Drax (DRX) once operated Britain’s largest coal-fired power station, but it’s been progressively replacing coal with biomass, and in April it strengthened its supply by buying a Canadian producer called Pinnacle. Drax can now make 4.9m tonnes of wood pellets a year, making it the third-largest manufacturer in the world – but environmentalists maintain that the rationale for this business model is broken.
When mature trees are felled and replaced with saplings, carbon absorption is reduced – it’s called “foregone carbon sequestration”. The cut wood is dried and compressed into pellets, but to do this it turns out that Pinnacle burns gas, which undermines its green credentials. Drax’s chief executive, Will Gardiner, was quoted as saying that he’ll have to “figure out” some alternative method, which hardly fills critics with confidence. The company transports the pellets from Canada and the southern United States to North Yorkshire; they have to be kept in special domes to avoid damp and spontaneous combustion. Burning them to create the steam needed to generate electricity releases carbon that has been stored in the forests for years.
ESG, what ESG?
All this consumes energy and increases carbon emissions – Drax spewed 13.3m metric kilotons of carbon into the atmosphere in 2020. Governments don’t count these emissions as CO2 emissions because they categorise them as having been “biologically sequestered”. This might make some sense if only timber offcuts and other waste are compressed into the pellets, and the power is generated close to their production, but less so if lengthy transport is involved – although Drax draws a parallel here with the transport of liquefied gas.
The process is classified as “renewable energy” and is supported by government grants. For Drax these are worth about £1bn a year and it could be argued that £436m of these were used to buy Pinnacle. They are due to end by 2027 and, meanwhile, Drax is pinning its hopes on developing "carbon-negative power stations". These will capture the stack emissions (from its chimneys), extract the carbon and store it under the North Sea in a process dubbed BECCS (bio-energy carbon capture and storage). It’s due to be up and running by 2030, and its construction promises to create up to 48,000 jobs.
Environmentalists aren’t convinced. They say that even if BECCS works, the emissions from earlier on in the process will still be helping to hasten climate change. In March 2021, about 40 groups issued a letter to Drax’s shareholders, warning them against buying Pinnacle because it depends on wood from the logging of Canada’s boreal forests, which store nearly twice as much carbon as is held in the world’s combined oil reserves. They said that the pent-up carbon then released is not regulated adequately in Canada, and that whole trees have been logged in primary forests and areas “clear-cut” - leaving areas with no tree vegetation at all. They claim that, in a throwback to 19th century ethics, the rights and cultures of more than 600 indigenous communities who have lived in these forests for centuries are being trampled on, and some of the breeding sites for more than 3bn North American birds and the home of many endangered animals are being destroyed. What price do you put on all that?
Drax shareholders evidently bought into the company’s vision (and the promise of a ‘sustainable and growing dividend’) since, despite these warnings, the vote in favour of the acquisition was almost unanimous – yet 40 per cent of Drax is owned by Schroders, Invesco, BlackRock, Artemis (all of which have claimed to be concerned about climate change) and Orbis.
Realpolitik
Environmentalists argue that the burning of massive amounts of wood for commercial energy conflicts with the Paris Climate Agreement – it’s neither carbon neutral nor sustainable, so consumers who think that they have signed up for renewable energy are being misled. They say that the rules on biomass need changing – something for the UN Cop25 climate summit, which the UK will host in Glasgow in November. The government is committed to reducing the UK’s net emissions of greenhouse gases to net-zero by 2050, and recently announced that a key stepping stone will be a 78 per cent reduction from 1990 levels by 2035. Environmentalists expect other nations to accuse the UK of hypocrisy: they ask how the UK can meaningfully advance its net-zero goal by using “fake renewable energy” – or expect other countries to preserve living forests when, through Drax, it’s actively encouraging valuable virgin forests to be felled.
Sadly, governments have a habit of applying unpopular policies through companies, rather than risk losing votes by taking a more direct responsibility. The jobs promised in the construction of BECCS are to be in the north, between Selby and Goole, and in Scunthorpe. Critics believe that the environment is being trumped by another government priority. It’s called “levelling up”.
The letter to Drax shareholders can be found on: https://www.biofuelwatch.org.uk/2021/drax-pinnacle-shareholder-letter/
The Drax side of the argument is on its website: www.drax.com/sustainability.
