UK's largest power generation company, Drax Power Limited,  which operates Europe's biggest coal-fired power plant, is investing £2 billion to build three new biomass-fired stations of 300 MW capacity each, in joint venture with Siemens.

Earlier in May this year Drax had outlined a £50-million project to cut down its coal consumption by replacing 10 per cent of its coal requirement with biomass, which will be prepared at a processing plant to be built by French power equipment major Alstom, with the first phase expected to be completed in 2009. The 1.5-million tonnes per year biomass co-firing facility will be constructed at the 4,000MW Drax Power Station in North Yorkshire, believed to be the largest biomass cofiring project in the world, and is a part of Drax's target of reducing its carbon dioxide emissions by 15 per cent, based on current out put by 2011.

Work on the he three biomass-fed power stations in joint venture with Siemens is expected to start on the first of the three plants in 2010, with the first plant expected to be operational in 2014. When all three plants are completed, Drax expects to provide at least 15 per cent of the UK's renewable energy and up to 10 per cent of total UK electricity.

"Meeting our 10 per cent co-firing target is key to achieving our goal of 15 per cent carbon abatement,"  Dorothy Thompson, chief executive of Drax, had said in May while announcing the biomass processing facility. ''We have a role to play in the transition towards a low carbon economy whilst delivering reliable supplies of electricity.''

Earlier this month Drax announced that it had signed a £10 million EPC contract with Doosan Babcock Energy Limited to supply direct injection biomass co-firing systems to all six coal-fired generating units at the 4,000MW Drax Power Station in North Yorkshire.

Building on Drax's expertise in biomass co-firing, the expansion of its renewables business is expected to deliver significant attractive long-term growth opportunities for Drax.

Each plant meets a mid-teens equity return hurdle based on current market scenarios and is expected to have a pay-back period of within six years from commencement of operations.

The new plants, once operational, will deliver essential baseload generation capacity to the UK electricity market, both making a significant contribution to the UK's renewables target and supporting national security of supply requirements.

Based on current estimates, once all three plants are operational Drax will be responsible for supplying at least 15 per cent of the UK's renewable power and up to 10 per cent of total electricity in the UK.

Drax is well positioned to build this biomass-fired generation business:

Biomass-fired generation has a strong strategic fit with Drax's existing business and will enable the Company to deliver additional value from its core competencies of production, trading, biomass procurement and handling and project execution.

Drax already produces power by co-firing biomass and is well advanced in its project to increase its biomass co-firing capability to 500MW by mid-2010, which will make Drax Power Station the largest biomass co-firing plant in the world.

Drax has an established biomass business management team in place and already purchases significant volumes of biomass in accordance with its established sustainable sourcing policy.

No commitments to construction contracts or financing have been made to date and Drax expects to finalise these arrangements over the next 12-18 months.

Drax also announces a new distribution policy: the company will distribute excess cash generated from operations in 2008 and 2009 and then target a pay-out ratio of 50 per cent of underlying earnings from 2010 onwards to complement the expected growth potential of the group.

Ubder the current project, Siemens Project Ventures will build three 300MW dedicated biomass-fired generation plants for Drax in the UK. Under the terms of the joint development agreement, the intended ownership of the biomass-fired generation business will be split 60:40 between Drax and Siemens Project Ventures.

Drax will manage and operate the biomass business and will also be responsible for all biomass procurement and trading. It is proposed that the plants will use Siemens' turbine technology.

Drax has secured rights to port sites at Immingham and Hull for two of the proposed biomass plants. The company is also progressing a number of options for the third site, including land at Drax Power Station. The planning application process for each of the two secured sites, including required consents, has recently commenced.

Costs
Current estimates of the total capital cost of the investment programme are around £2 billion, including investments in ancillary biomass logistics and processing facilities. Construction of the first plant is targeted to commence in late 2010, following execution of the construction and financing contracts and agreed capital commitment, with the first plant expected to be operational in 2014.

Distribution Policy
In order to fund the expansion of the biomass business, Drax  has changed its distribution policy. For 2008 and 2009, the company will distribute all excess cash generated from operations after meeting business requirements in each year.

Any refinancing proceeds will be used to fund Drax's equity investment in the new biomass business. For 2010 and beyond, Drax will target a pay-out ratio of 50 per cent of underlying earnings in each year, adjusted for non-cash accounting items (principally accounting for derivative contracts).

Commenting on the announcement, chief executive Thompson, "This is an exciting opportunity for Drax to develop its business and to deliver shareholder value by exploiting our core competencies, whilst achieving fuel diversification and carbon abatement.

"We are strongly of the view that investment in the generation sector will provide attractive returns. We believe our venture into dedicated biomass-fired generation underpins our commitment to reducing the carbon footprint of electricity generation from the continued, but necessary, reliance on fossil fuels, whilst delivering secure and reliable supplies of electricity.

"Based on current estimates, once all three plants are operational Drax will be responsible for supplying at least 15 per cent of the UK's renewable power and up to 10 per cent of total UK electricity."

Commenting on the announcement, Dr. Wolfgang Bischoff, managing director, Siemens Project Ventures, said, "We believe that the development of dedicated biomass plant will make a significant contribution to the renewable energy needs of the UK going forward and importantly help to address the challenge of climate change facing the sector. As a leading technology company we are used to providing solutions to such important issues."