Drax [LON:DRX] has been somewhat dragged over the coals this year. The Selby-based, FTSE250 listed energy company has been caught in the midst of the energy crisis in the UK. Although the company generates and sell electricity, it has been affected by the disruption in the energy market caused by the War in Ukraine and global inflationary pressures, as it has seen the price of biomass – the wood pellets it burns to generate electricity – soar in cost. Cost it has been passing down the line to its customers, despite being a recipient of generous government grants.
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Although the company describes itself as the UK biggest source of renewable energy, its sustainability credentials have been brought into question during the year. Drax started life as a coal power plant, and then began to introduce biomass – wood pellets – to co-burn with its coal in 2004. In April this year the company switched off its last coal-fired turbine after burning the fuel at a rate of 36,000 tonnes a day for 50 years and committed itself 100% to biomass (although last winter it had its coal turbines on standby if things got really difficult with energy supplies) and committed itself fully to renewables with a nameplate output of 4GW, but in practical terms 2.6GW derived from six turbines.
Is imported wood really sustainable?
However, environmental campaigners, most notably Friends of the Earth have rubbished Drax’s claims to be renewable in the same way that solar and wind generation is. Although wood is cleaner than coal, it is still a carbon-based fuel that releases significant amounts of carbon into the atmosphere -more than natural gas, as it is releasing the carbon dioxide captured and sequestered in trees over decades, as well as releasing large amounts of particulates.
Moreover, the majority of the power plant’s biomass is imported – shipped in ocean-going vessels often burning Heavy Fuel Oil, a highly pollutive transportation fuel. It is sourced, so Drax says, from industry and agriculture in brush clearance and offcuts from wood used in the construction sector. However, the company’s suppliers have been accused of felling virgin forest to keep up with Drax’s insatiable biomass demand, and many argue it is more environmentally sustainable to reuse construction wood, rather than burn it.
Investing in carbon capture technology
Drax is investing up to GBP2bn in carbon capture technology, but this itself is pilloried in the environmental industry as a ‘greenwash’ allowing rich countries, who can afford the technology, to keep burning fossil fuels when the developing world is being herded down the renewable energy path.
Drax would argue that it is balancing its carbon footprint by planting new trees, but in reality, these saplings take 50 to 75 years to capture the same carbon that is released when a mature tree is burned.
Industrial action affected operations
Drax has also had to deal with industrial action this year, with subcontractors hit by strikes which affected Drax’s operations and its own workers going out on strike in March. In the end the strikers forced their employees to improve their pay and conditions with further payouts of bonus and overtime rates to subcontractors earlier this month.
But the biggest headache for Drax this year has been subsidy-gate. As previously reported, Drax receives subsidies in the form of ROCs (Renewables Obligation Certificates) and CFDs (Contracts for Difference) dependent on the amount of woody biomass it burns. From 2012 until 2027, when this support runs out, Drax will have collected more than GBP11bn in subsidies. This figure is all the more extraordinary considering wind and solar generation, which guarantee real emissions reductions, are now effectively subsidy-free.
Drax subsidies called into question
The company’s use of subsidies was called into question as it was given money by the government to support its biomass generation but switched off one of its turbines for most of 2022 at the height of the energy crisis. Instead of burning its stockpile of biomass, it sold the pellets to third parties at a profit, as with Ukraine and Russia excluded from the timber market the price of wood and wood byproducts surged. If it had run its turbine, which earns a fixed subsidy levied on energy bills, it would have been required to return an estimated GBP639m to bill payers.
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The company didn’t break any laws, as it just exploited a loophole in the subsidy plan, but left a sour taste in the mouth of many politicians from both sides of political divide. Under the terms of the subsidy contract, energy projects receive a fixed price for each megawatt of electricity generated.
Usually, companies receive a payment levied on energy bills which tops up the earnings from the wholesale market to the agreed ‘strike price’. But in 2021/2 and 2022/3 market prices have been significantly higher than the subsidy level, requiring companies to pay the difference back to consumers.
Drax denied any wrongdoing and the accusation by Bloomberg investigators that it had intentionally shut one of its turbines down to avoid having to pay back any subsidy. Drax also was attracting criticism overseas and is looking at fines of up to GBP300,000 in Canada after one of its biomass plants in Alberta failed to submit an annual report on pollutant emissions to the country’s environment regulator.
The subsidiary was sanctioned for not reporting on time on hazardous compounds and particulates that were generated in the manufacture of wood pellets for the North Yorkshire power station.
Drax offers consistent shareholder returns
Despite all this Drax has been good to its shareholders. At the end of last year, as a result of record retail and wholesale energy prices, Drax reported its highest ever profits after a 101% increase on year-on-year earnings, and subsequently commenced a GBP150m share buy-back programme. The energy company also announced an interim dividend of 9.2p/share up from 8.4p/share in 2022, with expected full year dividend up 10% to 23.1p/share from 21.0p/share in 2022 and expectations of dividend growth in 2024.The fly in the ointment, however has been the share price. Drax opened the week (20th November) at 436.97p down -29.7% over one-year. Over the year-to-date, Drax lost -34.9%. The company’s shares have ranged between 395.2p and 728.5p over a 52-week period. The company has a market capitalization of GBP1.7bn.
The company has had its ups and downs, and its share price has been disappointing, but may create a good buying opportunity. The company loves a dividend, so it is worth considering as a source of passive income.
In the rush to decarbonise, there seems to be little central planning. Wind – especially onshore wind – is beset with its own set of problems, from feed-in-tariffs and Nimbyism, and solar also has its own hurdles. Neither source has been or will be as generously supported as Drax. Even though the company is far from perfect, it could be set to remain at the heart of the UK’s energy supply for another half-a-century.