Optimism from Europe’s biggest coal-fired power station

Jul 1 2008 by Iain Laing, The Journal

POWER station operator Drax has said that soaring commodity prices would see full-year results come in ahead of market expectations.

The owner of Europe’s largest coal-fired power station is expecting underlying earnings to be modestly higher than the £400m pencilled in by analysts.

The North Yorkshire-based group said it was generating more power than usual in a historically lower margin period, with profits buoyed by rocketing energy and commodity costs.

“Current commodity market conditions mean it is profitable to generate these incremental volumes, albeit at moderate margins,” it said.

Last year Drax felt the impact of falling wholesale electricity costs but a doubling in the price of coal in its pre-tax profits, which fell 29% to £449m.

But yesterday’s news suggests the higher margins now available are offsetting the impact of dearer coal.

Electricity prices have also been rocketing this year in contrast to 2007, when the company saw weaker wholesale electricity prices in an unusually warm winter.

Wholesale gas prices have been climbing higher following record crude oil costs since the latter half of 2007, prompting hikes from five of the UK’s big six energy firms.

Drax – which rejoined the FTSE 100 Index last week – added yesterday that it was sticking to its strategy of fixing steady forward sales of power, with contracts in place to sell 23.2 terawatt hours in 2008 – near maximum capacity – at an average price of £51.1 per megawatt hour.