Energy future poses burning question for coal firm Drax

What do you do, in a world turning its back on coal, when you own Europe's biggest coal-fired power station?

This has been the strategic question with which Drax Group (Frankfurt: D9F2.F - news) has been grappling during the last decade or so.

Opened in North Yorkshire 43 years ago, to generate power from the newly-discovered Selby coalfield, it was heralded as the UK's most efficient coal-fired power plant and, later, its most environmentally friendly.

At its height, Drax and other coal-fired power plants in the region produced around a fifth of Britain's electricity.

Drax remains the UK's single biggest power station and still contributes 7% of the UK's total electricity needs.

However, after years of criticism of coal from the environmental lobby, it became clear a rethink was needed.

Chief (Taiwan OTC: 3345.TWO - news) executive Dorothy Thompson and her colleagues concluded they needed to convert the company - once part of National Power but floated on the stock market in its own right in 2005 - from coal-fired generation to biomass.

To that end, Drax has spent the last decade converting three of the six boilers at its plant from burning coal to compressed wood pellets, helped by Government subsidies.

It now generates a sixth of the UK's renewable electricity - enough to power more than four million homes - and, as such, is one of the most important players in that market.

Some 68% of the electricity it generates is now from biomass and just 32% from coal.

In its latest update as to current progress, the company reported a half-year pre-tax loss of £83m - down from a profit last time of £184m.

That does not necessarily point to a failure in the strategy. Far (Hamburg: FA6.HM - news) from it. Earnings before interest, tax and accounting adjustments more than doubled.

However, due to writing down the value of its coal assets at a higher rate, one-off costs associated with the recent acquisition of retail supply business Opus Energy and a hit from currency movements, it was pushed into the red.

Perhaps more interesting is what happens next.

Drax took a whack when, in George Osborne's 2015 budget, the former chancellor removed its exemption from the climate change levy.

Since then, in the face of accusations that biomass is not genuinely a renewable energy source unless the wood from which its pellets are sourced is replaced, it has struggled to persuade ministers of the case for further subsidy.

With Britain due to phase out coal-fired power entirely by 2025, Ms Thompson has now insisted the company is "working on opportunities for a coal-free future", revealing it has sought planning permission to convert one and maybe two of its existing coal-burning units to be converted to gas.

She (Munich: SOQ.MU - news) added: "If we did this, the capacity would go from 650 megawatts (MW) to about 1300 MW… we believe, and all our working is showing, that this would be at a discount to new build CCGT [the new generation of gas-fired power stations] because we are using so much equipment from the existing units.

"We are in early stages [but] things are looking good."

This is quite a change of approach.

Ms Thompson confesses that, when her team first suggested a conversion to gas, she noted there had previously been "a catalogue of failures" in both financial and technical terms.

However, she admits, she has been persuaded:

"There is this history of us knowing how to convert things. We're not without experience here.

"I actually think it is doable, credible and very probably economically attractive."

And there may even be a stay of execution for coal-fired generation if Hinkley Point C, Britain's first new nuclear power station in a generation, does not open on time.

Ms Thompson said: "We await with interest the result of the consultation.

"We've heard nothing to indicate the Government isn't still looking for closure by 2025 and possibly something in advance of that… but we do note the challenges of [building] Hinkley."

Drax is also making fresh overtures to the environmental lobby.

It has unveiled David Nussbaum, the former chief executive of the World Wildlife Fund in the UK, as a new non-executive director.

This big, strategically important piece of infrastructure has already undergone plenty of changes during the last four decades.

It looks as if it has more in store during the next one.