Sell expensive Drax

The group's first unit was converted to biomass in April 2013 and its operating performance was encouraging with an efficiency level almost up there with coal. Buoyed by this promising start and UK government backing for renewables, Drax confirmed plans for its second and third units to be converted to biomass in 2015. Drax's transformation story won fans in the City and the shares soared 43 per cent last year.

But recent developments might have Drax wondering if it has leapt out of the frying pan and into the fire. In February, news broke of an EU investigation into whether a government-backed loan to Drax was in breach of state aid rules.

More seriously, Drax has had to contend with a government U-turn on the subsidy treatment of its converted units. In April, Drax announced the government had informed it that its second unit was no longer eligible for the new contracts for difference regime that provides a minimum price for the electricity it produces.

This is problematic as the new regime, which provides a price guarantee, is more attractive than the existing renewables obligation regime. Drax said the government's decision was disappointing and that it believes it has a legal foundation to challenge it.

The government's backpedalling, and indeed the EU action, highlight one of the key risks in renewable energy - that of political meddling. The trading backdrop can change as certain methods of power generation fall in and out of political favour. And that can unnerve investors. Drax's shares closed 12 per cent down (adjusted for going ex-dividend) on the day the UK government's U-turn was announced.

Also of concern are lingering questions over how green biomass really is. Drax says it is carbon neutral as when it is burnt it just releases the same carbon dioxide absorbed as it grew. It can also be sustainable if the trees or crops used are replaced.

But there is some criticism of Drax importing biomass wood pellets from North America. A group of leading US scientists wrote to energy secretary Ed Davey earlier this month asking him to end subsidies for burning wood pellets imported from North America. They claim it threatens forests and does not necessarily lower carbon emissions.

Drax argues that shipping the pellets by bulk ocean freight is more carbon-efficient than road transport and that the overall carbon emissions are far lower than the emissions from burning coal. Either way, the biomass debate looks set to continue and does raise questions over how wedded the government might be to its support.

Drax is also facing more tangible headwinds such as a mild winter and high wind power generation. The group's recent trading update warned that earnings this year would be below the City's expectations. Deutsche Bank now forecasts earnings to sink by two-fifths this year and, although they are forecast to recover in 2015, they will still be below last year's level.