Tag: BECCS (bioenergy with carbon capture and storage)

Half year results for the six months ended 30 June 2022

26 July 2022

Investors

RNS Number: 6883T
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Six months ended 30 JuneH1 2022H1 2021
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)225186
Continuing operations225165
Discontinued operations – gas generation-21
Net debt (£ million)(3)1,1011,029
Adjusted basic EPS (pence)(1)20.014.6
Interim dividend (pence per share)8.47.5
Total financial performance measures from continuing operations
Operating profit (£ million)20784
Profit before tax (£ million)20052

Drax CEO, Will Gardiner [click to view/download]

Will Gardiner, CEO of Drax Group, said:

“As the UK’s largest generator of renewable power by output, Drax plays a critical role in supporting the country’s security of supply. We are accelerating our investment in renewable generation, having recently submitted planning applications for the development of BECCS at Drax Power Station and for the expansion of Cruachan Pumped Storage Power Station.

“As a leading producer of sustainable wood pellets we continue to invest in expanding our pellet production in order to supply the rising global demand for renewable power generated from biomass. We have commissioned new biomass pellet production plants in the US South and expect to take a final investment decision on up to 500,000 tonnes of additional capacity before the end of the year.

“As carbon removals become an increasingly urgent part of the global route to Net Zero, we are also making very encouraging progress towards delivering BECCS in North America and progressing with site selection, government engagement and technology development.

“In the UK and US we have plans to invest £3 billion in renewables that would create thousands of green jobs in communities that need them, underlining our position as a growing, international business at the heart of the green energy transition.”

Financial highlights

  • Adjusted EBITDA £225 million up 21% (H1 2021: £186 million)
  • Strong liquidity and balance sheet – £539 million of cash and committed facilities at 30 June 2022
    • Expect to be significantly below 2 times Net Debt to Adjusted EBITDA by the end of 2022
  • Sustainable and growing dividend – expected full year dividend up 11.7% to 21.0 p/share (2021: 18.8 p/share)
    • Interim dividend of 8.4 p/share (H1 2021: 7.5 p/share) – 40% of full year expectation

Engineers at Cruachan Power Station

Progress with strategy in H1 2022

  • To be a global leader in sustainable biomass – targeting 8Mt of capacity and 4Mt of sales to 3rd parties by 2030
    • Addition of 0.4Mt of operational pellet production capacity
    • New Tokyo sales office opened July 2022
  • To be a global leader in negative emissions
    • BECCS – UK – targeting 8Mt of negative emissions by 2030
    • Planning application submitted and government consultation on GGR business models published with power BECCS business model consultation expected “during the summer”
    • BECCS – North America – targeting 4Mt of negative emissions by 2030
    • Ongoing engagement with policy makers, screening of regions and locations for BECCS
  • To be a leader in UK dispatchable, renewable power
    • >99% reduction in scope 1 and 2 emissions from generation since 2012
    • UK’s largest generator of renewable power by output – 11% of total
    • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
    • Planning application submitted for 600MW expansion of Cruachan and connection agreement secured

Outlook for 2022

  • Expectations for full year Adjusted EBITDA unchanged from 6 July 2022 update which reflected optimisation of biomass generation and logistics to support UK security of supply this winter when demand is high, a strong pumped storage performance and agreement of a winter contingency contract for coal

Future positive – people, nature, climate

  • People
    • Diversity and inclusion programme – inclusive management, promoting social mobility via graduates, apprenticeships and work experience programmes
    • Continued commitment to STEM outreach programme

An apprentice working in the turbine hall at Drax Power Station, North Yorkshire

  • Nature and climate
    • Science-based sustainability policy fully compliant with current UK and EU law on sustainable sourcing and aligned with UN guidelines for carbon accounting
    • Biomass produced using sawmill and forest residuals, and low-grade roundwood, which often have few alternative markets and would otherwise be landfilled, burned or left to rot, releasing CO2 and other GHGs
    • Increase in sawmill residues used by Drax to produce pellets – 67% of total fibre (FY 2021: 62%)
    • 100% of woody biomass produced by Drax verified against SBP, SFI, FSC®(4) or PEFC Chain of Custody certification with third-party supplier compliance primarily via SBP certification

Operational review

Pellet Production – increased production, flexible operations to support UK generation, addition of 0.4Mt of capacity 

  • Adjusted EBITDA up 13% to £45 million (H1 2021: £40 million)
    • Pellet production up 54% to 2.0Mt (H1 2021: 1.3Mt) (including Pinnacle since 13 April 2021)
  • Addition of c.0.4Mt of new production capacity
    • Commissioning of Demopolis and Leola, expect to reach full production capacity in H2 2022
  • Total $/t cost of $146/t(5) – 2% increase on 2021 ($143/t(5))
    • Increase in utility costs in Q2-22 (>20% increase)
    • Fuel surcharge – barge and rail to port (> 10% increase)
    • Commissioning costs at Demopolis and Leola plants
    • Net reduction in other costs, inclusive of optimisation of supply chain to meet reprofiling of Generation
    • No material change in fibre costs
  • Areas of focus for further savings – wider range of sustainable biomass fibre, continued focus on operational efficiency and improvement, capacity expansion, innovation and technology
  • Continue to target final investment decision on up to 0.5Mt of new capacity in H2 2022

Generation – increased recognition of value of long-term security of supply from biomass and pumped storage

  • Adjusted EBITDA from continuing operations £205 million up 24% (H1 2021: £165 million)
    • Optimisation of biomass generation and logistics to support security of supply at times of higher demand
    • Summer – lower power demand, lower power generation and sale of reprofiled biomass
    • Winter – maximise biomass deliveries to support increased generation at times of higher demand
    • Four small, planned biomass outages completed in H1, supporting higher planned generation in H2-22
    • Strong portfolio system support performance (balancing mechanism, ancillary services and optimisation)
    • Higher cost of sales – logistics optimisation, biomass and system costs
  • Six-month extension of coal at request of UK government – winter contingency contract for security of supply
    • Closure of coal units in March 2023 following expiration of agreement with ESO at end of March 2023
    • Fixed fee and compensation for associated costs, including coal
    • Remain committed to coal closure and development of BECCS, with no change to expected timetable
  • As at 21 July 2022, Drax had 25.4TWh of power hedged between 2022 and 2024 on its ROC and hydro generation assets at an average price of £95.9/MWh, with a further 2.3TWh equivalent of gas sales (transacted for the purpose of accessing additional liquidity for forward sales from ROC units and highly correlated to forward power prices) plus additional sales under the CfD mechanism
Contracted power sales 21 July 2022202220232024
ROC (TWh(6))11.78.84.5
Average achieved £ per MWh87.298.3109.5
Hydro (TWh)0.30.1-
-Average achieved £ per MWh133.1242.0-
Gas hedges (TWh equivalent)(0.1)0.51.9
-Pence per therm361.0145.8135.0
Lower expected level of ROC generation in 2023 due to major planned outages on two units

Customers – renewable power under long-term contracts to high-quality I&C customers and decarbonisation products

  • Adjusted EBITDA of £24 million (H1 2021: £5 million loss) – continued improvement following impact of Covid-19
    • principally in the SME business
    • Includes benefit of excess contracted power sold back into merchant market
  • Continued development of Industrial & Commercial (I&C) portfolio
    • 9TWh of power sales – 21% increase compared to H1 2021 (5.7TWh)
    • Focusing on key sectors to increase sales to high-quality counterparties supporting generation route to market
    • Energy services to expand the Group’s system support capability and customer sustainability objectives
  • SME – increasingly stringent credit control in SME business to reflect higher power price environment

Other financial information

  • Total operating profit from continuing operations of £207 million (H1 2021: £84 million), including £130 million mark-to-market gain on derivative contracts and £27 million of exceptional costs
  • Total profit after tax from continuing operations of £148 million includes an £8 million non-cash charge from revaluing deferred tax balances following confirmation of UK corporation tax rate increases from 2023 (H1 2021: £6 million loss including a £48 million non-cash charge from revaluing deferred tax balances)
  • Capital investment of £60 million (H1 2021: £71 million) – primarily maintenance
    • Full year expectation of £290–£310 million, includes £120 million for Open Cycle Gas Turbine projects, £20 million BECCS FEED and site preparation, and £10 million associated with new pellet capacity, subject to final investment decision (FID)
  • Depreciation and amortisation of £121 million (H1: £89 million) reflects inclusion of Pinnacle for a full six months, plant upgrades and accelerated depreciation of certain pellet plant equipment in line with planned capital upgrades
  • Group cost of debt below 3.6%
  • Cash Generated from Operations £185 million (H1 2021: £138 million)
  • Net Debt of £1,101 million (31 December 2021: £1,044 million), including cash and cash equivalents of £288 million (31 December H1 2021: £317 million)
    • Continue to expect Net Debt to Adjusted EBITDA significantly below 2 times by end of 2022, reflecting optimisation of generation and logistics to deliver higher levels of power generation and cash flows in H2 2022

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Webcast Live Event

An introduction to carbon accounting

12 May 2022

Sustainable business

Key takeaways:

  • Tracking, reporting, and calculating carbon emissions are a key part of progressing countries, industries, and companies towards net zero goals.
  • As a newly established discipline, carbon accounting still lacks standardisation and frameworks in how emissions are tracked, reduced, and mitigated.
  • The main carbon accounting standard used by businesses is the Greenhouse Gas (GHG) Protocol, which lays out three ‘Scopes’ businesses should report and act upon.
  • Carbon accounting evolves from reporting in the use of goals and timeframes in which targets are met.
  • Timeframes are crucial in the deployment of technologies like carbon capture, removals, and achieving net zero.

How can countries and companies find a route to net zero emissions? Many organisations, countries and industries have pledged to balance their emissions before mid-century. They intend to do this through a combination of cutting emissions and removing carbon from the atmosphere.

Tracking and quantifying emissions, understanding output, reducing them, and setting tangible targets that can be worked towards are all central to tackling climate change and reducing greenhouse gas emissions – especially when it comes to carbon dioxide (CO2). Emissions and energy consumption reporting is already common practice and compulsory for businesses over a certain size in the UK. However, carbon accounting takes this a step further.

“Carbon reporting is a statement of physical greenhouse gas emissions that occur over a given period,” explains Michael Goldsworthy, Head of Climate Change and Carbon Strategy at Drax. “Carbon accounting relates to how those emissions are then processed and counted towards specific targets. The methodologies for calculating emissions and determining contributions against targets may then have differing rules depending on which framework or standard is being reported against.”

Carbon accounting tools can help companies and counties understand their carbon footprint – how much carbon is being emitted as part of their operations, who is responsible for them, and how they can be effectively mitigated.

Like how financial accounting may seek to balance a company’s books and calculate potential profit, carbon accounting seeks to do the same with emissions, tracking what an entity emits, and what it reduces, removes, or mitigates. Carbon accounting is, therefore, crucial in understanding how countries and companies can contribute to reaching net zero.

A new space

How different organisations, countries and industries approach carbon accounting is still an evolving process.

“It’s as complex as financial accounting, but with financial accounting, there’s a long standing industry that relies on well-established practices and principles. Carbon accounting by contrast is such a new space,” explains Goldsworthy.

Regardless of its infancy, businesses and countries are already implementing standardised approaches to carbon accounting. Regulations such as emissions trading schemes and reporting systems, such as Streamlined Energy and Carbon Reporting (SECR) and the Taskforce on Climate Related Financial Disclosure (TCFD), are beginning to deliver some degree of consistency in businesses’ carbon reporting.

Other standards such as the GHG Protocol have sought to provide a standardised basis for corporate reporting and accounting. Elsewhere, voluntary carbon markets (e.g. carbon offsets) have also evolved to allow transferral of carbon reductions or removals between businesses, providing flexibility to companies in delivering their climate commitments.

The challenge is in aligning these frameworks so that they work together. For example, emissions within a corporate inventory or offset programme must be accounted for in a way that is consistent with a national inventory.

To date, these accounting systems have evolved independently with different rules and methodologies. Beginning to implement detailed carbon accounting, upon which emissions reductions and removals can be based, requires standardised understanding of what they are and where they come from.

Reporting and tackling Scope One, Two, and Three emissions

The main carbon accounting standard used by businesses is the Greenhouse Gas (GHG) Protocol. This voluntary carbon reporting standard can be used by countries and cities, as well as individual companies globally.

The GHG protocol categorises emissions in three different ‘scopes’, called Scope 1, Scope 2, and Scope 3. Understanding, measuring, and reporting these is a key factor in carbon accounting and can drive meaningful emissions reduction and mitigation.

Scope One – Direct emissions

Scope One emissions are those that come as a direct result of a company or country’s activities. These can include fuel combustion at a factory’s facilities, for example, or emissions from a fleet of vehicles.

Scope One emissions are the most straightforward for an organisation to measure and report, and easier for organisations to directly act on.

Scope Two – Indirect energy emissions

Scope Two emissions are those which come from the generation of energy an organisation uses. These can include emissions form electricity, steam, heating, and cooling.

A business may buy electricity, for example, from an electricity supplier, which acquires power from a generator. If that generator is a fossil-fuelled power station the energy consumer’s Scope Two emissions will be greater than if it buys power from a renewable electricity supplier or generates its own renewable power.

The ability to change energy suppliers makes Scope Two relatively straightforward for organisations to act on, assuming renewable energy sources are available in the area.

Scope Three – All other indirect emissions

Scope Three is much broader. It covers upstream and downstream lifecycle emissions of products used or produced by a company, as well as other indirect emissions such as employee commuting and business travel emissions.

Identifying and reducing these emissions across supply and value chains can be difficult for businesses with complex supply lines and global distribution networks. They are also hard for companies to directly influence.

Add in factors like emissions mitigations or offsetting, and the carbon accounting can quickly become much more complex than simply reporting and reducing emissions that occur directly from a company’s activities. Nevertheless, these full-system overviews and whole-product lifecycle accounting are crucial to understanding the true impact of operations and organisations, and to reach climate goals.

Working to timelines

Setting goals with defined timelines and the development of rules that ensure consistent accounting is also crucial to implementing effective climate change mitigation frameworks throughout the global economy. Consider the UK’s aim to be net zero by 2050, or Drax’s ambition to be net negative by 2030, as goals with set timelines.

For many technologies, the time scales over which targets are set have added relevance. There are often upfront emissions to account for and operational emissions that may change over time. Take for example an electric vehicle: the climate benefit will be determined by emissions from construction and the carbon intensity of the electricity used to power it.

A timeline of BECCS at Drax [click to view/download]

Looking at a brief snapshot at the beginning of its life, say the first couple of years, might not show any climate benefit compared to a vehicle using an internal combustion engine. Over the lifetime of the vehicle, however, meaningful emissions savings may become clear – especially if the electricity powering the vehicle continues to decarbonise over time.

This provides a challenge when setting carbon emissions targets. Targets set too far in the future potentially risk inaction in the short term, while targets set over short periods risk disincentivising technologies that have substantial long-term mitigation potential. 

Delivering net zero

Some greenhouse gas emissions will be impossible to fully abate, such as methane and nitrous oxide emissions from agriculture, while other sectors, like aviation, will be incredibly difficult to fully decarbonise. This makes carbon removal technologies all the more critical to ensuring net zero is achieved.

Technologies such as bioenergy with carbon capture and storage (BECCS) – which combines low-carbon, biomass-fuelled renewable power generation with carbon capture and storage (CCS) to permanently remove emissions from the atmosphere – are already under development.

However, it is imperative that such technologies are accounted for using robust approaches to carbon accounting, ensuring all emission and removals flows across the value chain are accurately calculated in accordance with best scientific practice. In the case of BECCS, it’s vital that not only are emissions from processing and transporting biomass considered, but also its potential impact on the land sector.

Forests from which biomass is sourced will be managed for a variety of reasons, such as mitigating natural disturbance, delivering commercial returns, and preserving ecosystems. Accurate accounting of these impacts is therefore key to ensuring such technologies deliver meaningful reductions in atmospheric CO2within timeframes guided by science.

Accounting for net zero

While carbon accounting is crucial to reaching a true level of net zero in the UK and globally, where residual emissions are balanced against removals, the practice should not be used exclusively to deliver numerical carbon goals.

“To deliver net zero, it’s vital we have robust carbon accounting systems and targets in place, ensuring we reduce fossil emissions as far as possible while also incentivising carbon removal solutions,” says Goldsworthy.

“However, many removal solutions rely on the natural world and so it is critical that ecosystems are not only valued on a carbon basis but consider other environmental factors such as biodiversity as well.”

Why and how is carbon dioxide transported?

11 April 2022

Carbon capture

What is carbon transportation?

Carbon transportation is the movement of carbon from one place to another. In nature, carbon moves through the carbon cycle. In industries like energy, however, carbon transportation refers to the physical transfer of carbon dioxide (CO2) emissions from the point of capture to the point of usage or storage.

Why does carbon need to be transported?

Anthropogenic (man-made) CO2 released in processes like power generation leads to the direct increase of CO2 in the atmosphere and contributes to global warming.

However, these emissions can be captured as part of carbon capture and storage (CCS). The CO2 is then transported for safe and permanent storage in geological formations deep underground.

Capturing and storing CO2 prevents it from entering the atmosphere and contributing to global warming. Processes that can deliver negative emissions – such as bioenergy with carbon capture and storage (BECCS) and direct air capture and storage (DACS) – aim to permanently remove CO2 from the atmosphere through CCS.

In CCS, carbon must be transported from the site where it’s captured to a site where it can be permanently stored. This means it needs to travel from a power station or factory to a geological formation like a saline aquifer or depleted oil and gas reservoirs.

As of September 2021, there were 27 operational CCS facilities around the world, with the combined capacity to capture around 40 million tonnes per annum (Mtpa) of CO2. It’s estimated that the UK alone has 70 billion tonnes of potential CO2 storage space in sandstone rock formations under the North Sea.

How is carbon transported?

CO2 can be transported via trucks or ships, but the most common and efficient method is by pipeline. Moving gases of any kind through pipelines is based on pressure. Gases travel from areas of high pressure to areas of low pressure. Compressing gas to a high pressure allows it to flow to other locations.

Gas pipelines are common all around the world, including those transporting CO2. In the US there are, for instance, more than 50 CO2 pipelines – covering around 6,500 km and transporting approximately 68 million tonnes of CO2 a year.

Gas takes up less volume when it’s compressed, and even less when it is liquefied, solidified, or hydrated. Therefore, before being transported, captured CO2 is often compressed and liquefied until it becomes a supercritical fluid.

In a supercritical state, CO2 has the density of a liquid but the viscosity (thickness) of a gas and is, therefore, easier to transport through pipelines. It’s also 50-80% less dense than water, with a viscosity that is 100 times lower than liquid.

This means it can be loaded onto ships in greater quantities and that there is less friction when it’s moving through pipes and, subsequently, into geological storage sites.

How safe is it to transport carbon?

It’s no riskier to transport CO2 via pipeline or ship than it is to transport oil and natural gas, and existing oil and natural gas pipelines can be repurposed to transport CO2.

To enable the safe use of CO2 pipelines, CCS projects must ensure captured CO2 complies with strict purity and temperature specifications, as well as making sure CO2 is dry and free from impurities that could impact pipelines’ operations.

Whilst there are a growing number of CCS transport systems around the world, CCS is still is a relatively new field but research is underway to identify best practises, materials and technologies to optimise the process. This includes research around potential risks and techniques for leak mitigation and remediation.

In the UK, the Health and Safety Executive regulates health, safety, and integrity issues for all natural gas pipelines, which are covered by legislation. The legislation ensures the safety of pipelines, pressure systems and offshore installations and can serve as a strong foundation for CO2 transport regulation.

Fast facts

Go deeper 

What is the carbon cycle?

25 March 2022

Carbon capture

What is the carbon cycle?

All living things contain carbon and the carbon cycle is the process through which the element continuously moves from one place in nature to another. Most carbon is stored in rock and sediment, but it’s also found in soil, oceans, and the atmosphere, and is produced by all living organisms – including plants, animals, and humans.

Carbon atoms move between the atmosphere and various storage locations, also known as reservoirs, on Earth. They do this through mechanisms such as photosynthesis, the decomposition and respiration of living organisms, and the eruption of volcanoes.

As our planet is a closed system, the overall amount of carbon doesn’t change. However, the level of carbon stored in a particular reservoir, including the atmosphere, can and does change, as does the speed at which carbon moves from one reservoir to another.

What is the role of photosynthesis in the carbon cycle?

Carbon exists in many different forms, including the colourless and odourless gas that is carbon dioxide (CO2). During photosynthesis, plants absorb light energy from the sun, water through their roots, and CO2 from the air – converting them into oxygen and glucose.

The oxygen is then released back into the air, while the carbon is stored in glucose, and used for energy by the plant to feed its stem, branches, leaves, and roots. Plants also release CO2 into the atmosphere through respiration.

Animals – including humans – who consume plants similarly digest the glucose for energy purposes. The cells in the human body then break down the glucose, with CO2 emitted as a waste product as we exhale.

CO2 is also produced when plants and animals die and are broken down by organisms such as fungi and bacteria during decomposition.

What is the fast carbon cycle?

The natural process of plants and animals releasing CO2 into the atmosphere through respiration and decomposition and plants absorbing it via photosynthesis is known as the biogenic carbon cycle. Biogenic refers to something that is produced by or originates from a living organism. This cycle also incorporates CO2 absorbed and released by the world’s oceans.

The biogenic carbon cycle is also called the “fast” carbon cycle, as the carbon that circulates through it does so comparatively quickly. There are nevertheless substantial variations within this faster cycle. Reservoir turnover times – a measure of how long the carbon remains in one location – range from years for the atmosphere to decades through to millennia for major carbon sinks on land and in the ocean.

What is the slow carbon cycle?

In some circumstances, plant and animal remains can become fossilised. This process, which takes millions of years, eventually leads to the formation of fossil fuels. Coal comes from the remains of plants that have been transformed into sedimentary rock. And we get crude oil and natural gas from plankton that once fell to the ocean floor and was, over time, buried by sediment.

The rocks and sedimentary layers where coal, crude oil, and natural gas are found form part of what is known as the geological or slow carbon cycle. From this cycle, carbon is returned to the atmosphere through, for example, volcanic eruptions and the weathering of rocks. In the slow carbon cycle, reservoir turnover times exceed 10,000 years and can stretch to millions of years.

How do humans impact the carbon cycle?

Left to its own devices, Earth can keep CO2 levels balanced, with similar amounts of CO2 released into and absorbed from the air. Carbon stored in rocks and sediment would slowly be emitted over a long period of time. However, human activity has upset this natural equilibrium.

Burning fossil fuel releases carbon that’s been sequestered in geological formations for millions of years, transferring it from the slow to the fast (biogenic) carbon cycle. This influx of fossil carbon leads to excessive levels of atmospheric CO2, that the biogenic carbon cycle can’t cope with.

As a greenhouse gas that traps heat from the sun between the Earth and its atmosphere, CO2 is essential to human existence. Without CO2 and other greenhouse gases, the planet could become too cold to sustain life.

However, the drastic increase in atmospheric CO2 due to human activity means that too much heat is now retained between Earth and the atmosphere. This has led to a continued rise in the average global temperature, a development that is part of climate change.

Where does biomass fit into the carbon cycle?

One way to help reduce fossil carbon is to replace fossil fuels with renewable energy, including sustainably sourced biomass. Feedstock for biomass energy includes plant material, wood, and forest residue – organic matter that absorbs CO2 as part of the biogenic carbon cycle. When the biomass is combusted in energy or electricity generation, the biogenic carbon stored in the organic matter is released back into the atmosphere as CO2.

This is distinctly different from the fossil carbon released by oil, gas, and coal. The addition of carbon capture and storage to bioenergy – creating BECCS – means the biogenic carbon absorbed by the organic matter is captured and sequestered, permanently removing it from the atmosphere. By capturing CO2 and transporting it to geological formations – such as porous rocks – for permanent storage, BECCS moves CO2 from the fast to the slow carbon cycle.

This is the opposite of burning fossil fuels, which takes carbon out of geological formations (the slow carbon cycle) and emits it into the atmosphere (the fast carbon cycle). Because BECCS removes more carbon than it emits, it delivers negative emissions.

Fast facts

  • According to a 2019 study, human activity including the burning of fossil fuels releases between 40 and 100 times more carbon every year than all volcanic eruptions around the world.
  • In March 2021, the Mauna Loa Observatory in Hawaii reported that average CO2 in the atmosphere for that month was 14 parts per million. This was 50% higher than at the time of the Industrial Revolution (1750-1800).
  • There is an estimated 85 billion gigatonne (Gt) of carbon stored below the surface of the Earth. In comparison, just 43,500 Gt is stored on land, in oceans, and in the atmosphere.
  • Forests around the world are vital carbon sinks, absorbing around 7.6 million tonnes of CO2 every year.

Go deeper

How biomass can enable a hydrogen economy

10 March 2022

Carbon capture

Key points:

  • Hydrogen as a fuel offers a carbon-free alternative for hard-to-abate sectors such as heavy road transport, domestic heating, and industries like steel and cement.
  • There are several methods of producing hydrogen, the most common being steam methane reforming, which can be a carbon-intensive process.
  • Biomass gasification with CCS is a form of bioenergy with carbon capture and storage (BECCS) that can produce hydrogen and negative emissions – removing CO2 permanently from the atmosphere.
  • The development of both BECCS and hydrogen technologies will determine how intrinsically connected the two are in a net zero future.

Reaching net zero means more than just transitioning to renewable and low carbon electricity generation. The whole UK economy must transform where its energy comes from to low-emissions sources. This includes ‘hard-to-abate’ industries like steel, cement, and heavy goods vehicles (HGVs), as well as areas such as domestic heating.

One solution is hydrogen. The ultra-light element can be used as a fuel that when combusted in air produces only heat, water vapour, and nitrous oxide. As hydrogen is a carbon-free fuel, a so-called ‘hydrogen economy’ has the potential to decarbonise hard-to-abate sectors.

While hydrogen is a zero-carbon fuel its production methods can be carbon-intensive. For a hydrogen economy to operate within a net zero UK carbon-neutral means of producing it are needed at scale. And biomass, energy from organic material – with or without carbon capture and storage (in the case of BECCS)– could have a key role to play.

In January 2022, the UK government launched a £5 million Hydrogen BECCS Innovation Programme. It aims to develop technologies that can both produce hydrogen for hard-to-decarbonise sectors and remove CO2 from the atmosphere. The initiative highlights the connected role that biomass and hydrogen can have in supporting a net zero UK.

Producing hydrogen at scale

Hydrogen is the lightest and most abundant element in the universe. However, it rarely exists on its own. It’s more commonly found alongside oxygen in the familiar form of H2O. Because of its tendency to form tight bonds with other elements, pure streams of hydrogen must be manufactured rather than extracted from a well, like oil or natural gas.

As much as 70 million tonnes of hydrogen is produced each year around the world, mainly to make ammonia fertiliser and chemicals such as methanol, or to remove impurities during oil refining. Of that hydrogen, 96% is made from fossil fuels, primarily natural gas, through a process called steam methane reforming, of which hydrogen and CO2 are products. Without the use of carbon capture, utilisation, and storage (CCUS) technologies the CO2 is released into the atmosphere, where it acts as a greenhouse gas and contributes to climate change.

Another method of producing hydrogen is electrolysis. This process uses an electric current to break water down into hydrogen and oxygen molecules. Like charging an electric vehicle, this method is only low carbon if the electricity sources powering it are as well.

For electrolysis to support hydrogen production at scale depends on a net zero electricity grid built around renewable electricity sources such as wind, solar, hydro, and biomass.

However, bioenergy with carbon capture and storage (BECCS) offers another means of producing carbon-free renewable hydrogen, while also removing emissions from the atmosphere and storing it – permanently.

Producing hydrogen and negative emissions with biomass 

Biomass gasification is the process of subjecting biomass (or any organic matter) to high temperatures but with a limited amount of oxygen added that prevents complete combustion from occurring.

The process breaks the biomass down into a gaseous mixture known as syngas, which can be used as an alternative to methane-based natural gas in heating and electricity generation or used to make fuels. Through a water-gas shift reaction, the syngas can be converted into pure streams of CO2 and hydrogen.

Ordinarily, the hydrogen could be utilised while the CO2 is released. In a BECCS process, however, the CO2 is captured and stored safely and permanently. The result is negative emissions.

Here’s how it works: BECCS starts with biomass from sustainably managed forests. Wood that is not suitable for uses like furniture or construction – or wood chips and residues from these industries – is often considered waste. In some cases, it’s simply burnt to dispose of it. However, this low-grade wood can be used for energy generation as biomass.

When biomass is used in a process like gasification, the CO2 that was absorbed by trees as they grew and subsequently stored in the wood is released. However, in a BECCS process, the CO2 is captured and transported to locations where it can be stored permanently.

The overall process removes CO2 from the atmosphere while producing hydrogen. Negative emissions technologies like BECCS are considered essential for the UK and the world to reach net zero and tackle climate change.

Building a collaborative net zero economy  

How big a role hydrogen will play in the future is still uncertain. The Climate Change Committee’s (CCC) 2018 report ‘Hydrogen in a low carbon economy’ outlines four scenarios. These range from hydrogen production in 2050 being able to provide less than 100 terawatt hours (TWh) of energy a year to more than 700 TWh.

Similarly, how important biomass is to the production of hydrogen varies across different scenarios. The CCC’s report puts the amount of hydrogen produced in 2050 via BECCS between 50 TWh in some scenarios to almost 300 TWh in others. This range depends on factors such as the technology readiness level of biomass gasification. If it can be proven – technical work Drax is currently undertaking – and at scale, then BECCS can deliver on the high-end forecast of hydrogen production.

The volumes will also depend on the UK’s commitment to BECCS and sustainable biomass. The CCC’s ‘Biomass in a low carbon economy’ report offers a ‘UK BECCS hub’ scenario in which the UK accesses a greater proportion of the global biomass resource than countries with less developed carbon capture and storage systems, as part of a wider international effort to sequester and store CO2. The scenario assumes that the UK builds on its current status and continues to be a global leader in BECCS supply chains, infrastructure, and geological storage capacity. If this can be achieved, biomass and BECCS could be an intrinsic part of a hydrogen economy.

There are still developments being made in hydrogen and BECCS, which will determine how connected each is to the other and to a net zero UK. This includes the feasibility of converting HGVs and other gas systems to hydrogen, as well as the efficiency of carbon capture, transport and storage systems. The cost of producing hydrogen and carrying out BECCS are also yet to be determined.

The right government policies and incentives that encourage investment and protect jobs are needed to progress the dual development of BECCS and hydrogen. Success in both fields can unlock a collaborative net zero economy that delivers a carbon-free fuel source in hydrogen and negative emissions through BECCS.

How is carbon stored?

13 January 2022

Carbon capture

Carbon storage is the process of capturing and trapping that CO2. This can occur naturally in the form of carbon sinks like forests, oceans, and soils that store carbon. However, it can also be manually carried out through technology.   

One of the most well-established ways of storing carbon through the use of technology is by injecting CO2 into naturally occurring geological formations that can lock in or sequester the molecule on a permanent basis. Carbon storage is the final phase of the carbon capture, usage, and storage (CCUS) process.

Why do we need to store carbon?

Global bodies like the UN’s Intergovernmental Panel on Climate Change (IPCC), as well as the UK’s own Climate Change Committee, emphasise carbon capture and storage as crucial to achieving net zero emissions and meeting the Paris Agreement’s goal of limiting temperature rises to within 1.5oC.

This includes supporting forest growth through afforestation and reforestation, and other nature-based solutions to store carbon, alongside CCUS technology.

The European Commission also highlights CCUS’s role in balancing increased energy demand and continued fossil fuel use in the future, with the need to reduce greenhouse gas emissions and prevent them entering the atmosphere.

How is carbon captured and transported to storage?

In naturally occurring examples, forests and ocean fauna absorb carbon through photosynthesis. When the vegetation eventually decomposes the carbon is sequestered into soil and seabeds.

Carbon can also be captured from emissions sources such as factories or power plants. The carbon is captured either pre-combustion, where it is removed from the fuel source, or post-combustion, where it is removed from exhaust fumes in the form of CO2.

The CO2 is then converted into a supercritical state where it has the viscosity of a gas but the density of a liquid, meaning it can travel more easily through pipelines. It can also be transported via trucks and ships, but pipelines are the most efficient.

Where can carbon be stored?

Natural carbon sinks differ all over the world, from peatlands in Scotland to Pacific coral reefs to the massive forests that cover countries like Russia, Canada, and Brazil. Wooden buildings also act as carbon storage as they maintain the carbon within the wood for long time periods.

The CO2 captured by manmade technologies can also be stored in different types of geological formation: unused natural gas reserves, saline aquifers, and un-minable coal mines.

The North Sea, with its expansive layers of porous sandstone, also offers the UK alone an estimated 70 billion tonnes of potential CO2 storage space.

If negative emissions technologies (which actively remove emissions from the atmosphere) were to capture and store the equivalent amount of CO2 as the 258 million tonnes expected to remain in the UK economy in 2050, it would take up just 0.36% of the available storage space.

Years of research by the oil and gas industries mean many such geological structures have been mapped and are well understood all around the world.

Carbon storage fast facts

How is the carbon kept in place?

In nature-based carbon sinks the carbon does not always remain in one location. In a forest, for example, trees and plants will hold carbon until the end of their lifetime after which they decompose, releasing some CO2 into the atmosphere while some is sequestered into soil.

When CO2 captured through CCUS is stored several things can happen to it in a geological storage site. It can be caught in the minute intervening spaces within the rock through capillary action, or trapped by a layer of impermeable cap-rock, which prevents it from moving upwards.

CO2 may also dissolve in the water and then sinks as it is heavier than normal water. The carbonated water reacts with basaltic rocks which cover most of the ocean floor. The reaction releases elements like calcium, magnesium, and iron into the water stream. Over time, these elements combine with the dissolved CO2 to form stable carbonate minerals that permanently fill pores within the rock.

How does CO2 enter the storage sites?

The CO2 is injected into the porous rocks of depleted or unused natural gas or oil reserves, as well as saline aquifers – geologic strata, filled with brine or saline water. Porous rock is filled with holes and gaps between the grains that make up the rock. When CO2 is injected into these structures, the CO2 floods the pores, displacing the brine or remnants of oil and gas. It then spreads out and is trapped in the dome-like structures of the rock strata called anticlines.

How long can CO2 be stored?

Appropriately selected and maintained geological reservoirs are “very likely” to retain 99% of sequestered carbon for more than 100 years and are “likely” to retain 99% of sequestered carbon for more than 1,000 years, according to the 2005 Special Report on CCS by the IPCC. Another study by Nature found that more than 98% of injected CO2 will remain stored for over 10,000 years.

In natural carbon sinks, the length of time that carbon is stored varies and depends on environments being preserved. Peatland, for example, builds up over thousands of years storing carbon. However, as peatlands degrade from attempts to drain them to create arable land, as well as peat extraction for fuel, they begin to emit CO2. The lifecycle of a tree by contrast is relatively short before it decomposes and releases some CO2 back into the atmosphere.

The ability for geological storage to contain CO2 for millennia means it can truly remove and permanently store emissions.

Go deeper

Forests, net zero and the science behind biomass

22 December 2021

Sustainable bioenergy

Tackling climate change and spurring a global transition to net zero emissions will require collaboration between science and industry. New technologies and decarbonisation methods must be rooted in scientific research and testing.

Drax has almost a decade of experience in using biomass as a renewable source of power. Over that time, our understanding around the effectiveness of bioenergy, its role in improving forest health and ability to deliver negative emissions, has accelerated.

Research from governments and global organisations, such as the UN’s Intergovernmental Panel on Climate Change (IPCC) increasingly highlight sustainably sourced biomass and bioenergy’s role in achieving net zero on a wide scale.

The European Commission has also highlighted biomass’ potential to provide a solution that delivers both renewable energy and healthy, sustainably managed forests.  Frans Timmermans, the executive vice-president of the European Commission in charge of the European Green Deal has emphasised it’s importance in bringing economies to net zero, saying: “without biomass, we’re not going to make it. We need biomass in the mix, but the right biomass in the mix.”

The role of biomass in a sustainable future

Moving away from fossil fuels means building an electricity system that is primarily based on renewables. Supporting wind and solar, by providing electricity at times of low sunlight or wind levels, will require flexible sources of generation, such as biomass, as well as other technologies like increased energy storage.

In the UK, the Climate Change Committee’s (CCC) Sixth Carbon Budget report lays out its Balanced Net Zero Pathway. In this lead scenario, the CCC says that bioenergy can reduce fossil emissions across the whole economy by 2 million tonnes of CO2 or equivalent emissions (MtCO2e) per year by 2035, increasing to 2.5 MtCO2e in 2045.

Foresters in working forest, Mississippi

Foresters in working forest, Mississippi

Biomass is also expected to play a crucial role in supplying biofuels and hydrogen production for sectors of the global economy that will continue to use fuel rather than electricity, such as aviation, shipping and industrial processes. The CCC’s Balanced Net Zero Pathway suggest that enough low-carbon hydrogen and bioenergy will be needed to deliver 425 TWh of non-electric power in 2050 – compared to the 1,000 TWh of power fossil fuels currently provide to industries today.

However, bioenergy can only be considered to be good for the climate if the biomass used comes from sustainably managed sources. Good forest management practises ensure that forests remain sustainable sources of woody biomass and effective carbon sinks.

A report co-authored by IPCC experts examines the scientific literature around the climate effects (principally CO2 abatement) of sourcing biomass for bioenergy from forests managed according to sustainable forest management principles and practices.

The report highlights the dual impact managed forests contribute to climate change mitigation by providing material for forest products, including biomass that replace greenhouse gas (GHG)-intensive fossil fuels, and by storing carbon in forests and in long-lived forest products.

The role of biomass and bioenergy in decarbonising economies goes beyond just replacing fossil fuels. The addition of carbon capture and storage (CCS) to bioenergy to create bioenergy with carbon capture and storage (BECCS) enables renewable power generation while removing carbon from the atmosphere and carbon cycle permanently.

The negative emissions made possible by BECCS are now seen as a fundamental part of many scenarios to limit global warming to 1.5oC above pre-industrial levels.

BECCS and the path to net zero

The IPCC’s special report on limiting global warming to 1.5oC above pre-industrial levels, emphasises that even across a wide range of scenarios for energy systems, all share a substantial reliance on bioenergy – coupled with effective land-use that prevents it contributing to deforestation.

The second chapter of the report deals with pathways that can bring emissions down to zero by the mid-century. Bioenergy use is substantial in 1.5°C pathways with or without CCS due to its multiple roles in decarbonising both electricity generation and other industries that depend on fossil fuels.

However, it’s the negative emissions made possible by BECCS that make biomass  instrumental in multiple net zero scenarios. The IPCC report highlights BECCS alongside the associated afforestation and reforestation (AR), that comes with sustainable forest management, are key components in pathways that limit climate change to 1.5oC.

Graphic showing how BECCS removes carbon from the atmosphere. Click to view/download

There are two key factors that make BECCS and other forms of emissions removals so essential: The first is their ability to neutralise residual emissions from sources that are not reducing their emissions fast enough and those that are difficult or even impossible to fully decarbonise. Aviation and agriculture are two sectors vital to the global economy with hard-to-abate emissions. Negative emissions technologies can remove an equivalent amount of CO2 that these industries produce helping balance emissions and progressing economies towards net zero.

The second reason BECCS and other negative emissions technologies will be so important in the future is in the removal of historic CO2 emissions. What makes CO2 such an important GHG to reduce and remove is that it lasts much longer in the atmosphere than any other. To help reach the Paris Agreement’s goal of limiting temperature rises to below 1.5oC removing historic emissions from the atmosphere will be essential.

In the UK, the  CCC’s 2018 report ‘Biomass in a low-carbon economy’ also points to BECCS as both a crucial source of energy and emissions abatement.

It suggests that power generation from BECCS will increase from 3 TWh per year in 2035 to 45 TWh per year in 2050. It marks a sharp increase from the 19.5 TWh that biomass (without CCS) accounted for across 2020, according to Electric Insights data. It also suggests that BECCS could sequester 1.1 tonnes of CO2 for every tonne of biomass used, providing clear negative emissions.

However, the report makes clear that unlocking the potential of bioenergy and BECCS is only possible when biomass stocks are managed in a sustainable way that, as a minimum requirement, maintains the carbon stocks in plants and soils over time.

With increased attention paid to forest management and land use, there is a growing body of evidence that points to bioenergy as a win-win solution that can decarbonise power and economies, while supporting healthy forests that effectively sequester CO2.

How bioenergy ensures sustainable forests

Biomass used in electricity generation and other industries must come from sustainable sources to offer a renewable, climate beneficial [or low carbon] source of power.

UK legislation on biomass sourcing states that operators must maintain an adequate inventory of the trees in the area (including data on the growth of the trees and on the extraction of wood) to ensure that wood is extracted from the area at a rate that does not exceed its long-term capacity to produce wood. This is designed to ensure that areas where biomass is sourced from retain their productivity and ability to continue sequestering carbon.

Ensuring that forestland remains productive and protected from land-use changes, such as urban creep, where vegetated land is converted into urban, concreted spaces, depends on a healthy market for wood products. Industries such as construction and furniture offer higher prices for higher-quality wood. While low-quality, waste wood, as well as residues from forests and wood-industry by-products, can be bought and used to produce biomass pellets.

A report by Forest 2 Market examined the relationship between demand for wood and forests’ productivity and ability to sequester carbon in the US South, where Drax sources about two-thirds of its biomass.

The report found that increased demand for wood did not displace forests in the US South. Instead, it encouraged landowners to invest in productivity improvements that increased the amount of wood fibre and therefore carbon contained in the region’s forests.

A synthesis report, which examines a broad range of research papers,  published in Forest Ecology and Management in March of 2021, concluded from existing studies that claims of large-scale damage to biodiversity from woody biofuel in the South East US are not supported. The use of these forest residues as an energy source was also found to lead to net GHG greenhouse emissions savings compared to fossil fuels, according to Forest Research.

Importantly the research shows that climate risks are not exacerbated because of biomass sourcing; in fact, the opposite is true with annual wood growth in the US South increasing by 112% between 1953 and 2015.

Delivering a “win-win solution”

The European Commission’s JRC Science for Policy literature review and knowledge synthesis report ‘The use of woody biomass for energy production in the EU’ suggests  a win-win forest bioenergy pathway is possible, that can reduce greenhouse gas emissions in the short term, while at the same time not damaging, or even improving, the condition of forest ecosystems.

However, it also makes clear “lose-lose” situations is also a possible, in which forest ecosystems are damaged without providing carbon emission reductions in policy-relevant timeframes.

Win-win management practices must benefit climate change mitigation and have either a neutral or positive effect on biodiversity. A win-win future would see the afforestation of former arable land with diverse, naturally regenerated and dedicated industrial forests.

The report also warns of trade-offs between local biodiversity and mitigating carbon emissions, or vice versa. These must be carefully navigated to avoid creating a lose-lose scenario where biodiversity is damaged and natural forests are converted into plantations, while BECCS fails to deliver the necessary negative emissions.

In a future that will depend on science working in collaboration with industries to build a net zero future continued research is key to ensuring biomass can deliver the win-win solution of renewable electricity with negative emissions while supporting healthy forests.

Updating on ambitions for pellet plants, biomass sales and BECCS

1 December 2021

Investors
Foresters in working forest, Mississippi

Highlights

  • New targets for pellet production and biomass sales
    • Biomass pellet production – targeting 8Mt pa by 2030 (currently c.4Mt)
    • Biomass pellet sales to third parties – targeting 4Mt pa by 2030 (currently c.2Mt)
  • Continued progress with UK BECCS(1) and biomass cost reduction
    • BECCS at Drax Power Station – targeting 8Mt pa of negative CO2 emissions by 2030
    • Biomass cost reduction – continuing to target biomass production cost of $100/t(2)
  • £3bn of investment in opportunities for growth 2022 to 2030
    • Pellet production, UK BECCS and pumped storage
    • Self-funded and significantly below 2x net debt to Adjusted EBITDA(3) in 2030
  • Development of additional investment opportunities for new-build BECCS
    • Targeting 4Mt pa of negative CO2 emissions outside of UK by 2030
  • Targeting returns significantly in excess of the Group’s cost of capital

Will Gardiner, Drax Group CEO, said:

Drax Group CEO Will Gardiner

Will Gardiner, CEO, Drax Group. Click to view/download.

“Drax has made excellent progress during 2021 providing a firm foundation for further growth. We have advanced our BECCS project – a vital part of the East Coast Cluster that was recently selected to be one of the UK’s two priority CCS projects. And we’re now setting out a strategy to take the business forward, enabling Drax to make an even greater contribution to global efforts to reach net zero.

“We believe Drax can deliver growth and become a global leader in sustainable biomass and negative emissions and a UK leader in dispatchable, renewable generation. We aim to double our sustainable biomass production capacity by 2030 – creating opportunities to double our sales to Asia and Europe, where demand for biomass is increasing as countries transition away from coal.

“As a global leader in negative emissions, we’re going to scale up our ambitions internationally. Drax is now targeting 12 million tonnes of carbon removals each year by 2030 by using bioenergy with carbon capture and storage (BECCS). This includes the negative emissions we can deliver at Drax Power Station in the UK and through potential new-build BECCS projects in North America and Europe, supporting a new sector of the economy, which will create jobs, clean growth and exciting export opportunities.”

Capital Markets Day

Drax is today hosting a Capital Markets Day for investors and analysts.

Will Gardiner and members of his leadership team will update on the Group’s strategy, market opportunities and development projects. The day will outline the significant opportunities Drax sees to grow its biomass supply chain, biomass sales and BECCS, as well as long-term dispatchable generation from biomass and pumped storage.

Purpose and ambition

The Group’s purpose is to enable a zero carbon, lower cost energy future and its ambition is to be a carbon negative company by 2030. The Group aims to realise its purpose and ambition through three strategic pillars, which are closely aligned with global energy policies, which increasingly recognise the unique role that biomass can play in the fight against climate change.

Strategic pillars

  • To be a global leader in sustainable biomass pellets
  • To be a global leader in negative emissions
  • To be a leader in UK dispatchable, renewable generation

The development of these pillars remains underpinned by the Group’s continued focus on safety, sustainability and biomass cost reduction.

A Global leader in sustainable biomass pellets

Drax believes that the global market for sustainable biomass will grow significantly, creating opportunities for sales to third parties in Asia and Europe, BECCS, generation and other long-term uses of biomass. Delivery of these opportunities is supported by the expansion of the Group’s biomass pellet production capacity.

The Group has 13 operational pellet plants with nameplate capacity of c.4Mt, plus a further two plants currently commissioning and other developments/expansions which will increase this to c.5Mt once complete.

Drax is targeting 8Mt of production capacity by 2030, which will require the development of over 3Mt of new biomass pellet production capacity. To deliver this additional capacity Drax is developing a pipeline of organic projects, principally focused on North America. Drax expects to take a final investment decision on 0.5-1Mt of new capacity in 2022, targeting returns significantly in excess of the Group’s cost of capital.

Underpinned by this expanded production capacity, Drax aims to double sales of biomass to third parties to 4Mt pa by 2030, developing its market presence in Asia and Europe, facilitated by the creation of new business development teams in Tokyo and London.

Drax is a major producer, supplier and user of biomass, active in all areas of the supply chain with long-term relationships and almost 20 years of experience in biomass operations. The Group’s innovation in coal-to-biomass engineering, supply chain management and leadership in negative emissions can be deployed alongside its large, reliable and sustainable supply chain to support customer decarbonisation journeys with long-term partnerships.

Drax expects to sell all the biomass it produces, based on an appropriate market price, typically with long-term index-linked contracts.

Continued focus on cost reduction

In 2018 the Group’s biomass production cost was $166/t(2). At the H1 2021 results, through a combination of fibre sourcing, operational improvements and capacity expansion (including the acquisition of Pinnacle Renewable Energy Inc), the production cost had reduced to $141/t(2). Drax’s aims to use the combined expertise of Drax and Pinnacle to apply learnings and cost savings across its portfolio and continues to target $100/t(2) (£50/MWh equivalent(4)) by 2027.

A Global leader in negative emissions

The Intergovernmental Panel on Climate Change(5) and the Coalition for Negative Emissions(6) have both outlined a clear role for BECCS in delivering the negative emissions required to limit global warming to 1.5oC above pre-industrial levels and to achieve net zero by 2050, identifying a requirement of between 2bn and 7bn tonnes of negative emissions globally from BECCS.

Separately, the UK Government has recently published its Net Zero Strategy and Biomass Policy Statement reaffirming the established international scientific consensus that sustainable biomass is renewable and that it will play a critical role in helping the UK achieve its climate targets. It also signposted an ambition for at least 5Mt pa of negative emissions from BECCS and Direct Air Capture by 2030, 23Mt pa by 2035 and up to 81Mt pa by 2050. The reports commit the Government to the development during 2022 of a financial model to support BECCS to meet these requirements.

Subject to the right regulatory environment, Drax plans to transform Drax Power Station into the world’s biggest carbon capture project using BECCS to permanently remove 8Mt of CO2 emissions from the atmosphere each year by 2030. The project is well developed, the technology is proven and an investment decision could be taken in 2024 with the first BECCS unit operational in 2027 and a second in 2030, subject to the right investment framework.

The Group aims to build on this innovation with a new target to deliver 4Mt of negative CO2 emissions pa from new-build BECCS outside of the UK by 2030 and is currently developing models for North American and European markets.

A UK leader in dispatchable, renewable generation

The UK’s plans to achieve net zero by 2050 will require the electrification of heating and transport systems, resulting in a significant increase in demand for electricity. Drax believes that over 80% of this could be met by intermittent renewable and inflexible low-carbon energy sources – wind, solar and nuclear. However, this will only be possible if the remaining power sources can provide the dispatchable power and non-generation system support services the power system requires to ensure security of supply and to limit the cost to the consumer.

Long-term biomass generation and pumped storage hydro can provide these increasingly important services. Drax Power Station is the UK’s largest source of renewable power by output and the largest dispatchable plant. The Group is continuing to develop a lower cost operating model for this asset, supported by a reduction in fixed costs associated with the end of coal operations.

Drax is also developing an option for new pumped storage – Cruachan II – which could take a final investment decision in 2024 and be operational by 2030, providing an additional 600MW of dispatchable long-duration storage to the power system.

In its Smart Systems and Flexibility plan (July 2021), the UK Government described long-duration storage technologies as essential for achieving net zero and has committed to take actions to de-risk investment for large-scale and long-duration storage.

Capital allocation and dividend

Strategic capital investment (3Mt of new biomass pellet production capacity, BECCS at Drax Power Station and Cruachan II) is expected to be in the region of £3bn between 2022 and 2030, backed by long-term contracted cashflows and targeting high single-digit returns and above.

No final investment decision has been taken on any of these projects and both BECCS and Cruachan II remain subject to further clarity on regulatory and funding mechanisms.

The Group believes these investments can be self-funded through strong cash generation over the period with net debt to Adjusted EBITDA significantly below 2x at the end of 2030, providing flexibility to support further investment, such as new-build BECCS as these options develop.

Drax remains committed to the capital allocation policy established in 2017, noting that average annual dividend growth was around 10% in the last 5-years.

Webcast and presentation material

The event will be webcast from 10.00am and the material made available on the Group’s website from 7:00am. Joining instructions for the webcast and presentation are included in the links below.

https://secure.emincote.com/client/drax/drax016

Notes:
(1) BioEnergy Carbon Capture and Storage.
(2) Free on Board – cost of raw fibre, processing into a wood pellet, delivery to Drax port facilities in US and Canada, loading to vessel for shipment and overheads.
(3) Earnings before interest, tax, depreciation, amortisation, excluding the impact of exceptional items and certain remeasurements.
(4) From c.£75/MWh in 2018 to c.£50/MWh, assuming a constant FX rate of $1.45/£.
(5) Coalition for Negative Emissions (June 2021).
(6) Intergovernmental Panel on Climate Change (August 2021).

Enquiries:

Drax Investor Relations: Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications: Ali Lewis
+44 (0) 7712 670 888

Website: www.drax.com

Forward Looking Statements
This announcement may contain certain statements, expectations, statistics, projections and other information that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans, investments, beliefs and objectives for the management of future operations of Drax Group plc (“Drax”) and its subsidiaries (the “Group”), including in respect of Pinnacle Renewable Energy Inc. (“Pinnacle”), together forming the enlarged business, are not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although Drax believes that the statements, expectations, statistics and projections and other information reflected in such statements are reasonable, they reflect the Company’s current view and beliefs and no assurance can be given that they will prove to be correct. Such events and statements involve significant risks and uncertainties. Actual results and outcomes may differ materially from those expressed or implied by those forward-looking statements. There are a number of factors, many of which are beyond the control of the Group, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These include, but are not limited to, factors such as: future revenues being lower than expected; increasing competitive pressures in the industry; and/or general economic conditions or conditions affecting the relevant industry, both domestically and internationally, being less favourable than expected; change in the policy of key stakeholders, including governments or partners or failure or delay in securing the required financial, regulatory and political support to progress the development of Drax and its operations. We do not intend to publicly update or revise these projections or other forward-looking statements to reflect events or circumstances after the date hereof, and we do not assume any responsibility for doing so.

END

2021 Adjusted EBITDA around top of current analyst expectations

Investors

Highlights

  • Major planned outage on CfD(1) unit completed on schedule
  • Incremental power sales on biomass ROC(2) units since July 2021 capturing higher prices
  • Commissioning of 550Kt of new biomass pellet production capacity in US Southeast
  • 2021 Adjusted EBITDA(3) – around the top end of current range of analyst expectations, subject to continued baseload generation on biomass units throughout December
  • Positive policy developments for biomass and framework for UK BECCS(4)

Pellet Production

In North America, the Group has made good progress integrating Pinnacle Renewable Energy Inc. (“Pinnacle”) since acquisition in April 2021 and is currently in the final stages of commissioning over 360Kt of new production capacity at Demopolis, Alabama. In October 2021, the Group commissioned a 150Kt expansion at its LaSalle plant in Louisiana and at Leola, Arkansas, a new 40Kt satellite plant is due to be commissioned in December.

These developments, along-side incremental new capacity in 2022, support the Group’s continued focus on production capacity expansion and cost reduction. Once fully commissioned, Drax will operate around 5Mt of production capacity across three major North American fibre baskets – British Columbia, Alberta and the US Southeast, of which around 2Mt are contracted to high-quality third-party counterparties under long-term contracts, with the balance available for Drax’s own-use requirements.

There has been no disruption to own-use or third-party volumes from the global supply chain delays currently being experienced in some other sectors. However, as outlined at the Group’s 2021 Half Year Results, summer wildfires led to pellet export restrictions in Canada. More recently, heavy rainfall and flooding in British Columbia have led to some further disruption to rail movements and regional supply chains. Through its enlarged and diversified supply chain Drax has been able to manage and limit the impact on biomass supply for own-use and to customers.

In addition, due to the Group’s active and long-term hedging of freight costs, there has been no material impact associated with higher market prices for ocean freight. The Group uses long-term contracts to hedge its freight exposure on biomass for its Generation business, and following the acquisition of Pinnacle, is taking steps to optimise freight requirements between production centres in the US Southeast and Western Canada, and end markets in Asia and Europe.

Generation

In the UK, the Group’s biomass and pumped storage generation assets have continued to play an important role providing stability to the UK power system at a time when higher gas prices, European interconnector issues, and periods of low wind have placed the system under increased pressure. The Group’s strong forward sold position means that it has not been a significant beneficiary of higher power prices from these activities in 2021 but has been able to increase forward hedged prices in 2022 and 2023.

In March, the Group’s two legacy coal units ended commercial generation activities and will formally close in September 2022 following the fulfilment of their Capacity Market obligations. Reflecting the system challenges described above, these units were called upon in the Balancing Mechanism by the system operator for limited operations in September and November. These short-term measures helped to stabilise the power system during periods of system stress and have not resulted in any material increase in the Group’s total carbon emissions.

In September, the Generation business experienced a two-week unplanned outage on one biomass unit operating under the ROC scheme. The unit’s contracted position in this period was bought back and the generation reprofiled across the two unaffected biomass ROC units and deferred until the fourth quarter. During this period, the Group’s pumped storage power station (Cruachan) provided risk mitigation from the operational or financial impact of any additional forced outages.

In November, the Generation business successfully completed a major 98 day planned outage on its biomass CfD unit, which included the third in a series of high-pressure turbine upgrades. Drax now expects the unit to benefit from thermal efficiency improvements and lower maintenance costs, incrementally reducing the cost of biomass generation at Drax Power Station.

Customers

The Group continues to expect the Customers business will return to profitability at the Adjusted EBITDA level for 2021, inclusive of an expected increase in mutualisation costs associated with the failure of a number of energy supply businesses in the second half of 2021. Separately, the Group is continuing to assess operational and strategic solutions to support the development of the SME(5) supply business.

Full year expectations

Reflecting these factors, the Group now expects that full year Adjusted EBITDA for 2021 will be around the top of the range of current analyst expectations(6), subject to good operational performance during December, including baseload running of all four biomass units. The Group’s financial expectations do not include any Balancing Mechanism activity in December for the coal units.

Drax continues to expect net debt to Adjusted EBITDA to return to around 2x by the end of 2022.

Negative emissions

In October, the UK Government selected the East Coast Cluster and Hynet as the first two regional clusters in the UK to take forward the development of the infrastructure required for carbon capture and storage. In addition, the UK Government published its Net Zero Strategy and Biomass Policy Statement, reaffirming the established international scientific consensus that sustainable biomass is renewable and indicating that it will play a critical role in helping the UK achieve its climate targets. It also signposted an ambition for at least 5Mt pa of negative emissions from BECCS and Direct Air Capture by 2030, 23Mt pa by 2035 and up to 81Mt pa by 2050. The reports commit the Government to the development during 2022 of a financial model to support the development of BECCS to meet these requirements.

The Group is continuing to progress its work on BECCS with the aim to develop 8Mt of negative CO2 emissions pa at Drax Power Station by 2030 and expects to make a decision on the commencement of a full design study in the coming weeks.

Generation contracted power sales

As at 25 November 2021, Drax had 34.3TWh of power hedged between 2021 and 2023 at £61.3/MWh as follows:

202120222023
Fixed price power sales (TWh)16.012.45.8
Of which ROC (TWh)10.810.15.8
Of which CfD (TWh)(7)(8)3.82.1-
Other (TWh)1.40.2-
Average achieved price (£ per MWh)54.070.7 61.2
Of which ROC (£ per MWh)56.961.161.2
Of which CfD (£ per MWh)(7)47.3118.3-
Of which Other (£ per MWh)50.058.2-

Since the Group’s last update on 29 July 2021, incremental power sales from the ROC units were 3.3TWh between 2022 and 2023, at an average price of £98.7/MWh.

Notes:
(1) Earnings before interest, tax, depreciation, amortisation, excluding the impact of exceptional items and certain remeasurements.
(2) BioEnergy Carbon Capture and Storage.
(3) Renewable Obligation Certificate.
(4) Contract for Difference.
(5) Small and Medium-size Enterprise.
(6) As at 26 November 2021 analyst consensus for 2021 Adjusted EBITDA was £380 million, with a range of £374-£391 million. The details of this company collected consensus are displayed on the Group’s website.
(7) The CfD biomass unit typically operates as a baseload unit, with power sold forward against a season ahead reference price. The CfD counterparty pays the difference between the season ahead reference price and the strike price. The contracted position therefore only includes CfD volumes and prices for the front six months.
(8) Expected annual CfD volumes of around 5TWh. Lower level of generation in 2021 unit due to major planned outage.

Enquiries:

Drax Investor Relations: Mark Strafford
+44 (0) 7730 763 949

Media:

Drax External Communications: Ali Lewis
+44 (0) 7712 670 888

Website: www.drax.com

Forward Looking Statements
This announcement may contain certain statements, expectations, statistics, projections and other information that are or may be forward-looking. The accuracy and completeness of all such statements, including, without limitation, statements regarding the future financial position, strategy, projected costs, plans, investments, beliefs and objectives for the management of future operations of Drax Group plc (“Drax”) and its subsidiaries (the “Group”), including in respect of Pinnacle Renewable Energy Inc. (“Pinnacle”), together forming the enlarged business, are not warranted or guaranteed. By their nature, forward-looking statements involve risk and uncertainty because they relate to events and depend on circumstances that may occur in the future. Although Drax believes that the statements, expectations, statistics and projections and other information reflected in such statements are reasonable, they reflect the Company’s current view and beliefs and no assurance can be given that they will prove to be correct. Such events and statements involve significant risks and uncertainties. Actual results and outcomes may differ materially from those expressed or implied by those forward-looking statements. There are a number of factors, many of which are beyond the control of the Group, which could cause actual results and developments to differ materially from those expressed or implied by such forward-looking statements. These include, but are not limited to, factors such as: future revenues being lower than expected; increasing competitive pressures in the industry; and/or general economic conditions or conditions affecting the relevant industry, both domestically and internationally, being less favourable than expected; change in the policy of key stakeholders, including governments or partners or failure or delay in securing the required financial, regulatory and political support to progress the development of Drax and its operations. We do not intend to publicly update or revise these projections or other forward-looking statements to reflect events or circumstances after the date hereof, and we do not assume any responsibility for doing so.

END