Brussels launches probe of UK state aid to Drax -FT

Feb 24 (Reuters) - Brussels has initiated a preliminary probe into the possible breach of state aid rules by the UK in guaranteeing a 75 million pound-loan to Drax Group (LSE: DRX.L - news) , operator of Britain's biggest power station, the Financial Times reported late Monday.

The newspaper said that Brussels has informally warned the UK that the country's ways of supporting big renewable energy projects, including Drax's biomass conversion, may harm competition as it involves heavy subsidies. ()

Drax was offered a 75 million pound guarantee by the British government last April for the conversion of its coal-fired power station to biomass, becoming one of the first projects under the government's UK Guarantees Scheme.

The UK Guarantees Scheme was launched in December 2012 to provide 40 billion of guarantees to kick start infrastructure projects struggling to access finance.

The European Commission is also investigating the loan guarantee for the Drax scheme, the financial daily said.

The British government is underwriting a 75 million pound loan that Drax took from investments provider Friends Life to convert half its Yorkshire station's generating units so the power producer could burn wood pellets and other fuels derived from plants, known as biomass.

Environment lobby group Friends of the Earth has lodged a state aid complaint against the burning of biomass to generate electricity, arguing it had the potential to produce more overall greenhouse gas emissions than coal, the newspaper reported.

The FT said the group believed that the UK guarantee might have favoured Drax by lowering the cost of the Friends Life loan, and the guarantee was also not formally notified to the European Commission as it should have been.

According to the FT report, the commission wrote to Friends of the Earth in late January, saying it had started a "preliminary investigation" into the complaint, which it had forwarded to UK authorities for a response.

The newspaper said, citing a commission spokesman, that the deal was being looked into but at this stage it would be premature to prejudge whether this could lead to a formal state aid investigation.

"(The scheme) is supporting infrastructure delivery as part of the government's long-term economic plan. Clear processes are in place to ensure that any guarantees comply with state aid rules," a Treasury spokesman told the FT.

A Drax spokesman told the financial daily that it was aware of the Friends of the Earth complaint, but it was a matter for the Treasury and the European Commission.