Drax Group Trading update – strong performance, disciplined capital allocation
Highlights
- Strong performance – Flexible Generation(1), Pellet Production and Biomass Generation
- Progressing target for >£500 million EBITDA post 2027 from FlexGen(1) and Pellet Production
- UK energy system operator confirms large-scale biomass required for 2030 clean power system
- Launch of Elimini – US-based developer of 24/7 renewable power and carbon removals
- Up to £300 million two-year share buyback programme progressing
- Full year 2024 expectations for Adj. EBITDA(2) around the top end of analyst estimates(3)
Drax Group CEO, Will Gardiner said: “We continue to deliver a strong operational performance, supporting the UK energy system with dispatchable, renewable power, keeping the lights on for millions of homes and businesses, while supporting thousands of jobs throughout our supply chain.
“Our Flexible Generation and Pellet Production businesses are making good progress towards our target to deliver post 2027 recurring EBITDA over £500 million and we are continuing to develop options for growth, while remaining disciplined on capital allocation.
“The UK Government aims to deliver a clean energy system by 2030, and NESO’s Clean Power 2030 report shows that large-scale biomass, BECCS and flexible generation are included in both pathways. We are excited to be a part of that process. Our investment in BECCS remains contingent on gaining further clarity from UK Government on the frameworks for continuing the operation of the power station beyond 2027 and supporting BECCS conversions from 2030.
“Subject to the right investment framework and milestones, Drax will develop its options for BECCS and pumped storage hydro which could create thousands of new jobs and private investment into green energy projects in both Yorkshire and Scotland.
“We believe that biomass has a growing role to play in the energy transition, such as in the production of SAF. We have also launched our new Elimini carbon removals business which aims to develop projects providing 24/7 power and carbon removals outside the UK, offering long-term investment opportunities in what we believe could be a major new global market.”
Full year expectations
Reflecting a continued strong performance across the business – Flexible Generation, Pellet Production and Biomass Generation – Drax now expects 2024 full year Adj. EBITDA to be around the top end of analysts’ consensus estimates(3).
Drax expects Net debt to Adj. EBITDA to be around 1x at the end of 2024.
Full year expectations remain subject to continued good operational performance.
Flexible Generation (FlexGen)
Drax continues to target post 2027 recurring Adj. EBITDA of over £250 million from FlexGen.
Drax believes that the retirement of older thermal assets and increased reliance on intermittent renewables, as well as an increase in power demand, will drive a growing need for dispatchable power and system support services, creating long-term, enduring earnings opportunities for, and value from, the Group’s Flexible Generation assets. As such, and in line with its ambition to be a UK leader in flexible renewable generation, the Group continues to assess opportunities for the development of its portfolio.
Pumped Storage and Hydro
The Group’s pumped storage and hydro business is performing well, providing flexible and renewable power generation and a wide range of system support services.
An £80 million investment to refurbish and upgrade two units at Cruachan Power Station is progressing. The project, which is underpinned by a 15-year Capacity Market agreement worth over £220 million (c.£15 million Adj. EBITDA pa), will add 40MW of additional capacity by 2027 and improve unit operations.
Open Cycle Gas Turbines (OCGTs)
Commissioning of three new-build OCGTs at two sites in England and one in Wales is due to commence from Q1 2025. This is later than originally planned, primarily due to delays in grid connection by the relevant authorities. The OCGTs will provide combined capacity of c.900MW and be remunerated under 15-year Capacity Market agreements, worth over £250 million, in addition to revenues from peak power generation and system support services. Drax will continue to assess options for these assets, including their potential sale.
Energy Solutions
In September 2024, Drax completed the sale of the majority of its non-core Opus Energy SME customer meter points. An employee consultation process has also been completed resulting in a reduction in headcount to reflect Energy Solutions’ focus on core I&C and renewables services, which are continuing to perform well.
Pellet Production
Building on increased production and improved margin in the first half of 2024, the Pellet Production business is continuing to performing well.
Drax continues to target post 2027 recurring Adj. EBITDA over £250 million from Pellet Production. This could comprise a combination of own-use and third-party sales, from existing and new markets, including Sustainable Aviation Fuel (SAF), where Drax is developing a pipeline of biomass sales opportunities in North America, Asia and Europe.
Separately, in October 2024, as a part of its plans to reduce carbon emissions in its supply chain, Drax announced a partnership with Smart Green Shipping to trial, develop and use an innovative wind-assisted ‘FastRig’ sail with a view to demonstrating how the technology can reduce fuel consumption and resulting emissions, which Smart Green Shipping believes could be up to 30% per year.
Biomass Generation
Drax Power Station, the UK’s largest source of 24/7 renewable power by is performing well, supporting UK energy security with flexible and reliable renewable power generation and a wide range of system support services. Drax believes that the size, flexibility and location of the asset make it an integral long-term part of the UK energy system.
A major planned outage was completed in August and the unit returned to service ahead of schedule.
Generation contracted power sales
As at 8 November, Drax had over £3.2 billion of contracted forward power sales between 2024 and 2026 on its RO biomass, pumped storage and hydro generation assets – 27.5TWh(4) at an average price of £118.8/MWh(5). Both 2024 and 2025 are effectively fully hedged.
The Group has a further 6.1TWh of CfD generation contracted for 2024 and 2025.
| Contracted power sales as at 8 November 2024 | 2024 | 2025 | 2026 |
| Net RO, hydro and gas (TWh)(4) | 11.0 | 9.7 | 6.8 |
| Average achieved £ per MWh(5) | 154.0 | 107.9 | 77.3 |
| CfD (TWh) | 4.4 | 1.7 | – |
Options for investment in energy security, flexible generation and carbon removals
Biomass Generation – bridging mechanism and UK Bioenergy Carbon Capture and Storage (BECCS)
In November 2024, the National Energy System Operator (NESO) issued a report to the UK Government on the pathways to a clean power system by 2030, outlining the need for significantly more renewable energy and power system flexibility. Drax notes that both of NESO’s pathways include large-scale biomass generation and at least one BECCS unit by 2030.
Following this year’s launch of a consultation on a mechanism for large-scale biomass generators transitioning from their existing renewable schemes in 2027 to BECCS, Drax continues to engage with the UK Government’s Department for Energy Security and Net Zero (DESNZ) regarding a transitional (bridging) mechanism.
Drax believes that a bridging mechanism offers the most effective way to build a link between the end of the current renewable schemes in 2027 and BECCS operations. Consistent with the position set out by Drax in 2023, clear policy support and milestones (including details of the subsequent allocation rounds for carbon capture and storage (CCS) projects and transportation & storage processes) are required to unlock further investment in the development of BECCS at Drax Power Station.
Opportunities for power supply to data centres
The growing demand for 24/7 power to meet the needs of data centres represents a potential opportunity for generators like Drax. NESO’s Future Energy Scenarios indicate a potential doubling of demand for power consumption from data centres by 2030.
The Group’s asset base of large-scale dispatchable power generation and cooling solutions from secure sites backed up by a resilient North American supply chain, and a route to large-scale high-integrity carbon removals via BECCS, is well aligned with the needs of this growing industry.
Drax has received positive engagement with data centre providers in relation to the potential to co-locate a data centre with biomass generation and Drax continues to explore such opportunities.
New pumped storage hydro – Cruachan
In October 2024, the UK Government confirmed its intention to introduce a cap and floor scheme to underpin investment in long duration storage schemes like Cruachan.
Initial design and engineering work is now complete on the option for a 600MW expansion of Cruachan. Drax is continuing to target a final investment decision in 2026, with operation from 2030.
Elimini
In September 2024, Drax launched Elimini, its international carbon removals business, which is operationally separate from the Group and will develop opportunities for 24/7 renewable power and high-integrity carbon removals outside of the UK.
To support the development of this business, in 2023, Drax established a global HQ for carbon removals in Houston, Texas, and the launch of Elimini represents the continued evolution of the carbon removals business.
Elimini will continue to develop a pipeline of project options, including new-build BECCS, the modification of existing sites and other industrial applications.
Balance sheet
In August 2024, Drax entered into a new sustainability-linked £450 million Revolving Credit Facility (RCF) which matures in 2027, with options to extend by two years(6). The facility, which is undrawn, provides additional liquidity and replaced a £300 million RCF which would have matured in 2026.
Separately, Drax completed a £50 million term-loan facility which matures in 2028 with a one-year extension option(6).
In aggregate, through 2024, the Group has put in place over £1 billion of new longer dated debt and facilities, significantly extending the Group’s maturity profile post 2027, whilst reducing gross debt by over £200 million.
Capital returns
At its half year results in July 2024 the Group announced a share buyback programme for the purchase of up to £300 million of Drax shares over a two-year period. In August 2024 a first £75 million tranche of the programme commenced. In October 2024, Drax confirmed a second £75 million tranche to follow the first. To date the programme has purchased c.11.9 million shares.
The total number of voting rights in Drax Group, excluding treasury shares, as at 8 November 2024 was c.375.8 million.
Other matters
Closure of Ofgem investigation into biomass profiling data
In August 2024, Ofgem closed its investigation into the Group’s biomass profiling data. Ofgem has confirmed that it did not find any evidence that the Group’s biomass is not sustainable or that Drax has been issued with Renewable Obligation Certificates (ROCs) incorrectly.
The investigation found that Drax had process gaps in relation to two aspects of its profiling data for Canada in the period April 2021 to March 2022. Ofgem noted that this was technical in nature and would not have impacted the level of ROCs earned by Drax under the Renewable Obligation scheme.
No harm has been caused to the consumer, but in recognition of Ofgem’s findings, Drax has made a payment of £25 million into Ofgem’s voluntary redress fund.
Opus Energy
Drax has provided c.£7 million to reflect costs associated with historical overcharging of Opus Energy customers between 2003 and 2023.
2024 full year results
Drax will report its full year results on Thursday 27 February 2025.