Tag: BECCS

Counting the cost: Why its critical that discussions around Net Zero are based on accurate numbers

23 January 2024

Opinion

Summary 

  • Ember’s modelling approach has used a number of assumptions that do not align with Drax’s current project ambitions or the government’s proposed design of the power-BECCS business model. 
  • Ember’s analysis is based on a four-unit deployment of BECCS. Drax’s current project plans and planning consent anticipate a two-unit conversion to BECCS. 
  • The analysis has also assumed a 25-year term for any power-BECCS contract, current government proposals are for a 15-year deal. 
  • The likely power-BECCS business model will be a dual CfD for carbon and power, with revenues earned in the Emissions Trading Scheme and Voluntary Carbon Market significantly reducing the amount of support required from the UK government. 
  • Ember have not given appropriate consideration to the counterfactual of BECCS at Drax. Baringa analysis shows that BECCS at Drax could, save the UK £15bn in whole economy costs between 2030 and 2050 providing a more efficient, cost effective and straightforward pathway to meeting Net Zero targets than other potential options 

Recent steps from the UK Government have been a vote of confidence in our plans to deliver bioenergy with carbon capture and storage (BECCS) at Drax’s power station in North Yorkshire, to deliver the world’s largest carbon dioxide removal facility. These decisions show the clear case and backing there is for Drax’s operations in Yorkshire and the Humber and the workers and communities that make this possible. Alongside planning consent, the Government also began consulting on a mechanism to facilitate large-scale biomass electricity generators to transition to power BECCS. As highlighted by the International Energy Agency, BECCS is the only technology that can both remove carbon and produce energy. These two steps together illustrate the decisions needed to ensure the UK’s energy security. 

Last week, we also saw a number of media reports about the cost of BECCS at Drax Power Station. Many of these reports were driven by a piece of analysis undertaken by Ember. Scrutiny on government expenditure is important, but it is critical that the assumptions made in determining the analysis are carefully considered and based on up-to-date information. 

Ember’s analysis ‘Drax’s BECCS project climbs in cost to the UK public’ has made a number of incorrect assumptions which do not align to the current proposed design of the power-BECCS business model or Drax’s current project ambitions. As a result, we believe Ember’s estimates relating to the £43bn overall cost of BECCS at Drax, as well as the projected £1.7bn yearly subsidy for BECCS at Drax is overstated.  

Three assumptions are of particular note: 

  1. Ember misunderstands Drax’s current plans to deploy power-BECCS at Drax Power Station. They have assumed that Drax converts all four biomass units to operate with carbon capture and storage. However, Drax’s current BECCS project plan, and recently successful Development Consent Order, anticipate a two-unit conversion. Any further development of BECCS beyond two units would require a change to the project plan, new engineering solutions and additional planning consents to be granted. This means that Ember’s assumptions have overestimated Drax’s BECCS deployment (and thus cost per year) by a factor of two.

  2. Ember has also misunderstood the currently intended structure of a power-BECCS business model. They have assumed that any contract for power-BECCS will be for a 25-year term. In their recent update on the design of the power-BECCS business model, published at the end of last year, the UK Government announced their minded-to position for a power-BECCS business model to have a term length of 15 years. This is broadly in line with business models proposed for other CCUS sectors. In their view, this provides a balance between subsidy costs and achieving negative emissions through delivering a larger volume of carbon removals. As a result, Ember’s assumption of a 25-year term does not accurately reflect the real-world policy development position and means that their assumption of the ‘lifetime costs’ of BECCS at Drax has been significantly overestimated.

  3. Ember has assumed that a power-BECCS project receives a Contract for Difference (CfD) on power market revenues only, assuming a strike price of £230/MWh. This approach ignores the primary purpose of BECCS which is its ability to produce negative emissions and facilitate the decarbonisation of some of the hardest and/or most expensive sectors of the economy such as aviation and agriculture.

 

Since some of the earliest proposed designs of the power-BECCS business model were announced back in August 2022, the Government has clearly stated its intent to ensure that remuneration for power-BECCS facilities takes into account both revenues earnable in the power market and in the carbon market. This position has led Government to develop a business model under a ‘dual CfD’ approach; a CfD on power (CfDe) and a CfD on carbon (CfDc). Under this approach, on the CfDc, the Government is exploring options to how a BECCS project will be able to access revenues in carbon markets such as the UK Emissions Trading Scheme (ETS) and Voluntary Carbon Market (VCM) revenues, which displaces revenues under the CfDc. These markets have the potential to bring in private revenues to support BECCS facilities and would reduce the amount of support required from the UK government and the taxpayer under the CfDc. This approach is aligned with the ‘polluter pays’ principle of decarbonisation whereby CO2 intensive companies provide funding to support decarbonisation measures such as BECCS. Examples of this hybrid approach to supporting BECCS projects can be seen with Orsted’s ‘Kalundborg Hub’ which is partly supported by Danish state subsidies and an agreement with Microsoft to purchase negative emissions in the VCM.  

This hybrid (dual CfD) approach means that, even if you take Ember’s £230/MWh cost of BECCS at face value, UK energy bill payers will not face a £1.7bn annual bill as claimed. ETS and/or VCM revenues supporting the project (via the CfDc) would have the potential to significantly reduce the amount of Government support required for the project. Later this year, the UK Government intends to consult on the integration of negative emissions into the UK ETS and the role of VCMs.  

Ember’s analysis has also not given appropriate consideration to the counterfactual to BECCS at Drax, i.e. what is the incremental cost of the UK meeting its legally binding net zero targets in the absence of the carbon removals delivered by Drax Power Station’s BECCS units? For example, the backing data of Ember’s ‘Cutting the Bills’ report, outlines how a 98% clean electricity system can be achieved by 2030 and the contribution that 0.6GW of BECCS must make in order to achieve this target and reduce electricity bills by £300 per year. For context, 0.6GW of BECCS is approximately equivalent to the power output of one and a half operational Drax BECCS units.  

In a report commissioned by Drax and published by Baringa this week, their modelling shows that two units of BECCS at Drax could, if implemented, save the UK £15bn in whole economy costs between 2030 and 2050 providing a more efficient, cost effective, and straightforward pathway to meeting Net Zero targets than other potential options. The other potential options include an investment of £8.5 billion in synthetic natural gas production (using biomass to create gas for consumption in industry etc.), an increase in biomass imports to feed this increase in synthetic natural gas production, the rollout of an additional 735,000 more heat pumps in hard-to-treat homes costing £5 billion, and the additional deployment of onshore and offshore wind costing £3 billion plus associated storage and network costs. Whilst it is recognised that it is impossible to accurately predict the future and no counterfactual can be 100% accurate, it is nonetheless important to develop robust assumptions for a counterfactual to understand savings as well as costs. The overall savings delivered by BECCS at Drax in meeting net zero far outweigh the costs associated with its deployment.  

In conclusion, Drax recognises the importance of ensuring that all CCUS and energy projects in the UK represent good value for money for the taxpayer and that differing parties may have different views and assumptions when modelling the cost of a project. We believe that Ember’s interpretation of both the scope of Drax’s BECCS project and the business model being developed to support power-BECCS deployment in the UK has resulted in an inaccurate and overstated picture of the cost of Drax’s BECCS project to UK electricity consumers. We remain committed to discussing these matters with government and remain confident in our ability to demonstrate that our project is value for money and expect that once the power-BECCS business model has been finalised, it is highly likely that the government will publish a full account of the strike price of Drax’s BECCS project, as they do with other CfD supported projects.  

Development of UK CCS infrastructure and BECCS business model

20 December 2023

Financial News

Drax notes the announcement by the UK Government of further policy support for the development of carbon capture utilisation and storage clusters (CCUS) in the UK, including an update on the Track-1 expansion and Track-2 processes.

The UK Government has also reiterated its ambition to deploy at least 5 MtCO2/year of engineered greenhouse gas removals by 2030, potentially scaling to 23 MtCO2/year by 2035 and up to 81 MtCO2/year by 2050, and published its latest position on the design of a Power BECCS business model, which includes a 15-year CfD with a dual payment mechanism linked to both low-carbon electricity and negative emissions.

Drax Group CEO, Will Gardiner said:

Will Gardiner, Drax Group CEO

“Today’s announcements by the Government will further progress the development of CCUS clusters in the UK and are an important step forward in facilitating the deployment of large-scale BECCS.

“We welcome the publication of further details on a BECCS business model and the Government’s continued commitment to deploy at least five million tonnes of greenhouse gas removals by 2030, which we believe can only be achieved through delivering BECCS at Drax Power Station.

“BECCS has the potential to deliver carbon removals whilst generating renewable power and installing this technology at Drax Power Station will enable it to continue to play a critical role in the UK’s energy security, creating and supporting thousands of jobs in the Humber region and helping the country meet its Net Zero targets.”

Details of the update from the UK Government:

Track-1 expansion – the Government has agreed Heads of Terms with the operator of the East Coast Cluster CO2 transport and storage network and will now consider the best time to launch an expansion process for the East Coast Cluster from 2024.

Track-2 cluster deployment – the Government has confirmed plans for the assessment of an initial “anchor phase” of capture projects connecting to the Acorn and Viking clusters, which will target projects for deployment in 2028/9, and the development of a “buildout phase” for additional projects to connect thereafter.

The updates on Track-1 expansion and Track-2 cluster deployment continue to affirm that there are two potential routes which could support BECCS at Drax Power Station as well as wider CCS projects in the Humber region by 2030 – the East Coast Cluster and Viking CCS cluster. Drax is in discussions with all relevant stakeholders in the region about the potential of deploying BECCS at Drax Power Station.

Separately, Drax continues to expect that a public consultation on a bridging mechanism will commence shortly.

Notes:

Links to documents

https://www.gov.uk/government/publications/carbon-capture-usage-and-storage-ccus-december-2023-statement/ccus-december-2023-statement

https://assets.publishing.service.gov.uk/media/6581851efc07f3000d8d447d/ggr-power-beccs-business-models-december-2023.pdf

Enquiries:

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

Media:

Drax External Communications:
Chris Mostyn
[email protected]
+44 (0) 7548 838 896

Andy Low
[email protected]
+44 (0) 7841 068 415

Website: www.Drax.com

END

Raising the Standard in Carbon Removals

4 October 2023

Opinion

By Angela Hepworth, Commercial Director at Drax

In their Sixth Assessment Report, the Intergovernmental Panel on Climate Change has clearly stated that to limit warming to 1.5C we will need carbon dioxide removals (CDRs) on a gigaton scale. The magnitude of this challenge lays starkly before us, but in equal measure with the size of the task, its importance has never been more evident.

It’s long been accepted that the world must decarbonise by reducing emissions, but the necessity of carbon removals is more newly recognised. CDRs are now acknowledged to be a crucial part of the effort to achieve net zero emissions, both to neutralise hard-to-abate emissions and sectors (like mining, transportation and aviation) and to remove excess historic carbon, or overshoot, already in the atmosphere.

At Drax we are developing Bioenergy with Carbon Capture and Storage (BECCS), which is unique in its ability to deliver renewable power and remove carbon from the atmosphere simultaneously.

Engineered carbon removal technologies like BECCS are crucial to achieving long-term climate goals. BECCS is the most scalable of these technologies that can be deployed rapidly and is affordable compared with other permanent removal solutions.

Credibility, transparency and trust

Historically, the voluntary carbon market has struggled with demonstrating credibility, transparency and trust and this has proven to be a significant weight on the industry’s ability to scale. We have seen reports of low-quality offsets sold as high integrity credits and projects that don’t deliver the carbon benefits claimed, which has diminished investor trust in the market as a whole.

To address these concerns, we are now seeing significant initiatives being put in place to implement the high standards and good governance in carbon removals credits that we need to effectively scale the market to levels required. The Integrity Council for the Voluntary Carbon Markets (ICVCM) is a prime example of this, serving as an independent governance body for the voluntary carbon market.

The ICVCM is working to champion standards across the industry and has set out its Core Carbon Principles (CCPs) – set of principles that all carbon offsets and removals must meet in order to be considered high integrity.

We welcome this initiative and hope it will raise standards across the market.

Similar to what we are seeing in the AI industry at present, in order to build trust in this nascent market and in turn scale it, it is also imperative that industry looks outside of itself and engages with other stakeholders who are impacted or interested in it. We must; develop ethical principles and guidelines for the design, development and deployment of carbon markets; implement transparent and accountable mechanisms for the oversight and governance of them; educate and engage the public and stakeholders on the benefits of CDRs; empower and protect the customers; and foster collaboration and dialogue among the industry, academia, civil society and policymakers.

Why we need standards for BECCS

At Drax we already recognise that addressing quality concerns is the only way that the market will work for everybody – buyers rightly want to have confidence that they are buying a high-integrity removals which are robustly quantified and verified, sellers need to be able to demonstrate the validity of their claims, and government needs a well-functioning market and a baseline from which to regulate it.

Our partnership with Stockholm Exergi and EcoEngineers is doing just that – developing a world-leading methodology to ensure the integrity of BECCS CDRs. The methodology was created to align with the ICVCM’s CCPs and to closely consider how to ensure everyone around the table is getting what they need:

  • Quantification: For the methodology to be successful it requires a thorough approach to quantifying net-negative carbon removals from BECCS. Quantification in the methodology starts with the gross volume of CO2 we capture and store, then subtracts any supply chain emissions, and/or emissions associated with the carbon capture and storage process, as well as any “leakage” impacts (increases in CO2 emissions outside the project boundary). We have intentionally developed this approach to be both robust and conservative so that BECCS CDRs verified under the methodology are a truly net negative product.
  • Guardrails: It is also crucial in any methodology for BECCS that there are robust guardrails in place to ensure biomass used comes from sustainable sources – for example, from forests where the carbon stock is stable or increasing, and excluding biomass sourced from sensitive areas where there’s high levels of biodiversity. Our methodology also provides that any potential social or environmental risks must be evaluated and mitigated for biomass to be used.
  • Verification: We aim to register our credits with one of the major registries, and once a methodology is adopted, we will ensure that our credits are independently verified to confirm that they meet all the requirements set out in the standard, and that there is robust governance in place, for example to ensure credits cannot be double counted.

Taking the methodology forward

Pioneering this work for BECCS standards is an important step toward increasing investment in BECCS CDRs – a climate critical technology – and it needs to be done collaboratively. It has been developed in partnership with Stockholm Exergy and EcoEngineers and we are now working to gather feedback from other stakeholders with the aim of making it comprehensive and representative.

As a part of this we’d like to invite further feedback – from other developers, standards bodies, potential customers and others, and welcome constructive comment on the text.

The methodology has also been submitted to the European Commission to help shape their proposals for the framework for CDRs that they are developing.

It is in the interest of all parties to work towards common standards for CDRs, to avoid current fragmentation of standards that causes confusion for customers, and we appreciate your feedback on this important work as we drive it forward.

Capturing the opportunity

We have an opportunity to change our current climate trajectory, but that will only happen if we take action now. We to need to reduce emissions and rapidly scale the market for high integrity, sustainable CDRs. Putting the required standards and governance into place to build a resilient and trustworthy carbon removals market is a core part of that.

We hope that this methodology has a part to play in that work and that it will bring us one step closer to manifesting the potential of BECCS done well at scale.

Read the Methodology

Read the Executive Summary

Methodology Enquiries

To discuss or provide feedback on the Methodology please contact [email protected]. 

Track-1 expansion process update

26 September 2023

Financial News

As part of the update, DESNZ set out its draft expectation to run the Track-1 extension and Track-2 processes in parallel, subject to T&S capacity and ministerial sign off. Following the designation of the Viking CCS cluster as a Track-2 cluster in July 2023, there are now two potential routes which could support the Drax Power Station BECCS project and wider CCS in the Humber region by 2030 – the East Coast Cluster and Viking CCS cluster.

DESNZ also set out an indicative timeline that shortlisted projects would commence negotiations from Autumn 2024. DESNZ will now receive feedback on its draft proposals pending further updates and the publication of final guidance in due course.

Will Gardiner, Drax CEO, said:

“The Government’s statements are a helpful step forward not just for BECCS in the UK, but for the wider fight against climate change. We can only reach net zero by investing in critical, new green technologies such as BECCS. I welcome the Government’s draft position and urge them to progress with both Track-1 expansion and Track-2 processes in parallel this winter”.

Separately, in August 2023 the UK Government published a Biomass Strategy which set out its position on the use of biomass in the UK’s plans for delivering net zero. The Biomass Strategy outlined the potential “extraordinary” role which biomass can play across the economy in power, heating and transport, including a priority role for BECCS, which is seen as critical for meeting net zero plans due to its ability to provide large-scale carbon dioxide removals. This is in addition to formal bilateral discussions between Drax and the Government in relation to a potential bridging mechanism between the end of the current renewable schemes in 2027 and the commissioning of BECCS at Drax Power Station.

Enquiries:

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

Media:

Drax External Communications:
Aidan Kerr
+44 (0) 0784 909 0368

Website: www.Drax.com

END

Can the EU lead certification of carbon removals globally?

20 September 2023

Opinion

By Kasia Wilk, Head of Public Affairs and Policy for Europe and Asia, Drax 

Key takeaways: 

  • Certification of carbon removals provides a mechanism to verify and ensure the credibility of carbon removal projects and their outcomes 
  • EU’s proposed certification mechanism is first of its kind but does not fully reflect the international dimension of carbon markets: it is unclear how removals outside of the EU and certificates issued outside of the EU will be treated. 
  • Understanding the use case of the certified units is equally important to the success of the regulation. Voluntary markets and corporate claims are essential to support the scale up of the industry. If the EU recognises and handles this challenge it could lead the world in carbon removals certification. 
  • EU climate policies should prioritise support for carbon removal solutions that are technically ready, economically feasible, permanent and have additional co-benefits. 
  • Bioenergy with Carbon Capture and Storage (BECCS) is unique in its ability to deliver renewable power and remove carbon from the atmosphere simultaneously.   
  • Sustainability of biomass is heavily regulated by the Renewable Energy Directive (RED). It is one of the strictest set of sustainability criteria for forest biomass in the world.  

Why do we need carbon removals?  

This summer was the warmest month ever recorded, the impact of climate change is being felt here and now. Tackling the causes of global warming is now more pressing than ever. We are currently on track for a 14% rise in greenhouse gas emissions by 2030. This could lead to temperatures increasing by more than double the Paris Climate Agreement’s 1.5 degrees target and bringing about even more extreme weather. Urgent action is needed now to revert this catastrophic trend. It’s increasingly clear that carbon dioxide removal (CDR) will be essential to reach Net Zero by 2050 as these technologies balance out those emissions that are difficult to avoid as well as help companies remove their historic emissions. They do so by capturing carbon dioxide (CO2) that is already in the atmosphere and removing it and storing it permanently. According to the Sixth Assessment Report of the UN’s IPCC, nearly all pathways to Net Zero by 2050 will require a significant scale-up of carbon removals. Carbon removal technologies are developing at pace and can make a significant contribution to tackling climate change. Nevertheless, to get the sector to where it needs to be by mid-century requires the right policies and investment to support deployment. 

The EU has already taken a number of steps to support the development of carbon removals. The CCS Directive establishes a regulatory framework for the geological storage of CO2 and the proposal for a Carbon Removal Certification Framework (CRCF) will support the development of a voluntary carbon market which is a cornerstone for the development of CDR. 

However, to support the scaling up of the sector it is essential to (1) assess the scale of removals required, (2) define binding EU targets and (3) develop roadmaps for the scale up of carbon removals in Europe. It is also important to coordinate Member State commitments, ensuring their plans for deployment can be realised through greater cooperation. 

The importance of certification 

Certification of carbon removals is essential for driving technological development and deployment. It provides a mechanism to verify and ensure the credibility of carbon removal projects and their outcomes. We need transparent and robust rules and procedures to ensure that only high-quality removals and removals that would not otherwise have taken place are credited, and to prevent the same activity from being certified twice or using the same certificate twice. This is what the EU proposal for a regulation establishing a Union certification framework for carbon removals aims to do. 

The proposed certification mechanism is a world-first and positions the EU as the leader in the field, addressing the need for removals in climate policy and providing a stringent, transparent regulatory oversight on certification. It has the potential to set high-quality criteria, create much needed standards for growing the carbon removal market and address many of the shortcomings that hamper its growth today. 

Yet, the scope of the EU certification proposal does not go far enough. It is currently limited to removals within the EU and it is unclear how removals outside of the EU and certificates issued outside of the EU will be treated, despite the important international dimension of climate policy. 

The European Commission has said that international carbon markets can play a key role in reducing global greenhouse gas emissions cost-effectively. Although specifics are still under development, the Paris Agreement provides a robust and ambitious basis for the use of international markets and reinforces international targets, transparency and the accountability. Recognising the importance of international carbon markets, Article 6 of the agreement: 

  • allows parties to use international trading of emission allowances to help achieve emissions reduction targets 
  • establishes a framework for common robust accounting rules, and 
  • creates a new, more ambitious market mechanism.

The lack of international consideration in the Commission’s proposals for certifying carbon removals could be challenging in the long run – particularly in light of the foreseen end uses of certified removal units, including their international exchange through voluntary carbon markets.  

To mitigate this, the Commission should consider two additional scenarios as part of the discussions on the scope of this voluntary certification framework: 

  • Credits generated outside the EU – EU businesses will still be able to use voluntary markets to purchase credits from projects in other jurisdictions, outside of the EU.  These could not be subject to the same high standards, unless they are being given the option to comply with the voluntary framework. 
  • Linking compliance markets – While integration of carbon removals with the Emissions Trading Scheme (ETS) framework will be assessed by the European Commission over the next few years, this proposal should take account of future potential linking of compliance markets.  Should removals be fungible in those linked ETS markets, it will be within the EU’s interest to ensure removals outside the EU are subject to the requirements and standards of the EU CRCF. 

How to assess and compare the existing CDRs methods? 

All carbon removal technologies will have a role to play in tackling climate change. However, they all differ in terms of process, permanence and technological readiness. To reach its Net Zero targets, EU climate policies should prioritise support for carbon removal solutions that are technically ready, economically feasible and permanent. They should take into account additional co-benefits for local communities, power systems and the environment, as well as the potential to be deployed at scale to ensure these technologies can make maximum contribution to the achievement of EU climate goals. 

BECCS is one of the best examples of this. When compared to other technologies, BECCS is unique in its ability to deliver renewable power and remove carbon from the atmosphere simultaneously whilst generating thousands of jobs across its value chain. 

It is also very well regulated. Sustainability of biomass is already covered by the Renewable Energy Directive (RED). The sustainability criteria for biomass in RED were updated in 2023 and has been formally adopted by the European Parliament. It is one of the strictest set of sustainability criteria for forest biomass in the world. It applies equally to domestic and imported biomass and protects against over-sourcing. It also safeguards biodiversity, ensures forest regeneration and sets strict limits on all supply chain emissions, including transportation. The 2023 revision of the RED (REDIII) specifically took account of the projected growth in biomass demand to 2050, including for BECCS, and amended the sustainability criteria appropriately.  

BECCS projects will see carbon capture equipment installed in plants that will also produce power, heat or fuels. In many cases the technology will be retrofitted to existing plants. Regulatory consistency here will be paramount.  

The detailed methodologies that will be developed under the certification framework will need to reflect the vast array of existing regulations, such as RED, to support deployment of these technologies, stimulate investment – and ascertain EU climate leadership – supporting domestic technologies/ or technologies in the region. 

What are the end uses of certified removals? 

Understanding the use case of the certified units is essential to the success of the regulation. The Commission proposal alludes to different end-uses, such as the compilation of national and corporate greenhouse gas inventories, the proof of climate-related corporate claims, or the exchange of verified carbon removal units through voluntary carbon markets. 

However, ongoing debates in the European Parliament – including on related files such as the Green Claims Directive – seem to threaten some uses. Banning claims based on offsetting would reduce incentives for companies to take supplementary action outside their value chains and deter the necessary investment going into the sector.  

Whilst emissions reductions should remain the absolute priority, carbon removals are essential to meet net zero targets and to address residual emissions and potentially historical emissions. The sector needs to start scaling up now for the EU to reach its climate targets in the coming decades. We cannot afford to wait until 2040 for a compliance market to begin scaling up carbon removals as it will be too late.  This is why voluntary markets and claims are critical.  

Companies should be incentivized to make some claims now provided they are on track with their GHG emissions reduction targets. At the same time, the EU should ensure consistency with other pieces of legislation such as the Corporate Sustainability Reporting Directive (CSRD) which also covers the use of carbon credits. 

Coming back to the international dimension, it will be important in that context to clarify how removals from outside the EU are to be treated on the EU market given the extraterritorial dimension of certain pieces of EU legislation and global nature of supply chains. 

Biomass and BECCS are essential in the UK’s journey to Net Zero

10 August 2023

Opinion

The Strategy provides an important steer on the short-, medium- and long-term use of biomass in the UK’s 2050 Net Zero target.

With the Government’s Strategy in hand, I am more certain than ever on two things.  First, that there remains a clear and powerful role for biomass and BECCS in helping the UK balance harder to abate sectors, like aviation, and reach Net Zero.

And secondly, that bioenergy with carbon capture and storage (BECCS) has a vital role to play in our global energy transition – and that Drax is well placed to deliver.

Why we should be confident

In developing the Strategy, the Government has considered several factors including: availability of biomass and the priorities for end use; impacts on air quality; the sustainability of biomass use; as well as the role of BECCS in helping to reach our long-term climate goals.

The ‘Priority Use Framework’ evaluates where biomass would be most sustainably and efficiently used across sectors, given supply constraints. This framework is an important tool, which has been developed with four key principles in mind; sustainability; air quality; the circular economy and resource efficiency; and ability to support us getting to Net Zero.

Critically, the Priority Use Framework states that:

  1. In the short-term (2020s) government will continue to facilitate sustainable biomass deployment through a range of incentives and requirements covering power, heat and transport
  2. In the medium-term (to 2035) government intends to further develop biomass use for utilities such as heat and power with a view to where possible transition to BECCS
  3. Biomass for use in BECCS should be prioritised in the long term (to 2050)

It’s very encouraging to see Government recognise the important role that biomass plays in our energy transition in both the short and medium term, as well as its prioritisation of BECCS in the long term.

Although there are various routes for deploying BECCS across different industries, the strategy further prioritises the deployment of BECCS on existing biomass generation plants with established supply chains, further supported by the development of the Power-BECCS business model for the first BECCS projects.

The Strategy is also promising as it presents an evidence-driven basis for long-term policy stability and I believe if the Government continues in this direction, it will draw investment to the UK’s bioenergy industry.

Why this is critical for the country

Biomass has already played an important role in supporting energy security while helping the UK decarbonise, displacing fossil fuels with a source of renewable, dispatchable power. Our work has also made a significant contribution to the UK economy, adding an estimated £1.8 billion to the UK GDP and supporting 17,800 jobs in 2021 alone.

And, looking to the future, BECCS presents an enormous opportunity to the UK.

Early investment in this critical technology has the potential to support energy security, and climate targets whilst creating jobs and making the UK a leader in the potentially trillion-dollar global CDR market.

This work needs to happen now – nearly all realistic pathways to limit warming to 1.5C require the carbon removal technology and renewable power BECCS offers, and expert voices at the UN’s Intergovernmental Panel on Climate Change, the UK’s Climate Change Committee, and Forum for the Future have said that carbon removals will be needed to address the climate crisis.

Today’s Strategy is a clear signal from Government that they recognise the importance of BECCS and the urgency with which we must employ it within the UK.

Why this is encouraging for Drax

Drax is an international, growing, sustainable business at the heart of global efforts to deliver Net Zero and energy security and I believe the Strategy we have seen from Government today is a clear indication of their support for the work that we do.

With BECCS, Drax has the ability to become a global leader in carbon removals technology. We are engaged in formal discussions with the UK Government about the project and, providing these are successful, we plan to invest billions in transforming Drax Power Station into the world’s largest carbon removals project. The prioritisation of BECCS within the Priority Use Framework shows the Government is aligned to this vision.

As we look forward

We welcome the Government’s Biomass Strategy and will continue to unpack what it means for our business over the coming days and weeks with a mind to our next steps.

Government must now ensure that as it progresses its consultation on biomass sustainability that that process is equally evidence-driven and ensures that science-based methods drive the policy forward. We hope to continue to work alongside Government to support these efforts.

Our formal discussions with the UK Government on BECCS and a ‘bridging mechanism’ to support the transition to BECCS have been productive, but to realise the scale of the ambition included in the Government’s Strategy, we need commitment through the delivery of a clear business model that supports BECCS.

Today’s support from Government brings us a big step closer and we look forward to continuing the work.

Will Gardiner
CEO
Drax

Read RNS here. 

Half year results for the six months ended 30 June 2023

27 July 2023

Financial News

RNS Number: 3301H
Drax Group plc
(“Drax” or the “Group”; Symbol:DRX)

Six months ended 30 June20232022
Key financial performance measures
Adjusted EBITDA (£ million)(1)(2)(excl. Electricity Generator Levy) (EGL)(3)453225
Adjusted EBITDA (£ million)(1)(2)(incl. EGL)417225
Net debt (£ million)(4)1,2741,116
Adjusted basic EPS (pence)(1)46.020.0
Dividend (pence per share)9.28.4
Total financial performance measures from continuing operations
Operating profit (£ million)392207
Profit before tax (£ million)338200

Will Gardiner, Drax Group CEO

Will Gardiner, CEO of Drax Group, said:

“In the first half of 2023, we delivered a strong system support and generation performance, providing dispatchable, renewable power for millions of UK homes and businesses. Drax Power Station remained the UK’s single largest provider of renewable energy by output during the period.

“We continue to focus on our role as the UK’s leading generator of flexible renewable power and our ambition to be a world leader in carbon removals. To that end, in the US, we have made good progress screening options for BECCS projects which can deliver long-term, large-scale carbon removal and attractive opportunities for growth.

“We are excited about the opportunity for BECCS in the UK and are in formal discussions with the UK Government to facilitate the transition to BECCS at Drax Power Station by 2030. Our plans could create thousands of new jobs in the Humber region, help the UK meet its carbon removals targets and support long-term energy security.”

Financial highlights – strong financial performance and returns to shareholders

  • Adjusted EBITDA (excl. EGL) of £453 million up 101% (H1 2022: £225 million)
    • Driven by system support services and dispatchable, renewable generation
  • Strong liquidity and balance sheet – £586 million of cash and committed facilities at 30 June 2023
    • Expect Net debt to Adjusted EBITDA (incl. EGL) to be significantly below 2 times target at the end of 2023
  • Sustainable and growing dividend – expected full year dividend up 10% to 23.1 p/share (2022: 21.0 p/share)
    • Interim dividend of 9.2 p/share (H1 2022: 8.4 p/share) – 40% of full year expectation
  • £150 million share buy-back programme ongoing(5)

2023 outlook

  • Full year expectations for Adjusted EBITDA and EGL unchanged and in line with analysts’ consensus estimates(6), inclusive of increased development expenditure on US BECCS
  • For the remainder of 2023 Drax will present Adjusted EBITDA including and excluding EGL

Progressing options for £7 billion of strategic growth opportunities 2024-2030, primarily BECCS

  • Ambition for the development of over 20Mt pa of carbon removals – 14Mt pa by 2030
    • New-build BECCS – two sites selected in US – targeting c.6Mt pa by 2030
    • Evaluating additional sites for greenfield and brownfield BECCS in US
    • Drax Power Station – targeting 8Mt pa by 2030
  • Targeting 8Mt pa of pellet production capacity and 4Mt pa of third-party sales by 2030
  • Targeting 600MW expansion of Cruachan Pumped Storage Power Station by 2030
    • Planning approval granted (July 2023)

UK BECCS

  • UK BECCS investment paused, subject to further clarity on support for BECCS at Drax Power Station
  • Formal discussions with UK Government – bridging mechanism between end of current renewable schemes in 2027 and BECCS

Operational review

Pellet Production – production and sales supporting UK generation, and sales to third parties

  • Adjusted EBITDA £48 million (H1 2022: £45 million)
  • Integrated supply chain model supports resilience and opportunities in a challenging market
    • Producer, user and seller of biomass pellets across multiple international markets
  • Production of 1.9Mt (H1 2022: 2.0Mt)
    • Unplanned outages, wind damage at Port of Baton Rouge and temporary suspension of production at one site due to wildfires, partially offset by production at the Demopolis plant
    • Ongoing disruption in H2 from wildfires and industrial action by Canadian transport workers in July
  • Increase in production cost (maintenance, labour, transport, energy and fibre costs) offset by revenue growth
  • Progressing development of new Longview pellet plant and Aliceville expansion
    • Investment of c.$300 million, operational 2025, 0.6Mt of new capacity
  • Third-party sales – heads of terms agreed for sale of 0.5Mt of biomass over five years to a Japanese customer

Generation – renewable generation and system support services

  • UK’s largest source of renewable power by output, primarily biomass generation at Drax Power Station
    • 9% of annualised UK renewables(7)
  • Adjusted EBITDA (excl. EGL) £457 million up 123% (H1 2022: £205 million)
    • Adjusted EBITDA (incl. EGL) £421 million up 106% (H1 2022: £205 million, £nil EGL)
  • Biomass generation – strong system support and renewable generation performance
    • Period-on-period reduction in generation
      • Maintenance – first major planned outage completed, second major planned outage in H2 2023 and forced outage on one unit due to a transformer issue – unit back in service
    • Higher achieved power price and value from system support
    • Higher biomass costs
  • Pumped storage and hydro – strong system support and generation performance
    • £154 million Adjusted EBITDA (excl. EGL) (H1 2022: £53 million)
    • Includes forward sale of peak power (winter 2022)
    • Increased level of wind capacity, intermittency and volatility underpin long-term need for dispatchable generation
  • Coal – no generation in 2023 – currently decommissioning following formal closure (March 2023)
  • As at 21 July 2023, Drax had 28.1TWh of power hedged between 2023 and 2025 on its ROC, pumped storage and hydro generation assets at an average price of £150.0/MWh(8)
    • Excludes sales under the CfD mechanism, which remains available subject to good ROC unit operational performance and market conditions
Contracted power sales 21 July 2023202320242025
Net ROC, hydro and gas (TWh(8/9/10))11.711.25.2
Average achieved £ per MWh162.7147.5126.2
Lower expected level of ROC generation in 2023 due to major planned outages on two units

Customers – renewable power sales to high-quality Industrial & Commercial (I&C) customers

  • Adjusted EBITDA of £37 million (H1 2022: £24 million) reflects continued improvement in I&C portfolio
    • 8.0TWh of power sales to I&C customers – c.16% increase compared to H1 2022 (6.9TWh)

Other financial information

Adjusted EBITDA and EGL

  • Accrued costs for EGL for the first time in H1 2023 and reported EGL within Adjusted EBITDA
    • H1 charge of £35 million
    • H2 charge expected to increase significantly reflecting higher achieved power price in H2
  • For the remainder of 2023 Drax will present Adjusted EBITDA including and excluding EGL

Profits

  • Total operating profit of £392 million (H1 2022: £207 million), including £85 million mark-to-market gain on derivative contracts
  • Total profit after tax of £247 million (H1 2022: £148 million profit after tax, including an £8 million non-cash charge from revaluing deferred tax balances) includes an increase in the headline rate of corporation tax in the UK from 19% to 25% from 1 April 2023
  • Depreciation and amortisation of £109 million (H1 2022: £121 million)

Capital investment

  • Capital investment of £210 million (H1 2022: £60 million) – primarily maintenance and development of OCGTs
  • 2023 expected capital investment of £520-580 million
    • Includes £120-140 million maintenance, including two major planned outages on biomass units; £30 million enhancements; £340-380 million strategic, including OCGT and pellet plant developments
    • OCGTs – c.900MW – three new-build sites in England and Wales, commissioning in 2024 – continuing to evaluate options for these projects, including their potential sale
    • Reduction in expected annual investment due to pause in investment in UK BECCS

Cash and interest

  • Group cost of debt c.4.6%
  • Cash generated from operations £404 million (H1 2022: £185 million)
  • Net debt of £1,274 million (31 December 2022: £1,206 million), including cash and cash equivalents of £125 million (31 December 2022: £238 million)

Capital allocation policy – unchanged

  • Continue to assess capital requirements in line with the current policy
    • Considerations include the timing of capital deployment, leverage profile, any dilution from share issuance and divestment of non-core assets