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How to figure out if Drax is a value trap

In the second in our series on utilities, analyst Robin Hardy examines power companies and takes an in-depth look at Drax
August 8, 2023

Although they were brought out of public ownership in the same way and at broadly the same time as the water companies, even fewer of the original cohort of UK electricity companies remain listed. But in this sector there is substantially more investible value, more operational diversity within stocks themselves, and its scope has extended beyond that envisaged at the time of the original government sales.

Today, of the 12 English/Welsh regional electricity companies (RECs), two generators (PowerGen and National Power) and four Scottish utilities only two remain: SSE (SSE) and National Grid (NG.). We can add to this Centrica (CNA) (an earlier privatisation), now a diverse energy company split off from British Gas in 1997; Drax (DRX), a former coal-fired power plant now focused on biomass; a clutch of new energy businesses largely in the investment trust sector, such as Greencoat UK Wind (UKW), The Renewables Infrastructure Group (TRIG) and NextEnergy Solar (NESF).

UK domestic electricity supply is today dominated by the so-called ‘Big Six’ – SSE (UK listed), British Gas (Centrica), Eon (DE:EOAN)), Scottish Power (Spanish utility Iberdrola (ES:IBE)), nPower (German conglomerate RWE (DE:RWE)), and France's recently delisted EDF. Following countless business failures when energy prices spiked (largely due to poor hedging policy and practice), there are today only a small number of direct alternative suppliers (such as Octopus and Ovo), along with a number of resellers such as Shell Energy and a handful of business-only suppliers. 

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