Drax sues UK government over U-turn on biomass conversion support

LONDON (Reuters) - British electricity producer Drax said on Wednesday it had commenced legal proceedings against a government decision not to support the conversion of one of its coal units to biomass under a new subsidy scheme. The government's move is a blow to Drax's plans to modernise its polluting coal plant in Yorkshire, northern England, to burn more environment-friendly biomass after two units were shortlisted to receive investment contracts in December. "Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now. We have, therefore, commenced legal proceedings to challenge the decision," Drax Chief Executive Dorothy Thompson said. Shares in Drax opened 10 percent lower on Wednesday. The government is changing the way in which it supports renewable energy projects by replacing a mechanism of direct subsidy payments to a system whereby qualifying projects are guaranteed a minimum price at which they can sell electricity. The government recommended Drax continue using the current direct subsidy scheme - which analysts say is less lucrative than the new contracts-for-difference (CfD) scheme - for the conversion of its Unit 3. "We believe that this decision is disappointing," said Angelos Anastasiou, utilities analyst at Whitman Howard. The government granted a CfD contract for the conversion of Drax's Unit 1, which will receive a 105 pounds ($180) per megawatt-hour guaranteed electricity price from April 2015 when the new scheme is due to start, pending EU state aid clearance. The government also awarded investment contracts to seven other projects on Wednesday, including two biomass plants and five offshore wind farms. These include the Dudgeon offshore wind farm, proposed by Norway's Statoil and Statkraft, Dong Energy's Burbo Bank offshore wind farm and a third biomass conversion unit at Drax's coal-fired power plant. (Reporting by Karolin Schaps; Additional reporting by Nina Chestney; Editing by Kate Holton and Dale Hudson)