Drax considers developing additional U.S. pellet capacity

By Erin Voegele | February 18, 2014

Drax Group plc has released preliminary financial result for 2013, reporting that earnings were ahead of expectations, reflecting good operations and healthy spreads. During a presentation to discuss the results, the company also indicated it is pursuing options to build 2 million metric tons of additional pellet production capacity, primarily in the U.S.

Drax reported EBITDA of £230 million ($383.99 million), down from £298 million in 2012. Underlying earnings for 2013 were £142 million, down from £193 million the previous year. The company said the year-over-year reduction in earnings was driven by an increase in carbon costs.

“As expected, the increasing cost of carbon drove earnings down year on year. Recognizing this, we have been investing significant capital to transform Drax into one of the world’s largest renewable generators, burning sustainable biomass. At the same time we have delivered strong operating performance across the business, including notably, good output, efficiency and reliability from our first converted unit,” said Dorothy Thompson, chief executive of Drax.

During a presentation to discuss the 2013 results, Thompson stressed that company’s most notable achievement last year was the big step it took forward in the journey to transform Drax into a predominantly biomass generator. “We are now confident that we will be a predominately biomass generator in 2016,” she said. “But, I think most importantly, we are now confident in terms of output and efficiency. We’re not going to just deliver good performance from these units, we are going to be able to deliver excellent performance, and this performance is going to surpass our expectations at the time we put together our investment proposition for this biomass transformation.” The real message today, Thompson continued, is that significant technical progress has been made in how to operate the biomass units going forward.  

Thompson explained that while the first converted unit was commissioned in April, it ran on a temporary fueling system until the new fueling system began commissioning in October. That temporary system constrained the unit’s maximum output to about 550 megawatts (MW). Once the new fueling system was operational near the end of the year, the unit was delivering more than 600 MW.

According to Thompson, Drax is confident that with some additional investment, it can deliver improved performance of its biomass units. She estimated that 630 MW of output could be achieved using standard biomass, with up to 645 MW possible with a very high caliber of biomass. The company also expects to achieve an efficiency of only 0.5 percent less than coal.

The higher-than expected output of the converted unit has resulted in two catches, Thompson said. First, better combustion has resulted in higher than expected NOx emissions. Second, the company currently does not have the port capacity, rail capacity or biomass supplies to support that higher capacity. However, Drax is working to develop solutions for both those issues.

Moving into 2014, Thompson said the focus will be on delivering good performance from the existing converted unit. She noted that the company also intends to modify another coal unit and run it as an enhanced co-firing (ECF) unit. The ECF unit will burn up to 85 percent biomass, possibility more, and be used to test additional agricultural fuels and determine what range of technical specifications for wood pellets can be burned. The unit will also trial low-NOx burners.

Thompson explained that the exact dates for the full conversion of Drax’s second and third units to biomass is highly dependent on the U.K. government’s contract for difference (CFD) proposal. The second unit is currently expected to be converted to biomass in April 2015. The soonest the third unit could be converted is the third quarter of 2015. However, Thompson said the company is confident it will have three units converted to biomass by 2016, and hopes to be advancing plans for the conversion of a fourth unit at that time.

Regarding biomass fuel supply, Thompson said the Drax remains confident that it can get all the biomass it needs, and noted it has already secured more than 4 million metric tons for 2014, and has made good progress on negotiations for fuel supplies for the additional units. “We do expect the biomass to predominantly come from North America,” she said, noting that additional supplies may be sourced from Europe and Latin America.

“What has become clear to us is there is real value for Drax in having our own pellet production,” she said. The 450,000-metric-ton-per-year pellet plants Drax is developing in Louisiana and Mississippi are progressing on time and on budget.

According to Thompson, Drax has determined there are several benefits associated with having its own pellet production capacity, including the ability to control quality and technical specification. Additional benefits include the ability to ensure timely and secure delivery and the ability to strategically locate pellet production to achieve aggregation benefits.

Thompson said Drax is pursuing options to develop up to 2 million tons of additional pellet capacity, primarily in the U.S. The company is also in the early stages of considering expanding its straw pellet capacity in the U.K.

“The objective here is to secure high quality pellets, optimize pellet plant efficiency, which…brings down fuel costs, and actively manage fiber inputs, which optimizes the physical and chemical characteristics of the biomass fuel,” said Tony Quinlan, finance director of Drax. “Our focus remains on North America, where we see the potential for attractive, double-digit returns, but we are also looking at the opportunity for expanding our U.K. pellet production, which can deliver some our most cost-effective biomass fuel.”

“A central case has been to monetize the first U.S. pellet plants and use the funds to develop further facilities. That remains a very credible option. However, these plants deliver attractive returns…and there is real value in having control of the supply chain, so we will also consider the merits of keeping some additional assets within the group,” Quinlan continued.