North Yorkshire-based power company Drax said on Monday it reached agreement with Iberdrola on revised terms for the £702 million acquisition of Scottish Power’s portfolio of pumped storage, hydro and gas-fired generation, subject to Drax shareholder approval.
The revised agreement is to ensure Drax gets a rebate on lost capacity payments due to a pause in a government scheme.
“The revised contractual arrangements are designed to mitigate the risk to 2019 capacity payments arising from the recent suspension of the Capacity Market,” said Drax.
The UK had to halt a back-up power scheme called the capacity market to avoid electricity shortages pending a further investigation by European Union regulators.
The scheme pays providers for making energy supplies available at short notice to avoid shortages that might occur as coal plants close and low prices dissuade investors from building new power plants.
Even though Drax believes that the European Commission will reapprove the existing capacity market in its current or similar form, the pause has put payments to plants it is buying in the Iberdrola deal at risk.
In light of this, Drax has agreed a risk-sharing scheme with Iberdrola which could mean it receives a payment of up to £26 million.
Drax CEO Will Gardiner said: “The capacity market is a central pillar of the UK’s energy policy and ensures security of supply while minimising costs to consumers.
“The Government has stated it is working closely with the European Commission to aid their investigation and to reinstate the full capacity market regime, including existing agreements, as soon as possible.
“To mitigate the risk that capacity payments take time to be restored, we have agreed revised terms which provide protection in 2019.
“Beyond 2019, while reinstatement of the Capacity Market is the most likely outcome, we considered other outcomes, the more plausible of which would still deliver returns in excess of Drax’s weighted average cost of capital.
“The acquisition makes financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.”