Drax Group said it remained on track to convert half its generating capacity from coal to wood pellets and other environment-friendly fuels as new levies on coal burning threaten the short-term profits at Britain’s biggest coal-fired power station.

The power supplier expects the first of three units that are planned to be powered by a range of imported biomass, including pellets produced from beetle-infested forests of Canada, to be operating by April.

Drax supplies 7 per cent of the UK’s electricity and is ranked as the country’s biggest single emitter of carbon dioxide.

A second unit is expected to be producing power by 2014, with the third planned to be online by 2016 as Drax rolls out an investment, costing in the range of £650m to £700m, to transform itself into one of Europe’s leading burners of biomass.

Shares in Drax, up by a quarter over the past year, rose by more than 6 per cent to 643p on Tuesday as analysts welcomed progress on its planned switch from coal.

The increase in share price was achieved even though Tony Quinlan, finance director, warned on Tuesday that a short-term increase in capital expenditure would combine with lower gross earnings in 2013 and 2014 to squeeze profits.

The power complex, originally state-owned and designed to be fed from now-abandoned coal fields in Yorkshire and nearby counties, achieved a record output level of 27.1 terawatt hours last year.

Earnings before interest tax, depreciation and amortisation for the year to December met forecasts at £298m, said Dorothy Thompson, chief executive. That compared with £334m last year.

Drax expects its biomass power generation to attract consumer subsidy rates running at half the amount attracted by less reliable offshore wind turbine output.

However, Ms Thompson added that increases in carbon charges for coal-based generation, which are being introduced under government policy from April, would be a drag on future earnings.

In spite of the prospect on higher carbon charges on Drax, the company benefited last year from falling international coal prices used to fuel one of Europe’s most efficient coal-fired stations.

The company is investing in two pellet production plants – one in each of the states of Mississippi and Louisiana – from which wood and forest fibre fuel will be shipped to North Yorkshire. Another long-term supply contract had been struck with Pinnacle Renewable Energy that will supply pellets supplied from pine wood killed by beetle attacks in western Canada.

Ms Thompson insisted that the importation of the heat-treated pellets posed no threat of the introduction of tree diseases in the UK.

Revenue slipped slightly from £1.84bn to £1.78bn but a fall in fuel costs allowed gross profits to rise from £501m to £511m.

But increased operating expenses and a swing from gains to losses on derivative contracts led to pre-tax profits falling from £338m to £190m.

The company ended the year with net cash of £311m after the successful placing of £190m in shares at 520p each last October aimed at strengthening its balance sheet ahead of a squeeze on cash flow.

A total dividend of 25.3p to 27.8p is payable from earnings per share that fell from 127.3p to 44.1p.