Brussels probes Drax for potential breach of EU state aid rules

25th Feb 2014 16:15

Shares in Drax edged lower on reports that Brussels is investigating a potential breach of EU state aid rules by the UK government following it guaranteeing a £75m loan to coal-fired power plant operator. Drax was offered the £75m by the UK government last April to support the group's conversion of its Drax coal-fired power station in North Yorkshire to biomass.The funding is being made available to Drax via the government's UK Guarantees Scheme. Launched in December 2012, the scheme aims to provide £40bn in guarantees to infrastructure projects struggling to secure finance.Under the terms of the initiative, the British government is underwriting a £75m loan the company secured from investments provider Friends Life. Drax will use the funds to convert half its Yorkshire station's generating units to enable them to burn wood pellets and other fuels - derived from plants - in what is termed as biomass. According to the FT, Brussels has already informally warned the UK government that its means of support for renewable energy projects, including the Drax biomass conversion, could breach EU competition rules as it involves heavy subsidies. Environment lobby group Friends of the Earth (FoE) has lodged a state aid complaint against the burning of biomass to generate electricity, arguing the technology has the potential to generate more greenhouse gas emissions than coal. According the FT, Friends of the Earth believes the UK guarantee might have favoured Drax by artificially lowering the cost to the company of the Friends Life loan. FoE also argues that the guarantee was not declared to the European Commission as it should have been.The newspaper report added that the commission informed FoE in late January that it had started a "preliminary investigation" into the complaint. The commission's correspondence to FoE was forwarded to UK authorities for a response.Citing a commission spokesman, the FT stressed that while the UK government's support for Drax was being looked at by Brussels it does not necessarily mean it will lead to a formal state aid investigation."(The scheme) is supporting infrastructure delivery as part of the government's long-term economic plan. Clear processes are in place to ensure that any guarantees comply with state aid rules," a Treasury spokesman told the FT.In early December 2013 Drax group's shares shot up after it announced another major advance for its biomass ambitions as it confirmed the government's go-ahead for revised price support to enable it to switch half its capacity from coal to biomass. Under the terms of the deal Drax, which supplies 7% of the UK's electricity supply to the national grid, has been given the government's backing for a minimum payment of £105 per megawatt hours of output under the terms of contracts for difference being introduced through the electricity market reform programme.In late afternoon trade Drax Group shares were off 0.4% to 3.5p to 809.5p, having recovered from an intraday low this morning of 801.5p. KP