Drax provides operational update during investor call

By Erin Voegele | July 30, 2014

The Drax Group plc has announced financial results for the first half of the year, reporting that biomass now accounts for more than 20 percent of the its output. According to the company, both the first converted unit and the enhanced cofiring unit are performing well.

Drax reported EBITDA of £102 million ($172.57 million) for the six months ended June 30, compared to £120 million for the same period of last year. The reduction is attributed primarily to the increasing cost of the U.K. carbon tax. Underlying earnings were £38 million, down from £70 million for the first half of last year. The company reported a loss of £11 million, compared to a £206 million project before taxes last year.

During an investor presentation to discuss the results, Dorothy Thompson, chief executive of Drax, noted the first half of the year represents the first time the company has reported on the converted unit while it was running on properly scoped systems. She also specified the company is still in the process of commissioning its enhanced cofired unit, which burns 85 percent or more biomass. The commissioning process has been complicated by the fact that Drax has used the unit for a low NOx trial for the Industrial Emissions Directive, and for fuel trials.

Regarding plans for future unit conversions, Thompson said Drax is confident it will convert at least three of its six units to biomass. At minimum, she said two units will be supported by the Renewables Obligation and one will be supported by a Contract for Difference (CfD), which is subject to state aid clearance by the European Commission. Under a more positive scenario, a second of those three initial conversions could be supported by a CfD.

In late 2013, the U.K. Department of Energy and Climate Change announced plans to offer CfDs to two planned biomass conversions at Drax. It later said one of those unit conversions was not eligible for a CfD. “We were somewhat surprised when the government changed its view on the eligibility of our second unit conversion,” Thompson said. “We decided to challenge that decision, and the way you challenge government when they’ve made a final decision is through the courts. The court found in our favor in July, subsequently the government issued us with an investment contract, conditional of the successful outcome, final outcome of our legal challenge because they are appealing it. Also conditional on state aid clearance. So for that second unit conversion, there is still a chance that we’ll the benefit of an investment contract with all the associated protection of a private law contract and revenue certainty.”

Drax is also considering converting a fourth unit to biomass. According to Thompson, there are two ways that conversion could be supported, either through a RO or by a CfD. She explained that the DECC recently announced the first budget for enduring CfDs, and noted that that budget is extremely limited.  “In the context of that limited budget, it is not surprising that there was no budget for unit conversions. Unit conversions are by definition very large renewable projects,” Thompson continued. While Drax plans to work hard on plans for the fourth unit conversion, and is confident that it will be supported by either an RO or a CfD, Thompson indicated the company expects the opportunity for a CfD would have to come in the 2015 award allocation, which has not been announced yet.

With regard to EU approval of the CfD program, Thompson noted that the EU announced the first set of approvals under the state aid clearance in July. In that set of approvals, the EU approved the CfD regime and said the program is a fine example of how to promote decarbonization of the economy with market-based support mechanisms. While the EU said it thinks CfD mechanisms are appropriate to support biomass conversions, it only offered project approval for offshore wind projects that have been awarded CfDs. Thompson said the delay is approving the biomass CfDs was expected. “We’ve always give guidance that we’ve expected approval to come in the second half of the year rather than the first half of the year, and that is because with offshore wind projects, there are an awful lot of them across the EU,” she said. [That is] not the case with biomass, so it will require further work because it is a more specialized technology, and to be honest, a new technology at the moment for conversions.”

As for Drax’s future plans, Thompson said it is possible the second unit conversion could happen this year. If that unit hasn’t been converted by the end of the year, it will be completed in 2015. The company also expects to complete construction on its three U.S.-based pellet projects next year. It is also possible Drax could commission its third biomass unit in 2015, but that will depend largely on biomass supply. The fourth planned unit conversion could be operational by 2016 or 2017.

Drax’s three existing U.S. pellet projects, including two pellet plants and one port facility, are progressing on schedule and on budget. Thompson said Drax is continuing to explore the option of increasing pellet production, but noted that future projects will be subject to funding capacity and the credit rating of Drax. She did, however, note Drax is currently working on plans to expedite development of a third pellet plant that would feed into the port operation it already has under development. A similar concept is under development on the East Coast that would feature an export location and pellet projection.

During the call, Thompson described the three reasons Drax likes having its own pellet production. First, she said it gives the company the opportunity to optimize the technical specifications of the pellets. It also gives the company better control over timing and the ability to deliver a reliable supply of fuel. Finally, the ability to consolidate biomass supplies through a single port lowers both costs and the carbon footprint.