EU approves UK state aid for RWE biomass-fired power plant

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BRUSSELS/LONDON, Dec 1 (Reuters) - The European Commission has approved British plans to subsidise the conversion of RWE (Xetra: 703712 - news) 's Lynemouth coal-fired power plant in northern England to burning biomass, sending the German utility company's shares higher.

The European Commission said on Tuesday a nine-month investigation showed that the project accords with European environmental and energy goals, giving the green light to an agreement struck under Britain's contracts-for-difference (CfD) electricity pricing mechanism to support the project until 2027.

RWE, which bought the coal-fired power plant in 2012, said it would now take 18 months to adapt the station to run 100 percent on biomass with a generation capacity of 420 megawatts.

Shares (Berlin: DI6.BE - news) in RWE rose by up to 8.5 percent following the approval, which also coincided with news the company was considering spinning off its retail, networks and renewables units.

State aid approval for Lynemouth was also positive for Drax , the operator of Britain's biggest coal-fired plant whose conversion of a third unit to biomass is still awaiting state aid approval by the European Commission.

CfD contracts for the two biomass conversion projects are comparable, analysts said, increasing Drax's chances for its plans to also gain state aid approval.

"This is positive news for the company, and it could even potentially lead to the government having a more positive outlook on the base load potential of biomass," said Angelos Anastasiou, utilities analyst at Whitman Howard.

Shares in Drax were up 12.3 percent in London at 1235 GMT.

A Drax spokesman said the decision was "encouraging" but the two contracts had differerent underlying technical and economic assumptions.

The company is considering converting a fourth of the six units at Drax to run on biomass.

Britain will hold its next auction of renewable energy subsidies by the end of 2016 and a further two over the course of the current government's term, energy minister Amber Rudd said last month.

It (Other OTC: ITGL - news) is unclear whether biomass projects will be able to participate in the next rounds but Andrew Koss, chief executive of Drax's operating subsidiary Drax Power, said conversion plans for a fourth biomass unit could be among the most competitive bidders in the scheme.

"If that happens (full competition under the scheme) we believe our fourth unit would be one of the cheapest," he said during a cross-party Energy and Climate Change Committee hearing in Parliament on Tuesday. (Reporting by Foo Yun Chee in Brussels and Karolin Schaps and Susanna Twidale in London; Editing by Greg Mahlich)