The £702m energy deal that is good news for the environment

Two of the UK's biggest energy companies have bought and sold assets from each other in a £702m deal that marks one of the sector's biggest shake-ups in years.

Scottish Power, one of the so-called "big six" household energy suppliers, is selling eight gas and hydro power stations to Drax.

The transaction makes Scottish Power, owned by Iberdrola (Amsterdam: ID6.AS - news) of Spain, the first vertically-integrated UK energy company - in other words, one that both generates power and sells it to households and businesses - to move completely from coal and gas-fired power generation to wind power.

The company has closed all of its coal-fired power plants during the last decade so the sale of its remaining gas and hydro power plants means all of its electricity will now be generated by wind power.

It is a feather in the cap of Scottish Power which, when its East Anglia One facility is completed in 2020, will be able to claim it operates the world's biggest offshore wind farm.

That is not to say that 100% of the energy consumed by households and businesses supplied by Scottish Power will be coming from renewable sources in future.

Clearly, those customers buying gas from the company will still be buying fossil fuels, while there will be days in which the wind does not blow and electricity has to come from back-up sources supplying the national grid.

That is where Drax's interest in these assets comes in.

Drax, near Selby in North Yorkshire, has been on a journey every bit as transformative as Scottish Power's during the last decade.

Once Europe's biggest coal-fired power plant, it has been converting four of its six units to biomass, burning wood pellets instead of coal.

This comes ahead of the UK's expected switch-off of coal-fired power generating capacity, in 2025, although Drax has been seeking to convert its final two units to gas-fired rather than biomass.

The move, accompanied by new carbon capture and storage projects on which Drax has been working, would make it carbon-negative.

So some people might be surprised to see it buying these assets, which include:

:: The Damhead Creek power station in Kent;
:: The Rye House plant in Hertfordshire;
:: Shoreham power station in Sussex;
:: Cruachan, a massive facility built inside a mountain near Loch Lomond in the Scottish Highlands, which generates power by pumping water between two reservoirs through a turbine and which can store electricity when supply exceeds demand.

Drax's interest can be explained by the fact that, as mentioned above, renewable energy can be intermittent.

On such occasions, a back-up supply of energy is required, as Will Gardiner, chief executive of Drax, notes: "It's a critical time in the UK power sector.

"As the system transitions towards renewable technologies, the demand for flexible, secure energy sources is set to grow.

"We believe there is a compelling logic in our move to add further flexible sources of power to our offering, accelerating our strategic vision to deliver a lower-carbon, lower-cost energy future for the UK."

That is not the only reason, though, why Drax was keen on buying these assets.

Two years after the UK is due to switch off its final coal-fired generating capacity, Drax's government subsidies for the coal-fired units it converted to biomass - worth some £730m to the company last year - run out, potentially wrecking its profitability.

Investors will wonder whether Drax has overpaid for these assets or whether Scottish Power has sold them for too little.

However, the price is at the bottom end of the range mooted when news the pair were in talks leaked out last month, while shares of both Drax and Iberdrola have risen sharply this morning.

The ratings agencies S&P Global (Frankfurt: 851710 - news) and Fitch have both said they see no concerns arising to Drax's creditworthiness as a result of the deal.

So, for Scottish Power, this deal marks its conversion to 100% renewable power generation, while for Drax, it marks further diversification away from coal and away from government subsidies.

And, in the main, it marks another little step on the UK's conversion from dirty coal-fired power to renewables.

At a time when other European countries, notably Germany, Poland and the Czech Republic, are still heavily producing and burning lignite, the most polluting form of coal there is, it is a good news story for the UK.