Tag: biomass energy

Investment programme in biomass capacity expansion and cost reduction

Woodchips and sawmill residue at Drax LaSalle Bioenergy in Louisiana, September 2019


  • Targeting biomass self-supply capacity of five million tonnes by 2027
    • 1.5 million tonnes of existing capacity, plus 0.35 million tonnes of low-cost capacity announced at the 2019 half year results
    • Evaluating options for a further three million tonnes over the next seven years
    • Supports target to reduce biomass cost by c.30 percent to c.£50/MWh
    • Targeting returns significantly in excess of the Group’s cost of capital
  • Trading update – in-line with expectations
    • Acquired assets performing strongly
    • Capacity Market restored and included in 2019 Adjusted EBITDA(1)

Will Gardiner, Drax Group CEO, said:

“Drax’s purpose is to enable a zero-carbon lower cost energy future. We believe sustainable biomass has a long-term critical role to play. That’s why we plan to supply 80 percent of our biomass from our own sources – a significant increase on the 20 percent we currently self-supply. Supplying more of our own biomass will cut costs and reduce supply chain risks, ensuring our biomass power generation remains viable in the long term. When combined with carbon capture it will also enable negative emissions, helping the UK on its path to net zero by 2050.”

Will Gardiner, CEO, Drax Group

Will Gardiner, CEO, Drax Group. Click to view/download in high res.

Capital Markets Day

Drax is today hosting a Capital Markets Day for investors and analysts.

Will Gardiner and his management team will update on how the Group is delivering on its purpose. The day will outline the significant opportunities Drax sees in growing its biomass supply and renewable generation businesses.

Investment in biomass to increase capacity and reduce cost

As a part of the Group’s key strategic objective of building a long-term future for sustainable biomass, Drax remains focused on opportunities to reduce its cost of biomass to a level which is economic without subsidy in 2027.

These savings will be delivered through further optimisation of existing biomass operations and greater utilisation of low-cost wood residues; an expansion of the fuel envelope to incorporate other renewable fuels and; a significant expansion of self-supply capacity.

Drax is targeting five million tonnes of self-supply capacity by 2027 (1.5 million today, plus 0.35 million tonnes in development), with greater scope for operational leverage and cost reduction. Drax will continue to work with its current suppliers to develop its portfolio.

At the 2019 half year results, Drax announced an investment in low-cost capacity at its existing three sites in the US Gulf, adding 350k tonnes of new capacity by 2021. The capital cost is in the region of £50 million, enabling targeted fuel cost savings in excess of £15/MWh on the additional capacity once commissioned.

Drax is evaluating options to deliver an additional three million tonnes of capacity. These options are expected to deliver returns significantly in excess of the Group’s cost of capital, with strong cash flow generation and a fast payback.

These activities would enable Drax to develop an unsubsidised biomass generation business by 2027, with the option to service wood pellet demand in other markets – Europe, North America and Asia.

Biomass sustainability is at the heart of the Group’s activities and Drax has implemented industry leading processes which support this expansion, encourage forest growth and make a positive contribution to climate change.

Drax LaSalle BioEnergy wood pellet plant in Louisiana

Drax LaSalle BioEnergy wood pellet plant in Louisiana is now co-located with a sawmill. A new rail spur became operational at LaSalle earlier in 2019. Click to view/download.

Options for gas generation

Drax continues to see flexible gas generation as an enabler of greater renewable and low carbon generation, in addition to supporting the development of hydrogen.

Any investment decision would reflect Drax’s objective of delivering earnings visibility and be underpinned by a 15-year capacity agreement to support a low double-digit rate of return. Drax would consider a range of funding options, including partnerships, consistent with Drax’s balance sheet objective of around 2 x net debt to Adjusted EBITDA(1) over time.

Capital allocation and dividend

Drax remains committed to the capital allocation policy established in 2017.

Trading and operational performance

The performance of the assets acquired from Iberdrola in December 2018 has been strong, particularly the pumped storage business which has performed well, driven by the system support market. Drax reiterates the Adjusted EBITDA(1) guidance provided at the time of acquisition, of £90-£110 million in the 2019 financial year.

In July, Drax completed the refinancing of the acquisition bridge facility used to acquire these assets. These facilities now extend the Group’s debt maturity profile to 2029, adding an ESG(2) facility with a mechanism that adjusts the margin based on Drax’s carbon emissions against an annual benchmark. The Group’s cost of debt is now below four percent and below three percent on the new facilities, reflecting the Group’s reduced business risk. The Group continues to identify opportunities to optimise its balance sheet and cash flow.

During the summer, Drax completed major planned outages on two biomass units. Following a delayed return to service, the plan is to run all four ROC(3) units at high utilisation levels in the fourth quarter of 2019.

The outlook for coal generation remains challenging and Drax continues to monitor the situation with regards to future operation, noting that all unabated UK coal generation must close by 2025.

Following formal confirmation from the UK Government, Drax expects the Capacity Market to be re-instated shortly, with full retrospective payments made for the capacity provided. Capacity payments due to Drax for 2019 and since the suspension of the Capacity Market in 2018 are £75 million. Drax expects these to be included in 2019 Adjusted EBITDA(1), with cash settlement in January 2020.

These factors underpin the Group’s expectations for full year Adjusted EBITDA(1), which remain unchanged and around 2 x net debt to Adjusted EBITDA(1) when adjusted to reflect cash payment of retrospective capacity payments received in January 2020.

Capital Markets Day webcast and presentation material

The event will be webcast from 9.30am and the material made available on the Group’s website at the same time. Joining instructions for the webcast and presentation are included in the links below.




(1) Earnings before interest, tax, depreciation, amortisation, excluding the impact of exceptional items and certain remeasurements.

(2) Environmental Social and Governance.

(3) Renewable Obligation Certificate.


Drax Investor Relations:
Mark Strafford

+44 (0) 1757 612 491


Drax External Communications:
Matt Willey

+44 (0) 203 943 4306

Website: www.drax.com


RNS Number: 8192T

View announcement in PDF format

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?


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.

Capturing carbon emissions from the atmosphere could transform these industries

Countries, companies and industries around the world are racing to find ways to reduce their emissions. But looking slightly further down the line there is in fact a grander aim: negative emissions.

Negative emissions technologies (NETs) can actually absorb more carbon dioxide (CO2) from the atmosphere than they emit, and they’re vitally important for avoiding catastrophic, man-made climate change. Without NETs it could be impossible to achieve the Intergovernmental Panel on Climate Change’s ambition of keeping temperatures under 1.5 degrees Celsius above pre-industrial levels.

One example already being implemented is bioenergy with carbon capture and storage (BECCS). It is what its name suggests. Using technologies to capture and store the CO2 generated during the process of energy generation from biomass or organic materials rather than releasing it into the atmosphere.

BECCS holds vast potential in the electricity generation industry. Drax Power Station is currently piloting one form of this technology on one of its biomass units to capture as much as a tonne of CO2 a day. But if it were deployed across all its biomass units, BECCS technology could make it the world’s first negative emissions power station.

Beyond the power industry, however, there’s scope for growth across other industries once the biomass is sourced sustainably. There are already five sites around the world where BECCS is being trialled and implemented at scale, laying the road to negative emissions.

Storing CO2 from ethanol production in the Illinois Basin

The ethanol production industry is already seeing significant deployment of BECCS, including the largest installation of the technology operating in the world. The Illinois Industrial Carbon Capture and Storage project is part of a corn-to-ethanol plant in the US that has the capacity to capture 1 million tonnes of CO2 every year.

Here, corn is used to create ethanol by fermenting it in an oxygen-deprived environment. This process creates CO2 as a by-product, which is captured and stored permanently in pores within the sandstone of the Illinois Basin under the facility.

Researchers believe with further development the site could capture as much as 250 million tonnes each year.

Norway’s cement challenge  

Concrete is one of the world’s most versatile building materials. As a result it is the second most-consumed material in the world behind water – more than 10 billion tonnes of it is produced every year. However, its key ingredient – cement, which acts as concrete’s binding agent – is made using a hugely carbon-intensive manufacturing process and now accounts for as much as 6% of all global carbon emissions.

The Norcem Cement plant in Brevik, South-East Norway, has been experimenting with using biomass to power the kilns used to create its cement (which must heat ingredients to 1,500 degrees Celsius). Now it’s taking this a step further by becoming part of the country’s ambitious Full Chain CCS project.

The project will see 400,000 tonnes of CO2 captured annually, which will then be transported by ship to a storage site on Norway’s western coast. From here a pipeline will transport the CO2 50 kilometres away and deposit it deep below the North Sea’s bed.

The plan has the potential to work at an even bigger scale. The pipeline will be capable of receiving as much as 4 million tonnes of CO2 per year, meaning it could even import and store carbon from other countries.

Burning waste and growing algae

In a world that seems increasingly unsure how to safely deal with its waste, the idea of incinerating it and making use of the heat this produces seems widely beneficial. But combusting any solid means releasing carbon emissions.

In Japan, however, a biomass-fired waste incineration plant is changing this by being the first in the world to capture its carbon emissions.

To get this project up and running, Toshiba, the firm behind the project, had to overcome unique challenges. For example, waste incineration produces a greater mix of chemicals than in ethanol or power production, including some that are corrosive to the metal pipes normally used in carbon capture.

Now running at commercial scale, the Saga City waste incineration plant isn’t just capturing CO2, it’s also utilising it to cultivate crops at a nearby algae farm. The carbon is being absorbed and used to grow algae for use in commercial scale cosmetic products, such as body and skin lotions.

Carbon isn’t the only thing finding new use at the facility. Reconstituted scrap metal from the plant is being used to make the medals for the 2020 Tokyo Olympics.

The carbon capture system has been operational since 2016 and is capable of capturing 3,000 tonnes of CO2 a year, but it isn’t the region’s first deployments of BECCS. 

Fully integrating BECCS into biomass power

Nearby, the Mikawa power plant on the Fukuoka Prefecture, is leading the race in Asia to fully integrate carbon capture technology into a biomass power station.

The 50 MW power station successfully piloted carbon capture in 2009 through a partnership with Toshiba. At the time it was powered by coal, however, in 2017, the plant upgraded to a 100% biomass boiler fuelled by palm kernel shells – a waste product from palm oil extraction mills. Now it’s in the process of ramping up its carbon capture capabilities, with a target of being operational in 2020.

The system – which after Drax will be the second plant in the world to capture carbon using 100% biomass feedstock – will have the capacity to capture more than 50% of the biomass plant’s CO2 emissions, or as much as 180,000 tonnes per year. Japan’s government is now supporting efforts to develop CO2 transportation and potential offshore storage solutions for next year.

Pulping wood and growing food

BECCS technology has yet to be deployed in the paper industry to the same extent as in other organic-matter-based industries. But with many pulp and paper mills already using by-products, such as hog fuel, in generating power for their sites, it’s a prime area for BECCS growth.

In Saint-Felicien, Quebec, commercial-scale carbon capture technology is being deployed at a pulp mill run by Resolute Forest Products, and, as of March 2019, had a capacity of capturing 11,000 tonnes of CO2 a year. Rather than storage, however, it supplies the carbon to a cucumber-growing greenhouse next door to the mill, as well as supplying enough warm water to meet 25% of the greenhouses’ heating needs.

Both long established biomass-based industries like ethanol and paper, and new sectors like electricity, are now adopting BECCS technology and driving innovation.

The biomass feedstocks involved in BECCS must, however, be sourced sustainably – or else a positive climate impact could be at the expense of environmental degradation elsewhere. ‘It should be possible to expand biomass supply in a sustainable way,’ found a recent ‘Global biomass markets’ report from Ricardo AEA for the UK’s Department for Business, Energy and Industrial Strategy (BEIS).

While it’s still a complex technology to deploy, BECCS is increasingly operating at larger scales and growing to the level needed to seriously reduce industrial CO2 emissions and help to combat climate change.

Learn more about carbon capture, usage and storage in our series:

Heating the future

We all want our homes and our workplaces to be warm and cosy, but not at the cost of catastrophic climate change. That’s why decarbonising our heating is a challenge that simply cannot be ignored.

Making decisions about how this is done requires careful consideration and a detailed, deliverable national strategy.

Here we discuss the key issues in decarbonising heat.

The numbers

The Climate Change Act commits the UK to reducing its carbon emissions by at least 80 per cent of their 1990 levels by 2050.

As heating our homes and workplaces is responsible for almost one fifth of our country’s total carbon emissions, we are clearly going to need to make huge changes to the way we keep our homes and workplaces warm in order to meet those commitments.

‘Over 80% of energy used in homes is for heating – suggesting large potential for continued decarbonisation.’

— Energising Britain: Progress, impacts and outlook for transforming Britain’s energy system, by I. Staffell, M. Jansen, A. Chase, C. Lewis and E. Cotton, 2018.

Improved insulation, greater energy efficiency and electrification will all reduce the need for fossil fuel-based heating. However, domestic energy efficiency in the UK is lagging well behind targets, although the situation varies from region to region – and such targets do not even exist yet for the non-domestic sector.

Roof insulation material

Even in a low or zero-carbon future, we’re still going to need to keep our homes and workplaces warm – and affordably.

Future policy

Against this backdrop, in March 2018, the UK Government issued a call for evidence for a Future Framework for Heat in Buildings.

Chancellor Phillip Hammond introduced a new ‘future homes standard’ in his 2019 Spring Budget Statement, “mandating the end of fossil fuel heating systems.” Gas boilers will be banned from all new homes from 2025.

A major change is coming. But what else will we need to change in order to transform our heating systems?

1. More electrification

The most noticeable change in the way we heat our homes and workspaces in the future may well come from the need to switch from systems that fuelled by natural gas to ones that are driven by electricity.

Some technologies that can offer a solution to the challenge of decarbonising heating depend on a significant amount of electricity to keep the warmth flowing.

For instance, the hybrid heat pump scenario which is currently supported by the Committee on Climate Change would see up to 85% of a consumer’s need for heat being met by low-carbon electricity.

To give some context to that figure, according to the Committee, 85 per cent of the UK’s homes now rely on fossil-fuel derived natural gas for heating and hot water, and on average these: “currently emit around 2tCO2 per household per year… which represents around one tenth of the average UK household’s carbon footprint.”

Changing from a situation where our heating depends on 85% fossil fuel gas to one that depends on 85% low or zero carbon electricity is little short of a complete transformation. Given that the new future homes standard is due to be introduced in less than six years, this transformation will need to happen quickly.

Of course, a great deal of the extra electricity needed will come from intermittent renewables such as wind turbines and solar panels – especially as the cost of renewable electricity is falling.

Much of that power looks likely to be supplied by distributed sources rather than those integrated into the national grid. Indeed, since 2011, power generation capacity connected directly to the distribution network grew from 12 gigawatts (GW) to more than 40 GW by the end of 2017, according to estimates from energy experts Cornwall Insight in a report for our B2B energy supply business, Haven Power.

With so much of our electricity reliant on the weather, there will still be a need for dispatchable and flexible thermal sources and energy storage, such as Drax and Cruachan power stations. Their centralised power generation can be turned up and fed directly into the national transmission system at short notice, to keep our heating running and our homes warm.

Dam and reservoir, Cruachan Power Station, Scotland

Such a transformation will obviously require careful strategic planning as well as an enormous amount of investment.

There may well be no single solution to the challenge of heat decarbonisation, rather a number of different solutions that depend on where people live and work, their individual circumstances, the energy efficiency of their homes and the resources they have close at hand.

But while it has previously been reported that the overall or system costs of electrifying heating could be as much as three times the cost of using gas, another study suggests that the costs could be much closer.

2. More heat pumps

Heat pumps that absorb environmental warmth and use it to provide low carbon heating have always been considered a possible option for the four million homes and countless workplaces that are not currently connected to the UK’s mains gas network.

Recently expert opinion has been changing with hybrid heat pumps seen as a workable solution even for homes and workplaces that are connected to gas supplies. Indeed, in 2018 the Committee on Climate Change stated that hybrid heat pumps: “can be the lowest cost option where homes are sufficiently insulated, or can be insulated affordably.” This means that they may be one of the simplest and most affordable options to provide the heating of the future.

Hybrid heat pumps draw heat from the air or ground around them and use a boiler to provide extra heat when the weather is exceptionally cold. In a low carbon future, that boiler could be fuelled by biogas. In a zero carbon situation, it could be powered by hydrogen.

Heat pumps can be air-source (ASHP) – absorbing warmth from the atmosphere like the heat exchanger in your fridge in reverse – or ground source (GSHP). GSHPs absorb heat through on a network of pipes (a ground loop) buried or a vertical borehole drilled in the earth outside your home or workplace.

Both ASHPs and GSHPs can be used to support underfloor heating or a radiator system, though neither will provide water heated to the high temperature a natural gas boiler will reach to keep radiators hot.

And even though the warmth they absorb is free, heat pumps depend on a supply of electricity to condense it and to bring it back to the heating system inside the house.

This electricity could be generated by distributed power from local solar PV, wind turbines, drawn from batteries or even from the low carbon grid of the future.

It is worth noting that the size of heat pumps and the amount of land they require – especially GSHP – makes them a less attractive solution for people who live or work in built up areas such as cities. While for those who live in blocks of flats, it is difficult to see how individual heat pumps could be a practical solution.

3. More hydrogen

The idea of switching the mains gas grid to store and transport hydrogen has long appealed as a potential solution to the challenge of decarbonising heating. Renewable hydrogen could then be burnt in domestic boilers similar to those we currently use for natural gas.

The benefits are many. Hydrogen produces no carbon emissions when burnt, and can be stored and transported in much the same way as natural gas (provided old metal pipes have been replaced with modern alternatives).

And given the sunk costs involved in the existing gas grid and in the network of pipes and radiators already installed in tens of millions of homes, hydrogen has always been expected to be the lowest cost option too.

However, according to the Committee on Climate Change’s latest findings, hydrogen should not be seen as a ‘silver bullet’ solution, capable of transforming our entire heating landscape in a single change.

The main reasons they give for this judgment are the relatively high cost of the electricity required to produce sufficient hydrogen to power tens of millions of boilers, the undesirability of relying on substantial imports of hydrogen, and the lack of a carbon-free method to supply the gas cost-effectively at scale.

Hydrogen could, however, be produced by gas reformation of the emissions retained by bioenergy carbon capture and storage (BECCS) such as that being pioneered at Drax Power Station. Carbon capture use and storage (CCUS), of which BECCS is the renewable variant, is supported by the UK government through its Clean Growth Strategy as it has potential to accelerate decarbonisation in power and industrial sectors.

Extremely rapid progress to provide hydrogen in sufficient quantities from BECCS is unlikely – but the first schemes could begin operating in the late 2020s.

Hydrogen production also has the potential to radically transform the economics of CCUS, making it a much more attractive investment.

It was originally assumed that the power required to drive the energy-intensive process of hydrogen created via electrolysis would come from surplus electricity generated by intermittent renewables at times of low demand. However, that surplus is not now generally regarded as likely to be sufficiently large to be relied upon. 

It is these limitations, together with a comprehensive model of the likely costs involved in different approaches to decarbonisation, that led the Committee on Climate Change to suggest that hybrid heat pumps could provide the bulk of domestic heating in the future.

At present, it seems likely that converting to hydrogen-fuelled boilers will mainly be an attractive option for those who live and work near areas where the renewable fuel can be most easily created and stored. The north of England is a prime example – close to the energy and carbon intensive areas of the Humber and Tees valleys where CCUS and hydrogen clusters could be located with good access to North Sea carbon stores such as aquifers and former gas fields.

4. More solar

Many homes in the UK – especially in the south – could be heated electrically without carbon emissions at the point of use.

Solar thermal (for water heating) or solar PVs (for electric and water heating) common sights on domestic property rooftops. The intermittency of solar power need not be an issue as the electricity generated could then be stored in batteries ‘behind the meter’ until it is needed.

However, the lack of sufficient daylight for much of the year in many parts of the UK could, together with the still relatively high cost of battery storage, still mean that this would not necessarily be a solution that can be applied at scale to millions of homes and workplaces all year round.

As the cost of battery storage continues to fall, it may well be that solar becomes a more practical and cost-effective solution.

5. More biomass

More geothermal

Sustainably sourced compressed wood pellets and biomass boilers have long been proposed as a potential solution to decarbonising heating for the many people who live and work off the mains gas grid. Bioenergy as a whole – including biogas as well as wood pellets – now provides around four percent of UK heat, up from 1.4% in 2008.

The main barriers to this are the current relatively high cost of biomass boilers. This is currently offset by the Renewable Heating Incentive (RHI) which the UK government has committed to continuing until 2021.

As this solution is adopted by more consumers, it is anticipated that the real costs of such new technology will fall as economies of scale start to take effect in much the same way that solar PV and battery technology has recently become more affordable.

6. More geothermal

Ruins of a tin mine, Wheal Coates Mine, St. Agnes, Cornwall, England

Geothermal energy uses the heat stored beneath the surface of our planet itself to provide the energy we need.

While in some countries such as Iceland, geothermal energy is used to drive turbines to generate electricity that is then used to provide power for heating, it is envisaged that in the UK it could be converted into warmth through massive heat pumps that provide heating to entire communities – especially those in former mining areas. There is already one geothermal district heating scheme in operation in the UK, in Southampton.

It is envisaged that such geothermal schemes would work most effectively at a district level, providing zero carbon heat to many homes and workplaces. According to a recent report, geothermal energy has the potential to “produce up to 20 per cent of UK electricity and heat for millions.”

At present, drilling is being carried out to see if geothermal heating could be viable in Cornwall. However, there is no reason why it could not be used in disused coalmines too where ground source heat pumps (GSHPs) would absorb and condense the required heat. This means that geothermal could have strong potential as a solution to the challenge of decarbonisation for former mining communities.

7. More CHP

Cory Riverside Energy’s Resource Recovery Facility in Belvedere, London, could be operated as a CHP plant in the future

By using the heat created in thermal renewable electricity generation – such as biomass – in combined heat and power schemes, businesses and individuals can reduce their energy costs and their carbon emissions. Such schemes can work well for new developments on a district basis, and are already popular in mainland Europe, especially Sweden, Denmark and Switzerland.

Warm homes, factories and offices

There are already a number of viable solutions to decarbonising heating in the UK. They rely on smart policy, smarter technology and customers taking control of their energy.

Rather than any one of these technologies providing a single solution that can help every consumer and business in the country to meet the challenge in the same way, it is more likely that it will be met by a number of different solutions, depending on geography, cost and individual circumstances. These will sometimes also work in concert rather than alone.

The UK has made solid progress on reducing carbon emissions – especially in power generation. When it comes to heating buildings, rapid decarbonisation is now needed. And that decarbonisation must avoid fuel poverty and help to rebalance the economy.

Find out more about energy in buildings in Energising Britain: Progress, impacts and outlook for transforming Britain’s energy system.

How getting renewable energy from your supplier actually works

Where does our electricity come from? One answer might be the power stations, wind turbines and solar panels that generate it. You might even go as far as to say the wind, sun, water, biomass and gas powering those stations. Or even the network companies transporting that power around the country. But there’s also a very important middle-man in this process: electricity suppliers.

Most of Great Britain gets its power from one of the ‘Big Six’ energy suppliers, which buy electricity from the wholesale market and then sells it to consumers. However, with more businesses and consumers looking for less carbon-intense electricity sources, there are now a whole host of smaller companies taking on the incumbents and offering all-renewable electricity.

From Ovo to Bulb to Drax’s own Haven Power and Opus Energy, consumers and businesses have more and greener options than ever about where to buy their electricity, with many even offering 100% renewable electricity.

But how do these companies ensure the megawatts powering homes, offices and street lights come from renewable sources?

Cleaning up the river

The electricity we use doesn’t just flow through a single cable from a power station to our houses. It travels through what’s called the transmissions system, which is run by National Grid ESO and local distribution network operators.

Apart from off-grid installations like solar panels on buildings, some of which are unable to export their unused power, all the electricity generated by different sources around the country goes into this same system. It means megawatts generated by a wind turbine get mixed up with those generated by a nuclear reactor or a coal power station.

Think of it as a river. Although it is its own entity, it is fed by multiple streams of water coming from different sources. In the case of electricity, megawatts from various generators are fed into a central system, which then enter homes, offices and devices around the country.

So, what makes green power generated from renewable sources, green power used in homes?

Suppliers can’t control exactly what megawatts you use, but they can influence the makeup of the overall ‘river’ your electricity is pulled from by what electricity they agree to buy and offer to their customers.

Renewable suppliers match the amount of electricity their customers use with the amount they buy from renewable sources. So, if a home uses 4 megawatt-hours (MWh) a year, a supplier will need to ensure it buys an equal amount of power from National Grid, which National Grid sources from generators. If that supplier offers 100% renewable power, it will need to ensure it has the right kinds of deals in place with renewable generators to deliver that amount of power.

It means that while the river of electricity is still a mix from different streams, more of the water will come from renewable streams. Therefore, if more homes and businesses switch to renewable suppliers, more of the overall river will be renewable, which will in turn help to decarbonise the electricity system, enabling a lower-carbon economy.

But how does this fit into the existing electricity business and infrastructure?

But how do suppliers actually buy renewable power from generators?

The business of electricity

To understand how suppliers ensure they are buying renewable power you first need to understand how the business works. Or at least, how it used to. The most obvious place to start is with the generators.

Be they gas power stations or an offshore wind farm, the generator is where electricity is produced and are often owned by a supplier.

Suppliers can buy electricity from their own generators, often months or years ahead of delivery. But if there is a shortfall, the supplier can also buy electricity on the wholesale market, where other generators can sell their electricity.

Because suppliers are on a competitive market, their aim is to buy the electricity for the lowest possible price and sell it for more – but at a better rate than rivals. Measures like carbon prices or green incentives help lower the cost of renewable and low-carbon generation, and position it as a more economically viable purchase than more expensive fossil fuels like coal.

Renewable-only suppliers also want to buy electricity as cheap as possible and sell it as affordably as possible. But unlike standard suppliers they only buy electricity from renewable sources.

This can be done by purchasing electricity from independent renewable generators on the wholesale market, or arranged through what are known as Power Purchase Agreements (PPAs) – longer-term contracts between generators and suppliers agreeing on a specific amount of power.

The advantage of these for the renewable generator is it secures revenue for the future, while for the supplier it means a dependable source of electricity. For large installations, these deals are often signed before construction even begins to ensure investors there will be a return.

Transitioning to a low-carbon electricity system, however, is not just about suppliers buying more electricity from renewable sources.

The future of electricity suppliers

As more businesses, individuals and communities are becoming prosumers and generating their own electricity, the wider role of the supplier in the system is changing.

The government’s feed-in-tariffs financially reward customers for generating their own electricity, even if they don’t export it to the grid. But even small generators can sign deals with suppliers to sell electricity through schemes such as Good Energy’s SmartGen policy, which is open to generators with between 10 and 100 kilowatts (kW) of installed capacity. Similarly Opus Energy helps over 2,100 businesses sell more than 1,100 gigawatt-hours (GWh) of excess wind, solar, anaerobic digestion and hydro power.

For larger prosumer businesses, the relationship with suppliers and the grid is different. Rather than the traditional buying and selling of electricity, it requires a cooperative approach to understand how the prosumer can best utilise their assets.

Beyond increasing the amount of low-carbon electricity, decarbonising the electricity system also means making more efficient use of energy and managing the data that can help improve efficiency. Haven Power’s partnership with Thames Water sees it analyse an average of 68 million half-hour smart meter readings every year, using the data to help the company improve its billing and forecasting. As the wider system becomes more intelligent, suppliers will be able to better forecast how much electricity its customers use and help them reduce their consumption.

The role required of suppliers in a changing system will create opportunities for more renewable and efficient use of electricity. And empower more consumers to get their electricity from low-carbon sources that can help to make the whole country’s electricity greener.

Want a different perspective on the same story? Watch TV’s Jonny Ball explain.

Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola

RNS Number : 1562E
Drax Group PLC


  • A unique portfolio of pumped storage, hydro and gas-fired generation assets
  • Compelling strategic rationale
    • Growing system support opportunity for the UK energy system
    • Significant expansion of Drax’s flexible, low-carbon and renewable generation model
    • Diversified generation capacity – multi-site, multi-technology
    • Opportunities in trading and operations
  • Strong financial investment case
    • High quality earnings
    • Expected returns significantly ahead of Weighted Average Cost of Capital (WACC)
    • Expected EBITDA(1) of £90-110 million in 2019
    • Debt facility agreed, net debt/EBITDA expected to be around 2x by the end of 2019
    • Supportive of credit rating and reduced risk profile for Drax
    • Strengthens ability to pay a growing and sustainable dividend

Will Gardiner, CEO, Drax Group

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“I am excited by the opportunity to acquire this unique and complementary portfolio of flexible, low-carbon and renewable generation assets. It’s a critical time in the UK power sector. As the system transitions towards renewable technologies, the demand for flexible, secure energy sources is set to grow. We believe there is a compelling logic in our move to add further flexible sources of power to our offering, accelerating our strategic vision to deliver a lower-carbon, lower-cost energy future for the UK.

“This acquisition makes great financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.

“We are combining our existing operational expertise with the specialist technical skills of our new colleagues and I am looking forward to what we can achieve together.”

A flexible, low-carbon and renewable portfolio

The Portfolio consists of Cruachan pumped storage hydro (440MW), run-of-river hydro locations at Galloway and Lanark (126MW), four CCGT(2) stations: Damhead Creek (805MW), Rye House (715MW), Shoreham (420MW) and Blackburn Mill (60MW), and a biomass-from-waste facility (Daldowie).

Clatteringshaws Loch and dam, part of the Galloway Hydro Scheme

Attractive high quality earnings and returns

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs(3). Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio. Further information is set out in Appendix 2 of this Announcement.

Capital expenditure in 2019 is expected to be in the region of £30-35 million.

For the year ended 31 December 2017, the Portfolio generated EBITDA of £36 million(4). EBITDA in 2019 is expected to be higher due to incremental contracted capacity payments (c.£42 million), no availability restrictions (Cruachan’s access to the UK grid during 2017 was limited by network transformer works) (c.£8 million), a lower level of corporate cost charged to the portfolio (c.£9 million) and revenues from system support services and current power prices. Gross assets as at 31 December 2017 were £419 million(5).

The Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of the Group’s WACC and to be highly accretive to underlying earnings in 2019.

The Acquisition strengthens the Group’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £32 million of shares purchased to date.

Financing the Acquisition

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility agreement to finance the Acquisition. Assuming performance in line with current expectations, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019.

Drax expects its credit rating agencies to view the Acquisition as contributing to a reduced risk profile for the Group and to reaffirm their ratings.

Conditions for completion

The Acquisition is expected to complete on 31 December 2018 and is conditional upon the approval of the Acquisition by Drax’s shareholders and clearance by UK Competition and Markets Authority (the “CMA”). A summary of the terms of the Acquisition agreement (the “Acquisition Agreement”) is set out in Appendix 1 to this announcement.

Drax trading and operational performance

Since publishing its half year results on 24 July 2018 Drax has commenced operation of a fourth biomass unit at Drax Power Station, which is performing in line with plan, and availability across biomass units has been good.

Biomass storage domes at Drax Power Station

Taking these factors into account, alongside a strong 2018 hedged position and assuming good operational availability for the remainder of the year, Drax’s EBITDA expectations for the full year remain unchanged, with net debt to EBITDA now expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Biomass generation is now fully contracted for 2019.

Contracted power sales at 30 September 2018

Power sales (TWh) comprising:18.611.55.7
TWh including expected CfD sales18.615.611.2
– Fixed price power sales (TWh) 18.611.05.1
At an average achieved price (per MWh)at £46.8at £50.4at £48.3
– Gas hedges (TWh)-0.50.6
At an achieved price per therm-43.5p47.4p

Drax intends to hedge up to 1TWh of the commodity exposures in the Portfolio ahead of completion in line with the Group’s existing hedging strategy.

Other matters

In light of the Acquisition and the expected timing of the general meeting to approve it, Drax will postpone the planned Capital Markets Day on 13 November 2018.

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Drax Investor Relations: Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763949

Drax External Communications:
Matt Willey
+44 (0) 7711 376087

Ali Lewis
+44 (0) 77126 70888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker):
+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):
+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition presentation meeting and webcast arrangements

Management will host a presentation for analysts and media at 9:00am (UK Time), Tuesday 16 October 2018, at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

Would anyone wishing to attend please confirm by e-mailing [email protected] or calling Christopher Laing at FTI Consulting on +44 (0) 20 3727 1355 / 07809 234 126.

The meeting can also be accessed remotely via a live webcast, as detailed below. After the meeting, the webcast will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 9am (UK time) on Tuesday 16 October 2018 for download at: www.drax.com>>investors>>results-reports-agm>> #investor-relations-presentations or use the link below.

Event Title:Drax Group plc: Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola
Event Date:Tuesday 16 October 2018
Event Time9:00am (UK time)
Webcast Live Event Linkhttps://www.drax.com/investors/16-oct-2018-webcast
020 3059 5868 (UK)
+44 20 3059 5868 (from all other locations)
Start Date:Tuesday 16 October 2018
Delete Date:Monday 14 October 2019
Archive Link:https://www.drax.com/investors/16-oct-2018-webcast

For further information please contact Christopher Laing on +44 (0) 20 3727 1355 / 07809 234 126.

Website: www.drax.com

Acquisition of the Portfolio from Iberdrola

Drax Smart Generation Holdco Limited (“Drax Smart Generation”), a wholly owned subsidiary of Drax, has entered into the Acquisition Agreement with Scottish Power Generation Holdings Limited (the “Seller”), a wholly-owned subsidiary of Iberdrola S.A., for the acquisition of ScottishPower Generation Limited (“SPGEN”), for £702 million in cash.

Loch Awe and Cruachan Reservoir from Ben Cruachan, Argyle and Bute

Strong asset base

The Portfolio principally consists of 2.6GW of assets which are highly complementary to Drax’s existing generation portfolio and play an important role in the UK energy system. The assets include:

Turbine hall at Cruachan Power Station

Cruachan Pumped Storage Hydro

440MW of large-scale storage and flexible low-carbon generation situated in Argyll and Bute, Scotland.

Cruachan provides a wide range of system support services to the UK energy market, in addition to providing merchant power generation. Cruachan has £35 million of contracted capacity payments for the period 2019 to 2022.

Cruachan, which provides over 35% of the UK’s pumped storage by volume, can provide long-duration storage with the ability to achieve full load in 30 seconds, which it can maintain for over 16 hours, making it a strategically important asset remunerated by a broad range of non-commodity based revenues.


Galloway Hydro Scheme, River Dee

Galloway and Lanark Run-of-River Hydro

126MW of stable and reliable renewable generation situated in South-west Scotland.

Both locations benefit from index-linked ROC revenues extending to 2027 and Galloway, in addition to renewable power generation, operates a reservoir and dam system providing storage capabilities and opportunities for peaking generation and system support services. It also has £4 million of contracted capacity payments for the period 2019 to 2022.




Combined Cycle Gas Generation (CCGT)

1,940MW of capacity at Damhead Creek (805MW), Rye House (715MW) and Shoreham (420MW) all strategically located in South-east England.

Shoreham Power Station, West Sussex

These assets provide baseload and/or peak power generation in addition to other system support services and benefit from attractive grid access income associated with their location. The three plants have contracted capacity payments of £127 million for the period 2019 to 2022.

Damhead Creek Power Station, Isle Of Grain, Kent

Damhead Creek also benefits from an attractive option for the development of a second CCGT asset, Damhead Creek II, which provides additional gas generation optionality alongside Drax’s existing coal-to-gas repowering and OCGT(6) projects. All options could be developed subject to an appropriate level of support. Damhead Creek II is eligible for the 2019 capacity market auction along with two of Drax’s existing OCGT projects.

Other smaller sites

The portfolio also includes a small CCGT in Blackburn (60MW) and a 50K tonne biomass-from-waste facility in Daldowie, which benefits from a firm offtake contract agreement with Scottish Water until 2026.

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

The UK has a target to reduce carbon emissions by 80% by 2050. The transition to a low-carbon economy requires decarbonisation of heating, transport and generation. This will in turn require additional low-carbon sources of generation to be developed in the UK. As much as 85%(7) of future generation could come from renewables – predominantly wind and solar. This will lead, at times, to high levels of power price volatility and increasing demand for system support services. Managing an energy system with these characteristics will only be possible if it is supported by the right mix of flexible assets to manage volatility, balance the system and provide crucial non-generation services which a stable energy system requires.

Pylon and electricity transmission lines from Cruachan Power Station above Loch Awe

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

Increased earnings potential aligned with generation strategy and UK energy needs

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

High quality earnings

Two thirds of the gross profits of the Portfolio is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs, in addition to power generation activities. Due to the expected growing demand for these assets and the contract-based nature of many of these services Drax expects to improve long-term earnings visibility through structured non-commodity earnings streams, whilst retaining significant opportunity to benefit from power price volatility.

When combined with renewable earnings and system support from existing biomass generation, the Acquisition is expected to lead to an increase in the quality of earnings.

Diversified generation and portfolio benefits

Wood pellet storage domes at Drax Power Station, Selby, North Yorkshire

The Acquisition accelerates Drax’s development from a single-site generation business into a multi-site, multi-technology operator.

With the acquisition of this portfolio, a fall in gas prices could be mitigated by an increase in gas-fired generation reflecting the relative dispatch economics of the different technologies.

Drax expects to benefit from the management of generation across a broader asset base, leveraging the Group’s expertise in the operation, trading and optimisation of large rotating mass generation.

Drax believes that the team operating the Portfolio has a strong engineering culture which is closely aligned with the Drax model and will enhance the Group’s strong capabilities across engineering disciplines.

Around 260 operational roles will transfer to Drax as part of the Acquisition, complementing and reinforcing Drax’s existing engineering and operational capabilities.

Financing and capital structure

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility to finance the Acquisition, with a term of 12 months from the first date of utilisation of the facility (with a seven-month extension option) and interest payable at a rate of LIBOR plus the applicable margin (the “Acquisition Facility Agreement”). The facility is competitively priced and below Drax’s current cost of debt.

Drax will consider its options for its long-term financing strategy in 2019.

Assuming performance in line with current expectations, net debt to EBITDA is expected to return to Drax’s long-term target of around 2x by the end of 2019.

Drax expects credit rating agencies to view the Acquisition as supportive of the rating and contributing to a reduced risk profile for the Group.

Process and integration plan

Drax is progressing a detailed integration plan to combine the Acquisition as part of the existing Power Generation business.

The transaction is subject to shareholder approval. A combined Shareholder Circular and notice of General Meeting will be posted as soon as practicable.

The transaction is expected to complete on 31 December 2018.


(1)    EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business. 2019 EBITDA is stated before any allocation of Group overheads.
(2)    Combined Cycle Gas Turbine.
(3)    Renewable Obligation Certificates.
(4)    2017 EBITDA is unaudited and based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies.
(5)    On an unaudited historic cost basis, inclusive of an historic write down and other changes arising from the application of Drax’s accounting policies, and incorporating intercompany debtors which will be replaced by Drax going forward.
(6)    Open Cycle Gas Turbines.
(7)    Intergovernmental Panel on Climate Change. In a 1.5c pathway renewables are projected to be 70-85% of global electricity in 2050.


The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).

J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) (“J.P. Morgan Cazenove”) and RBC Europe Limited (“RBC”), which are both authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the FCA and the PRA, are each acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as their respective clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.

J.P. Morgan Cazenove, RBC and their respective affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Each of J.P. Morgan Cazenove, RBC and their respective affiliates accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.

Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s, the Portfolio’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.

Each of the Company, J.P. Morgan Cazenove, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.

You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group, the Portfolio and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.

Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.

Appendix 1

Principal Terms of the Acquisition

The following is a summary of the principal terms of the Acquisition Agreement.

  1. Acquisition Agreement

Parties and consideration

The Acquisition Agreement was entered into on 16 October 2018 between Drax Smart Generation and the Seller. Pursuant to the Acquisition Agreement, the Seller has agreed to sell, and Drax Smart Generation has agreed to acquire, the whole of the issued share capital of SPGEN for £702 million, subject to certain customary adjustments in respect of cash, debt and working capital.

Drax Group Holdings Limited has agreed to guarantee the payment obligations of Drax Smart Generation under the Acquisition Agreement. Scottish Power UK plc has agreed to guarantee the payment obligations of the Seller under the Acquisition Agreement.

Conditions to Completion

The Acquisition is conditional on:

  • the approval of the Acquisition by Drax shareholders, which is required as the Acquisition constitutes a Class 1 transaction under the Listing Rules (the “Shareholder Approval Condition”); and
  • the CMA having indicated that it has no further questions at that stage in response to pre-Completion engagement by Drax or the CMA having provided a decision that the Acquisition will not be subject to a reference under the UK merger control regime.

Completion is currently expected to occur on 31 December 2018 assuming that the conditions are satisfied by that date.

Termination for material reduction in available generation capacity

Drax Smart Generation has the right to terminate the Acquisition Agreement upon the occurrence of a material reduction in available generation capacity at any of the Cruachan, Galloway and Lanark or Damhead Creek facilities which subsists, or is reasonably likely to subsist, for a continuous period of three months. The right of Drax Smart Generation to terminate in these circumstances is subject to the Seller’s right to defer Completion if the relevant material reduction in available generation capacity can be resolved by end of the month following the anticipated date of Completion.

Break fee

A break fee of £14.6 million (equal to 1% of Drax’s market capitalisation at close of business on the day before announcement) is payable if the Shareholder Approval Condition is not met, save where this is as a result of a material reduction in available generation capacity as described above.

Pre-completion covenants

The Seller has given certain customary covenants in relation to the period between signing of the Acquisition Agreement and completion, including to carry on the SPGEN business in the ordinary and usual course.  The Seller will carry out certain reorganisation steps prior to completion.

Pension liabilities

Drax Smart Generation has agreed to assume the accrued defined benefit pension liabilities associated with the employees of the SPGEN group as at the date of signing the Acquisition Agreement. Following Completion, the SPGEN group will continue to participate in the Seller’s group defined benefit pension scheme, known as the ScottishPower Pension Scheme (“SPPS”) for an interim period of 12 months unless agreed otherwise (the “Interim Period”) while a new pension scheme is set up by the SPGEN group for the benefit of its employees (the “New Scheme”).

At the end of the Interim Period, the SPPS trustees will be requested to transfer from the SPPS to the New Scheme an amount of liabilities (and corresponding share of assets) agreed between the Seller and Drax Smart Generation (or failing agreement, an amount determined by an independent actuary) in respect of the past service liabilities relating to the SPGEN group employees.  If the amount of assets transferred to the New Scheme does not match the amount agreed (or independently determined), there will be a true-up between the Seller and Drax Smart Generation.

If the SPPS trustees do not make any transfer to the New Scheme within the period of 18 months following the Interim Period (unless this was caused by a breach of the Acquisition Agreement by the Seller), Drax Smart Generation has agreed to pay £16 million (plus base rate interest) to the Seller as compensation for the SPPS liabilities not taken on by the New Scheme.

Seller’s warranties, indemnities and tax covenant

The Seller has provided customary warranties in the Acquisition Agreement.  The Seller also has provided Drax Smart Generation with indemnities in respect of certain specific matters, including for any losses associated with the reorganisation referred to above.  A customary tax covenant is also provided in the Acquisition Agreement.

  1. Transitional Services Agreement

The Seller and SPGEN will enter into a transitional services agreement effective at Completion. The specific nature, terms and charges relating to the services to be provided will be agreed between the Seller and SPGEN prior to Completion. The Seller will also provide assistance in relation to the extraction and separation of the SPGEN group from the systems of the Seller and integration of the SPGEN group onto the systems of the Drax Group.

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million (“Profit Forecast”), and gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio.

For the purpose of the Profit Forecast, EBITDA is stated before any allocation of Group overheads (as these will be an allocation of the existing Drax Group cost base which is not expected to increase as a result of the acquisition of the Portfolio).

Basis of preparation

The Profit Forecast has been compiled on the basis of the assumptions stated below, and on the basis of the accounting policies of the Drax Group adopted in its financial statements for the year ended 31 December 2017. Subsequent accounting policy changes include the application of IFRS15 and IFRS9 which are not initially expected to change the EBITDA results of the Portfolio. It also does not reflect the impact of IFRS16 which would apply in respect of the 2019 Annual Report and Accounts.

The Profit Forecast has been prepared with reference to:

  • Unaudited 2017 financial statements based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies
  • The audited financial statements of the entities forming the Portfolio for the year ending 31 December 2017
  • The unaudited management accounts of the Portfolio for the nine months ending 30 September 2018
  • And on the basis of the projected financial performance of the Portfolio for the year ending 31 December 2019

The Profit Forecast is a best estimate of the EBITDA that the Portfolio will generate for a future period of a year in respect of assets and operations that are not yet under the control of Drax. Accordingly the degree of uncertainty relating to the assumptions underpinning the Profit Forecast is inherently greater than would be the case for a profit forecast based on assets and operation under the control of Drax and/or which covered a shorter future period. The Profit Forecast has been prepared as at today and will be updated in the shareholder circular.

The forecast cost base reflects the expectations of the Drax Directors of the operating regime of the Portfolio under Drax’s ownership and the central support it will require.

Principal assumptions

The Profit Forecast has been prepared on the basis of the following principal assumptions:

Assumptions within management’s control

  1. There is no change in the composition of the Portfolio.
  2. There is no material change to the manner in which these assets are operated.
  3. There are no material changes to the existing running costs / operating costs of the Portfolio.
  4. There will be no material restrictions on running each of the assets in the Portfolio other than those that would be envisaged in the ordinary course.
  5. No material issues with the migration of services including trading and information technology from Scottish Power to Drax.
  6. No hedges are transferred as part of the Transaction.
  7. Transaction costs and one-off costs associated with the Integration are not included.

Assumptions outside of management’s control

  1. The acquisition of the Portfolio is completed on 31 December 2018.
  2. There is no material change to existing prevailing UK macroeconomic and political conditions prior to 31 December 2019.
  3. There are no material changes in market conditions in electricity generating market and no change to the UK energy supply mix.
  4. There are no material changes in legislation or regulatory requirements (e.g. ROCs, capacity market, grid charges) impacting the operations or accounting policies of the Portfolio.
  5. There are no changes to recent market prices for clean spark spread, power, carbon and other commodities.
  6. There is no material change from the historical 10-year average rainfall.
  7. There are no material adverse events that have a significant impact on the financial performance of any of the acquired assets, including any more unplanned outages than would be expected in the ordinary course.
  8. Prior to completion, the business will be operated in the ordinary course.
  9. There are no material issues with the transitional services provided by Scottish Power to Drax pursuant to the TSA, including the migration of such services to Drax.
  10. There is no material change in the management or control of the Drax group.



How to switch a power station off coal

Turbine hall at Drax Power Station

In 2003, the UK’s biggest coal power station took its first steps away from the fossil fuel which defined electricity generation for more than a century. It was in that year that Drax Power Station began co-firing biomass as a renewable alternative to coal.

It symbolised the beginnings of the power station’s ambitious transformation from fossil-fuel stalwart to the country’s largest single-site renewable electricity generator. This plan presented a massive engineering challenge for Drax, with significant amounts of new knowledge quickly needed.

Fifteen years later, three of its generating units now run entirely on compressed wood pellets, a form of biomass, while coal has been relegated to stepping in only to cover spikes in demand and improve system stability.

Now Drax has converted a fourth unit from coal to biomass. This development represents the passing of a two thirds marker for the power station’s coal-free ambitions and adds 600-plus megawatts (MW) of renewable electricity to Great Britain’s national transmission system.

Building on the past

Drax first converted a coal unit to biomass in 2013, with two more following in 2014 and 2016. This put Drax in an interesting position going into a new conversion: on one hand, it is one of the most experienced generators in the world when it comes to dealing with and upgrading to biomass. On the other, it’s still relatively new to the low carbon fuel compared with its dealings with coal.

Adam Nicholson

“We’ve decades of understanding of how to use coal, but we’ve only been operating with biomass since we started the full conversion trials in 2011,” says Adam Nicholson, Section Head for Process Performance at Drax Power. “We’ve got few running hours under our belts with the new fuel versus the hundreds of man years of coal knowledge and operation all around the country.”

When converting a generating unit, the steam turbine and generator itself remain the same. The difference is all in the material being delivered, stored, crushed and blown into the boiler and burned to heat up water and create steam. And because biomass can be a volatile substance – much more so than coal – this process must be a careful one.

Drax could build on the learnings and equipment it had already developed for biomass such as specially built trains and pulverising mills, but storage proved a bigger issue. The giant biomass domes at Drax that make up the EcoStore are advanced technological structures carefully attuned to storing biomass, but for Unit 4, they were off limits.

Instead Drax engineers had to come up with another solution.

The journey of a pellet through the power station

Normally wood pellets are brought into Drax by train, unloaded and stored in the biomass domes before travelling through the power station to the mills and then boilers. Unit 4, however, sits in the second half of the station – built 12 years after the first. This slight change in location presented a problem.

“There’s no link from the eco store to Unit 4 at all,” explains Nicholson. “You can’t use the storage domes and that whole infrastructure to get anything to Unit 4.”

Drax engineers set about designing a new conveyor system that could connect the domes to the mills and boiler that powers Unit 4. After weeks of design, the team had a theoretical plan to connect the two locations with one problem: it was entirely uneconomical.

Rail unloading building 1 and storage silos

“If we were building a new plant it would be relatively easy, because you could plan properly and wouldn’t have existing equipment in the way,” says Nicholson.

“We had to plan around it and make use of the pre-existing plant.”

Within that pre-existing plant though were vital pieces of equipment, some of which had laid dormant since Drax stopped fuelling its boilers with a mixture of coal and biomass and opted instead for full unit conversions.

Drax began cofiring across all six units in 2003, using two different materials – a mix of around 5% biomass and 95% coal. A direct injection facility was added in 2005. It involved blowing crushed wood pellets into coal fuel lines from two of the power station’s 60 mills.

Then, the amount of renewable power Drax was able to generate roughly doubled in the summer of 2010 when a 400 MW co-firing facility became operational.

Back to the present day, it’s fortunate for the Unit 4 conversion that the co-firing facility includes its own rail unloading building (RUB 1) and storage silos. They are located much closer to the unit than the bigger RUB 2 and the massive biomass domes.

This solved the problem of storage but moving the required volumes of biomass through the plant without significant transport construction still posed a challenge.

Rail unloading building 1 and storage silos for Unit 4 [left], EcoStore biomass domes for units 1-3 [right]

To tackle this the team modified a pneumatic transport system, previously tested during co-firing, to have the capability to blow entire pellets from the storage facilities around the power station at speeds of more than 20 metres per second. The success of this system proved key – it was the final piece necessary to make the conversion of Unit 4 economical.

The post-coal future

Andy Koss

For now, Drax’s fifth and sixth generating unit remain coal-powered, but are called upon less frequently. With Great Britain set to go completely coal-free by 2025, there are plans to convert these too, but as part of a system of combined cycle gas turbines and giant batteries rather than biomass powered units.

It’s an opportunity for Drax to again leverage its pre-existing plant and provide the grid with a fast acting-source of lower-carbon electricity. As with converting to biomass, it will pose a complex new engineering challenge – one that will prepare Drax to meet the future needs of grid as it continues to change and demand greater flexibility from generators.

“The speed at which the Unit 4 project has been delivered is testament to the engineering expertise, skill and ingenuity we continue to see at Drax. We’re nimble and innovative enough to meet future challenges,” says Andy Koss, Chief Executive, Drax Power.

“We may look very different in 10 or 20 years’ time, but the ethos of that innovation and agility is something that will persist.”

Repowering the remaining coal plant with gas and up to 200 MW of batteries will sit alongside research into areas such as carbon capture, use and storage (CCuS) that is all geared towards expanding Drax Power beyond a single site generator into a portfolio of flexible power production facilities.

Unit 4’s conversion is more than just a step beyond halfway for the power station’s decarbonisation, but a significant step towards becoming entirely coal-free.

Find out more about Unit 4.

Forestry 4.0

Around the world industries are undergoing profound change. The phrase ‘Industry 4.0’ describes this emerging era when the combination of data and automation is transforming long-established practices and business models.

Autonomous cars are perhaps one of most widely-known examples of ‘smart’ technology slowly inching towards daily life, but they are far from the only example. There is almost no sector untouched by this oncoming digital disruption – even industries as old as forestry are being transformed.

From smart and self-driving vehicles to data-crunching drones, Forestry 4.0 is ushering in a new era for efficient and sustainable forest management.

Drones and data

If the first industrial revolution was powered by steam, the fourth is being powered by data. Collecting information on every aspect of a process allows smart devices and machines to cut out inefficiencies and optimise a task.

In forestry, capturing and utilising huge amounts of data can build a better understanding of the land and trees that make up forests. One of the best ways to gather this data from wide, complex landscapes is through aerial imaging.

Satellites have long been used to monitor the changing nature of the world’s terrain and in 2021, the European Space Agency plans to use radar in orbit to weigh and monitor the weight of earth’s forests. But with the rise of drones, aerial imagining technology is becoming more widely accessible. Now even small-scale farmers and foresters can take a birds-eye view of their land.

Oxford-based company BioCarbon Engineering focuses on replanting areas of forests. It utilises drone technology to scan environments and identify features such as obstacles and terrain types which it uses to design and optimise planting patterns.

A drone then follows this path roughly three to six feet off the ground, shooting biodegradable seed pods into the ground every six seconds along the way. BioCarbon claims this approach can allow it to plant as many as 100,000 trees in a single day.

Gathering data on the health of working forests doesn’t necessarily require cutting-edge equipment either. In the smartphone era, any forestry professional now has the computing power in their pocket to capture detailed information about a forest’s condition.

Mobile app MOTI was designed by researchers at the School of Agricultural, Forest and Food Sciences at the Bern University of Applied Sciences in Switzerland. It allows users to scan an area of forest with a phone’s camera and receive calculated-estimates on variables such as trees per hectare, tree heights and the basal area (land occupied by tree trunks).

Automating the harvest

Capturing data from forests can play a huge part in developing a better understanding of the land, terrain and trees of working forests, which leads to better decision making for healthier forests, including how and when to harvest and thin. But the equipment and technology carrying out these tasks on the ground are also undergoing smart-tech transformations.

Self-driving and electric vehicles are expected to disrupt multiple industries, including forestry. Swedish startup Einride, recently unveiled a driverless, fully electric truck that can haul as much as 16-tonnes of lumber and is specially designed for off-road, often unmapped, terrain.

There are some pieces of equipment, however, that will be harder to fully automate – for example, harvesters, which are used to fell and remove trees. Their long, digger-like arm normally features a head consisting of a chainsaw, claw-grips and rollers all in one, which are controlled from the vehicle’s cab.

Even as image recognition and sensors improve, automating these types of machines entirely is hugely challenging. An ideal use of artificial intelligence (AI) would be enabling a harvester to identify trees of a particular age or species to remove as part of thinning, for example, without disturbing the rest of the forest. However, trees of the same species and age can differ from each other depending on factors such as regional climates, soil and even lighting at the time of analysis.

This makes programming a machine to harvest a specific species and age of tree is very difficult. Nevertheless, innovation such as intelligent boom control – as John Deere is exploring – can help human operators automate movements and make harvesting safer and more efficient.

Forestry has always changed as technology has advanced – from the invention of the axe to the incorporation of ecology – and the digital revolution is no different. Smart sensors and deeper data will, ultimately, help optimise the lifecycle, biodiversity and health of managed forests.

With thanks to the Institute of Chartered Foresters for inviting us to attend its 2018 National Conference in May – Innovation for Change: New drivers for tomorrow’s forestry.