Dorothy Thompson, the chief executive, said: “We have expressed disappointment with the proposed level of support for this technology, which makes the investment case for the independent [biomass] generators highly challenging.
“The development planned for the Drax power station site has proved the most [problematic] for a number of reasons, including its inland location which increases logistics costs.”
Thompson added that given the significant financial liability that “we would face were we to delay our investment decision until we have certainty over the final support level for dedicated biomass, we have decided to cancel the project.”
Drax has also shelved plans to build a second plant at another UK site, but is exploring options to develop a biomass facility with Siemens at the port of Immingham on the River Humber. Biomass typically burns wood chippings, agricultural waste and straw pellets, a process that cuts carbon emissions by around 80% compared to coal.
Thompson was more upbeat about prospects for boosting profits and reducing pollution by mixing increasing quantities of biomass with coal, so-called “co-firing,” at its huge Drax plant in North Yorkshire. The plant, near Selby, supplies 7% of Britain’s electricity.
A £450m development programme to boost “co-firing” is under consideration, but the rate of expansion is also dependent on government financial help. Co-firing currently accounts for 6% of Drax output, but the long-term plan is to take it to over 50% – a move that could eventually make up for the lost megawatts that would have been attributed to biomass, if new plants had come on stream.
Ministers are currently reviewing the financial regime governing the use of renewables to meet the EU target for 15% of energy to come from renewable sources by 2015. Its findings are expected to be published in the spring.
Green campaigners are still reeling from a decision last year by the Department of Energy and Climate Change (Decc) to slash solar power subsidies in a move that infuriated the industry, including many small businesses, some of which have gone bankrupt as a direct result of the clampdown. Although the high court has ruled the proposed cuts are illegal, because of botched consultation procedures, the government is drawing up emergency measures to cap the cost of solar panel subsidies.
Analysts says Drax is in a difficult position because its future will be determined by the shape of future regulation decided in Whitehall, while at the same time the level of profit from burning coal for power generation is uncertain from 2013 with the introduction of a minimum price for carbon. But Drax says it can easily replace half its coal-fired capacity with biomass to reduce toxic emissions, if sufficient government help is forthcoming.
The company revealed its financial results for the year to the end of December 2011, with underlying earnings falling 15% to £334m due largely to higher commodity prices. But pre-tax profits rose from £255m to £338m, thanks to a one-off tax credit and gains from hedging activities. The company cut the total dividend from 32p to 28p.
Thompson said: “We continue to operate at less than our installed renewable biomass capacity because of the current low level of regulatory support. However, the results of our biomass combustion trials give us full confidence in our technical capability to become predominantly biomass fuelled.”
Liberum Capital analyst Dominic Nash said: “Drax has provided more clarity on its biomass trials and capital expenditure. This is significant in our view as it indicates that co-firing above 50% is a possibility … and could be an important value-driver later in the decade.”