By Geoffrey Smith
Investing.com -- Shares in Drax (LON: DRX ) reversed early gains at the opening on Thursday in London, as broader market weakness offset an increase in the U.K. generator's profit guidance for 2022.
Drax, which generates power largely from burning biomass pellets and from pumped storage hydro, said it now expects adjusted earnings before interest, taxes, depreciation and amortization to be "slightly above the top of the range of analyst expectations, subject to continued good operational performance and logistics for the remainder of the year."
The upgrade is due not only to the strong performance of its renewables business, but also to a contract with National Grid (LON: NG ) to provide reserve power from the Drax plant's original coal-fired generation units, which it had closed in 2020 after the U.K.'s decarbonization strategy made them unprofitable.
The contract, which runs from October 2022 to March 2023, provides Drax with a fixed fee for making the units available, with National Grid paying Drax for costs, including the coal and carbon associated with any generation. The coal units will not sell power commercially to third parties, however, and the company still expects to close the units permanently in 2023.
However, the group warned that sharp rise in operating costs is expected to constrain it next year. It noted that the cost of wood pellet cargoes is currently around three times the historical average, a reflection of how the surge in wholesale gas prices this year has lifted prices for all alternative fuels too.
"These factors, alongside the Electricity Generators Levy, the recently-introduced U.K. windfall tax on power generators could make generation at certain times less economic and is expected to restrict the Group's purchase of additional biomass cargoes at spot prices," Drax said.
It now expects to continue rising to £100 (£1 = $1.2361) per megawatt-hour of generation in 2023.
Elsewhere, Drax said it's advancing its plans to build what would be one of the world's biggest carbon capture and storage businesses at its U.K. plant, with a final investment decision due in 2024, and the start of operations penciled in for 2027.
It's also considering two new-build 300 megawatt CCS power units each capable of producing 2 terawatt-hours of renewable electricity a year from biomass, each capable of capturing over 2 million tons of CO2 a year, against the backdrop of more regulatory support embedded in the Biden administration's Inflation Reduction Act.
The company said it sees "significant growth opportunities" in CCS in North America and will spend £30 million "with a view to progressing these opportunities" to final investment decisions. It said it will update the market on those projects in the first half of 2023.
By 03:40 ET (08:40 GMT), Drax stock was down 0.7% and is now up 3.1% so far this year.
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