Drax agrees deal to buy Canadian biomass pellet producer

Drax has signed an agreement to buy the Canadian biomass pellet producer Pinnacle Renewable Energy as part of its drive to increase self-sufficiency.

The group has agreed to pay C$11.30 per share – representing a 13 per cent premium on the closing price on the Toronto stock exchange on 5 February and valuing Pinnacle’s equity at C$385 million (£220 million). It will also take on C$356 million (£203 million) of net debt, bringing the implied value of the deal to C$741 million (£423 million).

Pinnacle operates a total of ten biomass pellet plants – six as part of joint ventures – with seven located in British Columbia, two in Alberta and one in the US state of Alabama.

The company owns around 80 per cent of their combined nameplate production capacity of 2.5 million tonnes per year – the rest being owned by its partners – but has the sales rights to all output. It is also developing a second plant in Alabama which will add another 0.4 tonnes per year to nameplate production capacity.

Drax currently operates 1.6 million of annual production capacity and is developing another 0.4 million tonnes. The new deal will bring the overall total for its enlarged supply chain to 4.9 million tonnes per year in 2022, by which point the plants currently in development will be operational. Of this, 2.9 million will initially be available for self-supply, with the figure rising to 3.4 million in 2027.

The group said it expects to further expand its production capacity as it seeks to increase its self-supply of pellets to 5 million tonnes per year and reduce the cost of its biomass generation to £50/MWh, both by 2027 when its Contracts for Difference subsidies expire. It noted that Pinnacle’s pellet production costs of US$124/tonne are lower than its own figure for 2019 of US$161/tonne.

Drax chief executive Will Gardiner: “I am excited about this deal which positions Drax as the world’s leading sustainable biomass generation and supply business, progressing our strategy to increase self-supply, reduce our biomass production cost and create a long-term future for sustainable biomass.

“We expect to benefit greatly from Pinnacle’s operational and commercial expertise, and I am looking forward to what we can achieve together.

“It will pave the way for our plans to use bioenergy with carbon capture and storage (BECCS) and become a carbon negative company by 2030 – permanently removing millions of tonnes of carbon dioxide from the atmosphere each year. Negative emissions from BECCS are vital if we are to address the global climate emergency whilst also providing renewable electricity needed in a net zero economy, supporting jobs and clean growth in a post-Covid recovery.”

The acquisition is subject to approval by stakeholders, courts and regulators and is expected to be completed in the second or third quarter of 2021.