Tag: gas

Taxing coal off the system

In the Spring Budget 2017, the Chancellor announced that the Government remains committed to carbon pricing. Philip Hammond’s red book revealed that from 2021-22 ‘the Government will target a total carbon price and set the specific tax rate … giving businesses greater clarity on the total price they will pay.’ Further details on carbon prices are to be ‘set out at Autumn Budget 2017’.

Researchers at Imperial College London have modelled what would have happened during 2016 with no carbon tax and also with an increased carbon tax. They have compared both with what actually happened. Their conclusion?

No carbon tax would mean:

  • More coal
  • Less gas
  • Higher emissions.

A higher carbon tax would mean:

  • Less coal
  • More gas
  • Lower emissions

Since it was announced in 2011, the Carbon Price Support (CPS) has encouraged generators and industry to invest in lower carbon and renewable technologies. It has also forced coal generators to fire their boilers only when they are really needed to meet demand, such as during the winter months or at times of peak demand and still or overcast weather conditions during the summer months.

The introduction of the carbon price has meant that gas power stations, which are less carbon intensive than coal, have jumped ahead of coal in the economic merit order of energy generation technologies and produced a greater share of the UK’s power. The same is the case for former coal generation units that have since upgraded to sustainable biomass – three such units at Drax Power Station result in savings in greenhouse gas (GHG) emissions of at least 80%.

A coal cliff edge?

The Carbon Price Support has resulted in significant savings in the country’s greenhouse gas emissions, helping the UK meet its international climate change commitments. Removing or reducing the CPS too soon and Britain’s power mix risks going back in time. It would improve the economics of coal and encourage Britain’s remaining coal power stations to stay open for longer creating a risk to security of supply through a ‘cliff edge’ of coal closures in the mid-2020s. Changing the economics to favour coal also makes it harder to reach the UK government’s goal of bringing a new fleet of gas power stations online.

What if …

Dr Iain Staffell from the Centre for Environmental Policy at Imperial College London has modelled a scenario in which the Carbon Price Support did not exist in 2016. “If the government had abolished all carbon pricing, we would probably have seen a 20% increase in the power sector’s carbon emissions,” said Staffell.

“Removing the Carbon Price Support would have the equivalent environmental impact of every single person in the UK deciding to drive a car once a year from Land’s End to John o’Groats.”

Without the Carbon Price Support, emissions from electricity consumption would be 20% higher, meaning an extra 250 kg per person (equivalent to driving a car 800 miles).

Running the numbers

The Carbon Price Support is capped at £18/tCO2 until 2021. In his Budget on 8th March 2017, Chancellor Philip Hammond – rightly, in the view of Drax – confirmed the government’s commitment to carbon pricing. Using data from National Grid and Elexon and analysis from Dr Iain Staffell, Electric Insights shows how coal power generation was only needed last winter when electricity demand was greater than could be produced by other technologies alone. Coal was only used at times of peak demand because it was among the most expensive energy technologies, in part due to the CPS.

What if that wasn’t the case and the government had decided to scrap the CPS before that point in time? More coal is burnt, particularly during the daytimes – on average coal produces 2,500 MW more over this week (equivalent to four of Drax Power Station’s six generation units).

And what does Dr Iain Staffell’s model suggest would have happened if the cap was doubled to £36/tCO2? The change is stark. Even for a week in the winter, with an average temperature across the country of 8.6oC, to see coal generation reduced so much compared to the actual CPS of £18/tCO2 or the £0/tCO2 scenario model, illustrates the impact of the Carbon Price Support.

Could bill payers save?

One argument for reducing the Carbon Price Support – or scrapping it altogether – is the possibility that consumers and non-domestic electricity bill payers would save money. It’s worth noting that apparent savings for electricity bill payers are lowered when the whole way that power is priced is accounted for, by the time it reaches homes and businesses.

“Carbon price support does increase the cost of wholesale power,” says Staffell. “But if you add the extra taxes, other renewable and low carbon support measures, transmission and balancing charges and fees imposed by electricity suppliers, the overall impact on consumer bills is modest. So, if the government abolished all carbon pricing, we could expect a 1 p/kWh reduction in our tariffs, but a 21% increase in our carbon emissions.”

As a report by economic consultancy NERA and researchers from Imperial College London has already shown, there are other ways to save bill payers money, while encouraging a low carbon future. Their analysis published in early 2016 found that households and businesses could save £2bn if the government considered the whole system cost of electricity generation and supply when designing its competitions for support under its Contracts for Difference (CfD) scheme.

2016, redux

Without the Carbon Price Support, the UK wouldn’t have managed to send carbon emissions back to 19th century levels.

So if 2016 was played out one more time but with no Carbon Price Support:

  • Coal generation would have increased by 102% (28 terawatt-hours) to 56 TWh
  • Gas generation would have decreased by 21% (-27 TWh) to 101 TWh
  • Carbon emissions would have risen by 21% (16 million tonnes of carbon dioxide) to 92MT CO2
  • The carbon intensity of the grid would have increased by 20% from 290 gCO2/kWh to 349 gCO2/kWh

And if 2016 had seen a doubling of the CPS to £36/tCO2:

  • Coal generation would have decreased by 47% (-12.9 TWh) to 14.7 TWh
  • Gas generation would have increased by 9% (11.8 TWh) to 139.5 TWh
  • Carbon emissions would have decreased by 10% (7.3 MT CO2) to 68.6 MT CO2
  • The carbon intensity of the grid would have decreased by 9% from 290 gCO2/kWh to 263 gCO2/kWh

The two scenarios presented above only modelled the impact of no or a higher Carbon Price Support on nuclear, coal and gas power supply. In the real-world, changes to the Carbon Price Support would also impact on energy technologies that operate under the Renewables Obligation (RO) such as two of Drax’s three biomass units and much of the country’s other renewable capacity. CPS changes would also likely impact imports and storage.

While no analysis is perfect this clearly illustrates the significantly negative impact that scrapping or reducing the Carbon Price Support would have on the UK’s decarbonisation agenda. It also highlights the benefits that the government’s decision to remain committed to carbon pricing will deliver.

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

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:

Decarbonisation: the next step

Turbines spinning

Half a decade ago we began a major transformation at Drax Power Station converting it to run on sustainable biomass. This week we’ve reached another milestone in that journey.

We’ve been granted a contract for difference (CfD), a UK government financial support that’s now been approved by the European Commission. It allows us to fully convert a third power generation unit to run entirely on compressed wood pellets, a form of renewable biomass. The granting of the CfD is a symbolic moment in our decarbonisation journey – it marks the close of one phase of development where the power station now makes more renewable than fossil fuel power, and the start of the next.

This next chapter began when we announced two major projects: the acquisition of Opus Energy and our plans to build four new rapid response, open cycle gas turbine (OCGT) power stations.

Like the upgrade of Drax Power Station, these new peaking plants are an important step in helping the country achieve a decarbonised energy system. They will do this by enabling more renewables to come onto the system.

The need for a diverse power network

Nearly 45% of the UK’s power already comes from gas, mostly generated by combined cycle gas turbine (CCGT) power plants. But while CCGT plants can deliver a steady supply of baseload power and flex up and down within seconds – just like Drax Power Station does with both coal and biomass – they can’t turn on and be at full capacity at very short notice. Starting from cold to quickly power the equivalent of a small city in a matter of minutes rather than hours or days, however, is exactly what the UK power network is increasingly going to need.

Solar and wind power can’t generate electricity when it’s dark or still. So to facilitate more of these intermittent renewables coming onto the grid, we need sources that can be quickly ramped up to ‘fill the gaps’ when lower carbon technologies aren’t able to provide the essential power for the modern world. This is where OCGT stations come in, alongside other standby technologies such as storage and demand side response.

OCGT stations have turbines that work like jet engines. This means they can start up incredibly quickly, getting to full load in just 30 minutes, meeting surges quickly when intermittent renewables can’t and nuclear, biomass and CCGT power stations are already providing baseload electricity.

Our proposed plants could be online as soon as the winter of 2020/21 – a few years before the last remaining coal-fired power stations close down. They will operate for roughly 500 hours a year (with a maximum availability of 1,500 hours depending on demand) and each will have a capacity of 299 MW. Each will generate enough instant power to simultaneously boil 120,000 kettles.

As well as allowing more renewables onto the system these gas plants support the government’s vision for reducing the carbon intensity of our energy grid – gas has half the carbon footprint of coal. More than that, we have expertise in it.

Drax CEO, Dorothy Thompson, has developed and operated 3,160 MW of gas assets in the past for Intergen, while a number of our engineers have worked across development, construction and operation of gas projects. We trade in it, too, so we know the market well. In short, a move into gas is one we are well suited too.

Drax Power CEO Andy Koss in a hard hat standing in front of a Drax biomass train

A secure economic future

Thanks to capacity market contracts, our OCGT plants will have limited reliance on income from the energy markets in the future. The capacity market is a government scheme designed to boost the UK’s energy security. It does this by paying new and existing power plants a fixed price to be available to generate electricity in future winters, the time of the year when demand is at its highest. The price they are paid is determined by a competitive auction, which allows government to secure as much capacity as it needs at the lowest price possible.

Building new power stations requires substantial investment, so having fixed-price contracts for power allows generators – like us – and their shareholders to invest in low carbon projects , safe in the knowledge that it will be economical to do so.

We’re aiming to secure 15-year capacity contracts for one OCGT in England and one in Wales within the next two years. In the most recent capacity auction , the price was driven too low to justify a commitment to build the first two plants. This doesn’t mean development on the plants will stop. Critical development work will continue throughout 2017 and next December the plants will be re-entered into the competition.

Continued commitment to biomass

Our new power stations mark a new chapter for Drax Group, but what they don’t affect is our commitment to biomass. Drax Power Station is already generating a majority of its electricity using high density wood pellets. And the granting of the CfD means we can now finalise the coal-to-biomass upgrade of half of the UK’s biggest power station and continue to invest in these assets. With the right support, we stand ready to complete the conversion of our North Yorkshire site and run entirely on sustainably-sourced biomass.

A study from engineering and design company Arup found that, after onshore wind, converted biomass power plants are the most affordable large-scale renewable power solution in the UK. More than that, the costs of undertaking this conversion have come down over the last few years. However, there is still room to bring this cost down further and we believe this needs to happen before we can fully convert Drax Power Station.

We are as determined to achieve this as we have ever been. Our view has always been to ensure we provide power for a brighter future and our new power stations are the next step in doing this.

Retooling for a post-coal future

The energy system in Great Britain is dramatically changing. Where it was once an industry dominated by coal, a predictable but dirty fuel, now our power increasingly comes from renewables. This is a trend that will continue, forcing more coal off the system.

Drax has a role in this new future of renewable power. We have already converted half of our power station in North Yorkshire to run on renewable biomass, and now, to support the needs of a system increasingly dominated by intermittent renewables like solar and wind, we are developing plans to build four new state-of-the-art flexible power stations – two in England and two in Wales.

Each will be 299 MW in size and powered by gas. Two of them could be producing electricity by 2020. It’s the next step for us in helping change the way energy is generated for a better future.


Supporting a renewable energy mix

Wind and solar accounted for 15% of Britain’s electricity mix between July and September from an installed capacity that has increased six fold in just six years. Biomass generation at Drax rose from almost nothing to producing 20% the country’s renewable power in the first half of this year. Renewable energy has come on leaps and bounds this decade – perhaps more than anyone ever thought it would.

But as well as being much lower in carbon emissions, renewables like wind and solar operate very differently to the fuels the GB Grid was built on – they’re intermittent. They only work when the sun is shining and the wind is blowing. So when it suddenly becomes still or dark, we need alternatives that plug the gap, deliver power and boost security of supply.

Biomass is one part of how we can do this using lower carbon fuels. Compressed wood pellets (the biomass used at Drax) is a renewable fuel that can be used to generate baseload power that can also be dialled up and down to meet demand. Like coal, it can also provide the ancillary services the Grid needs to stay stable.

Unlike combined cycle gas turbine (CCGT) power plants, which currently supply roughly 40% of the UK’s power and take 1.5 hours to start up from cold, our new open cycle gas turbine (OCGT) plants are like big jet engines – generating electricity at full power in just 20 minutes from cold or 10 minutes from a warm standby. It’s an incredibly fast turnaround and it’s what the energy network needs.

And because it’s a lower carbon fuel than coal with higher flexibility it will support the UK’s decarbonisation targets – by enabling more wind and solar on the Grid. We plan to use OCGTs to plug the gaps that intermittency creates – essentially flicking the switch on and off at very short notice. We anticipate they would run for no more than 1,500 hours per year – only at times when the electricity system is under stress. Through supporting more intermittent renewables we also help to enable more coal off the system.

A better future for customers

This new future will not only mean changes for us, the generators, but for customers, too.

How energy is supplied and used is evolving, and this is something that Drax can support with the growing retail side of our business.

We’re a company with a wealth of expertise in renewable power and we can use this to help deliver electricity to business customers in a way that caters for today’s market. We’re already doing this with Haven Power, but now we’re extending this with the acquisition of Opus Energy. With this new company as part of Drax Group we will be able to grow our existing retail offering, providing more of the UK’s growing businesses and established industrial and corporates not only with electricity, but also with gas. Our retail offering will provide businesses with a route to sell the power they generate but do not need – plus expertise in how they can use energy more efficiently.


These are the first steps in a new chapter for Drax. There will be more research and development to come. In the future we’ll be looking at how we can extend our American compressed wood pellet supply business, Drax Biomass, and at the potential for power storage systems.

If we want to continue to be a truly modern energy company that delivers on our aim of changing the way energy is generated, supplied and used for a better future, we need to be able to adapt. It’s always been a part of Drax’s history and it will be a part of our future.

Proposed Acquisition of Opus Energy Group Limited

RNS Number : 0297R
(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


  • 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.”


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>>investors>>results_and_reports>>IR presentations>>2016 or use the link https://www.drax.com/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


Instant Replay

UK Call-In Number

+44 (0) 20 8196 1998 

International Call-In Number

1 866 583 1035



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:



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


Revenues (£m)




Gross Profit (£m)




     Gross profit margin



Customer Meters (000’s)




Power (TWh)




Gas (TWh)








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  


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:




Revenues (£m)




   Year on year growth %



Gross Profit (£m)




   Gross profit margin %




Operating Cost (£m)




EBITDA (£m)(1)




EBIT (£m)(1)




Cash from Operations (£m)




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.


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. 


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.


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




Meters (000’s)




    Year on year growth %



Power (TWh)




Gas (TWh)





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.


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:



Power sales (TWh) comprising:



– Fixed price power sales (TWh)



at an average achieved price (per MWh)


at £48.5

at £44.4

– Gas hedges (TWh) (6)






Other Matters

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




(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.




Mind the gap

Later today the EDF Board is expected to give the go-ahead for a new nuclear power station at Hinkley. This will provide some long overdue clarity for Britain’s energy sector, but we now need to quickly move on and make the right decisions to secure the best mix of power generation.  The drawn out debate around Hinkley Point C has diverted attention away from the sector’s biggest challenge.

The Government has made it clear that coal must come off the system by 2025.  But coal still provides up to one fifth of the UK’s electricity, and plugging that gap will be far from easy.  Nor will doing so in a way that allows the country to meet its carbon targets while supporting the technologies that will deliver a modern energy system fit for the 21st century. The Government’s intention is absolutely right, but how does it intend to meet its target?

Let’s be clear, a positive Hinkley Point C decision will play an important role in the necessary energy mix but will provide no silver bullet. By most estimates, when finally complete, the nuclear plant will provide seven percent of the UK’s electricity needs.  However, this isn’t expected to come ‘on grid’ much before 2030, and let’s remember that in 2030 all but one of the UK’s current operating nuclear reactors are scheduled to be closed. Hinkley will therefore be replacing only some of the lost nuclear capacity, not providing ‘new’ energy to replace coal.

The last few years have seen a huge and welcome expansion in renewable sources of generation like wind and solar in the UK, but they are intermittent and cannot fill the gap alone. They still need to be supported by a constant supply of electricity that can be flexed up and down when the wind does not blow and the sun does not shine – a regular scenario on these shores.

As a form of low-carbon baseload generation, nuclear will undoubtedly be part of the answer. However, as we’ve already seen with Hinkley Point C, planning, funding and building new power stations can be a long and costly process. It has taken over a decade to reach today’s decision. In the past year alone, more than 5 gigawatts (GW) of coal power generation– Hinkley Point C is set to provide 3.2 GW – has come off grid well before the Government’s target of 2025. We don’t have the luxury of time: every day lost adds to the cost of addressing this challenge.

Gas will play a role but many, including the Institution of Mechanical Engineers (IMechE) have pointed out the huge number of gas-fired power stations we’ll need to plug the gap that ending coal creates. IMechE estimates 30 will be required which is clearly unrealistic, since the UK has built just four in the last 10 years.

At Drax, we have developed a solution to these challenges. We have used state of the art technology to upgrade some of our coal facilities to generate electricity from biomass in place of coal.  These facilities are already providing a reliable and flexible flow of electricity that also helps the UK meet its carbon targets.  The biomass we use is compressed wood pellets which perform in much the same way as coal and deliver an 80% CO2 saving.

Our biomass facilities are already powering three million homes and with the right support we can double this, helping to plug the energy gap that old plant coming off and delays to new build will leave us with.

Using biomass is more cost-effective than other renewables. This was illustrated by a recent study from Imperial College and economic consultancy NERA when they analysed the hidden costs of the back-up needed to meet demand created by intermittent renewables. Our biomass facilities can provide all of the electricity services required to keep the UK electricity system stable. Providing these services is set to become increasingly important in the years ahead as a greater need to back-up and balance the system will be required.

Finding the right mix of power generation will not be easy, but it is important we make every effort to get it right. Like Hinkley Point C, biomass is not a silver bullet, but it can and must play its part in helping the country transform to a low-carbon future.

The true cost of replacing coal-fired electricity generation

To make up for these closures, the Government is already planning to bring on new capacity. A new gas-fired power station will open at Carrington this summer, and we’re expecting to hear any day now that another nuclear power station will be created at Hinkley Point. And of course more electricity from renewables must be added over the years ahead as we look to meet our ‘go green’ targets.

In fact, the Government already has a plan in place to award contracts for new green energy off the back of three auctions over the next four years. The first of them is due later this year.

Drax understands that every one of those auctions is focused on offshore wind.

However, new independent research published by NERA Economic Consulting and Imperial College London questions that ‘single technology’ approach. 

Commissioned by Drax Group plc from leading economists, the research reveals the ‘true’ cost of the main forms of renewable energy – wind, solar and biomass.

And the evidence shows that opening up these auctions to include other renewables could result in significant savings that could be passed on to consumers. 

Where could these savings come from?

Renewables like wind and solar are vital, but they are by their very nature intermittent. That means other forms of power generation need to be available on standby at very short notice to meet the gap between supply and demand.

The costs of providing this standby electricity are passed on to consumers in their energy bills.

But crucially, they are not reflected in how the Government ranks the support that each type of renewable energy requires. Essentially the costs are hidden.

The NERA/ICL research shows that if these ‘hidden costs’ are added in, the true picture is very different.

When the true costs are taken into account, the Government’s preferred option – offshore wind – turns out to be the most expensive. In fact, the cheapest option is deploying new technology to existing power stations, enabling them to use biomass – essentially replacing coal with compressed wood pellets.

All in all, getting cheaper renewables into the mix could save consumers up to £2.2bn. How? Support for renewables is already funded through a portion of your energy bill, and bringing in a more cost-effective mix reduces the support needed.

That is why we at Drax are urging the Government to look at the true costs of new renewable capacity and include us in the mix for new power contracts.

To do so would not only lead to a potential £2bn saving for consumers, but replacing more coal with biomass gives the UK that reliable standby power we know we will need when other renewables can’t deliver it.

Using the latest technology we’ve already upgraded half of our Power Station to run on compressed wood pellets. The job’s not done. With the right support we want to carry on with the work we’re doing and help the Government to achieve its target of getting coal off the system by 2025.