Tag: Drax Power Station

End of coal generation at Drax Power Station

27 February 2020

Investors

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Following a comprehensive review of operations and discussions with National Grid, Ofgem and the UK Government, the Board of Drax has determined to end commercial coal generation at Drax Power Station in 2021 – ahead of the UK’s 2025 deadline.

Commercial coal generation is expected to end in March 2021, with formal closure of the coal units in September 2022 at the end of existing Capacity Market obligations.

Will Gardiner, Drax Group CEO, said:

“Ending the use of coal at Drax is a landmark in our continued efforts to transform the business and become a world-leading carbon negative company by 2030. Drax’s move away from coal began some years ago and I’m proud to say we’re going to finish the job well ahead of the Government’s 2025 deadline.

“By using sustainable biomass we have not only continued generating the secure power millions of homes and businesses rely on, we have also played a significant role in enabling the UK’s power system to decarbonise faster than any other in the world.

“Having pioneered ground-breaking biomass technology, we’re now planning to go further by using bioenergy with carbon capture and storage (BECCS) to achieve our ambition of being carbon negative by 2030, making an even greater contribution to global efforts to tackle the climate crisis.

“Stopping using coal is the right decision for our business, our communities and the environment, but it will have an impact on some of our employees, which will be difficult for them and their families.

“In making the decision to stop using coal and to decarbonise the economy, it’s vital that the impact on people across the North is recognised and steps are taken to ensure that people have the skills needed for the new jobs of the future.”

Coal in front of biomass storage domes at Drax Power Station, 2016

Drax will shortly commence a consultation process with employees and trade unions with a view to ending coal operations. Under these proposals, commercial generation from coal will end in March 2021 but the two coal units will remain available to meet Capacity Market obligations until September 2022.

The closure of the two coal units is expected to involve one-off closure costs in the region of £25-35 million in the period to closure and to result in a reduction in operating costs at Drax Power Station of £25-35 million per year once complete. Drax also expects a reduction in jobs of between 200 and 230 from April 2021.

The carrying value of the fixed assets affected by closure was £240 million, in addition to £103 million of inventory at 31 December 2019, which Drax intends to use in the period up to 31 March 2021. The Group expects to treat all closure costs and any asset obsolescence charges as exceptional items in the Group’s financial statements. A further update on these items will be provided in the Group’s interim financial statements for the first half of 2020.

As part of the proposed coal closure programme the Group is implementing a broader review of operations at Drax Power Station. This review aims to support a safe, efficient and lower cost operating model which, alongside a reduction in biomass cost, positions Drax for long-term biomass generation following the end of the current renewable support mechanisms in March 2027.

While previously being an integral part of the Drax Power Station site and offering flexibility to the Group’s trading and operational performance, the long-term economics of coal generation remain challenging and in 2019 represented only three percent of the Group’s electricity production. In January 2020, Drax did not take a Capacity Market agreement for the period beyond September 2022 given the low clearing price.

Enquiries

Drax Investor Relations:
Mark Strafford
+44 (0) 7730 763 949

Media

Drax External Communications:
Ali Lewis
+44 (0) 7712 670 888

Website: www.drax.com/uk

END

Capacity Market agreements for existing assets and review of coal generation

31 January 2020

Investors

Drax's Kendoon Power Station, Galloway Hydro Scheme, Scotland

^{RNS Number : 6536B}

T-3 Auction Provisional Results

Drax confirms that it has provisionally secured agreements to provide a total of 2,562MW of capacity (de-rated 2,333MW) from its existing gas, pumped storage and hydro assets⁽¹⁾. The agreements are for the delivery period October 2022 to September 2023, at a price of £6.44/kW⁽²⁾ and are worth £15 million in that period. These are in addition to existing agreements which extend to September 2022.

Drax did not accept agreements for its two coal units⁽³⁾ at Drax Power Station or the small Combined Cycle Gas Turbine (CCGT) at Blackburn Mill⁽⁴⁾ and will now assess options for these assets, alongside discussions with National Grid, Ofgem and the UK Government.

A new-build CCGT at Damhead Creek and four new-build Open Cycle Gas Turbine projects participated in the auction but exited above the clearing price and did not accept agreements.

T-4 Auction

Drax has prequalified its existing assets⁽⁵⁾ and options for the development of new gas generation to participate in the T-4 auction, which takes place in March 2020. The auction covers the delivery period from October 2023.

CCGTs at Drax Power Station

Following confirmation that a Judicial Review will now proceed against the Government, regarding the decision to grant planning approval for new CCGTs at Drax Power Station, Drax does not intend to take a Capacity Market agreement in the forthcoming T-4 auction. This project will not participate in future Capacity Market auctions until the outcome of the Judicial Review is known.

Enquiries:

Drax Investor Relations
Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications
Matt Willey
+44 (0) 0771 137 6087

Photo caption: Drax’s Kendoon Power Station, Galloway Hydro Scheme, Scotland

Website: www.drax.com/uk

Could Great Britain go off grid?

23 August 2019

Power generation

Acquisition Bridge Facility refinancing completed

24 July 2019

Investors

Private placement

The £375 million private placement with infrastructure lenders comprises facilities with maturities between 2024 and 2029⁽²⁾.

ESG Facility

The £125 million ESG facility matures in 2022. The facility includes a mechanism that adjusts the margin based on Drax’s carbon emissions against an annual benchmark, recognising Drax’s continued commitment to reducing its carbon emissions as part of its overall purpose of enabling a zero-carbon, lower cost energy future.

Together these facilities extend the Group’s debt maturity profile beyond 2027 and reduce the Group’s overall cost of debt to below 4 percent.

Enquiries:

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

Media:

Drax External Communications:
Matt Willey
+44 (0) 7711 376 087

Website: www.drax.com/uk

Note

^{(1) Drax Corporate Limited drew £550 million under an acquisition bridge facility on 2 January 2019 used to partially fund the acquisition of ScottishPower Generation Limited for initial net consideration of £687 million. £150 million of the acquisition bridge facility was repaid on 16 May 2019.}

^{(2) £122.5 million in 2024, £122.5 million in 2025, £80 million in 2026 and £50 million in 2029.}

Meet the apprentices powering our future

4 March 2019

Sustainable business

“Different people do things different ways,” says Sam Stocks, an apprentice engineer at Drax Power Station. It’s a sentiment echoed by corporate administration apprentice Chloe Carpenter at Opus Energy. Asked to describe her role, she says, “[It’s] a very different kind of job.”

Chloe and Sam are just two of a number of apprentices at Drax Group who are working across the UK. And while they’re proud to do things differently, they do have something in common – they’re all hands-on, practical people who would rather get stuck in on a project than sit still and hear about it in the classroom.

“I chose an apprenticeship over higher education because I’m more of a doing person,” says Molly Fensome, a corporate administration apprentice. Sam agrees. “I like to be hands-on,” he says. “I don’t like being sat in a classroom.”

They are doing things their way – engineering their own futures while growing personally and professionally. And ensuring the future of our energy supply in the process.

Finding a strong sense of identity

For Sam, working at Drax wasn’t just a sensible career move, it was also following in his family’s footsteps. “My grandad worked in the power station industry all his life. [My family] know exactly what I’m like and they knew what type of place this was to work.”

Drax’s transformation from a coal-powered plant to a modern, sustainable electricity company means Sam’s work is building a power framework for future generations, while also paying homage to his grandad’s career.

Jake Dawson, an electrical engineer apprentice, followed a similar path into the power industry. Being born and bred in the area, Drax Power Station has always been a part of his geography. “Because I’m such a local lad it was perfect for me,” he says.

In his role, Jake can play a key part in the region where he grew up. A recent Oxford Economics report shows that Drax contributes £431 million to Yorkshire and the Humber economy and supports over 3,200 jobs.

A role in a team

Drax is a large organisation, but for Chloe finding role models within her team she can look up to and take guidance from has been easy. “Mentoring sessions are relaxed and you build a special bond with that person,” she says. “You can talk to them about work, outside of work – anything. They’ll always be there for you.”

Corporate administration apprentice Matt Donnelly has had a similar experience, adding that he’s seen his confidence grow, and feels he has made lifelong friends in his role.

Ultimately, it’s not just that they are given the right support, but that apprentices are integrated as a part of the company from day one. “My favourite part of my apprenticeship so far is being part of the team,” says Chloe. “Because you feel like you’re not just an apprentice, but you’re also one of them.”

Being part of something bigger

Sam remembers his first day at Drax Power Station: “It was overwhelming, you don’t actually realise how big it is and realise how many people work here. It’s just normal now, if I go anywhere else, I’m thinking, ‘That’s not as big as at work.’”

It’s not just its size that makes the UK’s biggest single site renewable power station stand out, but the potential for career development there. It’s this that Jake had on his mind when he first made the decision to become an apprentice. He was working in an unskilled job with little opportunity, but he knew he had it in him to find something bigger.

His outlook today as a Drax apprentice is very different. “My aim after the four years is to carry on growing as a person, increasing all my skills that I have, and maybe eventually becoming a supervisor or an engineer, who knows?”

This mindset of striving for better is evident across apprentices. It’s what drove them to join the programme in the first place. “Instead of going somewhere like uni and then possibly coming out without a job, you’ve got a job, and you’re actually learning as you’re doing it,” says Sam. “The skill set that I’ve learnt now – I’ll probably go anywhere in the world with it.”

Find out more about apprenticeships at Drax

How to switch a power station off coal

22 August 2018

Sustainable bioenergy

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

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

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

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

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

Adam Nicholson

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

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

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

Instead Drax engineers had to come up with another solution.

The journey of a pellet through the power station

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

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

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

Rail unloading building 1 and storage silos

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

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

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

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

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

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

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

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

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

The post-coal future

Andy Koss

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

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

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

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

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

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

Find out more about Unit 4.

Drax: A rail history

5 July 2018

Power generation

Railways in Great Britain today are often seen as unreliable or chaotic, yet they remain a vital part of the lives of the population and the economy of the country.

When rail transport first arrived in earnest in the 19^th century, it suddenly allowed goods from around the world, as well as people, to quickly cross the country. It reshaped perceptions of the country’s geography, unlocked the population and accelerated industries.

Over time, however, the role of the railways has diminished, owing largely to the massive rise in car ownership and the shifting of freight onto the road. But that is not to say it has completely lost its importance.

With 6,000 trains passing through Drax Power Station every year, rail is still integral to Drax and the region around it. In fact, since the very first introduction of the railways to the region it has played a major part in shaping the landscape.

A village with two stations

Before the construction of the power station or nationalisation of the railways, Drax village was well-connected, with two different railway lines running through it: the North Eastern Railway (NER) Selby to Goole line, and the Hull and Barnsley Railway’s Doncaster to Hull line.

Each of these lines ran through a different station with NER calling at Drax Hales Station while Hull and Barnsley called at Drax Abbey Station. But, following nationalisation and British Rail’s modernisation plans, Drax Abbey Station, which had closed to passengers in 1931, closed to goods traffic in 1959. Drax Hales Station followed suit in 1964 when it was closed as part of what became known as the Beeching Axe.

“British Rail chairman Richard Beeching famously carried out a review of Britain’s railways in the 60s and as a result closed vast quantities of – what he considered – uneconomical lines,” explains Andrew Christian, FGD & By-products Section Head at Drax Power Station and expert on the area’s history. “At that time oil was cheap, people were increasingly using cars and motorways were being constructed. Nobody really foresaw the rail demand that would be needed in the future to serve the power station.”

Daleks on a merry-go-round

In the 1960s and 70s, with the planning and construction of Drax Power Station underway, there was a new need for railways in bringing coal from the new Selby coalfield. This resulted in the reopening of a closed part of the Hull and Barnsley line for four miles from a reinstated junction at Hensall. Known as Hensall Junction it was renamed Drax Power Station Branch Junction and later shorted to Drax Branch Junction.

A rail system known as a ‘MGR loop’ was installed on the power station grounds, which allows trains to loop around the station and deposit coal – today also wood pellets – without stopping.

The ‘merry-go-round’ trains as they are known, were originally made up of 40, four-wheeled merry-go-round (MGR) hopper wagons. These were much smaller than the wagons that carry biomass from ports to power stations today, and more than 11,000 MGRs where built to serve coal power stations around Great Britain.

Photo by Andrew Brade, Railway Engineer at Drax Power Station

The open-topped wagons were each capable of carrying 33 tonnes of pulverised coal, which was automatically released thanks to a piece of machinery alongside the track colloquially known as ‘Daleks’ thanks to their resemblance to the Dr Who villain.

But as the power station began to change and evolved to fit the modern world, so too did the railway serving it.

Rail at Drax beyond coal

The original Drax rail loop was a single track, with three coal unloading points. By 1993 there was 14.5 km of track with 27 sets of points and crossings allowing trains to switch rails, thanks to the double tracked loop and extra tracks laid to serve traffic taking limestone in and gypsum out from the power station. This was further expanded with the introduction of biomass and a new double track and unloading facility in 2013.

The biomass trains are specially designed to keep compressed wood pellets dry and they are much longer than their MGR predecessors. At 18.2 meters long, their capacity is 30% greater than a coal wagon. It means the 23-wagon trains bringing biomass to the power stations from Tyne, Hull, Immingham and Liverpool’s ports are a quarter of a mile long.

It might be a far cry from the heyday in which the railways crisscrossed the region, but they remain a vital part of the area. And while the area’s original lines are now 50 years dormant, their remnants are still visible in the lasting impact they’ve left on the surrounding landscape.

Many of the embankments and bridges found in and around Drax stem from those first railway lines, while much of the A645 road that was constructed in the early 1990s runs along the track bed of NER’s route to Goole.

Photos by Andrew Brade, Railway Engineer at Drax Power Station

The trains might not stop in Drax Village anymore, but they remain a vital part of the landscape, and how it’s powered.

Northern Powerhouse Minister Jake Berry was in Yorkshire on 5 July 2018 to unveil the first Drax freight wagons with ‘Northern Powerhouse’ branding to deliver biomass to the power station. Read more.

The night shift

21 June 2018

Power generation

Things are different at night. As darkness falls the familiar sights and sounds that make up daily life retreat, creating a strange yet familiar world. There’s less activity, but that doesn’t mean there is no activity.

While Great Britain sleeps, phones charge and fridges hum. Electricity is a 24-hour need, and so the stations generating it must be 24-hour operations. But the life of a power station by night is very different to that by day.

“Walking around the power station at night can almost feel like the Mary Celeste,” says Simon Acaster, Drax Power Station’s Generation Manager. “There may be as few as 50 to 60 people on site, which isn’t a lot when you consider the size of the plant and compare it to the day, when there are some 650 people around.”

Drax Power Station by day is a hive of activity. Alongside generation there are maintenance, engineering, trading and contract support. At night, this is all stripped back.

“Work is focused on the core production issues: looking after the asset and maintaining power generation output to meet our contract position, keeping the teams safe and making sure we stay environmentally compliant,” says Mark Rhodes, Shift Manager at Drax.

“It’s a quieter place,” he adds.

Keeping power flowing

Typically, teams at Drax swap over at 8pm and 8am on a cycle of day and night shifts. During the summer months, when one or more of the station’s six, 600+ megawatt (MW) units can be on outage and maintenance is carried out across the station, work often continues around the clock right through the night.

But during a period of normal operation, the night workforce is reduced to basic operations and maintenance teams, material handling teams receiving biomass deliveries – which continue through the night – and security staff.

Demand for electricity typically falls overnight, so Drax shuts down unneeded generation units around 10pm. As morning approaches teams prep them to restart in time for when people wake up and turn on kettles.

“Even when we shut the units down, the turbine is still turning throughout the night,” says Acaster. “All the hydraulic pumps and lube oil systems are still functioning. A lot of plant is in service even when the units are shut down.”

This means there’s still the potential, as during the day, for something to need maintenance or attention at any moment requiring the teams to jump into action.

“We aim to sort any short-term issues through the night,” says Rhodes. “But for any technical issues that can wait, we tackle them when the day team returns and we’re fully staffed. At night it’s more about safely managing the asset.”

The hardest part of a running the power station overnight, however, is not a technical one, it’s a human one.

“There’s no doubt about it, working nights is tiring,” says Acaster. “The biggest challenge is keeping everybody focused and aware of what’s happening.”

He continues: “Unit controllers regularly talk to their plant operators, checking in every hour so we know they’re safe. Supervisors need to be out on plant engaging and talking to employees, checking on what they’re doing and keeping them active and alert.”

The shifting of the night shift

The decarbonisation of Great Britain’s electricity system has changed the way Drax operates during the day, and the same is true of the night.

“Historically, we had six units and they would be baseload, generating 645 MW each,” says Rhodes. “They would operate continuously day and night.” But with the demand profile changing, lower power prices, and other methods of generation coming onto the system, that model is changing.

“Overnight is normally the time of least demand and when the price of power becomes most depressed,” Rhodes continues. “So we take units off and prepare them for the morning, returning when there is value.”

Regularly shutting down and starting the units takes a tougher toll on the equipment than running them continuously, which increases the need for maintenance teams on night shifts. There’s also a need for teams to be on standby to ramp up or down generation.

The increased volatility of the country’s power network, brought on in part by increasing levels of intermittent renewables, means National Grid can often ask Drax to increase or decrease generation at short notice to provide balancing services like inertia, frequency response or reserve power.

“Our units can come down to 300 MW and stay at that level,” says Acaster. “Across three units that gives National Grid 900 MW of spare capacity that can be turned up. It’s like a sleeping giant awaiting start up at any time.”

But unlike other sleeping giants this one is never truly at rest. The demands of the network keep it, and the men and women operating it, humming through the night, 24-hours a day. The power station at night is a quieter place, but it is never a silent one.

Chief Executive’s review

Will Gardiner, Chief Executive Officer, Drax Group

21 March 2018

Annual report

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/uk/truckdumps and www.drax.com/uk/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
Revenue	135.7	73.6
Cost of sales	(96.7)	(55.5)
Gross profit	39.0	18.1
Operating costs	(33.5)	(24.4)
EBITDA	5.5	(6.3)

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Fines at disport	%	9.6	7.6
Operations	Output	,000 tonnes	822	607
Financial	Variable cost/tonne	$/tonne	77	82

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/uk/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