Drax and Iberdrola, mid acquisition, agree to share £36M Capacity Market payment risk

Drax and Iberdrola have agreed a risk sharing mechanism over £36 million in Capacity Market (CM) payments for 1 January 2019 to 30 September 2019, which are uncertain after the ECJ set aside the Capacity Market and halted payments.

In November the ECJ agreed with a challenge brought by Tempus Energy that State Aid clearance for the CM had not been properly granted. It is not clear whether or when payments will resume and they provide important revenues to generators – including plants that are to be transferred from Scottish Power parent Iberdrola to Drax Group, in a deal agreed in October. Drax said that “Based on the information available and legal advice it has received, Drax believes that the most likely outcome is that the European Commission will re-approve the existing Capacity Market in its current or a broadly similar form.” 

Drax said the capacity payments are “a significant proportion of the earnings of the portfolio”. For the period from 1 January 2019 to 30 September 2022, expected CM payments were £29 million for the Cruachan pumped storage plant,  £5 million for the Galloway run-of-river hydro assets and £122 million for the CCGTs.

Regarding the expected £36 million in CM payments due for 2018/19, the companies have agreed that if less than 100% of Capacity Market payments are received and the gross profit of the Portfolio for the full year 2019  is lower than expected, Drax will receive a payment from Iberdrola of up to £26 million. The mechanism also gives Iberdrola the opportunity to earn an upside of up to £26 million if less than 100% of these payments are received but the Portfolio performs better than expected in 2019.

Drax said it considered  that the most likely outcome is that the European Commission will “re-approve the existing Capacity Market in its current or a broadly similar form”. It, like other generators, also hopes that the government will compensate them for Capacity Market payments that should have been made in 2018/19.

That includes £7 million in CM payments that Drax expected for its existing coal-fired stations. The company said the loss of that revenue would not affect its overall earnings for the year.

Further reading

Moody’s: generators lose £100M this winter – but retailers’ profit rises

BEIS seeks immediate State Aid approval for 2019/20 Capacity Market auction

Capacity Market ruling: the industry responds

European court annuls State Aid clearance for GB Capacity Market

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