large chunk of the £83m loss – the £65m lost on currency hedging – was a result of the volatility of the value of sterling since the Brexit vote.
The company buys its wood pellets from North American mills and hedges five years ahead to protect itself, resulting in a gain last June when the pound fell significantly after the EU referendum, and the £65m loss as sterling recouped some of its loss in value.
Will Gardiner, chief financial officer of Drax, said that before the referendum the company had hedged at $1.50 to the pound, meaning it would overall gain over the next five years. “The net impact will be a positive one,” he said.
Power generation overall for the group was largely flat in the first half of the year. Thompson said coal generation was “pretty low”, with the coal-fired units no longer playing a big role in major power generation but instead providing services to the grid and filling in as needed.
“We now feel we have completely adapted to a world where coal generation is not about hard running all year,” she said.
The company has already converted three of its six units to biomass, and on Wednesday disclosed that it had been trialling burning wood pellets in the fourth unit this year.
Drax said it had proved it could run the unit safely on biomass but it required further modifications which would cost millions. The unit will run on coal this winter and the company is still exploring whether to invest in the maintenance needed to switch it over entirely, to exploit subsidies it has previously secured.
The company’s ambitions for gas already include plans for four small gas power stations to provide flexibility for National Grid.
But Thompson said the firm was also exploring the technical and economic feasibility of switching one of its final three coal units to gas, which could be ready to provide backup power in the winter of 2023/24 if everything went smoothly. A planning application, which would take two years to approve, is due to be submitted shortly.
She added that the firm would be looking at options for making it ready for carbon capture.
