Author: Chris Woods

Half year results for the six months ended 30 June 2021

Engineers walking in front of sustainable biomass wood pellet storage dome at Drax Power Station, June 2021

RNS Number: 8333G
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Six months ended 30 JuneH1 2021H1 2020
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)186179
Continuing operations165160
Discontinued operations – gas generation2119
Net debt (£ million)(3)1,029792
Adjusted basic EPS (pence)(1)14.610.8
Interim dividend (pence per share)7.56.8
Total financial performance measures from continuing operations
Operating profit / (loss) (£ million)84(57)
Profit / (loss) before tax (£ million)52(85)

Will Gardiner, CEO of Drax Group, said:

“We have had a great first half of the year, transforming Drax into the world’s leading sustainable biomass generation and supply company as well as the UK’s largest generator of renewable power.

“The business has performed well, and we have exciting growth opportunities to support the global transition to a low-carbon economy.

Drax Group CEO Will Gardiner in the control room at Drax Power Station

Drax Group CEO Will Gardiner in the control room at Drax Power Station

“Drax has reduced its generation emissions by over 90%, and we are very proud to be one of the lowest carbon intensity power generators in Europe – a huge transformation for a business which less than a decade ago operated the largest coal power station in Western Europe.

“In the past six months we have significantly advanced our plans for Bioenergy with Carbon Capture and Storage (BECCS) in the UK and globally. By 2030 Drax could be delivering millions of tonnes of negative emissions and leading the world in providing a critical technology needed to tackle the climate crisis.

“We are pleased to be announcing a 10% increase in our dividend, and we remain committed to creating long-term value for all our stakeholders.” 

Financial highlights

Pinnacle named ship

  • Adjusted EBITDA from continuing and discontinued operations up £7 million to £186 million (H1 2020: £179 million)
  • Acquisition of Pinnacle Renewable Energy Inc. (Pinnacle) for cash consideration of C$385 million (£222 million) (enterprise value of C$796 million) and sale of gas generation assets for £186 million
  • Strong liquidity and balance sheet
    • £666 million of cash and committed facilities at 30 June 2021
    • Refinancing of Canadian facilities (July 2021) with lower cost ESG facility following Pinnacle acquisition
  •  Sustainable and growing dividend – expected full year dividend up 10% to 18.8 pence per share (2020: 17.1p/share)
    • Interim dividend of 7.5 pence per share (H1 2020: 6.8p/share) – 40% of full year expectation

Strategic highlights

Kentaro Hosomi, Chief Regional Officer EMEA, Mitsubishi Heavy Industries (MHI) at Drax Power Station, North Yorkshire

Kentaro Hosomi, Chief Regional Officer EMEA, Mitsubishi Heavy Industries (MHI) at Drax Power Station, North Yorkshire

  • Developing complementary biomass strategies for supply, negative emissions and renewable power
  • Creation of the world’s leading sustainable biomass generation and supply company
    • Supply – 17 operational plants and developments across three major fibre baskets with production capacity of 4.9Mt pa and $4.3 billion of long-term contracted sales to high-quality customers in Asia and Europe
    • Generation – 2.6GW of biomass generation – UK’s largest source of renewable power by output
  • >90% reduction in generation emissions since 2012
    • Sale of gas generation assets January 2021 and end of commercial coal March 2021
  • Development of BECCS
    • Planning application submitted for Drax Power Station and technology partner (MHI) selected
    • Participation in East Coast Cluster – phase 1 regional clusters and projects to be selected from late 2021
    • Partnerships with Bechtel and Phoenix BioPower evaluating international BECCS and biomass technologies
  • System support – option to develop Cruachan from 400MW to over 1GW – commenced planning approval process

 Outlook

  • Adjusted EBITDA, inclusive of Pinnacle from 13 April 2021, full year expectations unchanged

Operational review

Pellet Production – acquisition of Pinnacle, capacity expansion and biomass cost reduction

close-up of truck raising and lowering

  • Sustainable sourcing
    • Biomass produced using forestry residuals and material otherwise uneconomic to commercial forestry
    • Science-based sustainability policy fully compliant with current UK, EU law on sustainable sourcing aligned with UN guidelines for carbon accounting
    • All woody biomass verified and audited against FSC®(4), PEFC or SBP requirements
  • Adjusted EBITDA (including Pinnacle since 13 April 2021) up 60% to £40 million (H1 2020: £25 million)
    • Pellet production up 70% to 1.3Mt (H1 2020: 0.8Mt)
    • Cost of production down 8% to $141/t(5) (H1 2020: $154/t(5))
  • Near-term developments in US Southeast (2021-22)
    • Commissioning of LaSalle expansion, Demopolis and first satellite plant in H2
  • Other opportunities for growth and cost reduction
    • Increased production capacity, supply of biomass to third parties and expansion of fuel envelope to include lower cost biomass

Generation – flexible and renewable generation

  • 12% of UK’s renewable electricity, strong operational performance and system support services
  • Adjusted EBITDA down 14% to £185 million (H1 2020: £214 million)
    • Biomass – Lower achieved power prices and higher GBP cost of biomass reflecting historical power and FX hedging
    • Strong system support (balancing mechanism, Ancillary Services and optimisation) of £70 million (H1 2020: £66 million) – additional coal operations and continued good hydro and pumped storage performance, in addition to coal operations
    • Coal – utilisation of residual coal stock in Q1 2021 and capture of higher power prices
  • Pumped storage / hydro – good operational and system support performance
    • £34 million of Adjusted EBITDA (Cruachan, Lanark, Galloway schemes and Daldowie) (H1 2020: £35 million)
  • Ongoing cost reductions to support operating model for biomass at Drax Power Station from 2027
    • End of commercial coal operations in March, formal closure September 2022 – reduction in fixed cost base
    • Major planned outage for biomass CfD unit – August to November 2021 – including third turbine upgrade delivering improved thermal efficiency and lower maintenance cost, supporting lower cost biomass operations
    • Trials to expand range of lower cost biomass fuels – up to 35% load achieved in test runs on one unit
  • Strong contracted power position – 29.3TWh sold forward at £52.1/MWh 2021-2023. Opportunities to capture higher power prices in future periods, subject to liquidity
As at 25 July 2021 202120222023
Fixed price power sales (TWh) 15.99.14.3
-      CfD(6)3.80.6-
-      ROC10.88.44.0
-      Other1.30.10.3
At an average achieved price (£ per MWh)51.752.452.7

Customers – renewable electricity and services under long-term contracts to high-quality I&C customer base

 

  • Adjusted EBITDA loss of £5 million inclusive of £10-15 million impact of Covid-19 (H1 2020 £37 million loss inclusive of £44 million impact of Covid-19)
  • Continuing development of Industrial & Commercial (I&C) portfolio
    • Focusing on key sectors to increase sales to high-quality counterparties supporting generation route to market
    • Energy services expand the Group’s system support capability and customer sustainability objectives
  • Closure of Oxford and Cardiff offices as part of SME strategic review and the rebranding of the Haven Power I&C business to Drax
  • Continue to evaluate options for SME portfolio to maximise value and alignment with strategy

Other financial information

  • Total operating profit from continuing operations of £84 million including £20 million mark-to-market gain on derivative contracts and acquisition related costs of £10 million and restructuring costs of £2 million
  • Total loss after tax from continuing operations of £6 million including a £48 million charge from revaluing deferred tax balances following announcement of future UK tax rate changes
  • Total loss after tax from continuing operations of £6 million including a £48 million charge from revaluing deferred tax balances following confirmation of UK corporation tax rate increases from 2023
  • Capital investment of £71 million (H1 2020: £78 million) – continued investment in biomass strategy
    • Full year expectation of £210–230 million, includes pellet plant developments – LaSalle expansion, satellite plants and commissioning of Demopolis
  • Group cost of debt now below 3.5% reflecting refinancing of Canadian facilities in July 2021
  • Net debt of £1,029 million (31 December 2020: £776 million), including cash and cash equivalents of £406 million (31 December 2020: £290 million)
    • 5x net debt to Adjusted EBITDA, with £666 million of total cash and committed facilities (31 December 2020: £682 million)
    • Continue to expect around 2.0x net debt to Adjusted EBITDA by end of 2022
View complete half year report View investor presentation Listen to webcast

Acquisition of Joint Venture Interest from Westervelt

RNS Number : 7524D
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Drax is pleased to announce that it has agreed to acquire a 20% minority interest in Alabama Pellets, LLC (“Alabama Pellets”) – the joint venture which owns the Demopolis and Aliceville pellet plants – from The Westervelt Company (“Westervelt”) for $29.7 million cash consideration. The acquisition will increase the Group’s interest in Alabama Pellets to 90% and provide Drax with economic control over a further c.130,000 tonnes of biomass production capacity per annum. Completion is expected to take place in July 2021.

Westervelt is considered to be a Related Party under the UK Listing Rules with the proposed transaction constituting a Smaller Related Party Transaction under Listing Rule 11.1.10.

The acquisition of Pinnacle Renewable Energy Inc. included a change of control provision over Alabama Pellets. Drax has been in discussions with Alabama Pellets joint venture partners regarding future working relationships, including their minority interests. The remaining joint venture partner, Two Rivers Lumber Co., LLC, holds a 10% economic interest.

Demopolis and Aliceville are located in Alabama, in the US southeast, close to the Group’s existing US operations and have a combined nameplate production capacity of 660,000 tonnes per annum. Aliceville was commissioned in 2018 and Demopolis is expected to be commissioned in 2021.

Drax Group has 13 operational pellet plants (including Aliceville) plus satellite plant developments and Demopolis, with total nameplate production capacity of 4.9 million tonnes per annum once commissioned. These plants are geographically diverse and sited in three major fibre baskets (British Columbia, Alberta and the US southeast) with access to four deep water ports providing routes to markets in Asia, Europe and the UK.

Enquiries

Drax Investor Relations: Mark Strafford

+44 (0) 7730 763 949

Media

Drax External Communications: Ali Lewis

+44 (0) 7712 670 888

Website: www.Drax.com

END

7 places on the path to negative emissions through BECCS

Stockholm Gamla Stan Nacht Nordlicht

In brief:

  • Bioenergy with carbon capture and storage (BECCS) is increasingly being explored and deployed around the world at heat and power stations, factories and waste-to-energy plants as they aim to achieve net zero through negative emissions.

  • Sweden, Norway, Denmark, the US and UK all have projects either piloting or developing BECCS with the aim of achieving negative emissions to reach their net zero climate goals.

  • Drax, the world’s leading sustainable biomass generation and supply business, has the biggest BECCS project, aiming for eight million tonnes of negative emissions per year by 2030.

  • BECCS projects often form part of low emissions clusters which make use of local sustainable sources of biomass and partner with nearby industries to share CO2 transport and storage infrastructure.

Can a power station make a positive impact on the climate? How about a cement factory? Or even a whole city?

Negative emissions technologies (NETs) aim to help do this by removing carbon dioxide (CO2) from the atmosphere, reducing the detrimental effects of many industrial processes, and even go as far as countering the impacts of climate change.

Among NETs, BECCS offers a means of generating electricity or heat while also removing CO2 from the atmosphere. It works by using biomass from sustainable sources, which absorb CO2 from the atmosphere when they grow. When the biomass is used as fuel, that same CO2 is captured and stored, permanently and safely, usually under the seabed.

Trials of BECCS technology are already underway around the world as companies, governments and the third sector work towards their climate goals through negative emissions. 

  1. Stockholm Exergi – powering the world’s first climate positive city

Stockholm Exergi BECCS pilot plant

Stockholm Exergi BECCS pilot plant

Stockholm Exergi is the energy utility responsible for the Swedish capital’s heating, cooling, electricity, and waste processing services. It has bold ambitions to become ‘climate positive’ by 2025. Since December 2019, the company has trialled BECCS at its heat and power cogeneration plant in the Värtan area of Stockholm, where it calculates there is potential to capture 800,000 tonnes of CO2 per year.

The project sources biomass from ‘chopped slash’ made up of branches and treetops, as well as residues from the board, pulp and paper industries, 57% of which come locally from Sweden.

Stockholm’s location is also advantageous for storing CO2, with the nearby North Sea offering multiple sites that meet Stockholm Exergi’s criteria for carbon sequestration.

Graphic: Stockholm Exergi's BECCS plant would send captured carbon to the. Northern Lights project

Stockholm Exergi’s BECCS plant would send captured carbon to the Northern Lights project

Fabian Levihn, head of R&D at Stockholm Exergi highlights the economic advantages BECCS offers as a means of carbon offsetting for industries with hard-to-abate emissions. “For industrial emitters to remove the last 20% needed to reach net zero greenhouse gases it will cost as much as US$800 per tonne of CO2 or equivalent,” explains Levihn.

Fabian Levihn, head of R&D at Stockholm Exergi

Fabian Levihn, head of R&D at Stockholm Exergi

“If BECCS can be realised at $100 per tonne of CO2, it offers an upside in terms of economic efficiency for climate change abatement of $700 per tonne.”

Recent modelling by leading energy consultancy Baringa for Drax has shown that deploying BECCS in the 2020s can present billions of pounds of cost savings compared to waiting until later decades, closer to national net zero deadlines. 

  1. Mendota California – from cantaloupe to carbon capture

The City of Mendota’s seal proudly declares itself ‘The Cantaloupe Center of the world’. Now, however, the agricultural California city is getting a slice of energy innovation with a BECCS project designed to deliver negative emissions and reduce air pollution in the region.

The project comes from a partnership between Schlumberger New Energy, Chevron, Clean Energy Systems and Microsoft. It aims to remove as much as 300,000 tonnes of CO2 annually, the equivalent emissions created generating electricity for more than 65,000 US homes.

The BECCS plant, which is beginning its front-end engineering and design (FEED) phase before a final investment decision in 2022, is optimised for its location. The plant will convert waste from the surrounding agricultural industries, such as almond trees, into a renewable synthesis gas that will be mixed with oxygen in a combustor to generate electricity.

Desert, California

Desert, California

More than 99% of the carbon from this process is expected to be captured and then stored in nearby deep geological formations in the desert landscape. By using an estimated 200,000 tonnes of agricultural waste annually, the plant will also help towards the California Air Resources Control Board’s plan of phasing out almost all agricultural burning in the Valley by 2025.

The project is expected to create up to 300 construction jobs and about 30 permanent jobs once the facility is operating.

  1. HeidelbergCement – net zero at an industrial scale

Reaching net zero isn’t just about taking the emissions out of energy generation. Heavy industries must also reduce and remove CO2 with carbon capture and storage (CCS) and BECCS offers a way of achieving this at an even larger scale.

Concrete uses cement

Concrete uses cement

HeidelbergCement Norcem’s plant in Brevik, Norway plans to become the first industrial-scale CCS project at a cement production plant in the world. The project aims to capture 400,000 tonnes of CO2 per year, which will be compressed and transported by ship away from the plant, before being exported via pipeline and stored beneath the North Sea bed.

The plant aims to start CO2 separation from the cement production process by 2024. The end result will be a 50% cut of emissions from the cement produced at the plant. However, CCS is only part of the company’s plan to deliver carbon-neutral cement by 2050.

HeidelbergCement also plans to increase its use of alternative raw materials, primarily waste materials and by-products from other industries – biomass already plays a key part of this, making up 38.1% of the company’s alternative fuel mix. Importantly, it offers a model that can be sustainably applied to cement manufacturing around the world.

  1. Ørsted, Aker and Microsoft – Taking the carbon out of Denmark’s heat and power

Not one to be left behind by its Scandinavian neighbours, Denmark has set the ambitious target of reducing its emissions to 70% of 1990 levels by 2030. BECCS and negative emissions will be essential in meeting that goal, and the country already has some of the key infrastructure in place.

Ørsted operates six biomass-fired units that, as well as generating power, provide around one quarter of Denmark’s district heating. This use of combined heat and power stations, mean BECCS can decarbonise both utilities simultaneously. Ørsted, Aker Carbon Capture, and Microsoft are partnering to explore ways to do just that.

Avedøre combined heat and power plant in Denmark operated by Ørsted

Avedøre combined heat and power plant in Denmark operated by Ørsted

Ørsted’s biomass units are powered by low quality or surplus wood that would either be left to rot or be burned in the forest. With the biomass units already in operation, the partnership will address technological, regulatory, and commercial challenges around BECCS. This includes a technology collaboration to integrate Microsoft’s digital expertise into a BECCS project, along with Aker Carbon Capture’s capture technology.

The partnership is exploring the potential to store captured carbon in the North Sea-based Northern Lights project, which is expected to have the capacity to transport, inject, and store up around 1.5 million tonnes of CO2 per year.

Microsoft is already a partner in Northern Lights as part of its efforts to operate as carbon negative by 2030, which has seen it forge partnership across the CCS landscape.

  1. Drax – from coal emitter to climate innovator

Drax has evolved from a coal power station to run four of its 600MW-plus generating units on sustainable biomass and is the largest decarbonisation project in Europe.

BECCS pilots at the plant have already been successful in capturing more than a tonne of CO2 a day. By proving the viability of multiple capture technologies, Drax has set 2030 as the date when it aims to become carbon negative, which would also see its BECCS operations scale up to capture as much as 8 million tonnes of CO2 a year.

Drax Power Station with biomass storage domes lit up

Drax Power Station with biomass storage domes lit up

The power station is in an advantageous location to deliver such significant negative emissions. Located near the UK’s Humber region, Drax is partnered with a range of industrial emitters through the Zero Carbon Humber partnership, which aims to become the world’s first net zero carbon industrial cluster through a combination of industrial CCS, hydrogen and BECCS.

Sharing carbon capture and transport infrastructure across the region helps to reduce costs for each party, and in Drax’s case can translate into keeping electricity costs down for consumers.

Delivering BECCS, negative emissions and a net zero carbon cluster is an economic driver for the Humber. A recent report found it could create and support almost 48,000 new jobs at the peak of the construction period in 2027 and provide thousands of long term, skilled jobs in the following decades. Negative emissions from BECCS also has an essential role to play in enabling the UK to reach its target of net zero emissions by 2050.

“Drax is ready to invest in this essential technology which will help the UK decarbonise faster and kickstart a whole new industry here,” says Drax CEO Will Gardiner.

Drax Group CEO Will Gardiner in the control room at Drax Power Station

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“By delivering BECCS, the UK can show the world what can be achieved for the environment and the economy when governments, businesses and communities work together.”

  1. Fortum Oslo Varme – turning waste to negative emissions

Agriculture and forestry waste are some of the world’s primary sources of sustainable biomass. However, large amounts of household waste are also biological in origins – for example cardboard or vegetable peels.

Food waste recycling bin in a kitchen

Food waste recycling bin in a kitchen

Dealing with cities’ waste is an environmental necessity and key to achieving net zero on a wider scale. Waste-to-energy plants have long provided a means to avoid landfill usage, but by introducing CCS to such facilities they can deliver positive impact to the cities they serve.

The FOV (Fortum Oslo Varme) plant in Oslo delivers heat and power to the Norwegian capital by incinerating waste, approximately 50% of which comes from biological origins. The waste-to-energy facility first launched a CCS pilot in 2016 to remove CO2 from the atmosphere through BECCS.

The project is part of the city’s broader ambition to reduce its greenhouse gas emissions by 95% between 2009 and 2030. As the city’s largest single emissions source, introducing CCS to the FOV can reduce Oslo’s emissions by 14%, an essential step to reach the city’s ambitious climate goals.

The plant currently treats 400,000 tonnes of waste per year that can’t be recycled and has already conducted a 5,500-hour pilot with a 95% capture rate. The issue of non-recyclable waste hangs over almost every city in the world and the FOV’s system could be implemented on as many as 500 similar plants around Europe alone, delivering power, district heating, negative emissions from organic materials and waste reduction.

  1. HOFOR – keeping BECCS on budget

HOFOR is a not-for-profit utility currently exploring the potential of BECCS and makes an interesting case study for how the technology can be deployed as economically as possible.

Short for Hovedstadsområdets Forsyningsselskab, which roughly translates as Greater Copenhagen Utility, HOFOR is investigating the addition of BECCS to its combined heat and power (CHP) station. Biomass-fed CHP plants use residual energy from power generation, such as steam, to heat water that is then circulated through a citywide network of pipes to provide heating. It means that the energy utilisation of biomass is very high and, importantly for Nordic countries, provides a large supply of affordable heating.

Maintaining the affordability of its heating supply is crucial for HOFOR, which is bound by regulatory conditions to not undertake investments that make heat more expensive for its customers. For this reason, HOFOR’s exploration of BECCS needs to place an emphasis on technologies that have a high readiness level, and ways to keep costs to a minimum.

Minimalist living room, simple white and gray living with big window, scandinavian classic interior design

By partnering with other local utilities as part of the C4: Carbon Capture Cluster Copenhagen, the company is looking to share the costs of carbon transport and storage infrastructure, keeping heat prices low, while delivering negative emissions.

There is also the potential for HOFOR to sell captured carbon that can be used to create products, such as green aviation fuel. Carbon offsetting offers another way for the utility to invest in BECCS if there is an organised and long-term market for such transactions in place.

Go deeper

Discover the best business model for BECCS

Negative emissions consist of a range of technologies and nature-based solutions that capture and permanently store CO2 and other greenhouse gases from the atmosphere. They offer a way to remove emissions that are currently impossible to entirely reduce in industries like aviation, agriculture and construction, and eventually begin to reverse the effects of climate change. Join the Coalition for Negative Emissions

How to build a business model for negative emissions

Watching a biomass train as it prepares to enter Drax Power Station's rail unloading building 2 (RUB2)

In brief

  • Policy intervention is needed to enable enough BECCS in power to make a net zero UK economy possible by 2050

  • Early investment in BECCS can insure against the risk and cost of delaying significant abatement efforts into the 2030s and 2040s

  • A two-part business model for BECCS of carbon payment and power CfD offers a clear path to technology neutral and subsidy free GGRs

The UK’s electricity system is based on a market of buying and selling power and other services. For this to work electricity must be affordable to consumers, but the parties providing power must be able to cover the costs of generating electricity, emitting carbon dioxide (CO2) and getting electricity to where it needs to be.

This process has thrived and proved adaptable enough to rapidly decarbonise the electricity system in the space of a decade.

With a 58% reduction in the carbon intensity of power generation, the UK’s electricity has decarbonised twice as fast as that of other major economies. As the UK pushes towards its goal of achieving net zero emissions by 2050, new technologies are needed, and the market must extend to enable innovation.

Bioenergy with carbon capture and storage (BECCS) is one of the key technologies needed at scale for the UK to reach net zero. Yet there is no market for the negative emissions BECCS can deliver, in contrast to other energy system services.

BECCS has been repeatedly flagged as vital for the UK to reach its climate goals, owing to its ability to deliver negative emissions. The Climate Change Committee has demonstrated that negative emissions – also known as greenhouse gas removals (GGRs) or carbon removals – will be needed at scale to achieve net zero, to offset residual emissions from hard to decarbonise sectors such as aviation and agriculture. But there is no economic mechanism to reward negative emissions in the energy market.

For decarbonisation technologies like BECCS in power to develop to the scale and within the timeframe needed, the Government must implement the necessary policies to incentivise investment, and allow them to thrive as part of the energy and carbon markets.

BECCS is essential to bringing the whole economy to net zero

The primary benefit of BECCS in power is its ability to deliver negative emissions by removing CO2 from the atmosphere through responsibly managed forests, energy crops or agricultural residues, then storing the same amount of CO2 underground, while producing reliable, renewable electricity.

Looking down above units one through five within Drax Power Station

Looking down above units one through five within Drax Power Station

A new report by Frontier Economics for Drax highlights BECCS as a necessary cornerstone of UK decarbonisation and its wider impacts on a net zero economy. Developing a first-of-a-kind BECCS power plant would have ‘positive spillover’ effects that contribute to wider decarbonisation, green growth and the UK’s ability to meet its legally-binding climate commitments by 2050.

Drax has a unique opportunity to fit carbon capture and storage (CCS) equipment to its existing biomass generation units, to turn its North Yorkshire site into what could be the world’s first carbon negative power station.

Plans are underway to build a CO2 pipeline in the Yorkshire and Humber region, which would move carbon captured from at Drax out to a safe, long-term storage site deep below the North Sea. This infrastructure would be shared with other CCS projects in the Zero Carbon Humber partnership, enabling the UK’s most carbon-intensive region to become the world’s first net zero industrial cluster.

Developing BECCS can also have spillover benefits for other emerging industries. Lessons that come from developing and operating the first BECCS power stations, as well as transport and storage infrastructure, will reduce the cost of subsequent BECCS, negative emissions and other CCS projects.

Hydrogen production, for example, is regarded as a key to providing low, zero or carbon negative alternatives to natural gas in power, industry, transport and heating. Learnings from increased bioenergy usage in BECCS can help develop biomass gasification as a means of hydrogen production, as well as applying CCS to other production methods.

The economic value of these positive spillovers from BECCS can be far reaching, but they will not be felt unless BECCS can achieve a robust business model in the immediate future.

With a 58% reduction in the carbon intensity of power generation, the UK’s electricity has decarbonised twice as fast as that of other major economies. As the UK pushes towards its goal of achieving net zero emissions by 2050, new technologies are needed, and the market must extend to enable innovation.

Designing a BECCS business model

The Department for Business Energy and Industrial Strategy (BEIS) outlined several key factors to consider in assessing how to make carbon capture, usage and storage (CCUS) economically viable. These are also valid for BECCS development.

Engineers working within the turbine hall, Drax Power Station

Engineers working within the turbine hall, Drax Power Station

One of the primary needs for a BECCS business model is to instil confidence in investors – by creating a policy framework that encourages investors to back innovative new technologies, reduces risk and inspires new entrants into the space. The cost of developing a BECCS project should also be fairly distributed among contributing parties ensuring that costs to consumers/taxpayers are minimised.

Building from these principles there are three potential business models that can enable BECCS to be developed at the scale and in the timeframe needed to bring the UK to net zero emissions in 2050.

  1. Power Contract for Difference (CfD):
    By protecting consumers from price spikes, and BECCS generators and investors from market volatility or big drops in the wholesale price of power, this approach offers security to invest in new technology. The strike price could also be adjusted to take into account negative emissions delivered and spillover benefits, as well as the cost of power generation.
  2. Carbon payment:
    Another approach is contractual fixed carbon payments that would offer a BECCS power station a set payment per tonne of negative emissions which would cover the operational and capital costs of installing carbon capture technology on the power station. This would be a new form of support, and unfamiliar to investors who are already versed in CfDs. The advantage of introducing a policy such as fixed carbon payment is its flexibility, and it could be used to support other methods of GGR or CCS. The same scheme could be adjusted to reward, for example, CO2 captured through CCS in industry or direct air carbon capture and storage (DACCS). It could even be used to remunerate measurable spillover benefits from front-running BECCS projects.
  3. Carbon payment + power CfD:
    This option combines the two above. The Frontier report says it would be the most effective business model for supporting a BECCS in power project. Carbon payments would act as an incentive for negative emissions and spillovers, while CfDs would then cover the costs of power generation.
Cost and revenue profiles of alternative support options

Cost and revenue profiles of alternative support options based on assuming a constant level of output over time.

 Way to go, hybrid!

Why does the hybrid business model of power CfD with carbon payment come out on top? Frontier considered how easy or difficult it would be to transition each of the options to a technology neutral business model for future projects, and then to a subsidy free business model.

By looking ahead to tech neutrality, the business model would not unduly favour negative emissions technologies – such as BECCS at Drax – that are available to deploy at scale in the 2020s, over those that might come online later.

Plus, the whole point of subsidies is to help to get essential, fledgling technologies and business models off to a flying start until the point they can stand on their own two feet.

The report concluded:

  • Ease of transition to technology neutrality: all three options are unlikely to have any technology neutral elements in the short-term, although they could transition to a mid-term regime which could be technology neutral; and
  • Ease of transition to subsidy free: while all of the options can transition to a subsidy free system, the power CfD does not create any policy learnings around treatment of negative emissions that contribute to this transition. The other two options do create learnings around a carbon payment for negative emissions that can eventually be broadened to other GGRs and then captured within an efficient CO2 market.

‘Overall, we conclude that the two-part business model performs best on this criterion. The other two options perform less well, with the power CfD performing worst as it does not deliver learnings around remunerating negative emissions.’

Assessment of business model options

Assessment of business model options. Green indicates that the criteria is largely met, yellow indicates that it is partially met, and red indicates that it is not met.

Transition to a net zero future

Engineer inspects carbon capture pilot plant at Drax Power Station

Engineer inspects carbon capture pilot plant at Drax Power Station

Crucial to the implementation of BECCS is the feasibility of these business models, in terms of their practicality in being understood by investors, how quickly they can be put into action and how they will evolve or be replaced in the long-term as technologies mature and costs go down. This can be improved by using models that are comparable with existing policies.

These business models can only deliver BECCS in power (as well as other negative emissions technologies) at scale and enable the UK to reach its 2050 net zero target, if they are implemented now.

Every year of stalling delays the impact positive spillovers and negative emissions can have on global CO2 levels. The UK Government must provide the private sector with the confidence to deliver BECCS and other net zero technologies in the time frame needed.

Go deeper

Explore the Frontier Economics report for Drax, ‘Supporting the deployment of Bioenergy Carbon Capture and Storage (BECCS) in the UK: business model options.’

Robust trading and operational performance in Q1-2021, progressing biomass strategy

RNS Number : 0962W
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Highlights

  • Robust trading and operational performance during the first three months of 2021
  • Completion of acquisition of Pinnacle Renewable Energy Inc. (Pinnacle)
  • Strong balance sheet and cash flows
    • Continue to expect net debt to Adjusted EBITDA(1) of around 2 x by the end of 2022
  • Continued focus on clean energy generation and a reduction in carbon emissions
    • Commercial coal generation ended in March 2021, with full closure in September 2022
    • Sale of existing gas generation assets in January 2021
  • Sustainable and growing dividend
    • Final dividend of 10.3 pence per share – subject to shareholder approval at AGM
    • Total dividends of 17.1 pence per share, 7.5% y-o-y growth

Will Gardiner, Drax Group CEO, said:

“In the first quarter of 2021 we delivered a robust trading and operational performance, alongside steps to further decarbonise the business and support our flexible and renewable generation strategy. These include the end of commercial coal generation, the sale of our gas power stations and just last week we acquired leading Canadian biomass producer Pinnacle Renewable Energy Inc.

Drax Group CEO Will Gardiner in the control room at Drax Power Station

Drax Group CEO Will Gardiner in the control room at Drax Power Station [Click to view/download]

“The acquisition of Pinnacle positions Drax as the world’s leading sustainable biomass generation and supply business. This advances our strategy to increase self-supply, reduce our own cost of biomass production and create a long-term future for sustainable bioenergy, which will pave the way for the development of negative emissions from Bioenergy with Carbon Capture and Storage (BECCS). BECCS at Drax would make a significant contribution to the UK reaching its new target to cut carbon emissions by 78% by 2035.”

Trading, operational performance and outlook

The trading and operational performance of the Group has been robust in the first three months of 2021. Full year expectations for the Group remain underpinned by continued good operational availability for the remainder of 2021.

Generation

Drax’s generation portfolio has performed well with good asset availability and optimisation across its portfolio, including a strong system support performance from Cruachan (pumped storage), underpinning a solid financial performance.

During the summer Drax will, as previously announced, undertake planned maintenance on its CfD(2) biomass unit, including a high-pressure turbine upgrade to reduce maintenance costs and improve thermal efficiency, contributing to lower generation costs for Drax Power Station.

In March 2021 Drax secured Capacity Market agreements for its hydro and pumped storage assets worth around £10 million for the delivery period October 2024 to September 2025.

Drax also secured 15-year agreements for three new 299MW system support Open Cycle Gas Turbine (OCGT) projects in England and Wales. As the UK transitions towards a net zero economy it will become increasingly dependent on intermittent renewable generation.  As such, fast response system support technologies, such as these OCGTs, are increasingly important in enabling the UK energy system to run more frequently and securely on intermittent renewable generation. Drax is continuing to evaluate options for these projects including their potential sale.

Pellet Production

Pellet Production has performed well with good production and cost reduction plans on track.

On 13 April 2021, Drax completed its acquisition of Pinnacle. The acquisition advances the Group’s biomass strategy by more than doubling its sustainable biomass production capacity, significantly reducing its cost of production and adding a major biomass supply business, underpinned by long-term third-party supply contracts.

The Group’s enlarged supply chain will have access to 4.9 million tonnes of operational capacity from 2022. Of this total, 2.9 million tonnes are available for Drax’s self-supply requirements in 2022 (increasing to 3.4 million tonnes in 2027).

The acquisition positions Drax as the world’s leading sustainable biomass generation and supply business alongside the continued development of its ambition to be a carbon negative company by 2030, using BECCS.

Pinnacle’s performance in the first three months of 2021 was in line with Drax’s expectations through the acquisition process. Drax will update on full year expectations including Pinnacle at its half year results on 29 July 2021.

Customers

The Group’s I&C(3) supply business performed well. It continues to provide a route to market for Drax’s power and renewable products to high credit quality counterparties as well as opportunities to complement the Group’s system support capabilities.

Trading desk at Haven Power, Ipswich

Trading desk at Haven Power, Ipswich

The SME(4) supply business continued to be affected by the ongoing Covid-19 restrictions in the first three months of 2021. Drax is continuing to explore operational and strategic options for this segment of the business.

Balance sheet

As at 31 March 2021, Drax had cash and total committed facilities of £801 million.

Drax will retain Pinnacle’s existing debt facilities within the enlarged Group’s capital structure but will consider opportunities to optimise its balance sheet with lower cost sources of debt.

Drax continues to expect net debt to Adjusted EBITDA to return to its long-term target of around 2 x by the end of 2022.

Generation contracted power sales

As at 16 April 2021, Drax had 25.7TWh of power sales contracted at £49.0/MWh as follows:

 202120222023
Fixed price power sales (TWh) 15.07.53.2
Contracted % versus 2020 full year output (5)101%51%22%
Of which CfD (TWh) (6)3.2--
At an average achieved price (£ per MWh)49.248.649

Capital allocation and dividend

The Group remains committed to the capital allocation policy established in 2017, through which it aims to maintain a strong balance sheet; invest in the core business; pay a sustainable and growing dividend and return surplus capital beyond investment requirements to shareholders.

A final 2020 dividend of 10.3 pence per share was proposed in the 2020 results on 25 February 2021 and, subject to shareholder approval at today’s Annual General Meeting, will be paid on 14 May 2021.

An interim dividend of 6.8 pence per share was paid on 2 October 2020, making the total 2020 dividend 17.1 pence per share, an increase of 7.5% compared to 2019.

Enquiries:

Drax Investor Relations: Mark Strafford

+44 (0) 1757 612 491

Media:

Drax External Communications: Ali Lewis

+44 (0) 7712 670 888

Website: www.drax.com

END

Completion of the acquisition of Pinnacle Renewable Energy Inc.

Pinnacle named ship

RNS Number : 2689V 
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Drax is pleased to announce that it has completed the acquisition of the entire issued share capital of Pinnacle Renewable Inc.

The Acquisition was originally announced on 8 February 2021.

Enquiries:

Drax Investor Relations: Mark Strafford

+44 (0) 7730 763 949

Media:

Drax External Communications: Ali Lewis

+44 (0) 7712 670 888