Shares of U.K. Power Firm Drax Slump

LONDON--Shares in U.K. power generator Drax slumped on Wednesday after one of its planned biomass units was excluded from a list of renewable energy projects eligible for a new system of government subsidies.

Drax's shares fell by 9.9% after it said it would launch a legal challenge against the government's decision to offer it an investment contract to convert just one of its coal-fired generators into a generator that can use biomass fuel. Drax said the government had told it in December that two units scheduled for coal-to-biomass conversion at its power plant in northern England would be eligible for support.

Earlier Wednesday the Department for Energy and Climate Change revealed a list of eight renewable energy projects in the U.K. that had been offered subsidies known as contracts for difference. The system, which is central to the U.K. government's energy market reforms, aims to encourage developers to invest in renewable energy by guaranteeing them a minimum price for the electricity they produce over the first 15 years of output.

In total, five offshore wind and three biomass projects were named as the first renewable energy projects to be eligible for the new contracts. Denmark's Dong Energy is developing three of the wind farms included in the list.

In a statement, DECC said the decision to award the contracts should lead to GBP12 billion ($20.2 billion) of private sector investment in renewable energy projects that could add 4.5 gigawatts of electricity-generating capacity--around 4% of the country's total--by 2020.

But Drax, which has already converted one of its six generating units at its power station from coal to biomass, said it was disappointed by the government's change of heart, despite one of its planned generator conversions being offered support.

"Nothing has changed, as far as our plans are concerned, between being deemed eligible in December and now," said Drax Chief Executive Dorothy Thompson in a statement. "We have, therefore, commenced legal proceedings to challenge the decision."

DECC couldn't be immediately reached for comment.

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