Drax is expected to profit from UK energy crisis until 2023
Company’s shares hit seven-year high after revealing plans to invest £3bn despite questions over biomass
Last modified on Wed 1 Dec 2021 10.50 EST
The owner of the Drax power station is expected to profit from Britain’s energy crisis until 2023 and will plough billions into doubling its production of wood pellets for burning by 2030 despite mounting opposition from environmentalists.
The FTSE 250 energy company’s shares hit seven-year highs on Wednesday after it told investors it aimed to invest £3bn by 2030. Part of that investment would be directed towards doubling production and sales of biomass pellets, which Drax uses at its North Yorkshire power plant as an alternative to burning coal.
Its claims that electricity produced in this way is “carbon neutral” is disputed, with green groups saying burning biomass produces emissions that contribute to the climate crisis.
Drax will fund the expansion plans using its own cash as it prepares to profit from record high energy market prices in its long-term contracts over the next two years.
The company’s is valued at £2.43bn after its share price rose on Wednesday morning from 564p to more than 606p, its highest since October 2014.
Drax told investors its profits for the current financial year were likely to be at the upper end of market expectations. It said this was despite the company not being “a significant beneficiary” of the record gas and electricity prices that have forced factories to close and energy suppliers to almost 4m UK households to go bust.
Most of Drax’s electricity generation is sold via long-term contracts, meaning its earnings this year will rely more heavily on market prices a year or two ago than recent historic highs.
However, the company has managed to increase its earnings for this year by selling some electricity on a short-term basis and agreeing to fire up its last coal-burning units to help keep the lights on in September and again in November. It is expected to close both coal units by next September.
Drax will also be able to hike up the price of the electricity it generates for long-term contracts for 2022 and 2023. In addition, the company will continue to benefit from subsidies worth hundreds of millions of pounds to generate biomass electricity through the government’s renewable energy scheme.
The company has already received billions through the scheme, including £800m last year. This is despite growing environmental concerns over biomass electricity.
Questions about the method have also been raised within financial circles. The financial services firm Jefferies told its clients in October that bioenergy was “unlikely to make a positive contribution” towards tackling the climate crisis and was “not carbon neutral, in almost all instances”.
Will Gardiner, Drax’s chief executive, said criticisms of the company’s claim that it was on track to becoming “carbon neutral” were a “mischaracterisation of reality”.
He added that Drax’s long-term strategy – which involves fitting its biomass burners with carbon capture technology to generate “carbon negative” electricity – was backed by the UK government, and would play “a unique piece” in energy transition efforts globally.
“We’re excited about the opportunities ahead, and we have a lot of work to do,” he said.
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