EU opens in-depth study of Drax power plant conversion

(Updates with Drax comment, shares, British renewable plans)

BRUSSELS, Jan 5 (Reuters) - The European Commission has opened an in-depth investigation to assess whether Britain's plans to support the conversion of a unit of the Drax power plant from coal to biomass were in line with EU state aid rules.

The Commission said in a statement on Tuesday that it supported member states' efforts to increase the use of renewable energy, but EU state aid rules meant the cost of such support for consumers should be limited and it should not give certain operators an unfair advantage over competitors.

It (Other OTC: ITGL - news) added that the opening of an in-depth investigation gave Britain and interested third parties an opportunity to submit comments and did not prejudge the outcome.

Shares (Berlin: DI6.BE - news) in Drax Group (LSE: DRX.L - news) were trading down 2.4 percent at 225.8 pence at 1200 GMT.

The group said the opening of a formal investigation was the next step in the process of obtaining state aid approval and in line with its expectations.

Britain aims to close its coal-fired power plants by 2025, with nuclear and gas-fired plants complementing renewable energy.

The European Commission last month approved British plans to subsidise the conversion of RWE (Xetra: 703712 - news) 's Lynemouth coal-fired power plant in northern England to burning biomass, a move seen as positive for Drax.

The Commission also approved construction of the Teesside combined heat and power biomass plant in January 2015, another project selected for support.

Drax Group operates Britain's largest power station in Selby, North Yorkshire, which typically supplies some 8 percent of the country's electricity. It has already converted two of its six generating units to burn biomass in place of coal.

Britain plans to subsidise the conversion of a further coal-fired unit of the Drax plant to operate entirely on biomass - wood pellets - with the capacity to generate 645 megawatts of electricity.

The support consists of an offer of a "strike price" for the electricity generated. If the average wholesale price falls below that level, the Drax power plant operator would receive an additional payment.

The government strike price for biomass conversion projects is 105 pounds per megawatt-hour, compared with a current day-ahead power market price of 37 pounds per MWh.

The Commission said that its preliminary analysis showed that the estimates for the plant's economy performance may be too conservative, meaning that the operator may be overly compensated.

"We believe that (the project) will be cleared by the EC and that it will be operating under CfDs (contracts for difference) by the summer, which is a few months earlier than we previously thought," said Angelos Anastasiou, utilities analyst at Whitman Howard.

According to British estimates, the plant would require 2.4 million tonnes of wood pellets per year, mainly from the United States and South America.

There is a surplus of around 50 million tonnes in the U.S (Other OTC: UBGXF - news) . southeast, according to forestry inventory from the U.S. Department of Agriculture, Drax said.

The Commission said this considerable demand relative to the global market could distort competition and that this could outweigh the positive effect on achieving EU targets for renewable energy. (Reporting by Philip Blenkinsop in Brussels and Karolin Schaps in London; Editing by Tom Heneghan)