Utility Drax outlook strong to 2031 on deal with UK gov

UK utility Drax will keep all four of the biomass-fired units at its North Yorkshire power plant operational beyond March 2027, should a proposed agreement with the UK government for further state support up to 2031 be finalised and approved by parliament, the company said.

The UK government announced on 10 February details of a proposed contracts-for-difference (CfD) deal with Drax for 2027-31, covering all four of the firm's 645MW biomass-fired units.

Under the proposed contract, Drax would generate an aggregate collar of around 6 TWh/yr of biomass-fired power under CfD support in the four years from 1 April 2027 — the day following the expiry of its existing subsidy contract. The minimum generation under the support would be around 5 TWh/yr, Drax said. This would cover 43-52pc of Drax's total biomass-fired output in recent years (see table).

But Drax "will continue to develop options for long-term investment, including bioenergy with carbon capture and storage (Beccs) and data centres", the company said. This suggests that its biomass-fired power output could be higher than the amount covered under the CfD deal.

Security of supply concerns and the relative cheapness of biomass compared with natural gas were the primary reasons behind the government's decision to offer the new subsidies, rather than the plant's prospects to develop large-scale Beccs, the government said.

The proposed agreement also allows for system support and ancillary services, Drax said.

The CfD support for all Drax's four units at the 2.6GW plant will be under the same terms as Drax is currently receiving for unit 1, with season-ahead power prices setting the base-load market reference price for any given season during the contract period, Drax said.

Given these terms, the company is targeting average adjusted earnings before investment, taxes, depreciation and amortisation (Ebitda) from the plant of £100mn-200mn/yr ($125mn-250mn/yr) over April 2027–March 2031. This is inclusive of a "gain share mechanism", which stipulates that the utility will pay back returns above certain threshholds. If revenue minus allowable operating costs and capital investments over the agreement period average between £160mn-210mn/yr, Drax will pay to the government 30pc of the returns in excess of £160mn/yr. And if its revenue is over £210mn/yr, Drax will pay 60pc of the returns in excess of £210/yr.

The government said it would tighten the sustainability requirements for the subsidies under the new contract, asking for 100pc of the feedstock to be certified for sustainability, compared with 70pc at present.

"Drax supports these developments and will continue to engage with the government on the implementation of any future reporting requirements," the firm said.

Flexible generation, pellets

Drax continues to target over £500mn/yr of Ebitda post 2027 from flexible generation and wood pellet production, it said.

In pellet production, the group is "continuing to develop a pipeline of wider sales opportunities" in North America, Asia and Europe, Drax said. It has reached a preliminary agreement with US firm Pathway Energy for selling pellets for sustainable aviation fuel from 2029, although Pathway has yet to take an investment decision on the project.

By Erisa Senerdem