Author: dancowley

Q1 2023 Trading Update and £150 Million Share Buyback Programme

26 April 2023

Investors

RNS Number : 4506X
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Highlights

  • Strong system support and generation performance during the first three months of 2023
  • Closure of remaining coal units, decommissioning commenced April 2023
  • 2023 Adjusted EBITDA(1) expectations in line with analysts’ consensus estimates(2)
  • Final dividend of 12.6 pence to be paid subject to shareholder approval at today’s AGM
    • Total dividend for 2022 – 21.0 pence per share (2021: 18.8 pence per share)
  • £150 million share buyback programme to commence in Q2 2023

Drax Group CEO, Will Gardiner said:

“In the first quarter of 2023, we have delivered a strong system support and generation performance, providing renewable, secure, dispatchable power for millions of homes and businesses across the UK.

“We remain excited about the opportunity to do BECCS in the UK. Whilst the project is not currently in the Track 1 process, we have commenced formal discussions with the Government to facilitate the transition to BECCS at Drax Power Station by 2030.

“At the end of March, we formally closed the remaining two coal units at Drax Power Station. This is a significant moment for the business and I’d like to thank the many hundreds of people involved in making this happen and transforming Drax into a global leader in biomass power generation.

“In the US, we continue to make good progress screening options for over 10 BECCS projects which will deliver long-term, large-scale carbon removal.”

Generation

Drax has continued to optimise generation across all four biomass units (ROC and CfD), based on system need and sustainable biomass supply. The Group’s biomass, pumped storage and hydro assets have continued to support UK security of supply, providing a wide range of system support services and renewable electricity generation, which included forward power sales from pumped storage in the first three months of 2023.

Generation contracted power sales

As at 21 April 2023, Drax had 26.2TWh of power hedged between 2023 and 2025 on its ROC, pumped storage and hydro generation assets at an average price of £152.2/MWh(3). This excludes any sales under the CfD mechanism.

Contracted power sales as at 21 April 2023202320242025
Net ROC, hydro and gas (TWh)12.510.53.2
- Average achieved £ per MWh158.6149.1137.3
Lower expected level of ROC generation in 2023 due to major planned outages on two units

Coal

Following the completion of a “winter contingency” service agreement (October 2022 – March 2023) with National Grid, Drax has commenced the decommissioning of its two coal units. There was no coal generation during the agreement period.

Bioenergy Carbon Capture and Storage (BECCS) – UK

In March 2023, the UK Government provided an update on its plans for the deployment of carbon capture and storage infrastructure and projects. This confirmed that Power BECCS and certain other shortlisted projects were not included in the initial Track 1 process, which relates to projects targeting commissioning in the mid-2020s. The Government confirmed that during 2023 it will set out a process for the expansion of Track 1 and has also launched a Track 2 process. Power BECCS is eligible for both tracks.

Alongside this update the Government confirmed its commitment to support the deployment of large-scale Power BECCS projects by 2030. Drax has now commenced formal bilateral discussions with the Government to move the project at Drax Power Station forward and ensure that the Government is able to fulfil its restated commitment of achieving 5Mt pa of engineered Greenhouse Gas Removals by 2030. Drax believes that BECCS at Drax Power Station is the only project in the UK that can enable the Government to achieve this goal(6). This process will also include discussion of a bridging mechanism for biomass power generation between the end of the current renewable schemes in 2027 and the commissioning of BECCS.

In addition, the Government has now published its response to the Power BECCS business model consultation, which took place in 2022, confirming its preference for the use of a CfD mechanism to remunerate renewable power and carbon removals in BECCS. The Government has also committed to publish its biomass strategy by the end of June 2023 which will set out how the technology could be deployed.

Drax’s plan of record for investment in UK BECCS was based on a first BECCS unit commissioning in 2027 and a second by 2030. Since Power BECCS is not currently in the Track 1 process and Government’s aim is to support BECCS by 2030, Drax has paused further investment in its UK BECCS project in 2023 and will revise its UK BECCS investment schedule subject to further clarity on support for BECCS at Drax Power Station.

Pellet Production

The Group’s sustainable biomass pellet business has continued to support efforts to optimise biomass power generation and security of supply in the UK. In the US, the focus has remained on ensuring the Demopolis plant reaches full capacity and reliable, safe operation.

As outlined in the 2022 Full Year Results (February 2023), inflationary pressures, primarily in transportation and utilities have contributed to an increase in pellet production costs. Taken together with costs incurred in providing supply-side flexibility, Drax continues to expect production costs to be higher in 2023.

While continuing to optimise its supply chain to maximise value for the Group, Drax remains focused on opportunities to reduce the cost of biomass.

Full Year Expectations

Reflecting these factors, Drax continues to expect full year Adjusted EBITDA(1) for 2023 to be in line with analysts’ consensus estimates(2), subject to continued good operational performance.

Reflecting the reprofiling of investment in UK BECCS, Drax now expects capital investment in 2023 to be in the range of £520-580 million (was £570-630 million).

Capital Returns and Share Buyback Programme

In line with its capital allocation policy and reflecting (a) a strong net debt to Adjusted EBITDA position, (b) the revised timing of UK BECCS investment and (c) the mitigation of equity dilution associated with the vesting of share schemes(7), the Group plans to return up to £150 million to shareholders via a share buyback programme. The programme is expected to commence in Q2 2023 and be completed by the end of 2023.

The programme is not expected to have any impact on the Group’s medium and long-term growth plans which continues to include UK BECCS, US BECCS, pellet plant and pumped storage hydro expansion.

The Group remains committed to its current capital allocation policy, which remains unchanged and, beyond the current buyback programme, will continue to assess its capital requirements in line with the current policy.

Other

Drax will host a Capital Markets Day on 23 May 2023, updating on its plans for growth with a focus on BECCS.

Drax will report its half year results on 27 July 2023.

Notes:

  1. Earnings before interest, tax, depreciation, amortisation, excluding the impact of exceptional items and certain remeasurements.
  2. As of 21 April 2023, analyst consensus for 2023 Adjusted EBITDA was £1,156 million, with a range of £1,100 – 1,200 million. The details of this company collected consensus are displayed on the Group’s website. https://www.drax.com/wp-content/uploads/2023/04/Company_Collected_Consensus_April_2023.pdf
  3. Includes structured power sales in 2023 and 2024 (forward gas sales as a proxy for forward power), transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices. 2024: 1.1TWh, 2025: 0.8TWh, presented net of cost of closing out gas positions at maturity and replacing with forward power sales.
  4. Typical estimated annual biomass generation from ROC and CfD units c.13-14TWh based on estimated biomass availability, incrementally lower in 2023 due to major planned outages on two ROC units, resulting in lower ROC cap versus 2022.
  5. 2023 includes limited forward selling of pumped storage generation resulting in higher captured prices but lower system support availability.
  6. Biomass is the only large-scale source of dispatchable, renewable electricity and Drax power station in Yorkshire is the largest provider of secure supply in the UK’s electricity system. Its renewable biomass generation provides 2.6GW of electricity, representing c.4% of the UK’s dispatchable capacity and supplies millions of homes and businesses with dispatchable, reliable power. BECCS at Drax Power Station is expected to be one of the world’s biggest engineered carbon removal projects, permanently removing 8Mt of CO2 from the atmosphere every year by 2030. The project would see the addition of post combustion carbon capture to two of the existing biomass units, using sustainable biomass and technology from Drax’s technology partner, Mitsubishi Heavy Industries. Captured CO2 would be transported and permanently stored by the Group’s partners in the East Coast Cluster. Vivid Economics concluded that it could deliver £370 million of economic benefit for the UK during construction, creating and supporting more than 10,000 jobs during peak construction. Recent Baringa research also demonstrates that Drax is the UK’s largest source of energy security and will continue to play a vital role in the UK security of supply in to the late 2020s. Drax aims to source 80% of materials and services for the project from British businesses and is also working with British Steel to explore opportunities for its UK production facilities to supply a proportion of the steel needed for BECCS.
  7. Of the total share options outstanding as at 31 March 2023 (18.6 million), an aggregate number of approximately 9.4 million are expected to vest in 2023 under the Company’s various share plans. This includes approximately 6.8 million under the all-UK employee Sharesave Plan which matures in June 2023 when the three-year savings contract period concludes for approximately 900 participating employees. More information on outstanding awards and associated share-based payments can be found in note 6.2 to the Consolidated Financial Statements in the Annual Report and Accounts for the year ended 31 December 2022.

Enquiries:

Drax Investor Relations: Mark Strafford

+44 (0) 7730 763 949

Media:

Drax External Communications: Chris Mostyn

+44 (0) 7548 838 896

Website: www.Drax.com

Forward Looking Statements

This announcement may contain certain statements, expectations, statistics, projections and other information that are, or may be, forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans, beliefs, and objectives for the management of future operations of Drax Group plc (“Drax”) and its subsidiaries (the “Group”), are not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although Drax believes that the statements, expectations, statistics and projections and other information reflected in such statements are reasonable, they reflect the Company’s current view and no assurance can be given that they will prove to be correct. Such events and statements involve risks and uncertainties. Actual results and outcomes may differ materially from those expressed or implied by those forward-looking statements. There are a number of factors, many of which are beyond the control of the Group, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These include, but are not limited to, factors such as: future revenues being lower than expected; increasing competitive pressures in the industry; uncertainty as to future investment and support achieved in enabling the realisation of strategic aims and objectives; and/or general economic conditions or conditions affecting the relevant industry, both domestically and internationally, being less favourable than expected, including the impact of prevailing economic and political uncertainty. We do not intend to publicly update or revise these projections or other forward-looking statements to reflect events or circumstances after the date hereof, and we do not assume any responsibility for doing so.

Carbon markets will be essential in reaching net zero – we must ensure they support high standards

9 November 2022

Carbon capture

Angela Hepworth, Commercial Director, Drax

In brief:

  • The voluntary carbon market will be essential in deploying engineered carbon removals technologies like Bioenergy with carbon capture and storage (BECCS), and direct air carbon capture and storage (DACS) at scale.
  • The Integrity Council for the Voluntary Carbon Market is developing a set of Core Carbon Principles (CCPs).
  • Drax support proposed principles if they’re applied in ways appropriate for engineered carbon removals.
  • Standards around additionality and the permanence of carbon removals may apply very differently to nature-based and engineered removals, something that needs to be addressed explicitly.

There’s growing recognition, in governments and environmental organisations, of the urgent need to develop high-integrity engineered carbon removals at scale if the world has any chance of meeting our collective Paris-aligned climate goals.

Bioenergy with carbon capture and storage (BECCS), and direct air carbon capture and storage (DACS) are two technologies on the cusp of deployment at scale that can remove carbon from the atmosphere and store it permanently and safely. The technology is proven, developers are bringing forward projects, and the most forward-thinking companies are actively seeking to buy removal credits from BECCS and DACS developers.

Yet there’s a risk that the frameworks being developed in the voluntary carbon market could stifle rather than support the development of engineered carbon removals.

Drax is a world-leader in the deployment of bioenergy solutions. Our goal is to produce 12 million tonnes of high-integrity, permanent CO2 removals by 2030 from its BECCS projects in the U.K. and the U.S. We support the development of rigorous standards for CO2 removals that give purchasers confidence in the integrity of the CO2 removals they’re buying. Such standards are also important in providing a clear framework for project developers to work to.

However, the market and its standards have largely developed around carbon reduction and avoidance credits, rather than removals. To create a market that can enable engineered carbon removals at scale, re-thinking is needed to create standards that are fit for purpose to tackle the climate emergency.

Core Carbon Principles

The Integrity Council for the Voluntary Carbon Market is in the process of developing a set of Core Carbon Principles (CCPs) and Assessment Framework (AF) intended to set new threshold standards for high-quality carbon credits.

At Drax, we welcome and support the principles proposed by the Integrity Council. However, it’s crucial they’re applied in ways that are appropriate for engineered carbon removals, and support rather than prevent their development.

Many CCPs are directly applicable to engineered carbon removals and can offer important standards for projects developing removals technologies. Among the most important principles include those stating:

  • Removals must be robustly quantified, with appropriate conservatism in any assumptions made.
  • Key information must be provided in the public domain to enable appropriate scrutiny of the carbon removal activity, while safeguarding commercially sensitive information.
  • Removal credits should be subject to robust, independent third-party validation and verification.
  • Credits should be held in a registry which deals appropriately with removal credits.
  • Registries must be subject to appropriate governance, to ensure their integrity without becoming disproportionately bureaucratic or burdensome.
  • Removals must adhere to high standards of sustainability, taking account of impacts on nature, the climate and society.
  • There should be no double counting of carbon removals between corporates, or between countries. Bearing in mind that both corporates and countries may count the same removals in parallel, and that the Article 6 mechanism means countries can decide whether trades between corporates should or shouldn’t trigger corresponding adjustments to countries’ carbon inventories.

However, as pioneers in the field, we believe that two of the Core Carbon Principles need to be adapted to the specific characteristics of engineered carbon removals.

Supporting additionality and development incentives

The CCPs state: “The greenhouse gas (GHG) emission reductions or removals from the mitigation activity shall be additional, i.e., they would not have occurred in the absence of the incentive created by carbon credit revenues.”

Engineered carbon removal credits such as BECCS and DACS are by their nature additional. They are developed for the specific purpose of removing CO2 from the atmosphere and putting it back in the geosphere. They also rely on revenue from carbon markets – largely the voluntary market at present, but potentially compliance markets such as the U.K. and E.U. ETS in the future.

However, most early projects are likely to have some form of Government support (e.g., 45Q in the U.S., or Contracts for Difference in the U.K.) from outside carbon credit revenues. But that support isn’t intended to be sufficient on its own for their deployment – project developers will be expected to sell credits in compliance or voluntary markets.

Engineered carbon removals have high up-front capital costs, and it’s clear that revenue from voluntary or compliance markets will be essential to make them viable.

Additionality assessments should be risk-based. If it’s clear that a technology-type is additional, a technology-level assessment should be sufficient. This should be supplemented with full transparency on any government support provided to projects.

Compensating against non-permanent storage

On the topic of permanence that CCPs state: “The GHG emission reductions or removals from the mitigation activity shall be permanent, or if they have a risk of reversal, any reversals shall be fully compensated.”  A key benefit of engineered carbon removals with geological storage is that they effectively provide permanent carbon removal. Any risk of reversal over tens of thousands of years is extremely small.

The risk of reversal for nature-based credits, by contrast, is much greater. Schemes for managing reversal risk in the voluntary carbon market that have been developed for nature-based credits, are not necessarily appropriate for engineered removals.

Requirements for project developers to set aside a significant proportion of credits generated in a buffer pool, potentially as much as 10%, are disproportionate to the real risk of reversal from a well-manged geological store. They also fail to take account of the stringent regulatory requirements for geological storage that already exist or are being put in place.

Any ongoing requirements for monitoring should be consistent with existing regulatory requirements placed on storage owners and operators. Similarly, where jurisdictions have robust regulatory arrangements for dealing with CO2 storage risk, which place liabilities on storage owners, operators, or governments, the arrangements in the voluntary carbon market should mirror these arrangements rather than cutting across them, and no additional liabilities should be put on project developers.

At Drax, we believe the CCPs provide a suitable framework to ensure the integrity of engineered carbon removals. If applied pragmatically, they can give purchasers of engineered carbon removal credits confidence in the integrity of the product they’re buying and provide a clear framework for project developers. They can ensure that standards support, rather than stifle the development of high integrity carbon removal projects such as BECCS and DACS, which are essential to achieving our global climate goals.