Drax, the power generator that owns Europe’s biggest coal-fired power station, yesterday revealed plans to build three new biomass-fuelled power stations at a cost of £2 billion.

The company, which is more usually labelled the UK’s most polluting generator because of its ownership of its coal-fired power station, said that the plan would allow it to provide 15 per cent of the UK’s renewable energy and a tenth of the total UK electricity capacity by the middle of the next decade.

Dorothy Thompson, the chief executive of Drax, said: “This will be a material step in terms of the UK’s need for new generation capacity as well as its ability to meet climate change targets.”

A fifth of the UK’s existing generating capacity will close between now and 2020 and there is an urgent need for generators to open new capacity. The country is also in danger of missing its ambitious renewable energy targets because of the difficulty in bringing forward major renewable energy projects such as wind farms.

However, Drax’s move will be controversial because the argument in favour of burning biomass has not been proven. There will be immediate concerns over the source of the wood chips, peanut husks and straw pellets that Drax intends to burn.

Most of the fuel will have to be imported in the early years of the project as the UK’s provision of energy crops, including elephant grass and willow, is low. Drax would not say where it would source its fuel, stating commercial confidentiality, although it insisted that its sources were sustainable and would not destroy “the rainforest or other carbon sinks” or destabilise communities.

Ms Thompson said: “It makes no sense to pull down the rainforest to meet the UK’s energy needs and this project has a net carbon benefit, right through the supply chain.”

Doug Parr, the chief scientist of Greenpeace, said: “Biomass plants can help us in the fight against climate change, but only if they make the most of the waste heat they produce and use fuel from carefully chosen sources. Otherwise they’re cutting down trees, shipping them across the world and then throwing away the energy they get from them.

“Drax already owns the single-most polluting power station in the UK and if they fail to get the technology right they could be making their carbon footprint bigger, not smaller.”

The first power station will be built on the northeast coast at the port of Immingham and a second will be built in Hull, with the third, as yet undetermined, but possibly built on Drax’s existing site at Selby in North Yorkshire.

Together, the new power stations will produce 900 megawatts of electricity, enough to light 1.3 million homes.

Work is expected to start on the first of the three plants in 2010, although the deal has not yet been fully financed and signed off. The project will be 60 per cent owned by Drax and is expected to provide “attractive returns”, although no construction or financing commitments have been made to date.

However, shareholders will pay for the venture into green energy as Drax has proposed that it will change its dividend policy from 2010, so that only 50 per cent of free cashflow will be returned to investors. At present, the company returns all surplus cash via special dividends.

Tony Quinlan, finance director, said he did not believe financing for the projects would be a problem, despite the lack of liquidity in the debt markets. “We have been talking to lending banks and there is lots of interest in project finance for renewable energy infrastructure, which is deemed to be a good investment,” he said.

It is envisaged that the power stations will be financed with 60 per cent debt and 40 per cent equity. The plan also depends on the continuation of the existing Renewables Obligation Certificate, which sees the Government subsidise renewable power sources.

The generating company supplies 7 per cent of Britain’s electricity needs from a single site in Yorkshire. It has pioneered co-firing of biological material such as straw, forestry residue and sunflower seed and peanut husks alongside coal. By 2010 it will become the biggest biomass generator in the world, when an extension to its co-firing facilities is completed, taking their capacity to 500 megawatts.

Drax added that it was likely to make slightly more money than analysts had been expecting for the year. Drax is benefiting from low reserve margins in the UK’s electricity generating capacity, which means that the power it produces is more valuable in the market.

Generation game

4,000 Total generating capacity in MW

7% Proportion of Britain’s electricity generated by Drax

£701m Gross profit in 2007

700 People employed by Drax

Source: Times database

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