Drax earnings ignite but government support still unclear

Drax (DRX) is a political play for investors, as the government considers whether to keep handing the company hundreds of millions of pounds a year once the current subsidy deal ends in 2027. 

The pressure is on. This week, a second BBC Panorama programme reported Drax has used wood from old growth forests in British Columbia, despite claims it solely sources pellets for its eponymous power plant from wood waste. Drax said its sourcing was in line with its policies, and Ofgem had signed off on its most recent audit in May 2023. Chief executive Will Gardiner said the company’s “best case” scenario would be a bridging deal with the government for 2027 onward “agreed and signed before the election”. Labour has been more sceptical on biomass as a renewable energy source. 

In the short term, the company has plenty of cash generation capacity, from both the biomass plant and its hydroelectric assets. Adjusted Ebitda for 2023 was £1bn, 38 per cent ahead of the year before. The uptick was driven by the generation business, while external renewable certificate sales last year were £843mn, down slightly on the year before. Its contracts for difference deal saw it hand the government operator £63mn last year. 

Drax is also flagging a shift to US investment, with a new-build bioenergy with carbon capture and storage (BECCS) plant in the design phase, at a potential cost of $2bn (£1.6bn). As in the UK, the company would need power purchase agreements and guaranteed payments for storing carbon dioxide. 

The company also sells pellets that are burned in biomass operations, and earnings in this business were impacted by weather conditions in Canada, higher costs overall and unplanned outages at its plants. Adjusted Ebitda was down by a third, to £89mn. 

The company remains in limbo given the unclear future of its major earner. Hold.

Last IC View: Hold, 611p, 27 Jul 2023