Iberdrola and Drax agree Capacity Market risk share to get deal over line

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Iberdrola and Drax have amended terms of their proposed £700m deal to include a risk share mechanism in case Capacity Market (CM) revenues are reduced or fail to materialise.

Iberdrola aims to sell Drax 2.6GW of gas, pumped storage and hydro assets. However, the deal was undermined by the suspension of the Capacity Market last month. Significant revenues that Drax would accrue from buying the assets come from Capacity Market contracts.

The gas power stations included in the deal have contracted capacity payments of £122m from 2019-2022 while the Cruachan pumped storage hydro plant has CM contracts worth £29m.

The portfolio’s CM payments for 2019 stood at £36m. The two companies have amended terms of the deal so that if less than 100% of CM contracted revenue materialises, and the portfolio’s gross profit is lower than expected, Drax will receive a payment from Iberdrola of up to £26m.

However, if the portfolio performs better than expected, Iberdrola can earn up to £26m in upside from Drax, even if 100% of the CM payments are not received.

Drax said it had assessed potential outcomes following CM suspension and believes it will probably be re-instated, potentially with some changes.

However, even if the CM is not reinstated, it thinks it can make more money from the higher prices that would result in wholesale markets as a result.

As such, it will seek shareholder approval of the amended deal as soon as possible.

Related stories:

Drax eyes 2.6GW of Scottish Power generation assets

The money and the power: What next for Capacity Market

Tempus wins court case over Capacity Market bias against DSR

EMR delivery body confirms all capacity payments suspended, auctions shelved

Tempus Energy: DSR providers ‘ecstatic’ over Capacity Market judgment

Tempus Energy: A five year old can see the Capacity Market is anticompetitive, the billion won’t be paid

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