RWE, Drax power ahead as UK wins approval to convert Lynemouth power station

Shares in German utility RWE and UK power company Drax rallied after the European Commission approved the UK government's support for converting the Lynemouth power station from coal to biomass.

Lynemouth Power, a subsidiary of RWE Supply and Trading, operates the coal-fired plant, which would be able to generate 420 megawatts of electricity running exclusively on wood pellets.

The probe was launched in February amid fears that government aid would give RWE too much to convert the site from coal to biomass and could hamper competition.

The Lynemouth plant in Northumberland is one of eight projects in the UK, including a Drax biomass conversion plant, aiming to generate generate more electricity from renewable sources.

The EU has yet to rule on Drax’s project in North Yorkshire, but Tuesday's ruling appears to bode well for the company.

Howard Whitman analyst Angelos Anastasiou pointed out that the Lynemouth conversion to biomass burn is directly comparable to Drax’s third unit conversion, which has also been granted the same contracts for difference.

He said given that the situation with Drax’s third unit conversion is directly parallel to that of Lynemouth, it would seem reasonable to assume that Drax’s unit should also be cleared by the EC when it is reviewed.

“While Drax’s third unit still has to go through the review process, there should now be a considerable degree of confidence that it will be cleared by the EC and that it will be operating under CfDs in the not too distant future, rather than co-firing under the Renewable Obligation as it currently is,” said Anastasiou.

The UK government plans to support the project until 2027 in the form of a premium paid on top of the market price of the electricity generated.

The Commission said that after an in-depth investigation in February into whether the terms and conditions of UK support would avoid overcompensation, it is now satisfied that the submitted parameters are robust and present no risk of overcompensation.

In addition, the commission said there was no evidence the plan would lead to distortion in the global wood pellets market.

“The project’s contribution to the European renewable energy and CO2 emissions reduction targets clearly outweighs any potential distortions of competition that could be triggered by the state support,” the commission said.

The plant is due to use approximately 1.5m tonnes of wood pellets per year, mainly sourced from the US, Canada and Europe, the EC said.

At 1145 GMT, RWE shares were up 5% to €11.43 while Drax was 12% higher at 252p.