The Yorkshire-based power station Drax plans to supply more of its own biomass, to help the UK reach its targets for reducing carbon emissions.
In a trading update, Drax said it was targeting biomass self-supply capacity of five million tonnes by 2027. The company said it was evaluating options for a further three million tonnes over the next seven years.
Drax said it is also targeting returns significantly in excess of the group’s cost of capital. Drax said it was trading in line with expectations and its acquired assets were performing strongly.
Will Gardiner, Drax Group’s CEO said: “Drax’s purpose is to enable a zero-carbon lower cost energy future.
“We believe sustainable biomass has a long-term critical role to play. That’s why we plan to supply 80 per cent of our biomass from our own sources - a significant increase on the 20 percent we currently self-supply. Supplying more of our own biomass will cut costs and reduce supply chain risks, ensuring our biomass power generation remains viable in the long term. When combined with carbon capture it will also enable negative emissions, helping the UK on its path to net zero by 2050.”
Drax is today hosting a Capital Markets Day for investors and analysts. Mr Gardiner and his management team will provide an update on how the group is delivering its goals. The event will outline the “significant opportunities” Drax sees in growing its biomass supply and renewable generation businesses.
The statement added: “As a part of the group’s key strategic objective of building a long-term future for sustainable biomass, Drax remains focused on opportunities to reduce its cost of biomass to a level which is economic without subsidy in 2027.
“These savings will be delivered through further optimisation of existing biomass operations and greater utilisation of low-cost wood residues; an expansion of the fuel envelope to incorporate other renewable fuels and; a significant expansion of self-supply capacity.”
Drax is targeting five million tonnes of self-supply capacity by 2027. It is 1.5 million today, with 0.35 million tonnes in development.
Drax said it will continue to work with its current suppliers to develop its portfolio.
The statement added: “At the 2019 half year results, Drax announced an investment in low-cost capacity at its existing three sites in the US Gulf, adding 350,000 tonnes of new capacity by 2021. The capital cost is in the region of £50 million, enabling targeted fuel cost savings in excess of £15/MWh on the additional capacity once commissioned.”
Drax is evaluating options to deliver an additional three million tonnes of capacity. These options are expected to deliver returns significantly in excess of the group’s cost of capital, with strong cash flow generation and a fast payback.
These activities would enable Drax to develop an unsubsidised biomass generation business by 2027, with the option to service wood pellet demand in other markets - Europe, North America and Asia, the company said.
The statement added: “Biomass sustainability is at the heart of the group’s activities and Drax has implemented industry leading processes which support this expansion, encourage forest growth and make a positive contribution to climate change.
“Drax continues to see flexible gas generation as an enabler of greater renewable and low carbon generation, in addition to supporting the development of hydrogen.
“Any investment decision would reflect Drax’s objective of delivering earnings visibility and be underpinned by a 15-year capacity agreement to support a low double-digit rate of return.”
Drax said it would consider a range of funding options, including partnerships.
The company said that the performance of the assets acquired from Iberdrola in December 2018 has been strong, particularly the pumped storage business which has performed well, driven by the system support market.
In July, Drax completed the refinancing of the acquisition bridge facility used to acquire these assets.
These facilities now extend the group’s debt maturity profile to 2029. The group’s cost of debt is now below four per cent and below three per cent on the new facilities, reflecting the group’s reduced business risk.
The group said it was continuing to identify opportunities to optimise its balance sheet and cash flow.
The statement added: “The outlook for coal generation remains challenging and Drax continues to monitor the situation with regards to future operation, noting that all unabated UK coal generation must close by 2025.
“Following formal confirmation from the UK Government, Drax expects the capacity market to be re-instated shortly, with full retrospective payments made for the capacity provided. Capacity payments due to Drax for 2019 and since the suspension of the capacity market in 2018 are £75 million. Drax expects these to be included in 2019 Adjusted EBITDA with cash settlement in January 2020.
“These factors underpin the group’s expectations for full year Adjusted EBITDA, which remain unchanged.