10 February 2025
This announcement
contains inside information
Drax Group plc
("Drax"; "The Group"; Symbol:
DRX)
Low-carbon dispatchable CfD agreement
Highlights
·
Heads of terms agreed with UK Gov. for operation
of Drax Power Station (DPS) post 2027
- CfD
scheme with a strike price of £113/MWh (2012) applied to all four
biomass units
- c.6TWh pa generation collar with flexible operation to support
high and low demand periods
- Contract period Apr-27 to Mar-31
- Baringa estimate £1.6-3.1 billion of saving to
consumers(1)
·
Targeting average Adj. EBITDA of £100-200 million
pa from DPS over agreement period
·
Continuing to target >£500 million Adj. EBITDA
pa post 2027 from FlexGen and Pellet Prod.
Drax Group CEO, Will Gardiner said: "The
Government's low-carbon dispatchable CfD framework for biomass,
announced today, is an investment in UK energy security, which will
result in a net saving for consumers and support the delivery of
Clean Power 2030.
"Analysis from Baringa indicates the proposed
agreement will result in a £1.6-3.1 billion reduction in
electricity system costs, versus the construction of new fossil
fuel power stations, and Government has concluded today that Drax
offers the lowest cost option for bill payers during this
period.
"Drax Power Station is the UK's largest power
station and provides secure capacity equivalent to over 80% of
Hinkley Point C. The power station plays a critical role in UK
energy security, providing c.10% of all UK renewable energy and
over 50% at certain times of peak demand, with enough reliable
power for 5 million homes - equivalent to every home in London, or
Wales and Scotland combined.
"Under this proposed agreement, Drax can step
in to increase generation when there is not enough electricity,
helping to avoid the need to burn more gas or import power from
Europe, and when there is too much electricity on the UK grid, Drax
can turn down and help to balance the system.
"The size, flexibility and location of the
power station makes it important for UK energy security and the
proposed agreement helps protect the jobs and skills of today and
the future, creating options for billions of pounds of investment
in growth across Britain, including the development of large-scale
carbon removals and data centres."
Details of the low-carbon dispatchable CfD
Following the launch in early 2024 of a
consultation on a mechanism for large-scale biomass generators
transitioning from their existing renewable schemes in 2027 to
Bioenergy Carbon Capture and Storage (BECCS), Drax has continued to
engage with the UK Government regarding opportunities for
DPS.
Today the UK Government has published a
statement(2) which sets out the key elements of a
non-binding heads of terms for a low-carbon dispatchable CfD
agreement for DPS. The statement proposes a CfD mechanism with a
strike price of £113/MWh (2012) indexed to UK CPI. The CfD is
available to all four biomass units at DPS, with an aggregate
collar of c.6TWh pa (and a minimum of c.5TWh pa) and a four-year
term from Apr-27 to Mar-31.
Under the proposed agreement DPS will sell
c.6TWh of power annually against a season ahead reference price (as
per the current CfD scheme) and then seek to maximise generation
from its four units at times of high demand and reduce generation
at times of low demand, using the station's flexibility to support
UK energy security.
The proposed agreement also allows for system
support and ancillary services.
Taking these factors together, Drax is
targeting average Adj. EBITDA from DPS of £100-200 million pa
during the agreement period, which is inclusive of a gain share
mechanism(3). This target excludes incremental merchant
generation above the generation collar, which could provide a
further benefit.
The threshold for the gain share mechanism is
based on revenues less allowable operating costs and capital
investments for DPS over the four-year agreement
period.
Subject to the required Parliamentary
procedures - including the passage of the requisite Statutory
Instrument and the completion of the Subsidy Control process - and
agreement of a final contract, Drax will keep all four units
operational beyond March 2027, supporting UK energy security, while
continuing to develop options for long-term investment, including
BECCS and data centres.
The proposed agreement also anticipates a
tightening of biomass sustainability requirements. Drax supports
these developments and will continue to engage with the UK
Government on the implementation of any future reporting
requirements.
Continuing to target >£500 million EBITDA post 2027 from
FlexGen and Pellet Production
Separate to biomass generation, Drax
is continuing to target over £500 million of post 2027 Adj. EBITDA
from FlexGen and Pellet Production.
In Pellet Production, Drax is continuing to
develop a pipeline of wider sales opportunities in North America,
Asia and Europe. In December 2024, Drax announced a heads of terms
agreement for the sale of over 1Mt pa of biomass pellets to Pathway
Energy (Pathway) for a new sustainable aviation fuel (SAF) project
in Texas, which is targeting commercial operations in 2029. Pathway
is also developing other projects which could require an additional
2Mt pa, which taken together with the first 1Mt pa could represent
over 60% of Drax's pellet production in the 2030s. No investment
decision has been taken by Pathway.
Drax believes that the development of new
markets for biomass, particularly in North America, is supportive
of biomass pricing. The Pathway agreement, alongside own-use
biomass is expected to be priced consistent with Drax's ambition
for post 2027 Adj. EBITDA pa from Pellet Production.
Capital allocation
The Group's capital allocation
policy is unchanged and Drax remains focused on opportunities for
value creation.
Other matter
Drax will issue its 2024 full year
results on 27 February 2025.
Notes:
(1)
https://www.drax.com/Baringa_Report_February_2025
(2)
Written statements - Written questions, answers and statements - UK
Parliament
(3) The threshold for
the gain share mechanism is based on revenues less allowable
operating costs and capital investments for Drax Power Station over
the four-year agreement period.
If revenues less allowable operating
costs and capital investments for Drax Power Station are on average
over £160 million pa over the four-year period, Drax will pay 30%
of the returns between £160 million pa and £210 million
pa.
If revenues less allowable operating
costs and capital investments for Drax Power Station are on average
over £210 million pa over the four-year period, Drax will pay 60%
of the returns above £210 million pa.
Enquiries:
Drax Investor Relations:
Mark Strafford
mark.strafford@drax.com
+44 (0) 7730 763 949
Chris Simpson
Chris.Simpson@drax.com
+44 (0) 7923 257 815
Media:
Drax External
Communications:
Chris Mostyn
Chris.mostyn@drax.com
+44 (0) 7743 963 483
Andy Low
andy.low@drax.com
+44 (0) 7841 068 415
Website: www.drax.com
This announcement contains inside information
for the purposes of Article 7 of the Market Abuse Regulation (EU)
No 596/2014 which is part of UK law by virtue of
the European Union (Withdrawal) Act 2018, as amended
("MAR"). The person responsible for the release of this
information was Brett Gladden (Group Company
Secretary).
Forward-looking
statements
This announcement may contain certain
statements, expectations, statistics, projections, and other
information that are, or may be, forward looking. The accuracy and
completeness of all such statements, including, without limitation,
statements regarding the future financial position, strategy,
projected costs, plans, beliefs, and objectives for the management
of future operations of Drax Group plc ("Drax") and its
subsidiaries (the "Group"), are not warranted or guaranteed. By
their nature, forward-looking statements involve risk and
uncertainty because they relate to events and depend on
circumstances that may occur in the future. Although Drax believes
that the statements, expectations, statistics and projections and
other information reflected in such statements are reasonable, they
reflect Drax's current view and no assurance can be given that they
will prove to be correct. Such events and statements involve risks
and uncertainties. Actual results and outcomes may differ
materially from those expressed or implied by those forward-looking
statements. There are a number of factors, many of which are beyond
the control of the Group, which could cause actual results and
developments to differ materially from those expressed or implied
by such forward-looking statements. These include, but are not
limited to, factors such as: delays in the process for finalising
the proposed agreement with the UK Government, future revenues
being lower than expected; increasing competitive pressures in the
industry; uncertainty as to future investment and support achieved
in enabling the realisation of strategic aims and objectives;
and/or general economic conditions or conditions affecting the
relevant industry, both domestically and internationally, being
less favourable than expected, including the impact of prevailing
economic and political uncertainty, the impact of conflict
including those in the Middle East and Ukraine, the impact of cyber
attacks on IT and systems infrastructure (whether operated directly
by Drax or through third parties), the impact of strikes, the
impact of adverse weather conditions or events such as wildfires,
changes to the regulatory and compliance environment within which
the Group operates. We do not intend to publicly update or revise
these projections or other forward-looking statements to reflect
events or circumstances after the date hereof, and we do not assume
any responsibility for doing so.
END
