Broker snap: Investec cuts target for Drax after biomass review

25th Jul 2012 11:23

Investec has reduced its target price for coal-fired power station group Drax from 498p to 425p following the Department of Energy and Climate Change's (DECC's) final biomass banding.The DECC announced today that it has decided to create support levels for electricity generated from sustainable biomass at existing fossil fuelled power stations on an individual generating unit by unit basis, and not, as previously proposed, on a power station wide basis.1.0 renewable energy certificate (ROC)/MWh subsidies are now available for full conversion (counted as over 90%),with lower 0.6-0.9 ROC/MWh for enhanced co-firing at various levels, Investec explains."Drax had been planning to convert the station to 50-60% co-firing, but we believe that the lowered level of subsidy (1.0 ROC/MWh had been hoped for, rather than 0.6-0.9 ROC/MWh) challenged the viability," said analyst Angelos Anastasiou.Therefore, Drax is now planning to progress with 'full' conversion of individual units and says that within five years, it will become a predominantly biomass-fuelled generator."We believe that full conversion has to be more difficult to achieve, and full conversion of all six units will, by default, require even greater quantities of biomass," Anastasiou said.On the back of £20m in extra R&D costs, the broker has reduced its current-year forecasts, hence the target price cut. A 'hold' recommendation is maintained.By 14:59, shares were down 17.29% at 428.85p.BC