TIDMDRX
RNS Number : 7670J
Drax Group PLC
15 December 2022
15 December 2022
Drax Group plc
("Drax", "the Group", "Drax Group", "the Company"; Symbol:
DRX)
Trading Update - critical role supporting UK energy system and
progress with BECCS
Operational Highlights
-- Critical role supporting UK energy system with biomass, pumped storage and hydro
-- System support - strong pumped storage and hydro performance in H2-22
-- Strong contracted power sales 2022-24
-- >99% of generation from renewables - biomass, pumped storage and hydro
-- Jan to Nov Drax generated 20% of UK renewables at peak demand and 11% in total
Financial Highlights
-- 2022 Adjusted EBITDA(1) now slightly above the top of the range of analyst expectations(2)
-- Remain on track to be significantly below 2x net debt to Adjusted EBITDA by the end of 2022
Strategic Highlights
-- Growing global demand for negative emissions and increasing opportunities for BECCS
-- Development of North American options including two new-build
BECCS power stations, a pellet plant with BECCS and
coal-to-biomass-to-BECCS
-- c.GBP30 million development expenditure in 2023 to support options in North America
-- MoU signed for sale of 2Mt of Carbon Dioxide Removal (CDR) certificates
-- UK BECCS
-- "Track 1" Power-BECCS application submitted, shortlisted projects selected in Q1-23
-- UK Government - publication of Power-BECCS business model consultation
-- Pellet Production
-- c.$300m investment in new US pellet plant, port and capacity expansion - c.0.6Mt
-- 90kt pellet plant acquired - Princeton, British Columbia
Drax Group CEO, Will Gardiner said: "Drax plays a critical role
in supporting the UK energy system, generating more renewable power
by output than any other company. During the difficult winter
ahead, we will continue to optimise our biomass operations to
ensure that more renewable power is available, when the country
needs it most.
"As governments around the world increasingly look to introduce
supportive policies for carbon removals, Drax is considering more
exciting global opportunities for deployment of BECCS, advancing
our ambition to be a leader in this critical technology.
"Drax is a growing, international business at the heart of the
green energy transition and we are accelerating our plans to invest
billions of pounds in critical renewable energy and carbon removal
technologies which could create thousands of jobs and generate the
secure, renewable power that this planet urgently needs."
Pellet Production
The Group's sustainable biomass pellet business has continued to
support efforts to optimise biomass power generation and security
of supply in the UK at times of higher demand this winter.
As outlined at the Group's half year results, in July 2022,
there has been an incremental increase in costs in North America,
primarily in transportation and utility costs. These cost increases
have continued in the second half of 2022 and taken together with
costs incurred in providing supply-side flexibility, production
costs for the business are expected to be higher in 2022 and 2023.
These increased costs have been considered in an adjusted transfer
price, which was implemented in the second half of the 2022.
Drax remains focused on opportunities to reduce the cost of
biomass but will balance this against the need to optimise its
supply chain to deliver value for the Group.
In the second half of 2022, Drax commissioned a second 40kt
satellite plant at Russellville (Arkansas) and in August 2022, Drax
acquired a 90kt pellet plant in Princeton (British Columbia) from
Princeton Standard Pellet Corporation. In addition, following
commissioning in the first half of 2022 both the Demopolis
(Alabama) and Leola (Arkansas) pellet plants have continued to work
towards full production and these four plants combined will add
over 500kt of full production capacity.
Investment in new production capacity
Drax has taken a Final Investment Decision (FID) to invest in
two new pellet production projects - a 450kt new-build pellet plant
at Longview (Washington State), including the development of a new
port facility at this location, and a 130kt expansion of its
Aliceville site (Alabama). The combined investment in these three
projects is expected to be in the region of $300 million, inclusive
of the effect of inflation on construction costs.
The development of the new plant at Longview will provide the
Group with access to a new fibre basket and Drax will also develop
port infrastructure at the Port of Longview, adding a fifth port to
the Group's North American supply chain, with the opportunity to
consolidate additional capacity in the future. The US Pacific
North-West will be the Group's fourth major fibre basket alongside;
the US South; British Columbia; and Alberta. The new facility is
expected to support further diversification of the Group's fibre
sourcing production and export capacity, supporting sales into
Asian and European markets, as well as own-use.
The Longview plant will be located next to the Port of Longview,
removing the need for rail or road transport of pellets,
significantly reducing transport time, cost and carbon
emissions.
The plant and port are expected to begin commissioning in
2025.
The Aliceville expansion includes upgrades to existing systems
as well as new truck dumps and pelletiser units which will allow
for an increase in the amount of sawmill residuals processed. The
additional capacity is expected to begin commissioning in 2024.
Generation
The Group's biomass, pumped storage and hydro assets have
continued to support UK security of supply, providing power system
stability at a time of higher gas prices and volatility on the
power system.
Drax has continued to optimise biomass generation across all
four biomass units (ROC and CfD), maximising generation in the
winter, based on system need and sustainable biomass supply.
In October 2022, due to a fall in gas prices and a consequential
fall in short-term power prices, Drax bought back certain existing
forward sold power sales for 2022 on its ROC units. As a result,
Drax has taken steps to reprofile and optimise biomass supplies
between own-use and third-party supply.
The Group's pumped storage and hydro assets have performed
strongly in the second half of 2022, providing a wide range of
services to the system operator in support of system stability and
renewable electricity.
Generation contracted power sales
As at 8 December 2022, Drax had 28.3TWh of contracted power
sales between 2022 and 2024 on its ROC and hydro generation assets
at an average price of GBP135.8/MWh, with a further 1.4TWh
equivalent of gas sales (transacted for the purpose of accessing
additional liquidity for forward sales from ROC units and highly
correlated to forward power prices) plus additional sales under the
CfD mechanism.
Contracted power sales 8 December
2022 2022 2023 2024
----------------------------------------- ------- ------- ------
ROC (TWh) 10.7 11.1 6.1
- Average achieved GBP per MWh 90.2 154.5 159.0
Hydro (TWh) 0.3 <0.1 -
- Average achieved GBP per MWh 255.6 - -
Gas hedges (TWh equivalent) - 0.1 1.3
- Pence per therm - 153.2 133.9
Lower expected level of ROC generation in 2023 due to major
planned outages on two units
Generation biomass costs
Over the past 12 months the cost of biomass in the European spot
market has increased significantly, with cargoes trading at over
three times their historic average.
Reflecting higher production costs in its own supply chain,
those of third parties and higher spot market prices, Drax has
incurred additional costs in the second half of 2022, securing
biomass to support its reliable and dispatchable generation.
Accordingly, the Group currently expects its all-in contracted cost
of biomass for the UK generation business to be over GBP100/MWh in
2023. This is above the historic average, in part reflecting
increased transportation and fuel costs associated with higher
energy costs, inflation and the lower value of Sterling captured in
the Group's foreign exchange hedges.
These factors, alongside the Electricity Generators Levy (EGL)
(see note below), could make generation at certain times less
economic and is expected to restrict the Group's purchase of
additional biomass cargoes at spot prices.
Coal
In July 2022, at the request of the UK Government, Drax entered
into an agreement with National Grid, to provide a "winter
contingency" service to support the UK power system via its legacy
coal units.
The units will not generate commercially for the duration of the
agreement and will only operate if, and when, instructed to do so
by National Grid. To date National Grid has not instructed the
units to run, other than for testing. The contract, which covers
the period October 2022 to March 2023, provides Drax with a fixed
fee for the provision of the units with National Grid remunerating
Drax for costs, including the coal and carbon associated with any
generation.
Drax's decision, in 2020, to end coal generation supports the
Group's purpose of enabling a zero-carbon, lower-cost energy future
and the transition to a flexible, renewable generation model. This
has led to a c.99% reduction in the Group's Scope 1 and Scope 2
carbon emissions since 2012 and enabled Drax to become the UK's
largest source of renewable electricity by output.
Full Year Expectations
Reflecting these factors, and the strong pumped storage and
hydro performance in the second half of 2022, Drax now expects that
full year Adjusted EBITDA (1) for 2022 will be slightly above the
top of the range of analyst expectations (2) , subject to continued
good operational performance and logistics for the remainder of the
year.
The power sales reflected in the Generation business's
contracted power sales book includes some exchange traded
contracts, with higher power prices resulting in an increase in
collateral payments on these contracts in 2022. Inclusive of these
temporary cash outflows the Group continues to expect net debt to
Adjusted EBITDA(1) to be significantly below 2x at the end of
2022.
Electricity Generators Levy
In November 2022, the UK Government announced a windfall tax on
renewable and low-carbon generators, the EGL.
The EGL, which is expected to be implemented from 1 January
2023, represents a levy on power sales above a threshold and would
apply to Drax's three biomass units operating under the Renewable
Obligation scheme and its run of river hydro operations, but does
not include the sale of ROCs. Drax's CfD biomass unit is exempt,
along with Cruachan pumped storage hydro power station and coal
generation.
Through November and December Drax has engaged with the UK
Government regarding the precise details of the EGL, including UK
investment allowances and the treatment of costs for dispatchable
generators. Drax notes the UK Government's reference to the
potential for cost adjustments in its EGL technical note published
in November 2022. Drax anticipates an update from Government on
these issues shortly.
Bioenergy Carbon Capture and Storage (BECCS) - UK
Drax has continued to commit development expenditure into its
Drax Power Station BECCS project, including continuing a Front-End
Engineering Design study.
The project would see the addition of post combustion Carbon
Capture and Storage (CCS) to two of the existing biomass units,
using sustainable biomass and adapting a proven technical solution
from Drax technology partner, Mitsubishi Heavy Industries. By 2030
the project aims to permanently remove 8Mt of CO(2) per annum from
the atmosphere. In doing so Drax Power Station aims to become one
of the largest sources of Carbon Dioxide Removals (negative CO(2) )
in the world.
The UK Government recognises the important role which BECCS has
to play in delivering net zero, requiring at least 5Mt of CO(2)
removals per annum from BECCS and other engineered Greenhouse Gas
Removal technologies by 2030.
In August 2022, the UK Government published a Power-BECCS
business model consultation which set a viable investment framework
based on a CfD mechanism for both power generation and negative
emission production. In addition, the UK Government also set out
the timeframe for the selection of "Track 1" Power-BECCS projects,
stating that shortlisted projects could be confirmed from December
2022 with draft heads of terms for the contracts in the first half
of 2023. "Track 1" projects are expected to commission in the
mid-2020s and along with expected clarity on the financial model,
this supports Drax's aim to take a FID in 2024 and commission a
first unit in 2027, with a second by 2030.
The six-month extension of coal unit availability to March 2023
is not expected to impact the timing of a FID or intended
commissioning date for the project. Site preparation works for
BECCS are ongoing and will continue following formal closure of the
coal units in March 2023 on conclusion of the contract with
National Grid (see above).
BECCS - North America
Drax aims to realise its ambition to become a carbon negative
company by 2030 primarily through the development of BECCS,
including the development of BECCS globally.
To realise these opportunities, the Group is progressing a
number of work streams including regulation and policy, technology,
fibre sourcing, logistics and commercial.
Over the course of the year, the Group has made good progress
towards its ambition to deliver 4Mt per annum of CDRs from
new-build BECCS outside of the UK by 2030, with a primary focus on
North America.
Opportunities under consideration include two new-build 300MW
BECCS power units each capable of producing 2TWh of renewable
electricity from sustainable biomass and each capturing over 2Mt of
CO(2) per annum. Drax is also developing options for a pellet plant
with BECCS and the addition of BECCS to existing generation assets,
including coal-to-biomass-to-BECCS.
Key considerations for these opportunities include proximity to
sustainable biomass fibre, CCS infrastructure, regulatory support,
commercial potential and technology.
Drax is evaluating a range of potential financial models for
these projects, which could include long-term Power Purchase
Agreements (PPAs), long-term CDR offtake agreements and government
investment frameworks. As part of the development of these models,
in September 2022, Drax announced a Memorandum of Understanding
(MoU) for the world's biggest carbon removals deal with Respira, a
carbon broker. Under the terms of the MoU, Respira will be able to
purchase up to 2Mt of CDRs over a five-year period from Drax's
North American BECCS projects.
Regulation and policy development
The regulatory environment for BECCS in the US has continued to
develop in 2022, with the inclusion of BECCS as an eligible
technology under the Department of Energy climate goals funding
scheme and the increase in 45Q support to $85 per tonne of CO(2)
captured, under the Inflation Reduction Act. A recent National
Renewable Energy Lab report highlights that by 2035, the US could
need c.100Mt of negative emissions from BECCS to offset remaining
carbon emissions in the power sector.
In addition, recent State level developments in Louisiana and
California have both been supportive of the development of BECCS.
The Louisiana Congress approved a bill that classifies biomass as
carbon neutral and BECCS as carbon negative. Similarly,
California's net zero strategy identifies BECCS as a critical tool
in the delivery of their climate targets. The California Air
Resources Board, which is responsible for climate policy, has
stated its intention to deploy 75Mt of carbon removals, including
BECCS, by 2045.
Potential for significant growth in CDRs
Research by the Intergovernmental Panel on Climate Change
(IPCC), the world's leading authority on climate science, states
that CDR methods, including BECCS, are needed to mitigate residual
emissions and keep the world on a pathway to limit warming to
1.5(o) c.
All the illustrative mitigation pathways assessed in the IPCC's
latest report use significant volumes of CDRs, and specifically
BECCS as a key tool for mitigating climate change. The IPCC
believes that globally between 0.5 and 9.5 billion tonnes of CDRs
via BECCS will be required and the UN-backed Principles for
Responsible Investment estimate that the CDR market could be worth
over a trillion dollars by 2050.
Drax sees significant growth opportunities linked to BECCS in
North America and in order to progress these opportunities in 2023,
expects to invest in development expenditure in the region of GBP30
million with a view to progressing these opportunities to a FID.
Drax expects to update on progress with these opportunities in the
first half of 2023.
Biomass Sustainability
Delivering positive outcomes for people, climate and nature are
at the core of Drax's business model and ensuring that Drax only
uses biomass which is sourced sustainably is central to this
ambition.
Biomass - when sustainably sourced - supports good forestry, is
a renewable source of energy, and an important part of both UK and
international renewable energy policy.
Drax sources its biomass from well-established forestry markets
in the US and Canada as well as Europe. The main output from these
markets is sawlogs, which are processed for use in construction and
manufacturing, such as house building. When used in this way, these
materials represent a source of long-term carbon storage and when
the forest regenerates or is replanted these growing trees absorb
carbon from the atmosphere.
Drax supports these forest economies by providing incremental
secondary revenues to forest landowners through the purchase of
material which is not merchantable to a sawmill, such as bark,
branches, low-grade wood and woody material from forest management
activities (thinning), in addition to purchasing sawmill residues
from sawmills. These materials often have limited alternative uses.
In some instances, where there would otherwise be no demand for
these materials, they are burned to reduce the risk of wildfire,
the spread of disease and to allow the forest to be replanted -
this is especially prevalent in Canada.
In the US South, the periodic thinning of a forest helps improve
the size and quality of sawlogs when the trees reach maturity, the
economic value of the timber produced and the carbon absorbed and
stored, as well as forest health and biodiversity. If forests were
not thinned, the revenue from sawlogs would be reduced and
landowners may consider other uses for their land, such as
agricultural crops and livestock farming. The management of
forestland to produce sawlogs ensures forests are growing
vigorously, absorbing carbon, and forests remain a carbon sink.
Forests in the areas where Drax sources material are subject to
national and regional regulation and typically supported by, and
independently monitored for compliance by, forest certification
schemes such as: the Forestry Stewardship Council(R) (FSC)(3) ,
Sustainable Forestry Initiative (SFI) and Programme for the
Endorsement of Forest Certification (PEFC).
Drax supplements this regulation through its own biomass
sourcing policy and checks of its supply chain, with third party
verification under the Sustainable Biomass Program (SBP).
Other
In December 2022 Drax agreed a new GBP200 million credit
facility with banks within its lending group. The facility provides
an additional source of liquidity to the Group's undrawn GBP300
million revolving credit facility, over the next 12 months.
Drax will report its full year results on 23 February 2023.
Notes :
(1) Earnings before interest, tax, depreciation, amortisation,
excluding the impact of exceptional items and certain
remeasurements.
(2) As of 12 December 2022, analyst consensus for 2022 Adjusted
EBITDA was GBP668 million, with a range of GBP651-GBP681 million.
The details of this company collected consensus are displayed on
the Group's website.
https://www.drax.com/investors/announcements-events-reports/presentations/
(3) FSC C119787.
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
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 the Company'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: future
revenues being lower than expected; increasing competitive
pressures in the industry; and/or general economic conditions or
conditions affecting the relevant industry, both domestically and
internationally, being less favourable than expected. 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
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