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Profits at FTSE 250 power group Drax tumbled 17 per cent in 2016, as the impact of government policy changes highlight the urgency of its efforts to diversify.

Revenues at the company fell 4 per cent, to £2.9bn, in line with analyst forecasts.

But challenging commodity markets and the loss of tax exemptions dragged profits down further, with earnings before interest, tax, depreciation and amortisation falling to £140m.

The company had previously warned that full-year ebitda would be at the lower end of its previous guidance of £135m to £169m, but the final figure was still lower than consensus forecasts compiled by Bloomberg.

Statutory profit before tax was much higher than expected, more than tripling to £197m. However, the gains only reflected changes in the value of some of its currency hedging contracts which are included on its income statement.

Drax purchases most of its fuel in dollars and euros, but is hedged against currency moves until 2021, meaning it was shielded from the impact of the fall in sterling since the EU referendum in June.

Drax’s eponymous power station near Selby is the UK’s largest, and in 2016 it generated 65 per cent of its power from renewable wood pellets, rather than its traditional coal. However, the company has been looking to expand into gas generation and retail energy supply after the removal of government renewable energy subsidies hit its core business.

Drax estimated that the extension of the climate change levy – a tax that originally only affected power generated by fossil fuels – to renewable production reduced ebitda by £34m.

It was hopeful, however, that the newly-created Department for Business, Energy and Industrial Strategy “mean new opportunities to make the case for further biomass upgrades”.

In December, Drax announced a £340m deal for energy supplier Opus Energy, in a move that could turn its retail arm Haven Power into the UK’s fifth-biggest business energy supplier. Drax completed the deal last week.

Dorothy Thompson, Drax chief executive, said:

In a challenging commodity environment Drax has delivered a good operational performance with 65 per cent renewable power generation.

The acquisition of Opus Energy and rapid response open cycle gas turbine projects are an important step in delivering our strategy, diversifying our earnings base and contributing to stronger, long-term financial performance across the markets in which we operate.

Photo: Bloomberg

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