Investec: Drax profits hinge on public perception of biomass sustainability

The future of power producer Drax and all that follow its coal-to-biomass conversion lead in the UK hinges on public opinion of the sustainability credentials of biomass, according to recent note from investment bank Investec.

Investec analyst Harold Hutchinson described Drax’s plans to convert three of its six generators to wood chip burning as “a relatively cost-effective, environmentally-friendly and secure way for the UK to adapt its capacity mix”. However, he warned: “The debate public opinion on these issues will have an over-riding influence on the future of Drax’s profitability, and hence on prospective returns to shareholders.”

Hutchinson said a part coal, part biomass Drax will face commodity volatility and biomass supply chain as well as regulatory risks. But he emphasised that the critical challenge for all biomass plant was to “garner public acceptance for the renewable status of biomass”. He urged the industry to be transparent in it efforts to do this: “So far, we believe Drax is making positive advances in this regard.”

The government’s solid biomass sustainability standards are set to come into effect in theUKin 2015 and the Department of Energy and Climate Change has pledged that there will be no additional unilateral changes to sustainability criteria before April 2027. But the standards sparked anger when they were unveiled in the summer with green groups condemning them as “greenwash”. They said the standards failed to account for “carbon debt” between burning wood and forest regrowth and indirect changes to land use – for example where wood grown for building materials but used as biomass is replaced by carbon intensive materials.