Drax has amended the terms of its impending acquisition of Scottish Power’s pumped storage, hydro and gas-fired generation to mitigate risks in the UK’s capacity market.
The group announced the deal in October, and still plans to pay £702m for the portfolio, but has now agreed on a risk-sharing mechanism worth £36m with Iberdrola, covering the period from 1 January 2019 to 30 September 2019.
The capacity market is a UK government scheme that uses payments to incentivise investment in low-carbon electricity capacity, but the European Commission is investigating the UK government’s scheme establishing the market. While the investigation is ongoing, the scheme has suspended payments. A significant portion of the earnings in the Scottish Power portfolio come from capacity market payments, so much so that if the contracted payments for 2019 are not received, it reduces the expected cash profit range to from £90m-£110m to £43m-£63m.
Under the risk-sharing arrangement, Iberdrola will make a payment to Drax if the 2019 gross profit is below £155m, equal to 72 per cent of any shortfall. If the profit is more than £165m, Drax will pay Iberdola 72 per cent of any outperformance. Both payments are capped at £26m.
