Author: Will Gardiner

Building a sustainable business

The UK energy sector is changing rapidly. The boundaries between users, suppliers and generators are blurring as energy users are choosing to generate their own energy and are managing their energy use more proactively while, conversely, generators are increasingly seeing users as potential sources of generation and providers of demand management.

“The UK is undergoing an unprecedented energy revolution with electricity at its heart – a transition to a low-carbon society requiring new energy solutions for power generation, heating, transport and the wider economy”

In that context, our Group’s purpose is to help change the way energy is generated, supplied and used for a better future. This means that sustainability, in its broadest sense, must be at the very core of what we do. Successful delivery of our purpose depends on all our people, across all our businesses, doing the right thing, every day. With the right products and services, we can go even further and help our customers make the right, sustainable energy choices.

As our businesses transform and we embrace a larger customer base, different generation technologies and operate internationally, the range of sustainability issues we face is widening and becoming more complex. At the same time, the range of stakeholders looking to Drax for responsible leadership on sustainability is increasing. The need for transparency is greater than ever, so our website’s sustainability section provides a comprehensive insight into the Group’s environmental, social and governance management and performance during 2017.

Some of the highlights include:

  • Carbon reduction: I am pleased that, in 2017, the proportion of our energy generation from renewable sources remained high. 65% of our generation during the year came from sustainable biomass and accounted for 15% of the country’s overall renewable generation. We maintained our rigorous and robust approach to ensure that we only ever use biomass that is sustainably produced and legally sourced.
  • People: Another key achievement was the roll out of our people strategy to 2020 – One Drax – which focuses on talent to deliver on our strategic and operational objectives.
  • Safety: The health and safety of all our employees and contractors is of paramount importance to Drax. While the Group’s safety incident rate remained on target in 2017, the fire at our biomass rail unloading facilities in December did cause an outage, with disruption lasting into 2018. It highlighted once again that the risks of generating using biomass must be mitigated through robust safety procedures and a risk-based plant investment and maintenance programme. Safety therefore remains at the centre of our operational philosophy and we are determined to do even better.
  • Customers: Our business to business (B2B) Energy Supply business received recognition for their dedication to customer service. Opus Energy won “Utilities Provider of the Year” at the British Small Business Awards 2017.

We initiated a process which would allow us to participate in the United Nations Global Compact (UNGC). We are committed to the initiative and its ten principles, which align with our culture of doing the right thing.

Our website’s sustainability section also sets out our commitment to achieving the United Nations’ Sustainable Development Goals through our operations, the services we deliver to our customers and in partnership with others.

Global ambitions and goals are important, but so too are our ambitions for our local and regional communities. As such, we have played a key role in the UK Northern Powerhouse Partnership, initiatives such as POWERful Women and a comprehensive programme of stakeholder engagement.

“Sustainability, in its broadest sense, must be at the very core of what we do”

Finally, I do not believe any organisation, however well intentioned, can get its commitment to sustainability perfect on its own and I am very keen for Drax to learn from people reading our website’s sustainability section. It sets out what we see as our achievements and aspects in which we believe we need to do better. I would like to invite any stakeholder with an interest to comment on what we’re doing and help us improve where we can. Feedback can be submitted at Contact us or via our Twitter account or Facebook page.

Read the Chief Executive’s Review in the Drax Group plc annual report and accounts

Drax Group plc Chief Executive comments on full year results

Will Gardiner, CEO, Drax Group

We continued to transform the business in 2017, delivering a strong EBITDA performance, in line with expectations. This was delivered by all parts of the business making positive contributions for the first time.

We also made good progress delivering our strategy, which is clear and unchanged. We are increasing biomass self-supply, developing projects to diversify our generation mix and growing our B2B energy supply business.

The UK is undergoing an energy revolution, starting with a significant reduction in carbon emissions, and to support that we are helping to change the way energy is generated, supplied and used.

View full report

View investor relations presentation

Understanding the pounds behind the power

Editor’s note: On 21st September 2017 the Board announced that Will Gardiner would replace Dorothy Thompson as Chief Executive, Drax Group as of 1st January 2018. Read the announcement to the London Stock Exchange. This story was written by Will two months prior to that announcement and remains unedited below.

The UK electricity market used to be simpler. Coal, gas and nuclear plants generated energy and fed power into the National Grid. Retail companies then delivered that power to homes and businesses across the country thanks to regional distribution network operators. Today, it’s not as simple. The energy system of Great Britain has grown more complex – it needed to.

The push to lower carbon emissions led to the introduction of an array of different power generation technologies and fuels to the energy mix. These all generate power in different ways, at different times and in different conditions. Added to this are government schemes that have changed how this is all funded. In short, our electricity market is now more complex.

Drax Group has transformed itself to align with this new system. It is now an energy company with complementary operations across its supply chain – sourcing fuel, generating 17% of Great Britain’s renewable power and then selling much of that electricity directly to business customers in the retail market. This has fundamentally changed both how we do business and the financial mechanisms behind the business.

Where are we now?

Drax’s financial and operating strategies are very much inter-linked. Shifting how we generate energy changes how we generate revenue. The company is structured according to a set of distinct business segments, each of which is treated in a slightly different way.

The generation business

Drax has adapted its business model to the UK government’s regulatory framework, which through successive administrations has broadly promoted investment in renewable and low carbon power generation. Three of our six electricity generation units – accounting for 68% of our output in the first half of 2017 – have been upgraded from coal to produce renewable electricity from sustainable compressed wood pellets. These units are a core part of Britain’s renewable energy mix. Guaranteed income from the third unit conversion has given us a significantly higher degree of earnings visibility and reduced our exposure to commodity prices.

H1, 2017: 10.7 TWh total generation; 7.3 TWh biomass generation

Our coal generation units no longer provide 24/7 baseload electricity. This means we primarily use our coal generation as a support system. When the grid needs it we can ramp up and down coal generation responding to demand and ancillary service needs. Our renewable generation units do this too. Ultimately, however, our long-term goal is to convert the remaining coal units – either to renewables or to gas. Our Research and Innovation team is currently looking into how we might be able to do this, but early indications show that coal-to-gas conversion could be an attractive option for delivering flexible and reliable generation capacity for the UK.

Drax Power is doing well and generated £137m of EBITDA in the first half of this year, a £51m increase compared to the first half of 2016.

We are confident about the projected growth of our power generation business to £300 million EBITDA by 2025. That plan is aided by our move into rapid response gas – a technology that can meet urgent needs of a power system that includes an increasing amount of weather-dependent renewables. Two of the four rapid response gas projects we’re developing are ready to bid for 15-year capacity market contracts this coming February. They are designed to start up from cold faster than coal and combined cycle gas turbine (CCGT) units. These small-yet-powerful plants will respond to short-term power market price signals and be capable of providing other, ancillary services to further enhance security of supply.

These projects should add an attractive additional source of earnings to our generation business. They also will have attractive characteristics, as a significant element of their earnings will come from the capacity market – guaranteed government income for 15 years.

The retail business

We directly serve the retail market through Haven Power, which supplies renewable electricity primarily to industrial and commercial customers. Last week we announced that Haven Power was able to break-even six months ahead of schedule. Retail is an area we’re growing, and in February 2017 we acquired Opus Energy, the largest non-domestic UK energy company by meters installed outside the Big Six. This has had a marked effect – today we’re the largest challenger B2B energy retailer in the UK.

There is a healthy and regular annuity coming in through the existing retail business, and we believe this can generate £80 million of EBITDA by 2025, which, together with our growing biomass supply business, will make up a third of our earnings. We demonstrated good progress in the first half of the year, earning £11m of EBITDA.

The biomass business

Our two operational wood pellet manufacturing plants in Louisiana and Mississippi are progressing well. They are both still ramping up to full production and have seen marked improvements in pellet quality and production.

We are looking to grow our US business and as part of this we’ll need to build on the recent addition of LaSalle BioEnergy with further acquisitions. Expansion will grow our capacity for the self-supply of pellets from 15% to 30% of Drax Power Station’s requirements, adding an additional one million tonnes of production.

In the second half of 2017, we expect the profitability of Drax Biomass to increase. LaSalle will be commissioned in the first half of 2018 and reach capacity in 2019.

What’s next?

The energy landscape continues to change and we’ll need to change with it. Phasing out coal entirely is priority number one. For this we’ll continue to look at options. How and when we can convert more units to sustainable biomass depends on trials that we are conducting at Drax Power Station during 2017-18. The right government support would also make further conversions cost effective.

We also recognise that it’s important to look at alternative possibilities for our remaining coal units. This is why we are seeking planning permission to convert one or more of our 645 MW (megawatt) coal units to 1,300 MW of gas. Such an upgrade would be at a discount to a new-build, combined cycle gas turbine (CCGT) power station of equivalent capacity. And that’s simply because we would use much of the existing infrastructure and equipment.

Another major prospect is in the technology space and so we’re continuing to invest in research and innovation. Batteries and storage are a huge opportunity for us – both in how they could benefit our retail customers, and how they could provide solutions for large-scale centralised energy systems. In short, it’s an area with huge potential. We welcome the government’s recent initiatives designed to stimulate the development of battery technology, as well as encourage the use of electric vehicles.

Drax has gone through a period of considerable change and that will continue as we meet the UK’s low-carbon energy demands. We are improving the quality of our earnings, reducing our exposure to commodities, and positioning to take advantage of future opportunities. As we told investors in June, if we deliver on these plans, we can expect >£425 million of EBITDA in 2025.

Forbes: Drax joint-second most trustworthy company in Europe

I’m delighted that Drax Group plc has been named by Forbes magazine and MSCI ESG Research as one of the 50 most trustworthy companies in Europe.

In fact, Drax came joint second across the whole continent among companies judged who ‘consistently demonstrated transparent accounting practices and solid corporate governance’.

It’s a massive tribute to everyone involved with Drax that world-leading business experts have recognised our commitment to trust and integrity in this way.

Of course, that commitment goes much further than our accounting practices alone. (I believe my British colleagues would say that it runs right through Drax like the writing in a stick of rock.)

Indeed, it was one of the reasons I was so honoured to be asked to join Drax as CFO. From my very first meeting with CEO Dorothy Thompson, I could see that Drax would always strive do the right thing, in the right way.

That’s just as true for our sustainability data as it is for our business data.

It was our commitment to doing the right thing that led Drax to take on the decision to convert Drax power station from coal to compressed wood pellets.

It is our commitment to doing the right thing that means Drax is reducing emissions by over 80 per cent while giving people and businesses all over the UK the reliable, renewable power that they need.

And we know we can save bill-payers money at the same time.

The UK is lagging far behind the rest of Europe when it comes to generating energy from compressed wood pellets. Drax is committed to bringing us closer to the European average, while helping us move from the fossil fuels of the past to the renewables of the future. And yes, you can trust us on that.

Three ways to judge a CFO

It’s a good question, because you can’t build a great company without a great chief financial officer (CFO). But as a shareholder, how can you judge how well your CFO is doing? Without setting myself up for a fall, the answer I gave our investor broke down into these three questions:

  1. Are they keeping control? At its heart, the first part of any CFO’s role is to make sure that their business is under control and that all risks are being properly managed. They need to maintain a strong balance sheet and keep reporting and communications clear and transparent. Above all, they need to make sure there are no surprises.
  2. Are they improving efficiency? The second part is making sure the organisation is always working as efficiently as possible, keeping a strong hand on costs and ensuring that current revenue streams are always optimised. Above all, they need to be making sure that less money is going out and more money is coming into the organisation.
  3. Are they allocating capital wisely? The final task of any CFO is investing shareholder’s money in the best projects – first internally and second externally. Above all, they need to have a clear consideration of cash returns for shareholders.

So now the next time you wonder how well your CFO is doing, you know how to judge them.

This article was originally published by Will on LinkedIn.