Tag: Will Gardiner

The roadmap to zero carbon

The UK has come a long way in its efforts to decarbonise. Greenhouse gas emissions last year were 43% below 1990 levels, while increasing renewable electricity generation and a strengthening carbon price means the country could soon go coal-free for an entire summer.

There is still, however, much work needed to reach the UK target of reducing emissions to 20% of 1990 levels by 2050 and meeting the Paris Agreement’s aim of keeping temperature increases below two degrees Celsius. As ambitious as these goals may be, recent research by the Energy Transitions Commission (ETC) believes they can be met by 2050, with the right government policies and action from businesses.

To help to mitigate man made climate change, all industries, across all sectors must cut carbon emissions. It’s a big challenge but a clear first step must be the decarbonisation of electricity generation. This step will enable other industries to reduce their emissions in turn through electrification.

Since 2000 we have been building our experience in decarbonising electrical generation, transforming what was once Western Europe’s largest coal-fired power station into the UK’s biggest decarbonisation project. This puts us in a unique position to offer the leadership and innovation needed – across the electricity industry and other sectors – to reach a zero-carbon world.

Electricity generation will lead decarbonisation

The electrification of carbon-intensive sectors, such as transport and heating, will only contribute to reducing overall emissions if the electricity comes from mostly low or zero-carbon sources.

The ETC’s research suggests wind and solar will be capable of providing 85% of the world’s electricity generation by 2050. When these intermittent sources are unable to generate electricity the remaining 15% will come from a combination of nuclear, hydro, biomass and storage (including batteries, pumped storage and new technologies).

In fact, biomass alone could provide as much as half of that 15% but it is critical that this flexible, renewable, low carbon fuel must be sustainably sourced. For the wood biomass we use at Drax Power Station, its sourcing should contribute to growing and healthy forests, which will be another key part of the climate change solution.

Will Gardiner, CEO, Drax Group

At Drax, we have a long history of finding ways to cut emissions and improve the efficiency of our own biomass pellet supply chain, from bigger ships to more efficient rail freight loading and unloading.

The skills and experiences gained from these efforts serve not only to decarbonise our business but will benefit other supply chain-based industries along the path to lower-carbon emissions. More than this, it is far from the only way we are working towards doing this.

From here to zero-carbon

One of the biggest hopes for removing carbon from industry lies in carbon capture and storage. We’re leading the charge on bringing this technology to the fore by running a six-month pilot of a Bioenergy Carbon Capture and Storage (BECCS) system, which will capture a tonne of carbon every day from one of our four, 600+ megawatt (MW) biomass units.

Capturing emissions not only further reduces the carbon intensiveness of electricity generators of all kinds, but also opens new revenue streams for businesses through utilising captured carbon. For Drax, BECCS takes us another step towards becoming a carbon negative operation, where we remove more carbon from the atmosphere than we emit. It is also an opportunity to further expand the knowledge and experience of our team and become leading experts in a field which will be essential in meeting climate change goals.

Alongside this, our plans to repower the last of our coal-fired units to highly-efficient combined cycle gas turbines (CCGT) and build four, rapid-response open cycle gas turbines (OCGT) will give the electricity system the flexibility needed to support more intermittent renewable sources. The abilities of gas plant in balancing and system services can help to complete the journey away from coal before 2025. In subsequent decades, gas can play a pivotal role assisting the transition to a zero-carbon power system.

Our retail businesses, Haven Power and Opus Energy, also allow us to help companies and the public sector outside of electricity generation to reduce their carbon footprint. Beyond just supplying renewable electricity, we’re also looking at ways through closer customer partnerships to help businesses leverage new technologies to use electricity more efficiently and in turn lower their costs.

Reaching a zero-carbon future is a monumental task for electricity producers that depends on innovative thinking and new technologies. We have the experience in developing transformative ideas and making them a reality – all of which will be essential in guiding us into a brighter, more stable, decarbonised future.

Half year results for the six months ended 30 June 2018

RNS Number :  5142V
Drax Group PLC
Six months ended 30 JuneH1 2018H1 2017
Key financial performance measures
EBITDA (£ million)(1)102121
Underlying earnings (£ million)(2)79
Underlying earnings per share (pence)(2)1.62.2
Interim dividends (pence per share)5.64.9
Net cash from operating activities (£ million)112197
Net debt (£ million)(3)366372
Statutory accounting measures
Operating profit/(loss) (£ million)12(61)
Loss before tax (£ million)(11)(104)
Reported basic loss per share (pence)(1)(21)

Financial and Operational Highlights

  • H1 EBITDA lower year on year due to two unplanned outages, other areas performing well
  • Statutory loss before tax includes lower level of H1 EBITDA and asset write off
  • Refinancing complete – swapped floating for fixed rate debt with 7.5-year maturity
  • Sustainable and growing dividend
    • Increase in 2018 interim dividend to £22.4 million (5.6 pence per share) (H1 2017: £20 million)
    • Expected 2018 full year dividend of £56 million
    • Ongoing £50 million share buy-back programme – £13 million at 30 June 2018

Good progress with strategic initiatives, on track to deliver long-term objectives

  • Third biomass pellet plant, LaSalle Bioenergy, commissioning ahead of plan – full capacity Q1 2019
  • Conversion of fourth biomass generating unit on schedule and budget, commissioning late summer
  • Programme for long-term reduction in biomass cost including sawmill co-location and rail spur investment
  • Confident in growing requirement for system support services over coming years
  • Development of options for future generation:
    • Coal-to-gas repowering – detailed planning application accepted for review June 2018
    • Four OCGTs(4) – two projects in next capacity market auction, planning applications accepted for review for remaining two projects
  • B2B Energy Supply delivering solid progress to grow number of customer meters

2018 outlook

  • Full year financial expectations unchanged
    • Generation – fourth biomass unit conversion, improved margins, on target availability and capacity payments
    • Continued growth in Pellet Production and B2B Energy Supply
  • Capital Markets Day, 13 November

Will Gardiner, Chief Executive of Drax Group plc, said:

“Drax continues to be at the heart of decarbonising UK energy, securing government support to convert a fourth unit to biomass and piloting a Bioenergy Carbon Capture and Storage project, supporting the UK Government’s carbon capture and storage ambitions.

“Full year EBITDA expectations remain unchanged. However, first half EBITDA was lower, principally due to two specific generation outages. We made excellent progress with our Pellet Production business, driving down costs while producing at record levels and our B2B Energy Supply business continues to increase customer numbers. We also remain on track with our investment projects: the conversion of a fourth unit to biomass, and the development of our OCGT and coal-to-gas repowering options.

“We remain focused on safe and efficient operations and returns to shareholders and expect to declare a full year dividend of £56 million for 2018.”

Group Financial Review

  • Increase to operating profit includes unrealised gains on derivative contracts of £24 million (2017: loss £86 million)
  • Decrease in underlying earnings per share – principally reflects lower EBITDA from biomass generation in H1 2018 vs H1 2017
  • Reported basic earnings per share – a loss of 1.0 pence, which includes write off of coal-specific assets (£27 million) following commencement of fourth biomass unit conversion, largely offset by unrealised gains on derivative contracts (£24 million)
  • Tax – tax credit reflecting benefit of Patent Box claims
  • Capital investment of £46 million, full year investment expectation unchanged at £100–£110 million
    • Core maintenance (£50 million), improvement and optimisation projects (£20-£30 million) and conversion of a fourth biomass unit (£30 million)
  • Net debt of £366 million (31 Dec 2017: £367 million), including cash on hand of £245 million

Operational Review

Pellet Production – Good quality pellets at lowest cost

  • EBITDA up £14 million to £10 million
    • 80% increase in pellet production to 0.7 million tonnes (H1 2017: 0.4 million tonnes)
    • 12% reduction in cost per tonne
  • LaSalle Bioenergy (LaSalle) commissioning complete, full capacity Q1 2019
  • Biomass cost reduction initiatives
    • Co-location and offtake agreement with Hunt Forest Products for low-cost sawmill residues at LaSalle
    • Investment in LaSalle rail spur (£11 million) – reduced transport cost to Baton Rouge port facility

Power Generation – Optimisation of existing assets and decarbonisation projects

  • EBITDA down £49 million to £88 million
    • Rail unloading building outage restricted operation of two ROC(5) units (January 2018)
    • Generator outage on one ROC(5) unit (February 2018)
    • System support and flexibility £36 million (H1 2017: £48 million) – lower due to specific Black Start contract (Q1 2017)
    • Offset by 2016 insurance proceeds and lower carbon cost following decision to convert a fourth unit to biomass
  • Electricity output (net sales) down 17% to 8.9TWh (H1 2017: 10.7TWh)
    • Two unplanned outages on ROC(5) units in Q1 and reduced coal generation
    • High biomass availability in Q2
  • 71% of generation from biomass (H1 2017: 68%)
  • Commenced Bioenergy Carbon Capture and Storage (BECCS) pilot project, £0.4 million cost

B2B Energy Supply – Profitable business with growth in customer meters

  • EBITDA up £4 million to £16 million
    • 9% increase in customer meter points to 387,000 (H1 2017: 356,000)
    • Increase in bad debt reflecting challenging business environment for some customers
  • Strong renewable proposition – 59% of sales renewable
  • Continued investment in next generation IT systems
  • Development of flexibility and system support market

Notes:

  1. EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business.
  2. Underlying earnings exclude unrealised gains on derivative contracts of £24m (H1 2017: unrealised losses of £86m) and material one-off items that do not reflect the underlying performance of the business (finance costs of £7m (2017: £24m), acquisition and restructuring costs of £3m (2017: £6m), write off of coal-specific assets of £27m (H1 2017: £Nil), and the associated tax effect.
  3. Borrowings less cash and cash equivalents.
  4. Open Cycle Gas Turbine.
  5. Renewable Obligation Certificate.

View complete half year report

View analyst presentation

Chief Executive’s review

Drax Group CEO Will Gardiner

Market background

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

Our strategy

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

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

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

Summary of 2017

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Political, regulatory and economic background

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

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

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

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

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

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

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

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

Safety, sustainability and people

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

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

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

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

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

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

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

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

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

Research and innovation

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

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

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

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

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

Performance review: Pellet Production

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

Operational review

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

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

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

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


CASE STUDY

Low-cost, high-impact capacity increase

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

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


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

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


CASE STUDY

Locational benefits of Gulf cluster

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

All sites within 200-mile radius

Operational efficiencies

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

Shared logistics to Baton Rouge

  • Rail and road
  • Increased port throughput

Complementary fibre sourcing

  • Optimisation of supply between plants

Find out more: www.draxbiomass.com


Financial results

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

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

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

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

Pellet Production financial performance

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

Key performance indicators

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

Looking ahead

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

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

Performance review: Power Generation

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

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


STRATEGY IN PROGRESS

Gas power station development

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

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

Investment case

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

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


Regulatory framework

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

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

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

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

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

Generation capacity and system support

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

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

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

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

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

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

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


STRATEGY IN PROGRESS

Repowering away from coal

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

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

Find out more: repower.drax.com


Operational review

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

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

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

Financial results

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

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

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

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

Power Generation financial performance

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

Key performance indicators

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

Looking ahead

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

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

Performance review: B2B Energy Supply

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

Regulation and competition

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

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


STRATEGY IN PROGRESS

An innovative energy supplier

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

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

Assistant Church Warden, Chris Gunton, commented:

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

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

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

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

Commented Andrew Swales, Director of Hamerton Zoo:

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


Operational review

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

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

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

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

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

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

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

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

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

Financial results

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

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

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

B2B Energy Supply financial performance

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

Key performance indicators

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

Looking ahead

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

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

Outlook

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

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

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

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

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

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


2018 priorities

Pellet Production 

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

Power Generation

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

B2B Energy Supply

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


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

Read the Drax Group plc annual report and accounts 2017

Drax Group plc Chief Executive comments on full year results

Will Gardiner, CEO, Drax Group

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

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

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

View full report

View investor relations presentation

Drax Group plc: Full year results for the twelve months ended 31 December 2017

RNS Number : 9871F
Drax Group PLC
Twelve months ended 31 December20172016
Key financial performance measures
EBITDA (£ million)(1)229140
Underlying profit after tax (£ million)(2)321
Underlying earnings per share (pence)(2)0.75.0
Total dividends (pence per share)12.32.5
Net cash from operating activities (£ million)315191
Net debt (£ million)(3)36793
Statutory accounting measures
(Loss) / profit before tax (£ million)(183)197
Reported basic (loss) / earnings per share (pence)(37.2)47.7

All areas of the business contributing to positive EBITDA for the first time

  • EBITDA up 64% to £229 million – improving earnings quality from biomass generation and Opus Energy
    • Pellet Production – EBITDA up £12 million to £6 million – 35% growth in production
    • Power Generation – EBITDA up £64 million to £238 million – contribution from biomass generation
    • B2B Energy Supply – EBITDA up £33 million to £29 million –acquisition of Opus Energy
  • Strong cash flow generation and balance sheet – 1.6x net debt to EBITDA
  • Final dividend of £30 million, representing 60% of the recommended full year – £50 million
  • £50 million share buy back programme consistent with capital allocation policy
  • Statutory loss before tax principally driven by unrealised losses related to foreign currency hedging of £156 million

Delivering strategy and remain on course to hit >£425 million EBITDA target by 2025

  • Accelerated energy supply growth with acquisition and on-boarding of Opus Energy
  • Increased biomass self-supply through acquisition and commissioning of third biomass pellet plant, LaSalle Bioenergy
  • Government support received for fourth biomass unit conversion at Drax Power Station
  • Development of options for future generation: coal-to-gas repowering option, two OCGTs (4) to enter next capacity market auction in December 2018

Focused on operational excellence and investment in strategy

  • Continued focus on safety, operational excellence and project development
  • Targeted investment in long-term growth opportunities
  • Continued growth in EBITDA and cash generation
  • Sustainable and growing dividend, with opportunities to return capital in line with policy

Will Gardiner, Chief Executive of Drax Group plc, said:

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

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

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

Notes for analysts and editors

2017 Group Financial Review

  • Underlying earnings per share decreased to 0.7 pence
    • Accelerated depreciation of coal-specific assets, amortisation of intangible assets associated with the acquisition of Opus Energy and an increase in net finance charges.
  • Reported basic earnings per share – a loss of 37 pence, which includes unrealised losses on derivative contracts of £156 million (principally related to the foreign currency hedging programme) in addition to one-off items – transaction costs relating to the acquisition of Opus Energy (£8 million) and refinancing (£24 million)
  • Tax – one-off non-cash charge of £16 million – a reduction in US federal tax rates from 35% to 21% resulting in a revaluation of deferred tax balances, offset by £13 million cash tax credit from UK Patent Box tax regime, which rewards Drax patented innovation in biomass generation
  • Investment in line with guidance
    • Acquisition of Opus Energy (£367 million)
    • Acquisition and commissioning of LaSalle Bioenergy (£48 million)
    • Maintenance and improvement (£133 million) including pellet plant optimisation, strategic spares, Haven Power information systems, research and innovation and Opus Energy office consolidation
    • Continue to expect ongoing maintenance capital investment of £50-60 million per year
  • Net debt of £367 million (31 Dec 2016: £93 million), including cash on hand of £222 million

2017 Operational Review

Pellet ProductionFocus on good quality pellets at lowest cost

  • 35% increase in pellet production to 0.8M tonnes (2016 0.6M tonnes)
  • Low-cost expansion of Amite and Morehouse plants complete
  • Improving operational performance whilst providing supply chain flexibility
  • LaSalle Bioenergy commissioning ahead of plan from November 2017, increasing output through 2018
  • Biomass self-supply increased

Power GenerationFocus on optimisation of existing assets and development of projects

  • Electricity output (net sales) 20.0TWh (2016: 19.6TWh)
  • 65% of generation from renewables (2016: 65%)
  • £88 million from system support and flexibility
  • £90 million capacity market payments secured for 2017-2022

B2B Energy SupplyProfitable business with growth in sales and customer meters

  • 12% increase in customer meter points to more than 375,000
  • 46% of energy sales from renewables
  • Opus Energy EBITDA in line with plan; Haven Power exceeded EBITDA breakeven target
  • Continued investment in next generation IT systems

Notes:

(1)  EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business.

(2)  2017 underlying earnings exclude unrealised losses on derivative contracts of £156 million and material one-off items that do not reflect the underlying performance of the business (2016: unrealised gains of £177 million).

(3)  Borrowings less cash and cash equivalents.

(4)  Open Cycle Gas Turbine.

Contacts

Enquiries:

Drax Investor Relations: Mark Strafford

+44 (0) 1757 612 491

Media:

Drax External Communications: Ali Lewis

+44 (0) 1757 612 165

 

View full report

View investor relations presentation

Appointment of Interim Chief Financial Officer

RNS Number : 7736U
DRAX GROUP PLC
(Symbol: DRX)

Following the recent announcement that Will Gardiner will succeed Dorothy Thompson as Chief Executive Officer of Drax Group from 1 January 2018, the Board is progressing a process to appoint a permanent Chief Financial Officer (CFO) as soon as practicable.

In the meantime, Den Jones has been appointed as Interim CFO of the Group from 1 November 2017 and will work with Will Gardiner to ensure a smooth transition.

Den was previously CFO of Johnson Matthey, a FTSE 100 specialty chemicals company and has held senior and executive positions, including Interim CFO, in BG Group, a major global energy company. He spent the early part of his career in banking and professional services with Citibank and PwC where he held a number of specialist financial management positions.

Enquiries:

Investor Relations:

Mark Strafford

+44 (0) 1757 612 491

Media:

External Communications:

Ali Lewis

+44 (0) 1757 612165

Website: www.drax.com

END

Will Gardiner to succeed Dorothy Thompson as Chief Executive of Drax Group

RNS Number : 3929R
DRAX GROUP PLC
(Symbol: DRX)

Drax Group plc announces that Will Gardiner, currently Group Chief Financial Officer, is to be appointed as Group Chief Executive with effect from 1 January 2018. The appointment results from Dorothy Thompson’s decision to step down after 12 successful years as Group Chief Executive. Dorothy will leave the Group at the end of 2017.

Will joined Drax as Group Chief Financial Officer and a member of the Group Board in November 2015. The Board has kept succession planning well under review and his new appointment comes after a thorough selection process involving internal and external candidates.

Drax Chairman, Philip Cox said: “We are delighted Will is to become Chief Executive. He has been a key architect of our new strategy and is a focused, innovative and engaging leader. His appointment is a natural progression after two years working alongside Dorothy developing an ambitious strategy which I am confident will create significant benefits for all Drax’s stakeholders.

“On behalf of the Board I would like to thank Dorothy for her enormous contribution to Drax. She transformed the business during her tenure and leaves the Group in a strong position with a clear strategy that lays the foundations for further success in a changing energy sector.”

Will Gardiner said: “I am thrilled to be appointed as Group Chief Executive at this exciting time for Drax. The changes we are seeing in the UK energy sector are unprecedented and we have an opportunity to thrive while doing the right thing for the UK energy market. Drax’s people have demonstrated repeatedly their ability to deliver transformational change and I’m delighted to be working with them to build on Dorothy’s strong legacy.”

Dorothy Thompson said: “Drax Group plays a strategic role in the UK electricity sector generating around 16% of UK renewable electricity, is a world leader in the production of wood pellets and is a leading challenger brand in the supply of electricity to businesses. I retire knowing the Group is in excellent shape: it has the right strategy, the right team and in Will, the right leader.”

The Board will now commence a process to appoint a new Group Chief Financial Officer and will also review the option to make an appointment on an interim basis. 

No other disclosure obligations arise under paragraphs (1) to (6) of LR 9.6.13 R of the UK Listing Authority’s Listing Rules in respect of Will Gardiner’s appointment as Chief Executive of Drax Group plc.

Enquiries:

Drax Investor Relations:

Mark Strafford

+44 (0) 1757 612 491

+44 (0) 7730 763 949

Media:

Drax External Communications:

Matt Willey

+44 (0) 1757 612 285

+44 (0) 7711 376 087

Website: www.drax.com

Notes:

Will Gardiner joined Drax in November 2015 as Group Chief Financial Officer and a member of the Group Board. He is currently responsible for Finance, Strategy, and IT Systems.

Prior to joining Drax Will was Chief Financial Officer of CSR plc, a global semiconductor business.  He had previously been a Divisional Finance Director of BSKYB and Chief Financial Officer of Easynet Group plc.

At both CSR and Easynet Will’s focus was on driving transformational change to take advantage of new market opportunities. He is also a non-executive member on the Board of Qardio plc, a wireless medical devices company. Will is also a Trustee of the Institute for War & Peace Reporting, a London-based charity that supports local journalists and civic activists in areas of crisis and change around the world.

Will graduated from Harvard University with a BA Magna Cum Laude in Russian and Soviet Studies and from Johns Hopkins University with an MA in International Relations. He spent the early part of his career in corporate finance with Citibank and JP Morgan.

END

Understanding the pounds behind the power

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

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

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

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

Where are we now?

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

The generation business

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

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

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

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

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

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

The retail business

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

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

The biomass business

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

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

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

What’s next?

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

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

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

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