Shares in Drax Group (DRX) dropped by almost 10 per cent when the Department for Energy and Climate Change announced it would consult on removing grandfathering from the support provided to particular types of biomass projects. Renewable energy projects accredited under the government's Renewables Obligation (RO) contracts are currently protected from future changes to support levels.
The proposed changes would mean that generators carrying out new conversions from coal to biomass, or who increase the levels of co-firing, would no longer be able to move to higher RO support bands. The government is considering a grace period to take into account generators that have already acted on the basis that the grandfathering policy will continue.
Drax Group has six units, two of which have been converted to biomass burn under the RO. A third will operate under the Contracts for Difference scheme subject to European Commission state aid clearance, expected to be operational between July 2015 and June 2016. Analysts at broker Whitman Howard reckon these will be unaffected by the proposed changes.
While a potential fourth conversion may be affected, the broker reckons since it is not included in the group’s base case it would equate “to more of an out of the money option with very little value embedded in Drax’s share price”.
