Proactive Investors - Drax Group (LON:DRX)’s attempts to secure future government subsidies to support power generated at its Yorkshire biomass plants risk being pushed back, analysts think.
Though Bloomberg reported proposals for a rejigged funding model had been floated to Drax by the government on Friday, CitiGroup said such talks may not be so clear cut.
“We remain sceptical given that, in an election year, the government will likely spend limited political capital on a controversial technology,” the bank wrote in a note.
“[We] see the potential for key decisions to be pushed back,” analysts added.
Drax secured government permission to retrofit two of the four biomass units at its Yorkshire power plant with carbon capture technology earlier this week.
However, given biomass is more expensive than wind power and because the plans to install carbon capture are estimated to cost £2 billion, analysts anticipate a final investment decision to wait until Drax has confirmed government support.
This would follow on from a public subsidy package that guarantees the FTSE 250-listed generator is paid £118.54 per megawatt for some of the energy from its biomass plant.
Such a package is worth hundreds of millions of pounds a year and has attracted criticism given guarantees for offshore wind generators will sit at £73 per megawatt this year.
Questions have also been asked about the environmental effects of burning wood to produce power, with Drax's power station representing the UK’s largest source of carbon dioxide emissions in 2020, despite qualifying as carbon-neutral.
Drax’s current subsidy agreement with the government will run out in 2027, with Bloomberg reporting the replacement would cap the amount of power eligible for payments and include a profit sharing model with consumers.
“At the time of publication, we have yet to see any official consultation documents and do not have any visibility on the level of a potential strike price,” Citi added.
Citi hit Drax with a ‘sell’ rating, noting it forecasts shares in the generator to fall almost 6% on Thursday’s closing price to 437p.