Opus Energy buy bolsters Drax profits

EBIDTA rises more than 70 per cent to £121 million

Drax Group has reported a sharp increase in profits for the six months to the end of June, partly due to the purchase of business supplier Opus Energy in February.

Earnings before interest, taxation, depreciation and amortisation (EBITDA) grew more than 70 per cent year-on-year to £121 million, helped also by increased profits from biomass generation and “strong operational performance”. Revenues rose by around a fifth to £1.8 billion.

However, underlying earnings were dragged down from £17 million to £9 million by the accelerated depreciation of coal assets (£22 million), refinancing costs (£24 million) and amortisations relating to the purchase of Opus Energy (£19 million).

The firm posted a pre-tax loss of £83 million – down from a profit of £184 million in the first half of 2016 – after taking an additional £65 million hit on foreign currency hedging.

Retail

EBITDA from retail jumped from £2 million to £11 million as Haven Power, which serves the industrial and commercial market, reached breakeven profitability ahead of schedule.

“For the last 18 months, our focus has been to turn [Haven Power] into a profitable business,” Drax chief executive Dorothy Thompson told Utility Week. “Our aim was to achieve breakeven by the of this year and we’re very pleased to have done that in the first six months.”

Opus Energy, which by contrast focuses on the SME market, contributed £12 million to the result. Retail revenues shot up by almost a half to £940 million.

Generation

On the generation side, revenues rose by £16 million to £1,198 million, whilst EBIDTA grew nearly 60 per cent to £137 million. Output fell slightly from 10.9TWh to 10.7TWh, with 68 per cent coming from biomass generation and the other 38 per cent coming from coal generation.

Of the six units at Drax’s massive 3.9GW power station in Yorkshire, three are currently running entirely on biomass – two subsidized through the renewables obligation scheme and the third through the contract for difference (CfD) mechanism.

In March, Drax began a trial operating one of the three remaining coal-fired units entirely on biomass. Thompson said the trial demonstrated that the unit can be run on biomass safely and at a high level of output, although doing this reliably on a sustained basis “proved a little more challenging”.

Further modifications will be required before the unit can be permanently converted to biomass. The unit will return to running on coal over the winter before the required modifications are installed during a scheduled maintenance period next year and the trial is resumed.  

Thompson said Drax is looking at different options for the two other coal-fired units. “We remain keen to convert further units to run biomass and we would like to have the opportunity to compete on a fair basis in future CfD auctions and we will engage with government on that,” she explained.

“But in parallel we are looking at taking out the coal components of those units, retrofitting the ability to fuel them with gas.”

In June, Drax announced it was examining the possibility of transforming the units into combined-cycle gas turbines (CCGTs) by fitting new gas turbines to the existing steam turbines. This would increase the individual capacity of the units from 650MW to 1.3GW.

“We have today announced we are going to start the planning process, with a view to securing a permit to do that over the next two years, and in parallel we’re doing the technical and financial feasibility to ensure that we are comfortable that it would be good investment,” said Thompson.

She said the gas plants, which would be bid into the capacity market, could be delivered at a “substantially lower cost that new build because we are reusing all this existing equipment and infrastructure”.

Drax is also developing four new build gas projects that it acquired alongside Opus Energy, two of which it plans to enter in the upcoming four-year-ahead (T-4) capacity auction scheduled for February 2018. Thompson said the development process is “progressing well”, with the company now seeking tenders for construction. The two other plants are expected to be bid into the following T-4 auction for delivery in 2023/24.

Thompson welcomed Ofgem’s decision to drastically cut the value of the triad avoidance payments available to distributed generators, saying the reduction would boost the chance of success for Drax’s gas developments in future capacity auctions. She said the fact that they are worth around two to three times the typical value of capacity market contracts demonstrates the “magnitude of the distortion” created by the payments.