The share price of Drax Group, owner of the UK’s biggest coal-fired power station, fell by a fifth after the UK government released details of support rates for Renewable Obligation Certificates - or ROCs - a system designed to provide incentives for generators to switch to low-carbon power sources. Drax had planned to convert three of its six generating units to biomass, but the ROC plans make it plain that Drax would have received fewer certificates than initially envisaged. In short, the company is being forced to generate electricity predominantly through biomass fuels.
Drax’s chief executive, Dorothy Thompson, believes that "it will take some time to develop all of the sustainable biomass supply chain to fuel these units." Nevertheless, she is confident "that within approximately five years Drax could become a biomass fuelled plant." A conversion on this basis would obviously present some near-term challenges for Drax, as analysts at Liberum Capital point out: "The transition would now be more difficult with less revenue in the transition period. Full conversion of individual units will require boiler modifications and this raises the capex required. We believe that this is a viable option for Drax and depending on the level of incremental capex, could provide significant valuation upside, although it also raises execution risk."
The main beneficiaries of the ROC support rates decision will be the so-called 'energy from waste' (EfW) producers, who employ technologies such as gasification, landfill extraction and EfW with combined heating and power. All of these will attract higher ROC subsidies than those contained in the government’s original consultation document published October 2011. Early-stage movers, like Stobart Group, which provides ancillary services to this growing segment of the energy market, also stand to gain. The government also announced a 10 per cent reduction in subsidies for onshore wind farms, thereby sticking to the rate announced on October.
