Tag: gas

Capacity Market Agreements

Cruachan pylons

Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)
RNS Number : 8747R

T-4 auction – provisional results for existing pumped storage and hydro assets

Drax confirms that it has provisionally secured agreements to provide a total of 617MW of capacity (de-rated 582MW) principally from its pumped storage and hydro assets(1). The agreements are for the delivery period October 2024 to September 2025, at a price of £18/kW(2) and are worth around £10 million in that period. These are in addition to existing agreements which extend to September 2024.

T-4 auction – provisional results for new build system support assets

Drax confirms that it has provisionally secured 15-year agreements for three new 299MW (de-rated 284MW) Open Cycle Gas Turbine (OCGT) projects at sites in England and Wales(3). The agreements are for the delivery period October 2024 to September 2039, at a price of £18/kW(2) and are worth around £230 million in that period.

Artist’s impression of a Drax rapid-response gas power station (OCGT)

Artist’s impression of a rapid-response gas power station (OCGT)

These assets are intended to operate for short periods of time to meet specific system support needs. As the UK transitions towards a net zero economy, it will become increasingly dependent on wind generation and as such, fast response system support technologies such as these OCGTs are increasingly important to the energy system as a means to enable more wind to run more often and more securely.

The total capital cost of these projects is approximately £80-90 million each, with a build time of around two years.

A further OCGT project participated in the auction but exited above the clearing price and did not accept an agreement.

Drax will now evaluate options for all four OCGT projects including their potential sale.

Continued focus on biomass strategy and the development of negative emissions

In December 2019 Drax announced an ambition to become a carbon negative company by 2030 using Bioenergy Carbon Capture and Storage (BECCS) and the Group remains focused on its biomass strategy. In January 2021 Drax completed the sale of its Combined Cycle Gas Generation (CCGT) assets and in March 2021 ends commercial coal generation. Drax believes that its remaining portfolio of sustainable biomass, pumped storage and hydro will be amongst the lowest carbon generation portfolios in Europe.

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/northamerica

Turning waste into watts

Fields being ploughed by tractor

Think of carbon emissions and the image that comes to mind is often of industrial sites or power generation – not of what we eat and what we throw away. But food waste is a major contributor of greenhouse gas emissions.

Globally, food loss and waste from across the food chain generates the equivalent of 4.4 gigatonnes of carbon dioxide (CO2) a year, or about 8% of total greenhouse gas emissions.

But what if there was a way to reduce those emissions and generate power by using discarded food and other organic waste like grass cuttings or nut shells? A technology known as anaerobic digestion is increasingly making this idea a reality.

How anaerobic digestion works

All organic waste products have energy in them, but it’s tied up in the form of calories. When food and vegetation rots, microorganisms break down those calories into gases and other products.

Methane or Ammonium molecules. Science concept. 3D rendered illustration.

Methane or Ammonium molecules.

Exactly what these ‘other products’ are depends on whether there is any oxygen present. With oxygen, the products are water, CO2 and ammonia, but remove oxygen from the equation and a very valuable gas is produced: methane (CH4). The lack of oxygen is also what gives anaerobic digestion its name – when oxygen is present it becomes aerobic digestion.

During the anaerobic digestion process, bacteria and other microorganisms break down organic matter, gradually deteriorating complex polymers like glucose or starch into progressively simpler elements, such as alcohol, ammonia, CO2 and, ultimately, CH4, a biogas with huge potential as a fuel for other processes.

Anaerobic power in practice

The CH4 produced in anaerobic digestion is incredibly useful as a fuel – turn on a gas hob or stovetop and it’s predominantly methane that provides the fuel for the flame. The chemical compound is also the main component in the natural gas that makes up much of Great Britain’s electricity supply.

This means using anaerobic digestion to create CH4 out of waste products turns that waste into a valuable power source. But it’s not as simple as putting a bag over a rubbish tip and hoping for the best.

Instead, anaerobic digestion is carried out in large tanks called digesters. These are filled with feedstocks from biological substances that can include anything from food scraps, to alcohol and distillery waste, to manure. Under the right conditions microorganisms and bacteria begin to digest and breakdown these substances into their basic elements.

The air quantity and temperature of the digesters is carefully regulated to ensure the microorganisms have the best possible environment to carry out the digestion of the feedstock, with different types of feedstock and microorganisms operating best in different conditions.

The biogas created as a result of this digestion is then captured, ready to be turned into something useful.

biogas plant

Making use of biogas

Three different things can happen to the biogas produced during the course of the digestion. Locally, it can be combusted on-site to provide further heat to regulate the temperature of the anaerobic digestion units.

Or, it can be combusted in a combined heat and power (CHP) generator, where it can generate electricity to be used on site — for example to power a farm — or sold through energy suppliers such as Opus Energy onto wider regional or national electricity networks. This biogas electricity is an important element of Great Britain’s energy supply, accounting for 6,600 GWh or 7.3% of all power generated by solid and gaseous fuels in 2017.

Some of the biogas can even be cleaned to remove CO2, leaving behind pure methane that can be pumped onto natural gas grids and used to provide heat and power to households. Government research estimates a fully utilised biogas sector could provide up to 30% of the UK’s household gas demands.

After the digestion process has been completed and the biogas has been removed, what is left behind in the digester is a mass of solid matter called digestate. This is extremely rich in nutrients and mineral, such as potassium and nitrogen, making it an excellent soil enhancer.

Where anaerobic digestion is being used today

Today, much of anaerobic digestion power is generated on farms – unsurprisingly, given the ready access to biological waste material to use as feedstock. As well as a potential source of electricity and heat, it also gives farmers access to a new revenue stream, by selling electricity or biogas, as well as reducing utility and fertiliser costs.

While many of these installations are smaller scale, some can get quite big. Linstock Castle Farm in North Cumbria, for example, has a biogas facility with a 1.1 megawatt(MW) operating capacity, enough to power as many as 2,000 homes at a time. It was originally installed by the farmers as a more cost-effective way of growing their business than buying more dairy cows.

Biogas plant on a farm processing cow dung as a secondary business activity

There is, however, potential for anaerobic digestion to operate on an even larger scale. In the US, the city of Philadelphia is developing a system that will link all newly built households together into a network where food waste is automatically collected and transported to a biogas generating facility.

Closer to home, Northumbrian Water uses 100% of its sludge, the waste produced from purifying water, to produce renewable power via anaerobic digestion. It’s estimated to have reduced the carbon footprint of the facility’s operations by around 20%, and saved millions of pounds in savings on operating costs.

There have also been experiments with using biogas to power vehicles. The ‘Bio-Bus’ was the first bus in the UK to be powered by biomethane made from food, sewage and commercial liquid waste, and ran between Bath and Bristol Airport.

But anaerobic digestion power is not a magic bullet. It will be right in certain situations, but not all. If utilised effectively, anaerobic digestion and biogas could fill a vital role in national electricity and gas networks, while at the same time helping dispose of waste products in an environmentally-friendly and cost-effective way.

Could hydrogen power stations offer flexible electricity for a net zero future?

Pipework in a chemical factory

We’re familiar with using natural gas every day in heating homes, powering boilers and igniting stove tops. But this same natural gas – predominantly methane – is also one of the most important sources of electricity to the UK. In 2019 gas generation accounted for 39% of Great Britain’s electricity mix. But that could soon be changing.

Hydrogen, the super simple, super light element, can be a zero-carbon emissions source of fuel. While we’re used to seeing it in everyday in water (H2O), as a gas it has been tested as an alternative to methane in homes and as a fuel for vehicles.

Could it also replace natural gas in power stations and help keep the lights on?

The need for a new gas

Car arriving at hydrogen gas station

Hydrogen fuel station

Natural gas has been the largest single source of electricity in Great Britain since around 2000 (aside from the period 2012-14 when coal made a resurgence due to high gas prices). The dominance of gas over coal is in part thanks to the abundant supply of it in the North Sea. Along with carbon pricing, domestic supply makes gas much cheaper than coal, and much cleaner, emitting as much as 60% less CO2 than the solid fossil fuel.

Added to this is the ability of gas power stations to start up, change their output and shut down very quickly to meet sudden shifts in electricity demand. This flexibility is helpful to support the growth of weather-dependant renewable sources of power such as wind or solar. The stability gas brings has helped the country decarbonise its power supply rapidly.

Hydrogen, on the other hand, can be an even cleaner fuel as it only releases water vapour and nitrous oxide when combusted in large gas turbines. This means it could offer a low- or zero-carbon, flexible alternative to natural gas that makes use of Great Britain’s existing gas infrastructure. But it’s not as simple as just switching fuels.

Switching gases

Some thermal power stations work by combusting a fuel, such as biomass or coal, in a boiler to generate intense heat that turns water into high-pressure steam which then spins a turbine. Gas turbines, however, are different.

Engineer works on a turbine at Drax Power Station

Instead of heating water into steam, a simple gas turbine blasts a mix of gas, plus air from the surrounding atmosphere, at high pressure into a combustion chamber, where a chemical reaction takes place – oxygen from the air continuously feeding a gas-powered flame. The high-pressure and hot gasses then spin a turbine. The reaction that takes place inside the combustion chamber is dependent on the chemical mix that enters it.

“Natural gas turbines have been tailored and optimised for their working conditions,” explains Richard Armstrong, Drax Lead Engineer.

“Hydrogen is a gas that burns in the same way as natural gas, but it burns at different temperatures, at different speeds and it requires different ratios of oxygen to get the most efficient combustion.”

Switching a power station from natural gas to hydrogen would take significant testing and refining to optimise every aspect of the process and ensure everything is safe. This would no doubt continue over years, subtly developing the engines over time to improve efficiency in a similar way to how natural gas combustion has evolved. But it’s certainly possible.

What may be trickier though is providing the supply of hydrogen necessary to power and balance the country’s electricity system. 

Making hydrogen

Hydrogen is the most abundant element in the universe. But it’s very rare to find it on its own. Because it’s so atomically simple, it’s highly reactive and almost always found naturally bonded to other elements.

Water is the prime example: it’s made up of two hydrogen atoms and one oxygen atom, making it H2O. Hydrogen’s tendency to bond with everything means a pure stream of it, as would be needed in a power station, has to be produced rather than extracted from underground like natural gas.

Hydrogen as a gas at standard temperature and pressure is known by the symbol H2.

A power station would also need a lot more hydrogen than natural gas. By volume it would take three times as much hydrogen to produce the same amount of energy as would be needed with natural gas. However, because it is so light the hydrogen would still have a lower mass.

“A very large supply of hydrogen would be needed, which doesn’t exist in the UK at the moment,” says Rachel Grima, Research & Innovation Engineer at Drax. “So, at the same time as converting a power plant to hydrogen, you’d need to build a facility to produce it alongside it.”

One of the most established ways to produce hydrogen is through a process known as steam methane reforming. This applies high temperatures and pressure to natural gas to break down the methane (which makes up the majority of natural gas) into hydrogen and carbon dioxide (CO2).

The obvious problem with the process is it still emits CO2, meaning carbon capture and storage (CCS) systems are needed if it is to be carbon neutral.

“It’s almost like capturing the CO2 from natural gas before its combusted, rather than post-combustion,” explains Grima. “One of the advantages of this is that the CO2 is at a much higher concentration, which makes it much easier to capture than in flue gas when it is diluted with a lot of nitrogen.”

Using natural gas in the process produces what’s known as ‘grey hydrogen’, adding carbon capture to make the process carbon neutral is known as ‘blue hydrogen’ – but there are ways to make it with renewable energy sources too.

Electrolysis is already an established technology, where an electrical current is used to break water down into hydrogen and oxygen. This ‘green hydrogen’ cuts out the CO2 emissions that come from using natural gas. However, like charging an electric vehicle, the process is only carbon-neutral if the electricity powering it comes from zero carbon sources, such as nuclear, wind and solar.

It’s also possible to produce hydrogen from biomass. By putting biomass under high temperatures and adding a limited amount of oxygen (to prevent the biomass combusting) the biomass can be gasified, meaning it is turned into a mix of hydrogen and CO2. By using a sustainable biomass supply chain where forests absorb the equivalent of the CO2 emitted but where some fossil fuels are used within the supply chain, the process becomes low carbon.

Carbon capture use and storage (CCUS) Incubation Area, Drax Power Station

Carbon capture use and storage (CCUS) Incubation Area, Drax Power Station

CCS can then be added to make it carbon negative overall, meaning more CO2 is captured and stored at forest level and in below-ground carbon storage than is emitted throughout its lifecycle. This form of ‘green hydrogen’ is known as bioenergy with carbon capture and storage (BECCS) hydrogen or negative emissions hydrogen.

There are plenty of options for making hydrogen, but doing it at the scale needed for power generation and ensuring it’s an affordable fuel is the real challenge. Then there is the issue of transporting and working with hydrogen.

“The difficulty is less in converting the UK’s gas power stations and turbines themselves. That’s a hurdle but most turbine manufacturers already in the process of developing solutions for this,” says Armstrong.

“The challenge is establishing a stable and consistent supply of hydrogen and the transmission network to get it to site.”

Working with the lightest known element

Today hydrogen is mainly transported by truck as either a gas or cooled down to minus-253 degrees Celsius, at which point it becomes a liquid (LH2). However, there is plenty of infrastructure already in place around the UK that could make transporting hydrogen significantly more efficient.

“The UK has a very advanced and comprehensive gas grid. A conversion to hydrogen would be more economic if you could repurpose the existing gas infrastructure,” says Hannah Steedman, Innovation Engineer at Drax.

“The most feasible way to feed a power station is through pipelines and a lot of work is underway to determine if the current natural gas network could be used for hydrogen.”

Gas stove

Hydrogen is different to natural gas in that it is a very small and highly reactive molecule,  therefore it needs to be treated differently. For example, parts of the existing gas network are made of steel, a metal which hydrogen reacts with, causing what’s known as hydrogen embrittlement, which can lead to cracks and failures that could potentially allow gas to escape. There are also factors around safety and efficiency to consider.

Like natural gas, hydrogen is also odourless, meaning it would need to have an odourant added to it. Experimentation is underway to find out if mercaptan, the odourant added to natural gas to give it a sulphuric smell, is also compatible with hydrogen.

But for all the challenges that might come with switching to hydrogen, there are huge advantages.

The UK’s gas network – both power generation and domestic – must move away from fossil fuels if it is to stop emitting CO2 into the atmosphere, and for the country to reach net zero by 2050. While the process will not be as simple as switching gases, it creates an opportunity to upgrade the UK’s gas infrastructure – for power, in homes and even as a vehicle fuel.

It won’t happen overnight, but hydrogen is a proven energy fuel source. While it may take time to ramp up production to a scale which can meet demand, at a reasonable cost, transitioning to hydrogen is a chance to future-proof the gas systems that contributes so heavily to the UK’s stable power system.

Capacity Market agreements for existing assets and review of coal generation

Drax's Kendoon Power Station, Galloway Hydro Scheme, Scotland

RNS Number : 6536B

T-3 Auction Provisional Results

Drax confirms that it has provisionally secured agreements to provide a total of 2,562MW of capacity (de-rated 2,333MW) from its existing gas, pumped storage and hydro assets(1). The agreements are for the delivery period October 2022 to September 2023, at a price of £6.44/kW(2) and are worth £15 million in that period. These are in addition to existing agreements which extend to September 2022.

Drax did not accept agreements for its two coal units(3) at Drax Power Station or the small Combined Cycle Gas Turbine (CCGT) at Blackburn Mill(4) and will now assess options for these assets, alongside discussions with National Grid, Ofgem and the UK Government.

A new-build CCGT at Damhead Creek and four new-build Open Cycle Gas Turbine projects participated in the auction but exited above the clearing price and did not accept agreements.

T-4 Auction

Drax has prequalified its existing assets(5) and options for the development of new gas generation to participate in the T-4 auction, which takes place in March 2020. The auction covers the delivery period from October 2023.

CCGTs at Drax Power Station

Following confirmation that a Judicial Review will now proceed against the Government, regarding the decision to grant planning approval for new CCGTs at Drax Power Station, Drax does not intend to take a Capacity Market agreement in the forthcoming T-4 auction. This project will not participate in future Capacity Market auctions until the outcome of the Judicial Review is known.

Enquiries:

Drax Investor Relations
Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications
Matt Willey
+44 (0) 0771 137 6087

Photo caption: Drax’s Kendoon Power Station, Galloway Hydro Scheme, Scotland

Website: www.drax.com/northamerica

Climate change is the biggest challenge of our time

Drax Group CEO Will Gardiner

Climate change is the biggest challenge of our time and Drax has a crucial role in tackling it.

All countries around the world need to reduce carbon emissions while at the same time growing their economies. Creating enough clean, secure energy for industry, transport and people’s daily lives has never been more important.

Drax is at the heart of the UK energy system. Recently the UK government committed to delivering a net-zero carbon emissions by 2050 and Drax is equally committed to helping make that possible.

We’ve recently had some questions about what we’re doing and I’d like to set the record straight.

How is Drax helping the UK reach its climate goals?

At Drax we’re committed to a zero-carbon, lower-cost energy future.

And we’ve accelerated our efforts to help the UK get off coal by converting our power station to using sustainable biomass. And now we’re the largest decarbonisation project in Europe.

We’re exploring how Drax Power Station can become the anchor to enable revolutionary technologies to capture carbon in the North of England.

And we’re creating more energy stability, so that more wind and solar power can come onto the grid.

And finally, we’re helping our customers take control of their energy – so they can use it more efficiently and spend less.

Is Drax the largest carbon polluter in the UK?

No. Since 2012 we’ve reduced our CO2 emissions by 84%. In that time, we moved from being western Europe’s largest polluter to being the home of the largest decarbonisation project in Europe.

And we want to do more.

We’ve expanded our operations to include hydro power, storage and natural gas and we’ve continued to bring coal off the system.

By the mid 2020s, our ambition is to create a power station that both generates electricity and removes carbon from the atmosphere at the same time.

Does building gas power stations mean the UK will be tied into fossil fuels for decades to come?

Our energy system is changing rapidly as we move to use more wind and solar power.

At the same time, we need new technologies that can operate when the wind is not blowing and the sun is not shining.

A new, more efficient gas plant can fill that gap and help make it possible for the UK to come off coal before the government’s deadline of 2025.

Importantly, if we put new gas in place we need to make sure that there’s a route through for making that zero-carbon over time by being able to capture the CO2 or by converting those power plants into hydrogen.

Are forests destroyed when Drax uses biomass and is biomass power a major source of carbon emissions?

No.

Sustainable biomass from healthy managed forests is helping decarbonise the UK’s energy system as well as helping to promote healthy forest growth.

Biomass has been a critical element in the UK’s decarbonisation journey. Helping us get off coal much faster than anyone thought possible.

The biomass that we use comes from sustainably managed forests that supply industries like construction. We use residues, like sawdust and waste wood, that other parts of industry don’t use.

We support healthy forests and biodiversity. The biomass that we use is renewable because the forests are growing and continue to capture more carbon than we emit from the power station.

What’s exciting is that this technology enables us to do more. We are piloting carbon capture with bioenergy at the power station. Which could enable us to become the first carbon-negative power station in the world and also the anchor for new zero-carbon cluster across the Humber and the North.

How do you justify working at Drax?

I took this job because Drax has already done a tremendous amount to help fight climate change in the UK. But I also believe passionately that there is more that we can do.

I want to use all of our capabilities to continue fighting climate change.

I also want to make sure that we listen to what everyone else has to say to ensure that we continue to do the right thing.

Result of General Meeting

RNS Number : 2803L
Drax Group PLC
No.Brief DescriptionVotes For%Votes Against%Votes TotalVotes Withheld
1. To approve the acquisition of the entire issued share capital of ScottishPower Generation Limited268,580,49485.7544,619,02714.25313,199,52121,841

The resolution was carried. Completion of the acquisition is expected to occur on 31 December 2018.

The number of shares in issue is 407,193,168 (of which 12,867,349 are held in treasury. Treasury shares don’t carry voting rights).

Votes withheld are not a vote in law and have not been counted in the calculation of the votes for and against the resolution, the total votes validly cast or the calculation of the proportion of issued share capital voted.

A copy of the resolution is available for inspection in the Circular, which was previously submitted to the UK Listing Authority’s Document Viewing Facility, via the National Storage Mechanism at www.morningstar.co.uk/uk/NSM.

The Circular and the voting results are also available on the Company’s website at www.drax.com/northamerica.

Enquiries

Drax Investor Relations

Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763 949

Media, Drax External Communications

Matt Willey
+44 (0) 7711 376 087

Website: www.drax.com/northamerica

END

Chief Executive’s review

Drax Group CEO Will Gardiner

Market background

The UK is undergoing an energy revolution – a transition to a low-carbon economy requiring new energy solutions for power generation, heating, transport and the wider economy. Through our flexible, lower carbon electricity proposition and business to business (B2B) energy solutions, the Group is positioning itself for growth in this environment. More details can be seen on page 4 of our annual report.

Our strategy

Our purpose is to help change the way energy is generated, supplied and used.

Through addressing UK energy needs, and those of our customers, our strategy is designed to deliver growing earnings and cash flow, alongside significant cash returns for shareholders.

Our ambition is to grow our EBITDA to over £425 million by 2025, with over a third of those earnings coming from Pellet Production and B2B Energy Supply to create a broader, more balanced earnings profile. We intend to pay a sustainable and growing dividend to shareholders. Progression towards these targets is underpinned by safety, sustainability, operational excellence and expertise in our markets.

Summary of 2017

We made significant progress during 2017, but were below our expectations on the challenging scorecard targets we set ourselves in pellet production and biomass availability, the latter reflecting the significant incident we experienced on our biomass rail unloading facilities at the end of 2017, which extended into January 2018. Energy Supply performed well with Opus Energy in line with plan and Haven Power exceeding its targets. Through a combination of this performance and the progress of our strategy we have delivered EBITDA of £229 million, significantly ahead of 2016 (£140 million) and with each of our three businesses contributing positive EBITDA for the first time.

The Group scorecard is reported in full in the Remuneration Report (pp. 81-107 of our annual report) and the KPIs are also shown below. They reflect the diversity of our operations and our need to maintain clear focus on delivering operational excellence.

On a statutory basis we recorded a loss of £151 million, which reflects unrealised losses on derivative contracts, previously announced accounting policy on the accelerated depreciation on coal-specific assets as well as amortisation of newly- acquired intangible assets in Opus Energy. We also calculate underlying earnings, a profit after tax of £2.7 million, which excludes the effect of unrealised gains and losses on derivative contracts and, to assess the performance of the Group without the income statement volatility introduced by non-cash fair value adjustments on our portfolio of forward commodity and currency futures contracts.

During the year we refinanced our existing debt facilities, reducing our debt cost. We also confirmed a new dividend policy which will pay a sustainable and growing dividend (£50 million in respect of 2017), consistent with our commitment to a strong balance sheet and our ambitions for growth. At year end our net debt was £91 million below our 2x net debt to EBITDA target, providing additional headroom. There is more detail on our financial performance in the Group Financial Review on page 46 of our annual report.

In the US, our Pellet Production operations recorded year-on-year growth in output of 35%, with our first two plants now producing at full capacity. During the second half of 2017 we also completed the installation of additional capacity enabling our Morehouse and Amite facilities to handle a greater amount of residue material, supporting efforts to produce good quality pellets at the lowest cost.

As part of our target to expand our biomass self-supply capability we completed the acquisition of LaSalle Bioenergy (LaSalle) adding pellet production capacity. LaSalle commenced commissioning in November 2017 and due to its close proximity to our existing US facilities, once complete, will provide further opportunities for supply chain optimisation.

As in 2016, we benefited from the flexibility of self-supply. This often overlooked attribute of our supply chain enables us to manage biomass supply across the Power Generation business’ planned outage season and to benefit from attractively priced biomass cargoes in the short-term spot market.

In Power Generation, we experienced a significant incident on our biomass rail unloading facilities, including a small fire on a section of conveyor. We fully investigated the incident and following repairs over the Christmas period have now recommissioned the facility, with enhanced operating procedures. This is a timely reminder of the combustible nature of biomass and the need for strong controls and processes to protect our people and assets.

Our biomass units continued to produce high levels of renewable electricity from sustainable wood pellets for the UK market – Drax produced 15% of the UK’s renewable electricity – enough to power Sheffield, Leeds, Liverpool and Manchester combined. In doing so, we are making a vital contribution to the UK’s ambitious targets for decarbonisation across electricity generation, heating and transport – an 80% reduction by 2050 vs. 1990 levels.

We benefited from the first year of operation of our third biomass unit under the Contract for Difference (CfD) scheme which provides an index-linked price for the power produced until March 2027. The unit underwent a major planned outage between September and November, with a full programme of works successfully completed.

The flexibility, reliability and scale of our renewable generation, alongside an attractive total system cost, means we are strongly placed to play a long-term role in the UK’s energy mix. To that end we continue to see long-term biomass generation as a key enabler, allowing the UK Government to meet its decarbonisation targets and the system operator to manage the grid.

The UK Government recently confirmed support for further biomass generation at Drax Power Station and we now plan to continue our work to develop a low-cost solution for a fourth biomass unit, allowing us to provide even more renewable electricity, whilst supporting system stability at minimum cost to the consumer.

Our heritage is coal, but our future is flexible lower-carbon electricity. We are making progress with the development of four new standalone OCGT plants situated in eastern England and Wales and our work to develop options for coal-to-gas repowering with battery technologies. If these options would be supported by 15-year capacity market contracts, providing a clear investment signal and extending visibility of contract-based earnings out to the late 2030s.

In B2B Energy Supply, we completed the acquisition of Opus Energy, a supplier of electricity and gas to corporates and small businesses. The transaction completed in February 2017 and Opus Energy has continued to operate successfully within the Group, achieving its targets and making an immediate and significant contribution to profitability. Alongside this good performance we have also implemented the operational steps necessary to realise further operational benefits of the acquisition, and we now source all of Opus’ power and gas internally.

Haven Power delivered a strong performance with the sale of large volumes of electricity to industrial customers. Through our customer focus and efficiencies, margins have improved and the business generated a positive EBITDA for the first time.

Together, our B2B Energy Supply business now has over 375,000 customer meters, making it the fifth largest B2B power supplier in the UK.

We are delivering innovative low-carbon power solutions, with 46% of our energy sold from renewable sources. As the power system transforms, we will be working closely with our customers to help them adapt to a world of more decentralised and decarbonised power. We see this as a significant opportunity for the Group in the medium to long term.

In October 2017 we completed the sale of Billington Bioenergy (BBE) to Aggregated Micro Power Holding (AMPH). Consideration for the transaction was £2.3 million, comprised of £1.6 million of shares in AMPH and £0.7 million of cash.

The sale of BBE is aligned with our strategy to focus on B2B energy supply. However, through our shareholding in AMPH, we will retain an interest in the UK heating market, whilst gaining exposure to the development of small-scale distributed energy assets.

Political, regulatory and economic background

We continue to operate in a changing environment. The full impact of the UK’s decision to leave the EU is still unknown.

The immediate impact on the Group was a weakening of Sterling and an associated increase in the cost of biomass, which is generally denominated in other currencies. Through our utilisation of medium-term foreign exchange hedges the Group protected the cash impact of this weakness. In 2017, Sterling has generally strengthened, and we have been able to extend our hedged position out to 2022 at rates close to those that we saw before Brexit.

In terms of UK energy policy, the Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. SVT are not a common feature of the B2B market. At the microbusiness end of this market, which is closer in size to domestic, most of our customers are on fixed price products and are active in renewing contracts.

The UK Government’s response to its consultation on the cessation of coal generation by 2025 has confirmed an end to non-compliant coal generation by October 2025.

We believe our assets, projects and ability to support our customers’ electricity management will support the Government’s ambition to maintain reliability when coal generation ceases.

Running a resilient, reliable grid is not simply about meeting the power demand on the system; there are also system support services which are essential to its effective operation. As the grid decentralises and becomes dependent on smaller, distributed generation, the number of plants able to provide these services is reducing. Biomass generation, our proposed OCGTs and our repowering project would allow us to meet these needs, but this will not come for free. A reliable, flexible, low-carbon energy system will require the right long-term incentives.

In November 2017, the Government confirmed that the UK will maintain a total carbon price (the combined UK Carbon Price Support – CPS – and the European Union Emissions Trading Scheme – EU ETS) at around the current level. CPS has been the single most effective instrument in reducing the level of carbon emissions in generation and we continue to support the pricing of carbon, a view echoed in a report prepared for the UK Government by the leading academic Professor Dieter Helm.

Against this backdrop we continue to make an important contribution to the UK economy. According to a study published by Oxford Economics in 2016, Drax’s total economic impact – including our supply chain and the wages our employees and suppliers’ employees spend in the wider consumer-economy was £1.7 billion, supporting 18,500 jobs across the UK.

Safety, sustainability and people

The health, safety and wellbeing of our employees and contractors is vital to the Group, with safety at the centre of our operational philosophy. We also recognise the growing need to support the wellbeing of our employees and their mental health.

During the year we continued to use Total Recordable Injury Rate (TRIR) as our primary KPI in this area. Performance was positive, at 0.27, but we expect this to improve in the coming year.

The incident at our biomass rail unloading facilities in December did not lead to physical injuries but was nonetheless a significant event and caused disruption into 2018.

We consequently launched an incident investigation to ensure our personal and process safety management procedures are robust.

To promote greater awareness around wellbeing we have embedded this in our new people strategy and expect to focus more energy and resources on this important area during 2018.

Strong corporate governance is at the heart of the Group – acting responsibly, doing the right thing and being transparent. As the Group grows the range of sustainability issues we face is widening and recognising the importance of strong corporate governance, we have published a comprehensive overview of our sustainability progress in 2017 on our website. This also highlights future priorities to broaden our approach to sustainability and improved reporting of environment, social and governance (ESG) performance. We have also completed the process which allows us to participate in the UN Global Compact (UNGC) – an international framework which will guide our approach in the areas of human rights, labour, environment and anti-corruption.

During 2017 we published our first statement on the prevention of slavery and human trafficking in compliance with the UK Modern Slavery Act. We have added modern slavery awareness to our programme of regular training for contract managers and reviewed our counterparty due diligence processes.

We have continued to maintain our rigorous and robust approach to biomass sustainability, ensuring the wood pellets we use are sustainable, low-carbon and fully compliant with the UK’s mandatory sustainability standards for biomass. The biomass we use to generate electricity provides a 64% carbon emissions saving against gas, inclusive of supply chain emissions. Our biomass lifecycle carbon emissions are 36g CO2 / MJ, less than half the UK Government’s 79g CO2 / MJ limit.

Our people are a key asset of the business. Through 2017 we developed a new people strategy. The strategy focuses on driving performance and developing talent to deliver the Group’s objectives. We have established Group-wide practices, including a career development and behaviour framework focused on performance and personal development.

Research and innovation

A key part of our strategy is to identify opportunities to improve existing operations and create options for long-term growth. To that end we have established a dedicated Research and Innovation (R&I) team led by the Drax engineers who delivered our world-first biomass generation and supply chain solution.

We are actively looking at ways to improve the efficiency of our operations, notably in our biomass supply chain.

Biomass is our largest single cost and as such we are focused on greater supply chain efficiency and the extraction of value from a wide range of low-value residue materials.

In B2B Energy Supply we are using our engineering expertise to help offer our customers value-adding services and products which will improve efficiency and allow them to optimise their energy consumption.

In the following sections we review the performance of our businesses during the year.

Performance review: Pellet Production

Our pellets provide a sustainable, low-carbon fuel source – one that can be safely and efficiently delivered through our global supply chain and used by Drax’s Power Generation business to make renewable electricity for the UK. Our manufacturing operations also promote forest health by incentivising local landowners to actively manage and reinvest in their forests.

Operational review

Safety remains our primary concern and we have delivered year-on-year reduction in the level of recordable incidents.

Output at our Amite and Morehouse pellet plants increased significantly, although was below our target for the year.

We have remained focused on opportunities to improve efficiencies and capture cost savings as part of our drive to produce good quality pellets at the lowest possible cost. We still have more work to do in this area to optimise quality and cost, as our performance was below target for the year.

As part of our plans to optimise and improve operations we added 150k tonnes capacity at our existing plants, bringing total installed capacity to 1.1 million tonnes and increasing the amount of lower cost sawmill residues we are able to process and used in our pellets.


CASE STUDY

Low-cost, high-impact capacity increase

By-products of higher value wood industries, such as sawdust from sawmills, offer a low-cost source of residues for use in our pellet production process and during 2017 we added an additional 150k tonnes of capacity at our pellet plants to allow us to use more of this material. By investing in giant hydraulic platforms known as ‘truck dumps’, operators at Amite and Morehouse can unload a 50-foot truck carrying either sawdust or wood chips and weighing 60 tonnes in less than two minutes, increasing processing capacity, reducing the cost of processing and increasing the use of lower cost residues.

Find out more: www.drax.com/northamerica/truckdumps and www.drax.com/northamerica/sustainability/sourcing


At our Baton Rouge port facility greater volumes of production from our facilities drove higher levels of throughput with 17 vessels loaded and dispatched during the year (2016: 11 vessels).

In April, in line with our strategy to increase self-supply, we acquired a 450k tonne wood pellet plant – LaSalle Bioenergy (LaSalle). Commissioning of the plant began in November 2017 and we expect to increase production through 2018. LaSalle is within a 200-mile radius of our existing facilities. By leveraging the locational benefits of these assets we aim to deliver further operational and financial efficiencies.


CASE STUDY

Locational benefits of Gulf cluster

The location of our operations allows us to leverage benefits of multiple assets and locations for operational efficiencies

All sites within 200-mile radius

Operational efficiencies

  • Common plant and joint strategic spare parts
  • Maximise reliability, minimise capital outlay
  • Flexibility through outage cycle
  • Human capital

Shared logistics to Baton Rouge

  • Rail and road
  • Increased port throughput

Complementary fibre sourcing

  • Optimisation of supply between plants

Find out more: www.draxbiomass.com


Financial results

There was a significant improvement in 2017, with EBITDA of £5.5 million (2016: £6.3 million negative EBITDA), driven by increasing volumes of wood pellets produced and sold to the Power Generation business. Sales of pellets in the year ending 31 December 2017 totalled £136 million, an increase of 84% over 2016.

Gross margin increased, reflecting higher production volumes. Raw fibre procurement, transportation and processing comprised the majority of cost of sales and as such this remains an important area of focus and an opportunity for the business. Through incremental investment in plant enhancements we expect to see further benefits from efficiencies and greater utilisation of lower cost residues.

Total operating costs have increased, reflecting an increase in operations at Amite, Morehouse and the Port of Baton Rouge, alongside the addition of LaSalle.

We acquired LaSalle for $35 million and have invested an additional $27 million as part of a programme to return the unit to service.

Pellet Production financial performance

 2017
£m
2016
£m
Revenue135.773.6
Cost of sales(96.7)(55.5)
Gross profit39.018.1
Operating costs(33.5)(24.4)
EBITDA5.5(6.3)

Key performance indicators

AreaKPIUnit of measure20172016
OperationsFines at disport%9.67.6
OperationsOutput,000 tonnes822607
FinancialVariable cost/tonne$/tonne7782

Looking ahead

Through 2018 we expect to continue to deliver growth in EBITDA from our existing assets. Our focus is on the commissioning of LaSalle alongside opportunities for optimisation and efficiencies in our processes, to deliver good quality pellets at the lowest cost.

We remain alert to market opportunities to develop further capacity as part of our self-supply strategy.

Performance review: Power Generation

Drax Power Station remains the largest power station in the UK (almost twice the size of the next largest). During the year the station met 6% of the UK’s electricity needs, whilst providing 15% of its renewable electricity, alongside important system support services.

With an increase in intermittent renewables and a reduction in the responsive thermal generation historically provided by coal, the system of the future will require capacity which is reliable, flexible and able to respond quickly to changes in system demand and provide system support services. These long-term needs inform our biomass generation and the development of options for investment in gas – Open Cycle Gas Turbines (OCGTs) and coal-to-gas repowering.


STRATEGY IN PROGRESS

Gas power station development

We are developing options for four new OCGT gas power stations, two of which already have planning permission and could be on the system in the early 2020s, subject to being awarded a capacity agreement.

A high-tech new control room at Drax Power Station will allow engineers to have real time remote control of our OCGT assets via a fibre-optic cable network. Able to fire up from cold and produce power in minutes rather than hours, our OCGTs will help maintain system security as intermittent renewable sources of power increase and older thermal plants close.

Investment case

  • Option to develop 1.2GW of new OCGT gas
  • Investment decisions subject to 15-year capacity agreement
  • Multiple revenue streams, with high visibility from capacity contract
  • Low capital and operating cost
  • Attractive return on capital 
  • Broader generation asset base and location

Find out more: www.drax.com/northamerica/about-us/#our-projects


Regulatory framework

In October the Government published its Clean Growth Plan, setting out its plans for delivery of its legally binding target to reduce 2050 carbon emissions by 80% versus 1990 levels across electricity generation, heating and transport. This reinforces the Drax proposition – flexible, reliable, low-carbon electricity.

In November the Government updated its intentions regarding the future trajectory of UK Carbon Price Support (CPS), indicating that the total cost of carbon tax in the UK (the total of CPS and the EU Emissions Trading Scheme) would continue at around the current level (the tax is currently set at £18/tonne) whilst coal remains on the system.

We believe that CPS has been the single most effective instrument in reducing carbon emissions from generation and that having an appropriate price for carbon emissions is the right way to provide a market signal to further reduce emissions in support of the UK’s long-term decarbonisation targets.

The UK Government has now confirmed an end to non-compliant coal generation by 2025. We support this move subject to an appropriate alternative technology being in place. With this in mind we have continued to develop options for our remaining coal assets to convert to biomass or gas, to provide the reliable, flexible capacity which we believe will be required to manage the increasingly volatile energy system of the future.

Most recently with confirmation of Government support for further biomass generation at Drax Power Station we plan to continue our work to develop a low-cost solution for a fourth biomass unit, accelerating the removal of coal-fired generation from the UK electricity system, whilst supporting security of supply.

Generation capacity and system support

2017 saw the first full year of operation of our biomass unit under the Contract for Difference (CfD) mechanism, which provides index-linked revenues for renewable electricity out to 2027.

Our other biomass units are supported by the Renewable Obligation Certificate (ROC) mechanism which, similar to the CfD, is also index-linked to 2027. This acts as a premium above the price of power we sell from these units. We sell power forward to the extent there is liquidity in the power markets which, combined with our fuel hedging strategy, provides long-term earnings and revenue visibility.

Lower gas prices, higher carbon costs and the continued penetration of intermittent renewables have kept wholesale electricity prices subdued.

With increasing levels of intermittent renewables we are continuing to see opportunities to extract value from flexibility – short-term power and balancing market activity, the provision of Ancillary Services and the value achieved from out-of-specification fuels. To capture value in this market we continue to focus resource on optimising availability and flexibility of both coal and biomass units. This whole process requires a high level of teamwork between the operational and commercial teams across the Group to capture and protect value.

Over the period 2017 to 2022 we expect to earn £90 million from a series of one-year capacity market contracts for our coal units, demonstrating that they still have a role to play. The first of these contracts commenced in October 2017, adding £3 million to EBITDA.

Lastly, we continue to source attractively priced fuel cargoes – out-of-specification coals and distressed cargoes, which help keep costs down for the business and consumers. We do this for both coal and biomass. This is a good example of how our commercial and operational teams work together to identify opportunities to create value for the business, as these fuels typically require more complex handling processes.

You can follow the market and see prices at electricinsights.co.uk


STRATEGY IN PROGRESS

Repowering away from coal

Options for Drax Power Station to operate into the late 2030s and beyond moved up a gear in 2017 with the development of an option to repower two coal units to gas. Drax gave notice of the nationally significant infrastructure project to the Planning Inspectorate in September 2017. One of the units could be eligible for the capacity market auction planned for December 2019.

Local community consultations began in November 2017 and continued in February 2018 on options including up to 3.6GW of new gas generation capacity, a gas pipeline and 200MW of battery storage in line with Government plans to end non-compliant coal generation by 2025 and Drax Group’s strategy of playing a vital role in the future energy system.

Find out more: repower.drax.com


Operational review

Overall, we delivered a good performance during 2017 and maintained a strong safety performance.

We completed a major planned outage on the unit supported by the CfD contract. This unit provides stable and reliable baseload renewable electricity to the network and long-term earnings visibility for the Group. The safe and efficient completion of these complex works is a credit to those involved and reflects our continued focus on opportunities for improvement and efficiencies.

The entire organisation has responded to a number of challenging unplanned events. Most notably, in December we experienced a fire on a section of conveyor at our biomass rail unloading facility and consequently an unplanned outage from late December 2017 to mid-January 2018. Following investigation and recommissioning, the facility has returned to service with enhanced operating procedures. Although this issue did not relate to the operation of the biomass-generating units, the resulting restriction on fuel deliveries by rail required the optimisation of generation across our biomass units, resulting in lower EBITDA and full year biomass availability than our target for the year.

Financial results

Financial performance has significantly improved, with EBITDA of £238 million (2016: £174 million), principally due to the CfD mechanism.

Value from flexibility was below our target for the year, principally reflecting a lower level of Ancillary Service payments versus 2016.

Our operational performance drives the results. The financial impact of the unplanned outage on the rail unloading facility was mitigated by optimisation of our available biomass and the use of additional generation capacity retained for self-insurance purposes. However, this incident is a reminder of the need to invest appropriately to maintain a high level of operational availability and flexibility.

At the operating cost level, we have reduced costs reflecting the efficient single outage and our focus on the implementation of lean management techniques.

Power Generation financial performance

 2017
£m
2016
£m
Revenue2,719.62,490.9
Cost of power purchases(891.2)(904.4)
Grid charges(62.9)(69.4)
Fuel and other costs(1,367.1)(1,180.1)
Cost of sales(2,321.2)(2,153.9)
Gross profit398.4337.0
Operating costs(160.9)(163.2)
EBITDA237.5173.8

Key performance indicators

AreaKPIUnit of measure20172016
OperationsBiomass unit technical availability%Below targetBelow target
OperationsValue from flexibility£m88N/A

Looking ahead

We aim to optimise returns from our core assets, through reliable, flexible, low-carbon energy solutions which provide a long-term solution to the UK’s energy needs. Alongside this, value in the generation market will be created from an ability to execute agile decisions and capture value from volatile short-term power markets.

We will also continue to explore opportunities for lower carbon generation, to exploit our strengths and create opportunities for the long term. To that end we will continue to develop options for gas and pursue efficiencies through our biomass supply chain.

Performance review: B2B Energy Supply

Our B2B Energy Supply business – comprised of Opus Energy and Haven Power – is the fifth largest B2B power supplier in the UK. As the power system transforms, we will be working closely with our customers to help them adapt to a world of more decentralised and decarbonised power. The key factors influencing our business are regulation, competition and our operational performance.

Regulation and competition

The UK Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. The Government will take forward legislation which will provide the regulator Ofgem with the authority to cap these domestic tariffs. SVTs are not a feature of our business. Our focus remains on the B2B market. At the microbusiness end of the market, which is closer in proximity to domestic, most of our customers are on fixed price products and are actively rather than passively renewing their power supply contracts.

The B2B market remains competitive with 65 different suppliers across the market. Our Haven Power and Opus Energy businesses offer customer-centric power, gas and services. We offer simplicity and flexibility across our products and actively engage with customers to help them manage their energy requirements and reduce carbon emissions.


STRATEGY IN PROGRESS

An innovative energy supplier

90% of the electricity that Opus Energy supplied last year came from clean, renewable sources, at no extra cost to their predominantly small and medium-sized business customers. For those customers who want it, 100% renewable energy contracts are also available.

This was exactly what All Saints Church in Ascot was looking for to power their business.

Assistant Church Warden, Chris Gunton, commented:

“We wanted to move to a greener energy supplier, without paying a premium, so approached an energy broker for guidance. They advised us that Opus Energy were a reliable company with a good reputation, and when we asked for a quote they were the most competitive.”

It was a similar story for the Salisbury Museum, in Wiltshire. Nicola Kilgour-Croft, Finance Manager, said:

“We were looking for an energy supplier that offered great value, combined with the right length of contract and good ethics. Opus Energy ticked all these boxes for us.”

Alongside supplying customers, Opus Energy has Power Purchase Agreements with over 2,300 independent UK renewable energy generators. These could be anything from a single wind turbine owned by a village community, to Europe’s greenest zoo, Hamerton Zoo Park.

Commented Andrew Swales, Director of Hamerton Zoo:

“Working with Opus Energy has given us competitive prices, considerably better documentation and a highly efficient service. We’d happily recommend them.”


Operational review

We have remained focused on delivering an excellent standard of customer service, which is central to our proposition.

February 2017 saw the completion of the acquisition of Opus Energy, which has made good progress integrating into the Group supported by a dedicated team, who have been working on systems, people and commercial projects to ensure our processes work effectively together.

In March we completed the purchase of a new office facility in Northampton, enabling the consolidation of four Opus Energy offices into one and the centralisation of the operational teams.

Sales volumes at Opus Energy were lower than target, reflecting our focus on margin which has remained strong and customer renewal rates were towards the high end of expectation. This reflects the continued commitment to a strong level of customer service and in recognition of this Opus Energy was awarded Utility Provider to Small Businesses of the Year 2017 at the British Business Awards.

At Haven Power we have continued to focus on value-adding flexible products and services particularly to Industrial & Commercial customers whose needs extend beyond commodity supply.

This is demonstrated through our ability to help customers manage and optimise their power consumption profiles through collaboration with our carefully selected partners. Through better systems and services, customer targeting and a keener focus on cost to serve we are driving efficiencies and improved margin at Haven Power.

Following the acquisition of Opus Energy the major Enterprise Resource Platform (ERP) system upgrade was re-planned which has led to a revised timeline from Q2 2018 onwards.

We continue to actively manage credit risk by assessing the financial strength of customers and applying rigorous credit management processes, with a strong focus continuing to be placed on billing and cash collection.

Health and safety remains an area of focus for the business and we continue to target a reduction in the level of recordable incidents.

Financial results

Financial performance has significantly improved, with EBITDA of £29 million in line with our guidance (2016: £4 million negative). This was principally due to the acquisition of Opus Energy, which added 10 months of EBITDA, but also improved financial performance from Haven Power, which was ahead of plan.

Third Party Costs (TPCs) include grid charges, the cost of meeting our obligations under the Renewable Obligation (RO) and small-scale Feed-in-Tariff schemes. Grid charges include distribution, transmission and system balancing costs. TPCs have continued to increase and now account for 50% of revenue.

Total operating costs have risen with the acquisition of Opus Energy. We remain confident that over time the benefits of common platforms and knowledge sharing will lead to efficiencies.

B2B Energy Supply financial performance

 2017
£m
2016
£m
Revenue1,999.01,326.4
Cost of power purchases(883.7)(688.9)
Grid charges(435.8)(310.4)
Other retail costs(562.1)(303.6)
Cost of sales(1,881.6)(1,302.9)
Gross profit117.423.5
Operating costs(88.0)(27.8)
EBITDA29.4(4.3)

Key performance indicators

AreaKPIUnit of measure20172016
OperationsImplementation of new ERP (Haven Power)DateQ2 2018N/A
OperationsSales volume (Opus Energy)TWh5.7N/A
OperationsRenewal rate (Opus Energy)%Above TargetN/A

Looking ahead

In 2018 we will focus on Opus Energy on-boarding, systems development and the roll out of smart meters.

We continue to see opportunities for EBITDA growth in the B2B markets, which we will deliver through our customer-focused supply proposition.

Outlook

Our focus in 2018 remains on the delivery of our strategy and long-term ambitions for earnings growth, underpinned by safety, sustainability, operational excellence and expertise in our markets. We also recognise that being the most efficient operator in each of our markets is a key factor in our success.

Our objective in Pellet Production remains the commissioning of LaSalle, the production of good quality pellets at the lowest cost, cross-supply chain optimisation and identifying attractive options to increase self-supply.

Our biomass proposition is strong – reliable, flexible, low-carbon renewable electricity and system support which, combined with an effective fuel hedging strategy, will provide long-term earnings visibility. We remain focused on ways to increase supply chain efficiency and make biomass competitive beyond 2027. As part of this we remain focused on the optimisation of our assets in the US Gulf and reduction in pellet cost. To support this focus we are moving our US headquarters from Atlanta to Monroe, Louisiana, which benefits from a much closer proximity to these assets.

In Power Generation, we continue to explore ways to optimise our existing operations, whilst meeting the needs of the changing UK electricity system.

We remain supportive of the UK Government’s decarbonisation targets and will continue our work to deliver four OCGTs and a low-cost biomass unit conversion utilising existing infrastructure at Drax Power Station, alongside developing the option to repowering the remaining coal units to gas.

In B2B Energy Supply, we will continue to grow our B2B offering, with significant opportunities to grow market share. At the same time, we will invest in supporting infrastructure to ensure we can continue to grow, offer market-leading digital propositions and smart metering services.


2018 priorities

Pellet Production 

  • Commissioning of LaSalle Bioenergy
  • Development of options for optimisation and efficiencies
  • Consistent production and quality of pellets
  • Continued cost reduction and improvement in EBITDA

Power Generation

  • Reliable biomass generation
  • Development of fourth biomass unit
  • System support services
  • Development of OCGT options
  • Development of coal-to-gas repowering option
  • Continued cost reduction and growth in EBITDA

B2B Energy Supply

  • Development of value-added services
  • Continued cost reduction and growth in EBITDA
  • Investment in systems to support growth and Smart compliance


We have made good progress on the delivery of our strategy and will continue to build on this as we progress our targets for 2025, whilst playing an important role in our markets and helping to change the way energy is generated, supplied and used.

Read the Drax Group plc annual report and accounts 2017

Chief Executive comments on full year results

We are playing a vital role in helping change the way energy is generated, supplied and used as the UK moves to a low carbon future.

With the right conditions, we can do even more, converting further units to run on compressed wood pellets. This is the fastest and most reliable way to support the UK’s decarbonisation targets, whilst minimising the cost to households and businesses.

In a challenging commodity environment Drax has delivered a good operational performance with 65% renewable power generation.

 

The acquisition of Opus Energy and rapid response open cycle gas turbine projects are an important step in delivering our strategy, diversifying our earnings base and contributing to stronger, long-term financial performance across the markets in which we operate.


Related documents:

Proposed Acquisition of Opus Energy Group Limited

RNS Number : 0297R
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION
DRAX GROUP PLC
(Symbol: DRX)

Today Drax publishes details of the proposed acquisition of Opus Energy Group Limited (“Opus Energy”) and the acquisition of four Open Cycle Gas Turbine (“OCGT”) development projects(1) along with a strategy and current trading update for the period from 1 July 2016 to date.

Strategy Update

As outlined in its half year results, Drax has been exploring options to further improve earnings quality and deliver targeted long-term growth, evaluating opportunities to diversify across the markets in which it operates – pellet supply, generation and retail.

As part of this ongoing process, Drax is today announcing that it has entered into a conditional agreement to acquire Opus Energy and an agreement to acquire four OCGT development projects for electricity generation. Drax is also continuing to monitor opportunities to acquire further wood pellet plants.

The acquisition of Opus Energy will be subject to the approval of the CfD(2) by the European Commission and Drax remains confident of approval of this contract.

Today’s announcement marks a significant milestone in the execution of Drax’s strategy, helping it to change the way energy is generated, supplied and used for a better future.

Opus Energy

  • Proposed acquisition of Opus Energy for £340 million(3)
  • A well established and proven retail business serving the SME market
  • Compelling range of strategic and financial benefits including
    • Acceleration of retail strategy
    • Advances transition to diversified, higher quality long-term earnings
    • Attractive financial returns
      • Return on invested capital greater than cost of capital
      • Significantly accretive to earnings, with strong cash flow generation in 2017
  • Fully debt funded through new facility, with robust sub-investment grade business model
  • Class 1 transaction subject to shareholder approval and approval of CfD by the European Commission(2)

OCGT developments

  • A response to changing energy requirements
  • Acquisition of four OCGT projects with a total capacity of c. 1,200MW for initial purchase price of £18.5 million, with final consideration dependent on clearing price in capacity market auctions (4)
  • Two sites in 2016 capacity auction
  • Diversification of Drax generation mix

Trading

  • Drax continues to expect full year EBITDA(5) to be around the bottom of the range of current market forecasts (6)

Commenting on today’s announcement, Dorothy Thompson, Chief Executive Officer of Drax Group, said:

“Drax is already playing a vital role in helping change the way energy is generated, supplied and used as the UK moves to a low carbon future.

Today we are pleased to announce the proposed acquisition of Opus Energy, the UK’s leading challenger retail supplier in the SME market, creating a strong and competitive presence complementing our existing Haven Power offer.

We are pleased that five of our leading shareholders representing over 45% of the issued share capital have indicated that they will support the transaction, and we thank them for their support.

We are also announcing the acquisition of four OCGT development projects, which will play an important role in helping government meet their ambition of new gas generation,  reducing carbon emissions, forcing more coal off the system, providing additional system support to ‘plug the gaps’ created by intermittent renewables and boosting security of supply.  

With the right conditions, we can do even more, converting further units at Drax to use sustainable biomass in place of coal. This is the fastest and most reliable way to support the UK’s decarbonisation targets, whilst minimising the cost to households and businesses.

These initiatives mark an important step in delivering our strategy, contributing to stronger, more predictable, long-term, financial performance, through greater diversification of the businesses, delivering more opportunities right across the markets in which we operate.”

Enquiries:

Drax Investor Relations 

+44 (0) 1757 612 491

Mark Strafford

J.P. Morgan Cazenove (acting as exclusive financial adviser to Drax Group plc in connection with the proposed acquisition of Opus Energy):

+44 (0) 207 742 6000

Robert Constant

Carsten Woehrn

Wendy Hohmann

Drax Media

+44 (0) 1757 612 026

Paul Hodgson

Website: www.Drax.com  

J.P. Morgan Limited (which conducts its UK investment banking activities as J.P. Morgan Cazenove), which is authorised and regulated in the United Kingdom by the Financial Conduct Authority, is acting exclusively for Drax  Group plc and for no one else in connection with the proposed acquisition and will not regard any other person (whether or not a recipient of this document) as a client in relation to the proposed acquisition and will not be responsible to anyone other than Drax Group plc for providing the protections afforded to customers of J.P. Morgan Cazenove or for affording advice in relation to the proposed acquisition, the contents of this document or any transaction, arrangement or other matter referred to in this document.

Analyst call and webcast arrangements

Management will host a presentation for analysts and investors at 9:30am (UK time), Tuesday 6 December 2016, at The Lincoln Centre, 18 Lincoln’s Inn Fields, London, WC2A 3ED.

Would anyone wishing to attend please confirm by either emailing  [email protected] or calling Emma Payne at Brunswick Group on +44 (0) 207 3963556.

The meeting can also be accessed remotely via a conference call or alternatively via a live webcast, as detailed below. After the meeting, a video webcast and recordings of the call will be made available and access details for these recordings are also set out below.

A copy of the presentation will be made available from 7am (UK time) on Tuesday 6 December 2016 for download at: www.drax.com/northamerica>>investors>>results_and_reports>>IR presentations>>2016 or use the link https://www.drax.com/northamerica/investors/results-and-reports/#investor-relations-presentations

Event Title:

Drax Group plc: Analyst and Investor Call

Event Date:

Tuesday 6 December 2016

Event Time:

9:30am (UK time)

UK Call-In Number

+44 (0) 20 3003 2666

International Call-In Number

+1 212 999 6659

Webcast Live Event Link

https://cache.merchantcantos.com/webcast/webcaster/4000/7464/7468/69188/Lobby/default.htm

Instant Replay

UK Call-In Number

+44 (0) 20 8196 1998 

International Call-In Number

1 866 583 1035

Passcode:

2318096#

Start Date:

Tuesday 6 December 2016

Delete Date:

Monday 12 December 2016

Video Webcast

Start Date:

Tuesday 6 December 2016

Delete Date:

Tuesday 5 December 2017

Archive Link:

https://cache.merchantcantos.com/webcast/webcaster/4000/7464/7468/69188/Lobby/default.htm

 

Opus Energy

Drax Developments Limited, a member of the Drax group, has entered into a binding conditional agreement with the shareholders of Opus Energy (the “Sellers”) for the purchase of Opus Energy for £340 million, payable in cash on completion(3).

Completion of the acquisition is conditional on, amongst other things, the approval of Drax’s shareholders and the approval by the European Commission of the CfD Investment Contract(2) awarded to Drax by the UK government. Drax remains confident of approval of the CfD Investment Contract.

A circular is expected to be sent to shareholders in early 2017 convening a general meeting to vote on the acquisition. Completion of the acquisition is also expected to occur in early 2017.

Background to and reasons for the proposed acquisition

The Drax board of directors believes that the proposed acquisition provides a unique opportunity and is strategically and financially compelling. Opus Energy will enhance Drax’s retail offering by combining the leading “challenger” small and medium enterprise (“SME”) business with Haven Power’s strength in the industrial and commercial (“I&C”) market. The combination provides a robust platform for growth, combining Drax’s and Haven Power’s commercial capabilities and vertically integrated business model with Opus Energy’s established SME business and experience in both electricity and gas. The acquisition leverages Drax’s flexible, reliable, renewable generation offering to create energy solutions for customers. It also furthers Drax’s strategic ambition to diversify and improve the quality of its earnings whilst increasing the contribution of businesses with long-term growth opportunities.

Key benefits of the acquisition

Acceleration of Drax’s retail strategy

The acquisition provides access to a large and profitable SME focused retail business. As the leading “challenger” brand in the SME market, Opus Energy has demonstrated consistent sales and sustained growth in revenue and profitability(7) driven by customer satisfaction and high customer retention levels (>85% April 2015 to June 2016).  As at 31 March 2016, Opus Energy had a total of 129,025 customers (with 265,418 meters), and as at 30 April 2016 had a non-domestic electricity market share of 8% (by meters count).

Opus Energy’s experience and proven success in the SME market, combined with Haven Power’s existing presence in the I&C market, represents an exceptional opportunity for Drax to develop a platform for the growth of its retail business and significantly expand its customer base in the profitable SME sector, accelerating the implementation of Drax’s retail growth strategy.  

Platform for growth

Over the last six years, Opus Energy has trebled the number of meters contracted to 265,418 (as at 31 March 2016) and has driven profitability, through its low cost business model and strong customer service proposition. The acquisition provides the combined Drax and Opus Energy groups (the “Enlarged Group”) with established routes to market for electricity and gas in the SME market and Drax believes that the combination of Opus Energy and Haven Power can drive market share growth. The SME market covers a broad range of customers – at the large end commercial users, similar to I&C customers, whilst at the smaller end, users similar to domestic customers. The expertise and platforms shared by the combined business across both I&C and SME markets will enable the Enlarged Group to deliver new products and services and enhanced market coverage.

Compatible and complementary to existing retail business

Haven Power was acquired by Drax in 2009 as a credit efficient route to market for the large volumes of electricity produced by Drax Power and to monetise electricity sales and renewable certificates, such as Renewables Obligation Certificates (“ROCs”). Haven Power has focused on growing market share in the I&C market and currently has limited presence in the SME market, where Opus is well established.

The acquisition, therefore, complements Haven Power with its focus on a profitable separate and distinct customer segment. It will also enlarge the route to market for Drax’s generation business and allow its retail business to achieve critical mass both in the non-domestic market and within the Drax group. Opus Energy’s expertise in SME electricity and gas sales, combined with Haven Power’s track record in the I&C market and Drax’s umbrella of generation-backed power and commodity risk management, is anticipated to provide distinct benefits in the future, including the opportunity for an alternative hedge to commodity market exposure.

Drax believes that Opus Energy’s expertise in different but related markets, a challenger mentality and a shared customer service ethos with Haven Power, together with its strong credit and risk management, including commodity risk, makes Opus Energy a good cultural fit with Drax and contributes to the uniqueness of the acquisition opportunity.

Haven YE Dec 2015

Opus YE Mar 2016

Proforma

Revenues (£m)

1,290

573

1,863

Gross Profit (£m)

19

107

126

     Gross profit margin

1%

19%

Customer Meters (000’s)

30

265

295

Power (TWh)

13.8

4

17.8

Gas (TWh)

1.7

1.7

Staff

c.400

c.870

c.1,270

  

Advances transition to broader, higher quality long-term earnings

Drax’s current strategy is to enhance quality of earnings and manage its exposure to commodity and power markets by broadening the range of markets in which it operates with improvements in magnitude and stability of net income.

The acquisition aligns with this strategy and is expected to deliver more broadly based, high quality and predictable earnings, today and in the long-term. This will be driven by more revenue from electricity and gas sales in the SME market and Opus Energy’s high levels of customer retention (>85% in April 2015 to June 2016).

Attractive financial returns

Opus Energy is expected to deliver strongly enhanced margins to Drax’s retail business having experienced consistent mid-single digit EBIT margins over the last three financial years. Opus Energy is focussed on small SME and multi-site corporate groups obtained via an extensive network of third party intermediaries (“TPIs”) and is supported by a specialist customer service department.  The utilisation of TPIs has helped to increase Opus Energy’s customer base and has established a broad sales network incentivised to maximise margin. Together with a simplified pricing model and quick customer revenue collection, Opus Energy delivers significantly higher net margins per customer than those currently achieved by Haven Power in the higher volume, low margin I&C sector.  In addition, over the last three financial years, the difference between Opus Energy’s EBIT and EBITDA has remained consistently low reflecting the low capital intensity of its business.

The acquisition is expected to add both short and long-term financial benefits to Drax. Drax expects to achieve a return on invested capital higher than its current cost of capital. The addition of the well-established and growing Opus Energy business with its high profitability and high cash conversion is expected to be significantly accretive to earnings and cash flow in 2017, with Opus Energy having delivered reported EBITDA of £33.7 million, EBIT of £32.8 million and cash from operations of £34.3 million in the financial year ended 31 March 2016.

Synergy potential

The principal synergy will be the opportunity to benefit from the sourcing of wholesale electricity and gas from Drax Power. Over the past three years, the costs associated with wholesale energy purchasing have been approximately £6 million per year. By bringing these into the Drax group, Drax expects to eliminate the majority of this cost. Following completion of the acquisition and replacement of these wholesale energy purchasing agreements, the majority of Opus Energy’s power and gas wholesale supply requirements for new customers will be provided by Drax Power.

Drax also expects the consolidation of commodity positions within the Enlarged Group to achieve some economies of scale.

Opus Energy’s capability within the gas market will give Haven the ability to satisfy the increasing demand for dual supply from customers in Haven target market at the smaller end of the size range.

The acquisition will also allow Drax to drive traditional operational efficiencies over time. Opus Energy’s IT platform is expected to be able to absorb forecasted customer growth in the immediate future, allowing Drax the time and flexibility to create a sustainable IT platform solution for the Enlarged Group in the medium term.

Information on Opus Energy  

Overview

Founded in 2002, Opus Energy is a business to business supplier of electricity, gas and related services in the UK, employing c.870 people across Northampton, Oxford and Cardiff. By number of customers, Opus Energy is the UK’s largest non-domestic energy supplier outside of the Big 6, with an established customer base and a non-domestic market share of 8% (by meters count) as at 30 April 2016. As at 30 April 2016 Opus Energy was the UK’s 6th largest non-domestic electricity supplier (by meters) and the 8th largest gas supplier (by meters). Opus Energy supplied 4.0TWh/year of electricity and 1.7TWh/year of gas between 1 April 2015 and 31 March 2016. Compared to Drax which operates both in the SME and large I&C markets, Opus Energy is focused on SME customers.  It has two core divisions made up of “small”, predominantly single site SME customers and larger “corporate” multi-site SME customers.

Compared with the I&C market, the SME market is characterised by lower energy consumption per meter and higher gross margins per MWh with high customer retention rates. A large share of contracts are entered into via TPIs in the SME market and, in comparison to the I&C market, customer bad debt as a proportion of revenue is on average higher.

Financial information

For the financial year ended 31 March 2016, Opus Energy had a turnover of £573 million, achieving year on year growth of 9%. Opus Energy’s average annual turnover growth rate over the past two years is c.15%. Gross profit for the year ended 31 March 2016 was also up 10% from the previous financial year to £107 million and gross assets totalled £162 million. Opus Energy’s market share (by meters) increased by 1% in the year ended 30 April 2016. Opus Energy’s net debt as at 31 March 2016 was £3 million (once adjusted for the payment of a dividend of £25 million in April 2016.) 

Opus Energy had the following key metrics in the three financial years prior to 31 March 2016:

Mar-14

Mar-15

Mar-16

Revenues (£m)

434

524

573

   Year on year growth %

21%

9%

Gross Profit (£m)

79

97

107

   Gross profit margin %

18%

19%

19%

Operating Cost (£m)

49

60

73

EBITDA (£m)(1)

30

38

34

EBIT (£m)(1)

29

37

33

Cash from Operations (£m)

28

32

34

Sources and notes:
(1) Reduction in financial year ended 31 March 2016 reflects removal of Climate Change Levy Exemptions

Business description

Small SME

Opus Energy offers electricity and gas products to small SMEs and has established various channels for acquisition and retention of SME customers, including internal channels such as renewal or change of tenancy and external channels such as direct marketing and TPIs.  In the financial year ended 31 March 2016, Opus Energy supplied 2.1 TWh to 124,552 electricity meters and 1.7 TWh to 44,591 gas meters belonging to small SME customers. For the financial year ended 31 March 2016, small SME sales generated turnover of £323 million.

Corporate

Opus Energy offers fixed and flexible products to a wide range of corporate electricity and gas customers. In the financial year ended 31 March 2016, Opus Energy supplied 1.9 TWh to 96,275 corporate meters belonging to around 3,500 corporate customers, comprised of both large and small companies. For the financial year ended 31 March 2016, corporate sales generated turnover of £214 million. Corporate distribution channels are similar to the channels used for SMEs, although greater reliance is placed on TPIs, with Opus Energy receiving corporate customer business from over 160 TPIs. 

Renewables

Approximately 20% of electricity sourced by Opus Energy comes from small to mid-sized embedded renewable electricity generators. Such generators include wind turbines, solar, hydro and anaerobic digestion.  As at 31 March 2016, 2,197 meters relating to 483MW of export capacity were registered to Opus Energy. For the financial year ended 31 March 2016, purchases of renewable generation totalled £59 million.

Supply

All of the gas and approximately 80% of the electricity sold by Opus Energy is sourced from wholesale supply agreements. The remainder of the electricity is purchased from the small to mid-sized renewable energy generators described above. It is intended that the wholesale energy purchase agreements will be replaced with arrangements to source electricity and gas through Drax Power, while the existing arrangements with renewable generators will be retained.

Operational metrics

Mar-14

Mar-15

Mar-16

Meters (000’s)

175

223

265

    Year on year growth %

27%

19%

Power (TWh)

3.4

3.8

4

Gas (TWh)

0.8

1.2

1.7

 

Management Team

Following the acquisition, Opus Energy will form part of Drax’s retail operations, which are led by Jonathan Kini. On completion of the acquisition, Fred Esiri (Chairman) and, following a hand over period, Charlie Crossley Cooke (Chief Executive) and Louise Boland (Managing Director) will leave Opus Energy. Opus Energy is currently led by an experienced senior management team who, save for as set out above, are expected to remain in their respective roles.

Jonathan Kini will continue to lead Drax’s retail business (including Opus Energy) and represent it at Drax’s Executive Committee level. There will not be any changes to the Drax board of directors following the acquisition.

Current trading and outlook

Opus Energy has continued to achieve strong growth in the number of meters supplied since 31 March 2016.  Electricity meter numbers exceeded 243,000 by 31 October 2016, a 15% increase since the end of October 2015, with gas meters up by 29% to over 52,000, resulting in a total meter count exceeding 295,000. Volumes supplied to customers in the first seven months of the financial year were also significantly up (17% in electricity and 22% in gas). The average prices charged to customers over the period decreased as a result of lower commodity prices (3% reduction in average electricity price and 5% lower gas prices).  The combination of these factors has resulted in turnover for the first seven months of the financial year of £337 million which was 13% higher than the same period in 2015. In addition, it is expected that EBIT for the year ending 31 March 2017 will be generally in line with EBIT for the year ended 31 March 2016.

Summary of the principal terms of the acquisition

Drax Group plc, Drax Group Holdings Limited (“Drax Group Holdings”) and Drax Developments Limited (“Drax Developments”) entered into an acquisition agreement (the “Acquisition Agreement”) with the Sellers on 6 December 2016 in relation to the acquisition of Opus Energy for £340 million.

As part of the transaction, a “locked box” mechanism has been agreed from 31 March 2016 to the date of completion of the acquisition. This has the effect that “economic ownership” of Opus Energy (and all profits earned) passing to Drax Developments as at 31 March 2016, by preventing cash and cash equivalents being paid out of Opus Energy to the Sellers or persons connected to them (other than certain items agreed in the Acquisition Agreement, including the dividend paid in April 2016). To compensate the Sellers for this, “locked box” interest of 8% per annum (pro-rated for the actual period between 31 March 2016 and completion of the acquisition) will be paid to the Sellers at completion of the acquisition.

As at 31 March 2016, Opus Energy had net debt of £3 million. Following completion of the acquisition, it is expected that the existing debt facilities of Opus Energy will be repaid and cancelled and any working capital requirements of Opus using debt facilities and existing cash of the Enlarged Group.

The acquisition is expected to complete in Q1 2017. The acquisition is conditional upon:

  • the approval by the European Commission of the CfD Investment Contract awarded to Drax by the UK government. Drax remains confident of approval of the CfD Investment Contract(2);
  • the approval of the acquisition by Drax shareholders, which is required as the acquisition constitutes a Class 1 transaction under the Listing Rules; and
  • the UK Competitions and Markets Authority (the “CMA”) not having made an order or a reference under the UK merger control regime such that the acquisition is prohibited from completing whilst the CMA completes an investigation.

Drax Group Holdings has agreed to guarantee the obligations of Drax Developments under the Acquisition Agreement.

Certain of the Sellers have given to Drax Developments customary warranties relating to Opus Energy’s business and warranties and covenants relating to Opus Energy’s tax position. Drax Developments intends to arrange a warranty and indemnity insurance policy to provide cover up to £50 million in respect of those warranties and covenants (subject to certain exceptions and limitations).

Financing of the acquisition

The consideration in respect of the acquisition will be financed entirely by a new acquisition debt facility of up to £375 million.

Drax aims to maintain a credit rating in the BB range in line with its robust sub-investment grade business model. This is consistent with the recent update from S&P, which reconfirmed the existing rating.

Drax will consider potential options for its long-term financing strategy in 2017.

Integration

Drax is developing a detailed integration plan to combine Opus Energy into the Enlarged Group.

OCGT Developments

Drax Developments, has entered into an agreement with Watt Power Limited, a developer of OCGT assets, to acquire four 299MW OCGT development projects(1). OCGTs are gas-fired power plants that can be used by Drax to provide flexible support to the electricity system to make up any shortfall in generation.

Two of these projects are in an advanced stage of development and will participate in the 2016 T-4 capacity market auction, which begins today. If either of these projects are awarded a capacity contract in this auction they will commence operations by 2020, supported by a 15 year capacity contract, providing a very high level of base revenue certainty until at least 2035. This is consistent with Drax’s strategy to improve the quality of its earnings and deliver targeted long-term growth.

The other two projects require further development in anticipation of their targeted participation in the 2019 T-4 capacity market auction.

The initial purchase price for all four developments is £18.5 million, with the total consideration payable dependent on the clearing price in future capacity market auctions(4).

The current total gross asset value of these assets is £7.3 million and, as they are development assets, there are currently no profits attributable to the assets. 

The consideration will be funded from existing cash and assuming full development, the investment in each project is currently expected to be in the range of £80 million to £100 million.

Trading and Operational Performance

Since publishing its half year results on 26 July, trading conditions in the markets in which Drax operates have improved, with higher power and commodity prices.

Drax’s second major planned biomass unit outage was completed over the summer. The outage commenced earlier than planned due to a generator issue but has now been completed with no biomass related issues identified. Both biomass and coal operations are currently performing well, although availability of biomass units over the period has been lower than forecast due to the generator issue noted above and an unplanned outage on fuel feed systems.

As noted above, the CfD Investment Contract(2) awarded by the UK government remains subject to approval by the European Commission and Drax remains confident of approval of this contract.

Taking these factors into account, amongst others, based on the current power prices and good operational availability for the remainder of the year, alongside CfD revenues during December, Drax continues to expect full year EBITDA(5) to be around the bottom of the range of current analyst forecasts(6).

Power Sales Contracted for 2016 and 2017

As at 28 November 2016, the power sales contracted for 2016 and 2017 were as follows:

2016

2017

Power sales (TWh) comprising:

18.9

14.9

– Fixed price power sales (TWh)

18.9

13.2

at an average achieved price (per MWh)

 

at £48.5

at £44.4

– Gas hedges (TWh) (6)

1.7

   p/therm

 

56.4

  

Other Matters

Drax will announce its full year results for the year ending 31 December 2016 on 16 February 2017.

 


 

Notes:

(1)   Four OCGT projects, each with capacity of 299MW:
a.    Progress Power Limited is a company holding a proposed development on land located at Eye Airfield in mid-Suffolk. The site has a Development Consent Order (DCO)
b.  Hirwaun Power is a company holding a proposed development on land located at Hirwaun    Industrial Estate, Aberdare in the County of Swansea. The site has a Development Consent Order (DCO)
c.    Millbrook Power is a company holding a proposed development on land located at Rookery South Pit near Marston Moreteyne in Bedfordshire
d.    Abergelli Power is a company holding a proposed development on land located at Abergelli Farm, in the County of Swansea
(2)   The Government introduced Contracts for Difference (CfDs), which are long-term contracts, to support the development of low carbon electricity generation. To avoid an investment hiatus in the renewables sector before CfDs become available under the enduring regime, the Government introduced a scheme for Investment Contracts under the Final Investment Decision Enabling (“FID Enabling”) for Renewables mechanism. These were ‘early’ CfDs intended to provide greater confidence for investors in advance of the enduring CfD.
(3)   As part of the “locked box” mechanism additional interest of 8% per annum (pro-rated for the actual period between 31 March 2016 and completion of the acquisition) will be paid to the Sellers at completion of the acquisition.
(4)   The range of consideration payable for the four assets is £18.5 million to £90.5 million, dependent on the capacity market auction clearing price with the top of this range being associated with a capacity market clearing at £75/kW (the current 2016 auction price cap). However, the T-4 auctions in 2014 and 2015 cleared towards the low end of the range of expectations, at £19.40/KW and £18.0/KW respectively.
(5)   EBITDA is defined as profit before interest, tax, depreciation (including asset obsolescence charges and gains and losses on asset disposals), amortisation and unrealised gains and losses on derivative contracts.
(6)   Based on a range of market forecasts for EBITDA, published since 26 July 2016, of £135 million to £169 million. These forecasts generally assume a CfD Investment Contract for Drax’s third biomass unit conversion with a strike price of £100/MWh (2012 terms) by January 2017.
(7)   Excluding a reduction in the financial year ended 31 March 2016 reflecting the removal of the Climate Change Levy exemption for renewable power
(8)   Structured power sales (and equivalents) include forward gas sales, providing additional liquidity for forward sales, highly correlated to the power market and acting as a substitute for forward power sales.

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

END