Tag: decarbonisation

Energy Revolution: A Global Outlook

5 December 2018

Carbon capture

Read the full report [PDF]

The global energy revolution

As a contribution to COP24, this report informs the debate on decarbonising the global energy system, evaluating how rapidly nations are transforming their energy systems, and what lessons can be learned from the leading countries across five energy sectors.

It was commissioned by power utility Drax Group, and delivered independently by researchers from Imperial College London and E4tech.

Clean power

  • Several countries have lowered the carbon content of their electricity by 100 g/kWh over the last decade. The UK is alone in achieving more than
    double this pace, prompted by strong carbon pricing.
  • China is cleaning up its power sector faster than most of Europe, however several Asian countries are moving towards higher-carbon electricity.
  • Germany has added nearly 1 kW of renewable capacity per person over the last decade. Northern Europe leads the way, followed by Japan, the US and China. In absolute terms, China has 2.5 times more renewable capacity than the US.

Fossil fuels

  • Two-fifths of the world’s electricity comes from coal. The share of coal generation is a key driver for the best and worst performing countries in clean power.
  • Coal’s share of electricity generation has fallen by one-fifth in the US and one-sixth in China over the last decade. Denmark and the UK are leading the way. Some major Asian nations are back-sliding.
  • Many European citizens pay out $100 per person per year in fossil fuel subsidies, substantially more than in the US or China. These subsidies are growing in more countries than they are falling.

Electric vehicles

  • In ten countries, more than 1 in 50 new vehicles sold are now electric. China is pushing ahead with nearly 1 in 25 new vehicles being electric and Norway is in a league of its own with 1 in 2 new vehicles now electric, thanks to strong subsidies and wealthy consumers.
  • There are now over 4.5 million electric vehicles worldwide. Two thirds of these are battery electric, one third are plug-in hybrids. China and the US together have two-thirds of the world’s electric vehicles and half of the 300,000 charging points.

Carbon capture and storage

  • Sufficient storage capacity has been identified for global CCS roll-out to meet climate targets, but large-scale CO2 capture only exists in 6 countries.
  • Worldwide, 5 kg of CO2 can be captured per person per year. The planned pipeline of CCS facilities will double this, but much greater scale-up is needed as this represents only one-thousandth of the global average person’s carbon footprint of 5 tonnes per year.

Efficiency

  • Global progress on energy intensity is mixed, as some countries improve efficiency, while others increase consumption as their population become wealthier.
  • Residential and transport changes over the last decade are mostly linked to the global recession and technological improvements, rather than behavioural shift.
  • BRICS countries consume the most energy per $ of output from industry. This is linked to the composition of their industry sectors (i.e. greater manufacturing and mining activity compared to construction and agriculture).

continued … [View PDF]

I. Staffell, M. Jansen, A. Chase, E. Cotton and C. Lewis (2018). Energy Revolution: A Global Outlook. Drax: Selby.

View press release:

UK among world leaders in global energy revolution

Negative emissions techniques and technologies you need to know about

28 November 2018

Carbon capture

Cutting carbon emissions is the headline environmental policy for the 195 countries signed up to the Paris Climate Agreement – and so it should be. Decarbonisation is crucial to keeping global warming below 2oC and avoiding or at least mitigating potentially dire consequences for our planet, its people and biodiversity.

However, centuries of pumping out carbon dioxide (CO2) from factories, vehicles and power plants means it’s not enough just to reduce output. Countries must also work on CO2 removal (CDR) from the atmosphere. Implemented at scale, what’s also known as Greenhouse Gas Removal (GGR) could mean a country or facility removing more CO2 than it emits – effectively giving it negative emissions.

Achieving this is not only advantageous to combating climate change, it’s essential. A new report from the Intergovernmental Panel on Climate Change (IPCC) explores 116 scenarios in which global warming is kept to 1.5 oC of pre-industrial levels (more ambitious than the Paris Agreements 2oC). Of these scenarios, 101 use negative emissions technologies (NETs) at a scale of between 100 to 1,000 gigatonnes* over the 21st century.

Given the scale of the ambition, the task of capturing enough carbon to be truly negative will need to rely on many sources. Here are some of the techniques, technologies, and innovations aiming to push the world towards negative emissions.

  1. Forests

Weyerhaeuser Nursery, Camden, Alabama

CDR doesn’t have to utilise complex tech and chemistry. The planet’s natural carbon cycle already removes and stores huge amounts of carbon from the atmosphere – primarily through trees. The world’s forests have absorbed as much as 30% of annual global human-generated CO2 emissions over the last few decades.

Regenerating depleted forests (reforestation), planting new forests (afforestation), and protecting and helping existing forests thrive through active management can all contribute to offsetting emissions.

The IPCC report estimates that reforestations and afforestation could potentially capture 0.5 and 3.6 billion tonnes of CO2 a year at a cost of USD$5 to $50 (£3.90 to £39) per metric tonne.

There are potential drawbacks of extensive afforestation. It could compete with food crops, as well as reducing the reflection of heat and light back into space that arid lands currently offer to prevent global warming.

  1. Bioenergy with carbon capture and storage

Europe’s first BECCS pilot project at Drax Power Station

Biomass on its own is an important fuel source in lowering emissions from industries such as power generation. On one hand, it’s created by organic material, which during its lifetime absorbs carbon from the atmosphere (often enough to offset emissions from transportation and combustion). On another, it creates a sustainable market for forestry products, encouraging landowners to responsibly manage forests, which in turn can lead to growing forests and increased CO2 absorption.

But when combined with carbon capture and storage (CCS or CCUS) technology it becomes a negative carbon emissions process, known as BECCS. Drax is partnering with carbon capture company C-Capture in a £400,000 pilot to develop CCS technology, which will remove a tonne of carbon from its operations a day. Combined with the carbon removed by the forests supplying the biomass, it could turn Drax into the world’s first negative emissions power station.

Beyond just storing the captured carbon underground, however, it can be used to create a range of products, locking in and making use of the carbon for much longer.

The IPCC report estimates between 0.5 and 5 billion metric tonnes of carbon could be captured globally this way at a cost of $100 to $200 (£80-160) per metric tonne.

  1. Increased ‘blue carbon’

Mangrove roots

It’s not only forests of fast-growing pines or eucalyptus that remove CO2 from the atmosphere. In fact, coastal vegetation such as mangroves, salt marshes and sea grasses suck in and store carbon in soil at a greater rate than plants on land. The carbon stored in these waterside ecosystems is known as ‘blue carbon’.

Human encroachment and development on coastlines has depleted these environments. However, efforts are underway to regenerate and expand these hyper-absorbent ecosystems –turning them into carbon sinks that can remove more emissions from the atmosphere than conventional forests. Apple is currently throwing its financial weight behind a mangrove expansion project in Colombia to try and offset its global operations.

  1. Boosting ocean plants’ productivity

Beyond costal mangroves, the ocean is full of plants that use CO2 to photosynthesise – in fact, the oceans are thought to be one of the world’s largest carbon sinks. But there are some people who think we could enhance marine plants’ absorption abilities.

Eelgrass Bed

One such approach involves injecting iron nutrients into the ocean to prompt a bloom in microscopic plants called phytoplankton, which float in the upper part of the ocean absorbing the CO2 absorbed from the atmosphere. When the plants eventually die they then sink trapping the absorbed carbon on the seabed.

An additional positive effect would be an increase in dimethyl sulphide, which marine plants emit. This could alter the reflectivity of clouds that absorb water from the ocean and further act to cool the earth.

  1. Enhanced rock weathering

Plants absorbing CO2 through photosynthesis is the most-commonly known part of the carbon cycle, however, rocks also absorb CO2 as they weather and erode.

The CO2 usually reaches the rock in the form of rain, which absorbs CO2 from the atmosphere as it falls. It then reacts with the rocks, very slowly breaking them down, and forming a bicarbonate that is eventually washed into the ocean, locking the carbon on the seabed.

The problem is it takes a long time. One idea that seeks to use this natural process more effectively is to speed it up by pulverising rocks and spreading the resulting powder over a larger area to absorb more CO2 from rain and air.

Natural rock weathering currently absorbs around 0.3% of global fossil fuel emissions annually, but the IPCC estimates at scale it could capture 2 and 4 billion metric tons at a cost of between $50 and $200 (£39-160) per metric ton. This approach also requires extensive land use and has not been trialled at scale.

  1. Sequestering carbon in soil

Soil is another major carbon sink. Plants and grasses that die and rot store carbon in the soil for long periods. However, modern farming techniques, such as intensive ploughing and fertilisation, causes carbon to be released and oxidised to form CO2.

Adjustments in farming methods could change this and, at scale, make agriculture carbon neutral. Straightforward techniques such as minimising soil disturbance, crop rotation and grassland regeneration could sequester as much as 5 billion tonnes of carbon into the soil annually, according to the IPCC, at potential zero cost.

A challenge to this method is that once soil is saturated it can’t hold any more carbon. That material would also be easily released if methods are not maintained in the future.

  1. Increasing soil carbon with biochar

A way to super-charge how much carbon soil can store is to add a substance called biochar to the earth. A type of charcoal made by burning biomass, such as wood or farm waste, in the absence of oxygen, biochar can increase the amount of carbon locked into the soil for hundreds or thousands of years. It also helps soil retain water, and reduce methane and nitrogen emissions.

Biochar has only been trialled at a small scale but the IPCC estimates that between 0.5 and 2 billion metric tonnes could be captured annually through this means. However, it predicts a cost of between $30 and $120 (£23-94) per metric tonne. Additionally, producing biochar at scale would require large amounts of biomass that must be sustainably sourced.

  1. Direct air capture

CO2 is in the air all around us and so removing it from the atmosphere can effectively take place anywhere. Direct air capture (DAC or DACCS) proposes that the carbon capture and storage technology many power stations are now trialling can be carried out almost anywhere.

Direct Air Capture of CO2 by a Climaworks startup, KEZO, involving garbage Incineration in Switzerland

Swiss start-up Climeworks is one company attempting to make DAC viable. Its technology works by passing air through a surface that reacts with CO2 to form a compound, but releases the remaining air. The newly formed compound is then heated so the reactive chemical agent can be separated and reused. The CO2 is then stored underground with gas and water where it reacts with basalt and turns to stone in less than two years.

The main challenge for this technique is the cost – between $200 and $600 (£156-468) per metric tonne – and that it requires large amounts of energy, creating further demand for electricity.

One hundred million tonnes

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

The primary challenge for negative emission technology as a whole is that so few have actually been implemented at a global scale. However, trials are in motion around in the world, including at Drax, to remove emissions and help limit the effects of climate change.

Even if the UK decarbonises heavily across all sectors of the economy by 2050, there’s still projected to be 130 MtCO2 (million tonnes of carbon dioxide) net emissions. But a Royal Academy/Royal Society report released earlier this year was optimistic. It concluded that the country can become net zero and do its part in mitigating man made climate change – with BECCS identified as the negative emissions technology best suited to take the leading role and at least cost.

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

A price worth paying? Why the Treasury should maintain a higher carbon price

25 October 2018

Power generation

Last week it was Green GB Week, a nationwide campaign supported by the UK government, showcasing the country’s green credentials and progress in transitioning towards a low carbon world. It is therefore timely that ahead of the Autumn Budget, the energy industry should be speaking about measures, such as the Carbon Price Support mechanism, which are within the power of government to help keep Great Britain on track in meeting its decarbonisation goals.

Aurora Energy Research, a leading energy research and analytics firm, has produced fresh analysis that suggests that maintaining a higher carbon price is key to phasing out coal power generation and decarbonising the UK electricity sector in a timely, cost-effective manner. 

Is the carbon price at risk?

In April 2013, HM Treasury introduced the ‘Carbon Price Support’ – a tax paid by coal and gas generators in Great Britain. In part, this was a response to low costs in the European ‘Emissions Trading System’ which requires generators to buy certificates against their emissions. At the time, the UK Government felt that these certificates were too cheap and wanted to impose a higher carbon price to drive a more modern, low-carbon energy mix.

This Carbon Price Support has had a huge impact, particularly on coal. Prior to its introduction, coal represented 50% of power generation but since it has fallen to record lows. 2017 saw the first day without any coal on the power system since the industrial revolution. Records continue to be broken throughout 2018, with coal generation falling to 1% during summer months.

However, 2018 has also seen prices within the Emissions Trading System surge. Prices started this year at €8/tonne and now seem to be steadying at roughly €20/tonne. This has created uncertainty over the future of the UK Carbon Price Support scheme. Many in energy, from power generators to environmental campaign groups are worried that the Treasury might respond to rising European prices by slashing the Carbon Price Support in this year’s Autumn Budget, which could threaten to undo the success the UK has had in decarbonising its energy mix.

The carbon price is needed to keep coal at bay

Aurora has tested the impacts of different trajectories for the carbon price going forward to 2040 and the implications are significant, particularly for coal.

Aurora’s analysis shows that if government maintains the current Carbon Price Support rate of £18/tonne, then at current EU ETS futures levels, coal should come off the GB power system in 2021-22. By contrast, the same analysis suggests that if Chancellor Philip Hammond were to reduce the Carbon Price Support to £7/tonne, then coal power stations would stay on the system until 2025 and increase generation during that time, as illustrated below.

Source: Aurora Energy Research

This would make it difficult for the UK to meet its carbon targets. The UK government has committed to reducing greenhouse gas emissions in line with 5-yearly ‘carbon budgets.’ Cutting the Carbon Price Support rate to £7/tonne would result in 29 million tonnes of additional carbon dioxide (CO2) during the 4th carbon budget period, which runs from 2023-27. This is an increase of almost 20% on total power sector emissions – against a carbon budget that the UK is currently on track to miss.

The cost of the carbon price

A higher carbon price raises electricity prices slightly, but the mechanics of this are complex and the rising price of electricity is somewhat offset by lower subsidy payments to low carbon generators. Comparing a ‘status quo’ scenario to one where the Carbon Price Support falls to £7/tonne raises annual power system costs by £700 million (average over 2021-40), which translates to roughly £9 a year on the average household’s electricity bill.

Source: Aurora Energy Research

Decarbonisation affects not just the future of GB’s power system, but also its international reputation and progress in meeting climate change targets. The Carbon Price Support has helped to make GB’s power system a success story in reducing carbon emissions while keeping costs reasonable.

There are always trade-offs to be made in policy but cutting the carbon price would threaten the progress Great Britain has made in decarbonising its energy mix, making it harder to meet emissions targets.

Download the report: Carbon Pricing Options to Deliver Clean Growth

Aurora’s press release: Clarity on carbon pricing is needed in Autumn Budget – a cut risks a resurgence of coal

Drax Power CEO Andy Koss’ comments on the Aurora report report 

Beyond the bottom line – why businesses need a purpose

Jonathan Kini, CEO Customers

18 October 2018

Opinion

Electricity, like so many industries today, is changing at a rapid pace. Technology and data are transforming both the industry itself and its relationship with consumers, while renewables are shifting where electricity comes from and how the system operates. In eras of transition, when few have clear views of the future, it’s crucial that businesses remain focused on their goals and values, beyond just revenue, to steer them through times of disruption and change.

This is often referred to as a company’s ‘purpose’ and it acts as a guiding North Star for businesses in meeting challenges or opportunities, in any industry.

Drax’s purpose is “helping to change the way energy is generated, supplied and used for a better future”. This strong sense of purpose was one of the key factors for me, personally in moving into the electricity industry.

We have an unprecedented chance to be a part of the zero carbon future and the purpose we share across the business is key to grasping that. But for Drax purpose is not just about what drives us. As the largest supplier of renewable electricity to UK businesses, we are in the unique position of being able to help other companies follow their purpose and meet their own sustainable business goals.

Why purpose pays off

Business today is about more than just the bottom line. There is a growing recognition in the role companies play in the lives of their employees and consumers, in wider society and the well-being of the planet.

The hard-nosed business people of the past might ask: why does this matters? How does a company’s stance on social issues, for example, impact revenue or value to shareholders? However, evidence shows that businesses with a strong sense of purpose foster more engaged employees, are more innovative, retain more customers, and even make more money.

And it starts with people. A sense of being a part of something bigger than yourself is a strong influence on people. It attracts the best talent and enables them to deliver with passion. This not only inspires a greater level of engagement in employees, but drives them to go further for clients, as well as fostering creativity and innovation.

At a time when innovation and ability to adapt to changes are more and more valued by businesses, purpose unites workforces and enables companies to implement new ideas and transform themselves more quickly.

It was the desire for a strong guiding purpose that brought me into the electricity industry. The Paris Climate Agreement brought greenhouse gas emissions into the forefront of global thinking, and the opportunity to be a part of meeting this monumental challenge, and creating a net-zero future still plays a strong role in what drives me every day.

Of course, sustainability is not just part of Drax’s purpose. More people than ever around the world care deeply about our planet, many believe climate change is our biggest threat. As a result, sustainable business is now an important part of many different types of companies’ purpose.

Helping others follow their purpose

Drax is in a position to not only help move the UK towards much lower carbon electricity generation, but to also enable other businesses to meet their own sustainability goals.

An increasing number of businesses are generating their own electricity from renewable sources. These so-called prosumers can also sell electricity back to the grid when they have excess power, offering an opportunity for new revenue. 

One such business is a farm outside of Solihull in the West Midlands, where since 2014 it has generated its own electricity from solar panels. This is now the site of Drax Retail’s first Power Purchase Agreement (PPA) batteries. It means that rather than just selling electricity back to the grid via Opus Energy in real time, the farm can store electricity and sell it to grid when it needs it most and the price is higher.

It is just one example of a commercial benefit for a business that make sustainability a part of its purpose. And research by Haven Power found that 78% of small businesses want to use energy efficiency as a means of saving money.

Having a purpose inspires the people who make businesses successful and gives the business direction. Our purpose of helping to decarbonise the UK allows us to help other businesses follow their purposes too.

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

16 October 2018

Investors
RNS Number : 1562E
Drax Group PLC
THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

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

Will Gardiner, CEO, Drax Group

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

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

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

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

A flexible, low-carbon and renewable portfolio

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

Clatteringshaws Loch and dam, part of the Galloway Hydro Scheme

Attractive high quality earnings and returns

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

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

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

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

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

Financing the Acquisition

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

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

Conditions for completion

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

Drax trading and operational performance

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

Biomass storage domes at Drax Power Station

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

Biomass generation is now fully contracted for 2019.

Contracted power sales at 30 September 2018

201820192020
Power sales (TWh) comprising:18.611.55.7
TWh including expected CfD sales18.615.611.2
– Fixed price power sales (TWh) 18.611.05.1
At an average achieved price (per MWh)at £46.8at £50.4at £48.3
– Gas hedges (TWh)-0.50.6
At an achieved price per therm-43.5p47.4p

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

Other matters

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

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

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

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

Ali Lewis
+44 (0) 77126 70888

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

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

Acquisition presentation meeting and webcast arrangements

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

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

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

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

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

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

Website: www.drax.com/uk

Acquisition of the Portfolio from Iberdrola

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

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

Strong asset base

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

Turbine hall at Cruachan Power Station

Cruachan Pumped Storage Hydro

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

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

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

 

Galloway Hydro Scheme, River Dee

Galloway and Lanark Run-of-River Hydro

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

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

 

 

 

Combined Cycle Gas Generation (CCGT)

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

Shoreham Power Station, West Sussex

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

Damhead Creek Power Station, Isle Of Grain, Kent

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

Other smaller sites

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

Benefits of the Acquisition

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

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

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

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

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

Increased earnings potential aligned with generation strategy and UK energy needs

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

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

High quality earnings

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

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

Diversified generation and portfolio benefits

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

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

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

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

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

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

Financing and capital structure

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

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

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

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

Process and integration plan

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

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

The transaction is expected to complete on 31 December 2018.

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

IMPORTANT NOTICE

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

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

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

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

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

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

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

Appendix 1

Principal Terms of the Acquisition

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

  1. Acquisition Agreement

Parties and consideration

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

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

Conditions to Completion

The Acquisition is conditional on:

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

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

Termination for material reduction in available generation capacity

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

Break fee

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

Pre-completion covenants

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

Pension liabilities

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

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

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

Seller’s warranties, indemnities and tax covenant

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

  1. Transitional Services Agreement

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

Appendix 2

Profit Forecast

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

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

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

Basis of preparation

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

The Profit Forecast has been prepared with reference to:

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

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

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

Principal assumptions

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

Assumptions within management’s control

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

Assumptions outside of management’s control

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

 

END

The roadmap to zero carbon

Will Gardiner, Chief Executive Officer, Drax Group

1 October 2018

Opinion

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.

Coal comeback pushes up UK’s carbon emissions

Iain Staffell, Imperial College London

17 September 2018

Opinion
UK coal production

10-year high gas prices1 have prompted a resurgence in coal-fired power across Britain – and with it a 15% increase in carbon emissions from electricity generation.

If coal-fired electricity remains cheaper than gas-fired (as analysts predict), we could see the first year-on-year rise in carbon emissions from Britain’s power sector in six years. This highlights the importance of retaining a strong carbon price if we are to ensure the successful decarbonisation of the power system is not reversed.

After dropping to a historic low of just 0.2 GW during June and July, Britain’s coal power generation doubled in August, and has shot up to 2 GW during the first week of September.  The last time coal output was this high was during the Beast from the East, when temperatures plummeted in March.

With these coal power stations running instead of more efficient gas plants, Britain is producing an extra 1,000 tonnes of carbon dioxide (CO2) every hour.2  Carbon emissions from electricity generation are up 15% as a result.  These coal plants are not running solely because they are needed to meet peak demand, but because gas prices have risen sharply and carbon prices have not kept up, making coal power stations more economic to run than gas-fired ones.

It became cheaper to generate power from coal than from gas (see thick lines, chart below) in late August.  Even though carbon prices now double the cost of generating electricity from coal,3 coal plants are consistently “in the money” at the moment, meaning they can generate power profitably all day and night.

Estimated cost of generating electricity from coal and gas in Quarter 3 (thick lines), and the output from coal power stations in Britain (thin line)

Estimated cost of generating electricity from coal and gas in Quarter 3 (thick lines), and the output from coal power stations in Britain (thin line)

The cost of emitting CO2 has increased sharply, up 45% so far this year due to the ongoing rally in European Emissions Trading Scheme (EU ETS) prices.  Rising carbon prices should make gas more economical to burn as it emits less than half the CO2 of coal.

However, wholesale gas prices have also risen 40% since the start of the year, as supplies and storage are squeezed in the run up to winter.  Gas prices are at a ten-year high, currently 14% above their previous quarterly-average peak back in 2013 (see chart below).  These rising costs are feeding through into wholesale power prices, which have risen by a third over the past year to hit £60/MWh.

The cost of generating electricity and carbon cost

The estimated cost of generating electricity from fossil fuels over the last 20 years, along with the cost of emitting CO2.

Britain’s carbon price strengthened dramatically through 2014–15 due to the government implementing a Carbon Price Support scheme.  This caused gas to become competitive against coal for power generation, leading to carbon emissions from the power sector halving.  Unless Britain’s carbon price can once again make up the gap between coal and gas prices, we risk rolling back some of the world-leading gains made on cleaning up our electricity system.

The Committee on Climate Change has made it clear that power is the only sector that is pulling its weight when it comes to decarbonising the UK.  Clean electricity could power low-carbon vehicles and heating, but this opportunity will be wasted if the electricity comes from high-carbon coal.

UK electricity system

So what can be done?  The sharp rise in gas prices hints at a lack of flexibility in the energy system.  Britain came uncomfortably close to gas shortages in March, in part due to the closure of the country’s largest gas storage site.  With nearly half of the electricity generated in Britain coming from gas, plus five-sixths of household heat, diversifying into other – cleaner – energy sources would help insulate consumers and businesses from price spikes.

No one country has the power to determine international fuel prices.  Several factors have come together to push up gas prices, including a lack of transmission capacity, depleted stores of gas after the long hot summer and a lack of wind power increased output from gas-fired stations. Suppliers which don’t wish to be caught short after the Beast from the East, are also stocking up on gas.

Any knee-jerk reaction to try and lower the cost of electricity (for example, slashing the cost of carbon emissions) may only have a short-term impact, and could easily lead to longer-term damage (such as the resurgence of coal) which would require further interventions in the future.

Britain does have control over its carbon price. Its power stations and industry currently pay the Emissions Trading System price (determined on the Europe-wide market) which has fluctuated wildly over the past week between €25 (£22) and €19 (£17) per tonne, plus £18 per tonne in Carbon Price Support which goes to the Treasury.  This needs to be maintained or strengthened further to save the power system from backsliding, and to show strong climate leadership on the international stage.

Explore this data live on the Electric Insights website

View Drax Power CEO Andy Koss’ comment

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

[1] The three-month average cost of generating electricity from gas exceeded £60/MWh for the first time since 2009.  Short-term price spikes have been higher than this, such as the first week of March during the Beast from the East.↩

[2] Extra generation from coal reduces the output from gas plants, which are their main competitors, as nuclear, wind and solar already run as much as possible.  Calculation based on 1934 MW of coal generation (the average during the first week of September) emitting 937 gCO2 per kWh (1812 tonnes per hour) instead of gas generation which would have emitted 394 gCO2 per kWh (762 tonnes per hour).↩

[3] The coal that must be burnt to produce 1 MWh of electricity now costs around £31, and the CO2 pollution costs an extra £31 on top.  For comparison, producing 1 MWh of electricity from gas costs £50 for the fuel and £15 for the CO2.↩

What can be made from captured carbon?

11 September 2018

Carbon capture

The combination of a heatwave and an entertaining world cup campaign put big demands on Great Britain’s beer supplies this summer. But European-wide carbon dioxide (CO2) shortages put a hold on that celebratory atmosphere as word spread that a lack of bubbles could result in the country running out of beer.

The drinks business managed to hold out, but the threat of long term CO2 shortages still lingers over the continent. One possible – and surprising – solution could lie in electricity generation, thanks to the capturing and storing of its carbon emissions.

Carbon capture and storage (CCS) is one of the key technologies in need of development to allow nations to meet their Paris Agreement goals. It has the potential to stop massive amounts of emissions entering the atmosphere, but it also raises the question: what happens to all that carbon once it’s captured?

Drax recently met with the British Beer & Pub Association to discuss using some of the carbon it plans to capture in its upcoming trial of Bioenergy Carbon Capture and Storage (BECCS) to keep the fizz in drinks.

It’s a novel solution to a potential problem, but it’s just one of the many emerging possibilities being developed around the world.

Smarter sneakers

Carbon capture is all about reducing carbon footprints – a phrase energy company NRG interpreted quite literally by creating ‘The Shoe Without A Footprint’. The white trainer was created to showcase the abilities of carbon capture, use and storage (CCuS) and is made of 75% material produced from captured emissions that have been turned into polymers, a molecular structure similar to plastics.

Only five pairs of the sneakers were created as part of NRG’s Carbon XPrize competition to find uses for captured carbon. However, they remain symbolic of the versatility offered by captured and stored carbon and its potential to contribute to the manufacture of everyday objects.

Better furniture

Finding an alternative to plastics is one of the key ways of facilitating a move away from global dependencies on crude oil. Sustainable materials company Newlight uses captured CO2 or methane emissions to create a bioplastic called AirCarbon –  a thermopolymer, which means it can be melted down and reshaped.

The company has teamed up with IKEA, which will buy 50% of the 23,000 tonnes of bioplastic Newlight’s plant produces per year. It’s part of the Swedish furniture giant’s efforts to increase the amount of recycled materials it uses and means upcycled carbon could soon be appearing in millions of homes around the world.

Cleaner concrete

If the shoes people walk around on can be made from captured carbon, so too can the cities they walk within. Making concrete is a notoriously dirty process. Cement, the main binding agent in concrete, is thought to contribute to as much as 5% of the world’s greenhouse gas emissions, but this could change thanks to clever use and implementation of carbon capture technology.

At one level, CCS can be introduced to capture emissions from the manufacturing process. On another, the CO2 captured can be used as a raw material from which to create the concrete, effectively ‘locking in’ carbon and storing it for the long term.

Teams of engineers, material scientists and economists at UCLA who have worked on the problem for 30 years have succeeded in creating construction materials from CO2 emissions in lab conditions using 3D printing technology. Now it’s just a matter of scaling it up to industrial usage.

A metal alternative

Carbon nanotubes are stronger than steel but lighter than aluminium, which makes them a hugely useful material. They’re currently used in jets, sports cars and even in industrial structures, but producing them can be expensive and, until recently, could not utilise CO2 for manufacture. A team from George Washington University is changing that.

Its C2CNT technology splits captured CO2 into oxygen and carbon in a molten carbonate bath using electrolysis. From here the carbon is repurposed into carbon nanotubes at a high rate and lower cost than previous methods.

Future fuels

Transportation is one of the major emitters of carbon around the world, so any way it can be reduced or re-used in this field will be a huge positive. Carbon recycling company LanzaTech has developed a way to do this via a process that uses anaerobic bacteria to ferment emissions into cleaner chemicals and fuels.

Its first facility, opening this year in China, will create fuel-grade bioethanol that can be blended with gasoline to create vehicle fuel, or even converted into jet fuel with 65% lower greenhouse gas emissions.

Aviation, too, can benefit from carbon recycling through the creation of synthetic crude oil and gas using CO2. Technology company Sunfire is developing processes that combine hydrogen (set to become a major part of industry and transport) and biogenic CO2, (emissions from natural sources), to create synthetic hydrocarbons that could fuel planes.

From Silicon Valley to Valles Marineris

Earth isn’t the only place humans are innovating around carbon capture – at least, right now. With the race to send men and women to Mars stepping up, the challenges of dealing with its inhospitable atmosphere (which is 95% CO2) and ensuring a minimal human impact to the planet are becoming more acute. Carbon capture and use presents an opportunity to tackle both.

Californian company Opus 12 has developed a device that recycles CO2 from ambient air and industrial emissions and turns it into fuels and chemicals using only electricity and water. The device has the CO2 conversion power of 37,000 trees (or 64 football fields of dense forest) packed into the volume of a suitcase, and can convert CO2 into 16 different products.

In the long-term, the technology might provide critical services for human colonies on the Red Planet by capturing and using CO2 from the atmosphere or any future Mars-based factories. The Opus 12 device can also use ice (buried on the planet in places that could be accessible to astronauts) to convert Mars CO2 into plastic to make bricks and tools, methane that can form rocket fuel, and feedstocks for microbes to create medicine or food.

Turning pollution into possibilities

Many of these technologies are in their infancy, but the possibilities they present are very real. In fact, Drax’s upcoming trial of BECCS will see it capture and store as much as a tonne of carbon every day.

The proliferation of this technology in industry and electricity production – and the resultant increase in captured carbon – will help encourage more companies to see CO2 emissions as an opportunity for revenue while helping countries meet their Paris Agreement emissions goals.

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