The boss of Britain's largest power station yesterday attacked the Government's plan to impose a windfall tax on the energy industry, saying it could jeopardise the much-publicised effort to spur a "green energy" revolution.
Ministers, responding to public anger at the major price increases announced by five of the country's six largest utility companies in recent weeks, have threatened to hit the industry with a punitive tax that it would use to aid those in fuel poverty. The Treasury could confirm its decision as early as this week or when the Chancellor, Alistair Darling, unveils his first Budget next week.
Dorothy Thompson, the chief executive of the Drax power station in North Yorkshire, said she had advised the Treasury against the move, arguing that it would be "unwise, given the tens of billions that industry will have to invest in order to meet highly ambitious emissions reduction targets set out by the Government and the European Union". She added: "There is no clear justification for it. Our sector requires significant investment over the next decade to meet the growing capacity gap and to meet the Government's renewable objectives."
The prospect of a punitive new tax is just one of several clouds gathering on the horizon for Drax, which provides about 7 per cent of the UK's energy needs and is the country's single big-gest polluter. Its finance director Gordon Boyd warned yesterday that the Treasury might close a loophole which allows the company to save £22m a year by allowing it to deduct interest on a complex bond arr-angement. HM Revenue and Customs began an inquiry into such "disguised interest" last December. The threat to the tax break prompted Lakis Athanasiou, an analyst at Evolution Securities, to slash his price forecast for Drax shares yesterday by 50 per cent.
Drax, Europe's largest coal power station, reported yesterday that its profits had nosedived because of the soaring price of coal and falling electricity prices. Average electricity prices fell to £45.30 per megawatt-hour in 2007, compared with £48.90p the previous year. Meanwhile, coal prices almost doubled to £63.90 per tonne over the year. Drax, which burned 9.8 million tonnes of coal last year – felt the impact in its pre-tax profits for 2007, which fell by 29 per cent to £449m.
Mr Boyd also announced he would resign as finance director and that a search for his successor had begun.
Among Britain's coal power stations, Drax is by far the most vulnerable to the low-emissions future envisaged by ministers. It emitted 21 million tonnes of the greenhouse gas carbon dioxide last year from burning coal, but received fewer than half of the credits for those emissions, 9.5 million tonnes, that it needs to comply with the EU Emissions Trading Scheme, which seeks to regulate and reduce pollution. Currently, nearly all credits are given away for free but the EU has proposed that, from 2013, all allowances will have to be purchased.
That could vastly shrink Drax's margins, which are already under pressure from the high price of coal. Mr Athanasiou estimated that Drax would this year have to spend €120m on carbon permits – based on their current price of about €21 per share. Many analysts believe that if the EU proposals become law, the cost of emitting CO2 could double. For Drax, that could make operating as it does now virtually impossible. Mr Athanasiou said: "It would probably respond by becoming a peak-hour operator [rather than providing base-load electricity]. A change to the carbon price of €10 either way would have a £1.50-per-share impact."
Ms Thompson admitted she was contemplating buying or building a gas-fired plantto hedge against Drax's near-total dependence on coal. She said Drax had made "good progress" with improving its environmental performance and upgrading its turbines under a £100m investment programme. Its target is to produce 10 per cent of its output from renewable biomass sources by the end of 2009, and to reduce carbon emissions by more than 3 million tonnes a year. The drive comes despite a 75 per cent rise in wheat and rapeseed costs last year, which led Drax to shelve plans for a rapeseed crushing plant.Reuse content