Tag: investors

Proposed Acquisition of Opus Energy Group Limited

6 December 2016

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

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

Strategy Update

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

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

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

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

Opus Energy

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

OCGT developments

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

Trading

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

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

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

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

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

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

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

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

Enquiries:

Drax Investor Relations 

+44 (0) 1757 612 491

Mark Strafford

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

+44 (0) 207 742 6000

Robert Constant

Carsten Woehrn

Wendy Hohmann

Drax Media

+44 (0) 1757 612 026

Paul Hodgson

Website: www.Drax.com  

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

Analyst call and webcast arrangements

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

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

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

A copy of the presentation will be made available from 7am (UK time) on Tuesday 6 December 2016 for download at: www.drax.com>>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

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

Instant Replay

UK Call-In Number

+44 (0) 20 8196 1998 

International Call-In Number

1 866 583 1035

Passcode:

2318096#

Start Date:

Tuesday 6 December 2016

Delete Date:

Monday 12 December 2016

Video Webcast

Start Date:

Tuesday 6 December 2016

Delete Date:

Tuesday 5 December 2017

Archive Link:

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

 

Opus Energy

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

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

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

Background to and reasons for the proposed acquisition

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

Key benefits of the acquisition

Acceleration of Drax’s retail strategy

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

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

Platform for growth

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

Compatible and complementary to existing retail business

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

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

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

Haven YE Dec 2015

Opus YE Mar 2016

Proforma

Revenues (£m)

1,290

573

1,863

Gross Profit (£m)

19

107

126

     Gross profit margin

1%

19%

Customer Meters (000’s)

30

265

295

Power (TWh)

13.8

4

17.8

Gas (TWh)

–

1.7

1.7

Staff

c.400

c.870

c.1,270

  

Advances transition to broader, higher quality long-term earnings

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

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

Attractive financial returns

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

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

Synergy potential

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

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

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

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

Information on Opus Energy  

Overview

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

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

Financial information

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

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

Mar-14

Mar-15

Mar-16

Revenues (£m)

434

524

573

   Year on year growth %

21%

9%

Gross Profit (£m)

79

97

107

   Gross profit margin %

18%

19%

19%

Operating Cost (£m)

49

60

73

EBITDA (£m)(1)

30

38

34

EBIT (£m)(1)

29

37

33

Cash from Operations (£m)

28

32

34
Sources and notes:
(1) Reduction in financial year ended 31 March 2016 reflects removal of Climate Change Levy Exemptions

Business description

Small SME

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

Corporate

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

Renewables

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

Supply

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

Operational metrics

Mar-14

Mar-15

Mar-16

Meters (000’s)

175

223

265

    Year on year growth %

27%

19%

Power (TWh)

3.4

3.8

4

Gas (TWh)

0.8

1.2

1.7

 

Management Team

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

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

Current trading and outlook

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

Summary of the principal terms of the acquisition

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

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

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

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

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

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

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

Financing of the acquisition

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

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

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

Integration

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

OCGT Developments

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

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

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

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

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

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

Trading and Operational Performance

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

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

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

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

Power Sales Contracted for 2016 and 2017

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

2016

2017

Power sales (TWh) comprising:

18.9

14.9

– Fixed price power sales (TWh)

18.9

13.2

at an average achieved price (per MWh)

 

at £48.5

at £44.4

– Gas hedges (TWh) (6)

–

1.7

   p/therm

 

–

56.4

  

Other Matters

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

 

 

Notes:

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

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

END

 

The new Renewable Energy Directive and what it means for biomass

29 November 2016

Sustainable bioenergy
European union flag against parliament in Brussels, Belgium

***This story was published the day before the announcement by the European Commission. Please scroll to the bottom of this page for the Drax view ***.

When the European Union set out its policy for the promotion of renewable energy in the 2009 Renewable Energy Directive (RED) it set a very ambitious target: by 2020, renewables should make up 20% of the EU’s energy consumption. Each Member State was given a specific goal and made to detail exactly how it would hit this.

The Directive was comprehensive in many ways, but it didn’t include a clear sustainability policy for solid biomass, including compressed wood pellets. As one of the largest sources of renewable energy in Europe, this left a policy gap that many voices – including Drax – have called to be filled.

It’s a wish that will now be granted. A revised RED is set to be published by the EU that will specify clear criteria for all biomass.

“Sustainability has always been absolutely central to our biomass strategy but Drax has always argued that there is a right way to source biomass and a wrong way.”

Dorothy Thompson, Drax Group CEO, July 2014

Importance of sustainable biomass

Biomass is a well-established and essential part of the renewable energy mix. It offers a unique mix of reliability, flexibility and affordability, all while helping to deliver carbon reductions. This makes it particularly important as countries like the UK seek to phase out coal generation and hit the targets set out in the Paris Agreement.

However, in order to secure these carbon benefits biomass needs to be produced sustainably. This means that it comes from responsibly-managed, growing forests, and that the emissions from the supply chain are measured and minimised.

In the UK there are already binding sustainability criteria but this isn’t the case across the EU. Biomass use in the UK is regulated under the EU Timber Regulations and UK’s own Renewable Obligation (RO) biomass sustainability criteria.

The RO is a form of government support designed to incentivise large scale renewable electricity generation in the UK, and to qualify for this, energy companies must adhere to sustainability standards such as properly accounting for their greenhouse gas (GHG) emissions and only sourcing from responsibly managed land and forests.

An EU-wide approach to biomass that follows the UK’s could see the implementation of a risk-based scheme that asks large energy companies to prove how they mitigate against a set of identified risks – like those in the RO criteria. However, it’s important that compliance with these is independently verified – something that could be done by using independent schemes such as the Sustainable Biomass Program (SBP).

The SBP carries out supply-base evaluation of pellet producers to ensure the wood they’re using is qualified as sustainable and they’re meeting the RO criteria. Programmes like the SBP are already being used by most major biomass power generators in the EU and could act as a blueprint for the future.

Two workers stand next to machinery at the Morehouse facility in the USA.

Efficiency where effective

Only a few of the power stations across the EU are suitable for conversion from coal to biomass but those that are, like Drax, can deliver fast, significant carbon savings.

The thermal efficiency of such stations may not be as high as a newly built plant, but they do allow governments to quickly move away from coal. More than that, these plants can continue to provide the critical services – such as voltage control and black start – the grid needs to remain stable and that other renewables can’t.

Drax is one of these stations, and in the first half of 2016 it was able to deliver around 20% of the UK’s renewable power. Thanks to its conversion to biomass, it now does this with over 80% carbon reductions relative to coal.

With the abundance of suitable and sustainably-grown fibre that can be used for biomass electricity generation, there is a strong case for the EU to encourage the coal phase out by encouraging others to undergo conversion from coal to biomass.

But what’s also needed is a clear set of sustainability criteria for biomass. The move to define this is a step in the right direction but the final EU proposal needs to be a practical one.

If the updated RED achieves this, it will mean a bright future for renewable energy in Europe and a clearer path for meeting the continent’s Paris Agreement targets.

*** 30 November, 2016 UPDATE ***

Drax welcomes Renewable Energy Directive proposal

Drax welcomes the publication of the Renewable Energy Directive and bioenergy policy proposal. Drax has been at the forefront of calling for standards based on a risk-assessment to demonstrate the sustainability of biomass used for energy production.

Matt Willey, Public Affairs Director of Drax Power had said that:

“Drax has campaigned for a robust, pragmatic biomass sustainability policy for the whole EU for many years and today is a step in the right direction. It is important that large users of biomass can demonstrate forest regeneration is taking place, that areas of high conservation value are protected, that soil and water quality is maintained and that harvesting does not exceed the long-term production capacity of the forest. We welcome the fact the Commission proposes that voluntary national or international schemes, including those which use a risk based approach, can be used to provide evidence of sustainability.”

“The UK already has the toughest sustainability rules in the world so Drax can be sure our compressed wood pellets are sustainable but it makes sense to have a common policy across the EU.”

Drax Power has made huge efforts to demonstrate the sustainability of its biomass. Sourcing from regions with large surpluses combined with low wood paying capability, Drax is able to track and trace every shipment back to low risk areas, which assures that biodiversity is protected and promotes sustainable forest management.

Should the carbon tax be scrapped? Definitely not

Andy Koss, CEO Generation until April 2020

21 November 2016

Opinion
Coal field at Drax Power Station

Carbon emissions from electricity consumption in Britain are at their lowest level ever. Each unit of electricity produced now contains less than half the carbon it did four years ago. This pace of decarbonisation is ahead of expectations – it’s also entirely necessary.

Carbon dioxide (CO2) contributes to the warming of the planet and so limiting how much of it is released into the atmosphere is critical. Nowhere is this more important than in the power sector – one that has relied on carbon-intensive fossil fuels like coal for its lifetime.

The UK government has recently ramped up plans to end coal power generation by 2025, and since 2013, one of its methods for doing so has been an economic one: making organisations pay for every tonne of CO2 they release.

It makes carbon emissions an economic disincentive for businesses, but surprisingly, some of CO2’s biggest emitters fully support it – Drax included.

How do you put a price on carbon?

The EU was the first region to put such a scheme in place when, in 2005, it introduced the EU Emissions Trading System (EU ETS). Under this system, energy companies have to buy permits that allow them to emit CO2. But the price of those permits has historically been volatile – dropping as low as below £3 per tonne in 2014.

In 2013 the UK introduced the Carbon Price Floor (CPF), a means of bolstering the EU’s cost of carbon by setting a minimum price on emissions. Currently this is set at £18 per tonne, more than four times the value of an EU carbon permit.

More recently the CPF has become a point of contention as some industries claim it stifles progress and have called for it to be scrapped in the upcoming Autumn Statement.

This opposition has already caused blockers. Plans to raise the CPF to £30 per tonne by 2020 were halted by previous Chancellor George Osborne, who instead froze it at £18 until the end of the decade.
But this view isn’t universally shared. Drax, along with a number of other energy companies, including SSE and Calon Energy, recently wrote to the current Chancellor Philip Hammond to argue to keep the price in place until at least 2025.

In the letter we state the reason for our support plainly: we believe the Carbon Price Floor is central to the UK’s efforts to decarbonise its electricity system. In short, if we want a cleaner future, the CPF needs to remain in place.

Andu Koss Standing in front of turbines

Why price carbon?

Not only does a carbon tax disincentivise using CO2-heavy fuels and processes, it encourages investment in lower carbon and renewable energy sources by making them more cost effective relative to coal, diesel and fuel oil.

More than that, it places the decisions on how to reduce CO2 emissions into the hands of those making them. As long there is a societal cost to global warming, it makes sense to put a cost to the emissions that cause it.

In 2009 Drax began an upgrade of our power station to run on biomass. It was a decision to pursue decarbonisation on our own terms made by people with the knowledge of how best to achieve it. Today three of our six units are powered by compressed wood pellets, which has seen an 80% reduction in carbon emissions when compared to coal.

It’s also a significant revenue driver for the country. The levy is expected to raise £1 billion this year, while globally the World Bank estimates the value of implementing carbon pricing initiatives at a little under $50 billion dollars.

The revenue is significant, but so too are the impacts on emissions. Since 2012, the UK’s carbon emissions have fallen by over 4.5% a year and on May 5th, the country reached a milestone: the first time since 1881 the UK was powered without burning any coal.

This evidence sets out a clear argument. The CPF contributes to reducing carbon emissions, and for this reason it’s important it remains a part of the UK’s decarbonisation strategy. Scrapping it would be a grave error in the UK’s future energy plans and could limit our ability to meet the Paris Agreement targets.

2016 has already been an historic year for the electricity industry in Britain. But if the CPF is scrapped it will become a milestone year for different reasons. Rather than the year in which low-CO2 power generation took a step forward, it will be the year a decarbonised electricity future drifted further from our reach.

Hinkley may be an important milestone, but it’s no silver bullet to the UK’s energy challenges

Dorothy Thompson, (2005-2017 Chief Executive, Drax Group)

7 October 2016

Opinion

In September, the Prime Minister gave the go-ahead for the construction of two new nuclear reactors at Hinkley Point in Somerset, setting in motion the process for what could be the biggest and most expensive nuclear power station ever built.

While this monumental decision will provide some long overdue clarity for Britain’s energy sector, it has dangerously diverted the attention from a far bigger energy challenge facing the UK – replacing the contribution currently made by coal.

In November last year the Government made a commitment that the UK must stop generating power from coal by 2025. For the sake of future generations, this was the right decision to take – coal is, after all, a fossil fuel of the past that’s damaging the environment. However, it still provides up to one fifth of the UK’s electricity, and plugging that gap will be far from easy. Doing so in a way that allows the country to meet its carbon targets while supporting technologies that will deliver a modern energy system fit for the 21st century only adds to this challenge.

Hinkley Point C will play an important role in the future energy mix, but let’s be clear – it’s no silver bullet.

When finally complete, Hinkley Point C is expected to provide seven percent of the UK’s electricity – less than a third of what is needed to replace coal. What’s more, this new generation isn’t even expected to come ‘on grid’ much before 2030, by which point all but one of the UK’s operating nuclear reactors, which provide around 20% of the UK’s current needs, are scheduled to close.

In short, Hinkley will be replacing lost nuclear capacity, and nowhere near all of it, rather than providing the ‘new’ energy we desperately need to plug the gap the end of coal will create. This raises the question – what can replace outgoing coal in the necessary timescale?

While we have seen a huge and welcome expansion in renewable sources of generation like wind and solar in the UK, they are intermittent so cannot fill the void 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.

Gas and nuclear will form part of the solution, but as we’ve seen with Hinkley, planning, funding and building new power stations can be a long and costly process – it took over a decade to reach the decision on Hinkley Point. Gas fired power stations can be up and running far quicker, but obviously planning and approval are still required, and only a handful have been built in the last 10 years.

Alternative technologies – like small modular nuclear reactors and electricity storage – held in some quarters as the answer, certainly hold potential. However, the reality is they aren’t yet fit for purpose at scale and will need much more research and development and in some cases regulatory approval, before they become viable.

Dorothy Thompson

Dorothy Thompson, CEO, Drax Group

Time, unfortunately, is not a luxury we have. This year alone, more than six gigawatts (GW) of coal power generation could come off grid – almost twice the generating capacity of Hinkley Point. Every day lost adds to the cost and complexity of addressing the challenge we face – making a solution less likely.

A recognised, cost-effective renewable option does exist though, but it is often unmentioned in the debate – it’s called biomass.

Using the latest technology at Drax Power Station we have upgraded half of the coal facilities to generate electricity using sustainable compressed wood pellets instead of coal. Since this re-uses existing coal infrastructure, it’s quicker and more efficient than building new power stations, while also providing a reliable and flexible flow of electricity that can help the UK meet its carbon targets. The compressed wood pellets we use, for example, perform in much the same way as coal but deliver a more than 80% CO2 saving.

This solution is proven and ready to go. Already Drax’s facility is powering more than three million homes and delivering 20% of the UK’s renewable electricity, making it the biggest single site renewable generator in the country. Drax can go further though, with the right government support and a level-playing field, delivered via technology-neutral auctions for energy contracts.

With all six Drax generation units converted plus Lynemouth power station – which already has that future secured – and one or two other, smaller biomass power stations, around 10% of the UK’s electricity could be generated using this technology well before 2025.

Finding the right mix of power generation will not be easy, but it is important to make every effort to get it right.

Like Hinkley Point C, biomass is no silver bullet, but it is ideally placed to play an even greater role in helping the country transform to a low-carbon future.

How a new industrial revolution in green energy is transforming the North once again

6 October 2016

Sustainable business

The North of England has long been a proving ground for the kind of engineering innovations that have transformed the world. The heartland of the First Industrial Revolution, it is now at the centre of a new revolution focused on clean energy production and sustainable power, led by organisations like Drax.

Europe’s largest decarbonisation project

Over the last decade, Drax has been carrying out a major high-tech engineering and infrastructure project to upgrade half its generating units to use sustainable biomass in place of coal.

These converted units now produce enough electricity to power Birmingham, Leeds, Sheffield, Liverpool, Manchester and Newcastle – all using compressed wood pellets, cutting carbon emissions by more than 80%.

But more than just having environmental benefits, it’s provided a huge boost to the economy.

Boosting the UK economy

In 2015, Drax contributed more than £1 billion to the UK’s GDP and supported some 14,000 jobs across the country.

“The economic benefit has reached all parts of the country,” says CEO Dorothy Thompson. “We’ve been the catalyst for rejuvenation and growth across the Northern Powerhouse, with port expansion on the coasts of East Yorkshire, the North West and North East.”

This boost was particularly significant in the North, where Drax generated over £620 million for the local economy.

Innovation driving a better future for Britain

It’s these kinds of innovative upgrades that are helping to tackle the urgent environmental challenges that our society faces as we make the transition to lower carbon and renewable power, and changing the way we think about producing energy in the UK.

Having nurtured the Industrial Revolution, today the North of England is again the focus of a major paradigm shift. Where once coal fields and smoke stacks dominated the local landscape, now Drax’s giant biomass storage domes speak of a new future for the region, for the UK, and for renewable energy production as a whole.

To find out more about how Drax has benefited the UK’s economy, please visit https://www.draximpact.co.uk/

Forbes: Drax joint-second most trustworthy company in Europe

Will Gardiner, Chief Executive Officer, Drax Group

22 April 2016

Opinion

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

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

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

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

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

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

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

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

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

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

We can make a difference in 2016 and beyond

Dorothy Thompson, (2005-2017 Chief Executive, Drax Group)

23 February 2016

Investors

Today we released our financial results for 2015.  I’ll be the first to admit that they are not good.  What makes it all the more painful is that one of the strongest operational performances the business has achieved in the last decade, was more than wiped out by factors well outside of our control.

Let’s be frank, for any business operating in the UK energy market 2015 was a tough year. The deterioration in the commodity markets were some of the most severe I have seen in my career. This was then accompanied by a series of unexpected regulatory announcements which caused many to question the UK governments commitment to decarbonisation.

Like any CEO on results day I have spent this morning speaking to investors, journalists and financial analysts. Instead of focusing too much on what hasn’t gone our way in 2015, I’ve focused on where I think we can make a difference in 2016 and beyond, and I’ve been pleased with their positive reaction.

The affordable way to end coal

In November Amber Rudd announced the government’s proposal to consult on setting a clear end date for coal of March 2025. Given it still provides around 25% of the country’s electricity this is an ambitious target. Part of the solution is new nuclear and gas. But as a recent report by the Institute of Mechanical Engineers noted, the country will find it very hard to build enough new facilities to replace coal capacity in time.

Instead of having to take all the existing coal power stations off the grid and build new facilities, the country could use the world leading biomass technology that Drax has pioneered to upgrade some of them to use compressed wood pellets instead of coal. The economic consultancy NERA found that more biomass conversions are one of the most sensible ways for the UK to get off coal at the fairest price to the taxpayer. With the right support we stand ready to convert our remaining coal units to become a fully renewable generator.

Helping society and creating shareholder value

I fundamentally believe that Drax is making a valuable contribution in helping society deal with one of the most pressing issues of our time – cutting carbon emissions to limit climate change. We have an approach which is both affordable and reliable. So long as we remain operationally strong, which I am very confident about, then shareholder value will accrue.

Throughout 2016 and beyond, we will build on our expertise and continue to evaluate a range of longer term strategic options. I lead a strong business that will use the opportunities available to us to create value for our shareholders and help bring about a reliable, renewable future that we can all afford.

Three ways to judge a CFO

Will Gardiner, Chief Executive Officer, Drax Group

17 December 2015

Opinion

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

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

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

This article was originally published by Will on LinkedIn.