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Drax shares hit by UK subsidy move

Shares in Drax, the FTSE 250 power generator, fell more than 8 per cent on Wednesday morning after the company said it had taken legal action against the UK government following a decision not to back the conversion of one of the company's coal units under a new subsidy scheme.

Drax, which has embarked on a £700m programme to switch from coal to wood pellets, picked up a subsidy for one of two generating units at its plant in Selby, Yorkshire, but said it was disappointed by the decision that the other unit had been deemed ineligible for support.

The government earlier on Wednesday unveiled the names of eight renewable energy projects that have qualified for its new system of subsidies, in a move it says will give a massive boost to green growth and jobs.

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The successful ventures include five big offshore wind farms and three biomass projects.

One of the biggest beneficiaries is the Danish company Dong Energy, which saw three of its offshore wind developments – Burbo Bank in Liverpool Bay, Hornsea 1 in the North Sea and Walney Extension in the Irish Sea – qualify for the new support.

The projects have all been awarded contracts for difference, or CFDs, a new form of state support introduced under the government's sweeping reform of Britain's electricity market.

Under CFDs, generators and developers receive a fixed "strike" price for the electricity they produce for 15 years. The scheme is popular with investors because it removes many of the risks involved in paying the upfront costs of big new infrastructure projects.

(Read more: Could crowdfunding save the planet?)

But the CFDs still require state aid approval by the European Commission, which has concerns that they might be a waste of taxpayer money. It could take many months to get a green light from Brussels, potentially causing big delays to the projects.

CFDs are the centrepiece of the government's energy bill, which became law last year and was designed to attract £110bn of new investment in low-carbon electricity.

Britain is set to lose a fifth of its generating capacity in the coming years as polluting coal-fired stations and old nuclear reactors are phased out, and there are fears that it might struggle to keep the lights on and meet its challenging climate change targets unless big new investments can be brought on.

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The government created an interim form of CFD for a clutch of developers with advanced projects that wanted to move ahead quickly without having to wait for the official rollout of the CFD scheme later this year. It is these early CFDs that were awarded on Wednesday.

The Department of Energy and Climate Change said the eight projects would provide up to £12bn of private sector investment by 2020, supporting 8,500 jobs and adding a further 4.5 gigawatts of low-carbon electricity to Britain's energy mix.

It said that once the projects are built, the UK will be "well on the way" to meeting its target of generating 15 per cent of energy demand from renewable sources by 2020.

"It's practical reforms like these that will keep the lights on and tackle climate change, by giving investors more certainty," said Ed Davey, energy secretary.

Britain has seen a big spurt in green power, with renewables' share of total electricity generation more than doubling since 2010.

(Read more: Why solar is a real energy disruptor)

But in recent months, many developers have expressed concern about the country's investment climate. The issue of energy became highly politicised last year after Ed Miliband said a future Labour government would freeze household energy bills.

Amid a huge public outcry over rising fuel tariffs, the regulator Ofgem last month ordered a full competition review of the energy market. Some of the "big six" said it would be hard to make big investments in power generation while the review, which is expected to take two years, was going on.

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