Capacity market return a case of when not if, says Drax

Drax Group has said it is “absolutely confident” the capacity market will be re-established with the only question mark hovering over when that will come into effect.

That is according to chief executive of Generation, Andy Koss, who stressed that the timetables set out by the government and the European Commission had been adhered to but with Brexit uncertainties looming delays were still to be expected.

The group, which yesterday (24 July) reported EBITDA up 35 per cent for the six months to 30 June, believes the capacity market can be re-established on the same or similar terms.

Drax’s reported EBITDA figure – which included strong increases from the generation side of the business – omitted £34 million of capacity payments following the suspension of the Capacity Market in November 2018 amid questions that it unfairly favoured fossil fuels.

Upon lifting of the suspension, Drax expects retrospective payments to be made to generators and this has been reflected in its expectations for the year. Once the market is re-established, Drax expects to receive £68 million income from the capacity market, plus a further £7 million in relation to the end of 2018.

In the half-year, the company recorded net debt of £924 million, up from £366 million the previous year.

Koss said the company is making progress with its debt to refinance acquisitions using bond finance and remains committed to get EBITDA in range by the end of the year, a target that he said is achievable assuming the capacity market is re-established.

The company forecast that the Gas and Hydro assets acquired last year would generate EBITDA in the range of £90 million to £110 million, a prediction Koss said the company is confident will be “comfortably” met. For H1 it has exceeded its targets and similar performance is expected in the second half of the year.

Koss said the integration of the assets remains the company’s current focus but it remains “alert to options” for new acquisitions and is seeing huge amounts of change in the sector. The integration is on track to be completed by the end of the year.

Chief executive Will Gardiner said: “Drax Group has delivered strong profit and dividend growth in the first half of the year. Integration of our new Hydro and Gas generation assets is progressing well and the value the group delivers from supporting the energy system has almost doubled. Drax is supporting British business with innovative new energy services and, despite challenging market conditions, our Customers business continues to grow. Our biomass cost reduction initiative and plans for expanded biomass self-supply are going well.”

The biomass cost reduction plan aims to increase its self-supplied biomass pellets to 30 per cent in the coming years with the expansion of three plants to reach 25 per cent self-supply already agreed.

Another company strength highlighted by the H1 results is the 92 per cent increase in value from flexibility across Drax’s generation platforms. This amount is up from £36 million year on year to £69 million.

Koss commented that this increased value is largely down to the acquisition as well as strategically located gas assets around London.

As consumer demand grows Koss said Drax is well-positioned to offer more flexibility from across its portfolio to meet the rising needs of the National Grid.

Commenting on recent proposals for a low-carbon industrial cluster in the Humber region, Koss said the large-scale carbon capture and storage (CCS) network has the potential to capture up to 30 million tonnes of carbon from nearby industrial emitters – including 15 million tonnes produced by Drax.

At present Drax has the capacity to capture one tonne of carbon each day via its bioenergy carbon capture and storage (BECCS) pilot project, but the proposed network has the potential to make significant contributions to reaching the government’s 2050 emissions targets.

It is trialling a molten carbonate fuel cell study that uses the carbon dioxide produced by flue gases and feeds into a nearby green houses.

Gardiner added: “Drax wholeheartedly supports the UK’s target of achieving net zero carbon emissions by 2050. Reducing our greenhouse gas emissions by half in the past year underscores Drax’s commitment to this goal. With the right investment and regulatory framework, we could go further and Drax could become the world’s first carbon negative power station – something the UK Committee on Climate Change recognises will be crucial.”

The results coincide with an announcement by the company that its carbon emissions for the first half of the year were down by 52 per cent and a record high amount of its power being generated by renewables.

Commenting on the record-breaking low carbon emissions Koss said coal is a thing of the past and believes the 25 per cent reduction in carbon emissions over the past six years is set to continue. The company predicts coal will only be necessary for balancing on cold winter days in the future.