Power prices and climate levies hit Drax

Profit dip salved by black start contracts and business retail performance

Drax Group profits have seen a sharp decline in 2016 due to low wholesale power prices the removal of levy exemption certificates for renewable generation halfway through 2015.

Earnings before interest, tax, depreciation and amortisation (EBITDA) dropped by 17 per cent year-on-year to £140 million and underlying earnings were down 54 per cent at £21 million. The removal of levy exemption certificates alone reduced EBITDA by £34 million, the company said.  

The results were boosted by an increase in revenues from provision the ancillary services, which more than tripled to £47 million after National Grid awarded a black start contract to Drax in April last year. They were also lifted by the improved performance of its business retail arm Haven Power and the increased profitability of its pellet supply operations for biomass generation.

Towards the end of 2016 Drax completed the conversion of one of its six units to run entirely biomass after a contract for difference awarded in 2014 was given state aid approval by the European Commission. The unit had been co-firing biomass and coal since July 2015, supported by the renewables obligation (RO). Two other units were already running entirely on biomass – again subsidised by the RO - meaning the plant’s capacity is now split 50:50 between coal and biomass.

Biomass generation at the plant increased from 11.5TWh in 2015 to 12.7TWh the following year. Its share of total generation at the power station rose by more than 20 percentage points to 65 per cent.

“We are playing a vital role in helping change the way energy is generated, supplied and used as the UK moves to a low carbon future,” said Drax Group chief executive Dorothy Thompson.

“With the right conditions, we can do even more, converting further units to run on compressed wood pellets. This is the fastest and most reliable way to support the UK’s decarbonisation targets, whilst minimising the cost to households and businesses.

She said the recent acquisition of Opus Energy for £340 million and four open-cycle gas turbine plants with a combined capacity of 1.2GW marked an “important step” in Drax’s strategy to diversify its revenue streams.

Commenting on the results, analysts at investment firm Jefferies said: “The December 2016 Opus Energy acquisition was both unexpected and significant as it signalled that Drax's management is planning its long-term future, one where power generation may not play an overwhelmingly significant part.

“With Drax's leverage set to [double] in 2017, continued high earnings sensitivity to commodity prices coupled with managing the integration of Opus Energy, means that we see further challenges this year. We also note that UK forward power prices have dropped 10 per cent since November.”

Author: Tom Grimwood,
Channel: Finance & investment

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