plant for US$3 billion, which was more than was expected, and financed it with substantial
leverage. One of the factors that was said to justify the leverage was electricity price protection
from a hedging contract with the UK subsidiary of TXU, a diversified energy company based
in Dallas, Texas, that covered 60 per cent of the plant’s output. The remainder of the plant’s out-
put was subject to merchant risk. The senior bonds received investment-grade ratings in 1999.
Since the project financing in 1999 AES and its Drax power plant investment have been affect-
ed primarily by two important developments with far-reaching ripple effects: first, the combination
of the UK’s New Electricity Trading Arrangements (NETA) and an oversupply of generating capac-
ity reduced wholesale electricity prices by far more than had been expected, and consequently
reduced the earnings and value of power plants such as Drax. Secondly, the bankruptcy of Enron
caused investors and lenders to take a more conservative stance towards the entire power industry,
requiring companies such as AES and TXU to deleverage and sell off assets. When TXU, facing
its own financial problems, terminated the hedging contract, it was clear that Drax would not be
able to service its debt on an ongoing basis. In November 2002 Drax reached a six-month standstill
agreement with its lending banks and bondholders to give it time to restructure.
Power plant description
The plant was commissioned in two 1,980 MW stages, in 1974 and 1986. It consists of six
660 MW (gross) coal-fired steam turbine generating units and three 25 MW gas-oil-fired,
open-cycle gas turbine generating units. Each of the 660 MW units is designed to operate
wholly independently and thus can be dispatched, ramped up or down or put on or off line
without affecting the operating capabilities of the other units. Drax is designed to operate as
a base-load generating facility, being on line and operating at close to full capacity most of
the time. However, the power station also has the capacity to be started up or shut down daily
and therefore to be run when prices are high and not run when they are low. This is known as
the ability to operate on a two-shift basis.
In 1996 Drax was retrofitted with a flue gas desulphurisation unit designed to dispose of
250,000 tons of sulphur emissions each year, representing about 90 per cent of the sulphur
dioxide from boiler gases contained in coal that has sulphur content of up to 2.8 per cent by
weight. As a result Drax is able to burn coal from a variety of sources and remain in compli-
ance with current environmental standards.
The 1,850-acre plant site is located close to supplies of coal, cooling water and limestone,
and an ash disposal site. It has good connections with the road and rail infrastructure. The
plant’s significant project parties are illustrated in Exhibit 12.1.
Background
The British power industry
As in most countries, firm fuel supply and electricity offtake contracts were the norm for most
British independent power producers (IPPs) until the mid-1990s, when the energy market
became deregulated and IPPs started to assume greater fuel-supply and electricity-sale risks.
Before March 2001 electricity in England and Wales (as distinct from Scotland and Northern
Ireland, the other parts of the United Kingdom) was traded between generators and suppliers
through a day-ahead market known as the Pool, administered by the National Grid Company
plc. The Pool was used to determine which generators were dispatched to satisfy demand and
POWER PLANT