Tag: investors

AGM statement

25 April 2018

Investors

RNS Number : 0475M
Drax Group PLC

Drax holds its Annual General Meeting at 11:30am today at The Grand Hotel & Spa, Station Rise, York YO1 6GD. At this meeting Philip Cox CBE, Chairman of Drax Group, and Will Gardiner, Chief Executive Officer (CEO) of Drax Group, will make the following comments:

Philip Cox CBE, Chairman, said:

“2017 was an important year for the Group with the development of our strategy, a new dividend policy and the departure of Dorothy Thompson who announced her intention to stand down as CEO. I would like to thank Dorothy for her enormous contribution to the Group over the last 13 years.

Dorothy is succeeded by Will Gardiner, who was previously Group Chief Financial Officer (CFO) and a key architect of our strategy. His appointment follows a thorough review of internal and external candidates and is a natural progression after two years working alongside Dorothy developing our strategy, which remains clear and unchanged. I am confident this strategy will create significant benefits for all Drax’s stakeholders.”

Will Gardiner, CEO, said:

“I am very pleased to have taken over as CEO of the Drax Group. I have greatly enjoyed working alongside Dorothy Thompson for the past two years as CFO. Having worked closely with the Board and executive team, I know that I will be leading a great team. I have also worked closely on developing our strategy and I look forward to continuing to deliver it and taking advantage of the opportunities ahead.

In 2017 we made significant progress with the strategy we announced in December 2016. We completed the acquisition of Opus Energy – a leading challenger brand in the UK Small and Medium-sized Enterprise (SME) energy market; we acquired a third biomass pellet plant (LaSalle Bioenergy), which significantly increases our pellet production capacity; and we continued to develop options for flexible gas generation at four sites around the UK as well as the exploration of coal-to-gas repowering at Drax Power Station. To support our strategy, we completed a refinancing in May and announced a new dividend policy in June.

We have a major role to play in supporting the UK energy system, as it becomes increasingly ambitious in decarbonising. With confirmation of Government support for further biomass generation at Drax Power Station we are working on a fourth biomass unit conversion.

Through this flexible, low-carbon and customer-focused approach we aim to deliver higher quality earnings, with a reduction in commodity exposure alongside opportunities for growth.

Safety remains at the centre of our operational philosophy and we have performed well in this regard, although we continue to work to improve our performance across the Group. Biomass is a challenging fuel to manage. We work very hard to manage it carefully, but unfortunately, in December, we had a fire at Drax Power Station. It cost us several weeks of production but most importantly, no one was hurt. We are currently incorporating the lessons learned from that incident in our operations to ensure that we operate as safely as we can.

Our financial performance, which we measure with reference to EBITDA, was £229 million in 2017, significantly ahead of 2016 (£140 million).

This increase was principally from producing high levels of renewable power from sustainable biomass and growth in our Energy Supply and Pellet Production businesses. I am very pleased that all three of our businesses generated positive EBITDA⁽¹⁾ last year for the first time.

In June we announced a new dividend policy. This policy is to pay a dividend which is sustainable and expected to grow as the implementation of the strategy generates an increasing proportion of stable earnings and cash flows. In determining the rate of growth in dividends the Board will take account of contracted cash flows, the less predictable cash flows from the Group’s commodity based business and future investment opportunities. If there is a build-up of capital the Board will consider the most appropriate mechanism to return this to shareholders.

For 2017 we are recommending a total basic dividend of £50 million (12.3 pence per share) inclusive of a final dividend of £30 million, equivalent to 7.4 pence per share.

We are also currently undertaking a £50 million share buy-back programme. This is consistent with our capital allocation policy and commitment to returns to shareholders.

Sustainability remains at the heart of the business, both the specific sustainability of biomass and more broadly the long-term sustainability of the Group.

Biomass sustainability is in the financial and long-term interests of the business and we always strive to ensure all our pellets comply with our policy. It is fundamental to us that the biomass we use is sustainable and meets statutory requirements. We have a dedicated sustainability team whose role is to ensure the wood pellets we manufacture and use to generate electricity meet the requirements we have set ourselves in our Sustainability Policy and the criteria for sustainable biomass as established by the UK government.”

Philip Cox CBE, Chairman, added:

“The Board and its committees play an active role in guiding the Company and leading its strategy. We greatly value the contribution made by our Non-Executive Directors and during a time of transition their role is especially important.

The Board has been complemented by the appointment of two new Non-Executives. Firstly, David Nussbaum, whose in-depth knowledge of sustainability will support our continued focus in this area; and secondly, Nicola Hodson, whose experience in technology, business transformation and energy, will provide real value as the Group delivers its strategy.

As a Board, we are well aware that, to achieve our strategic objectives, our commitment to diversity is crucial and reducing our gender pay gap is an important part of this.

We must do more to attract, retain and progress women to ensure we’re an employer of choice for everyone who sees their future in energy. In this context, we are supportive of the goals of Hampton Alexander.

It only remains for me to say that your Board remains totally committed to the complementary aims of delivering sustainable long-term value for the Group, and of helping our country build a low-carbon economy.”

Enquires:

Investor Relations

Mark Strafford +44 (0) 1757 612491

Media

Ali Lewis +44 (0) 1757 612165

Website: www.drax.com

Notes:

EBITDA is defined as earnings before interest, tax, depreciation, amortisation and material one-off items that do not reflect the underlying trading performance of the business.
The principal performance indicators and operational achievements for 2017 which were “summarised on the screen” were as follows:

During 2017:

Total revenue – £3,685 million
(2016: £2,950 million)
- EBITDA – £229 million
  (2016: £140 million)
- Gross Profit – £545 million
  (2016: £376 million)
- Net debt – £367 million
  (2016: £93 million)
Total recordable injury rate – 0.27
(2016: 0.22)
Total dividend – 12.3p
(2016: 2.5p)
% of UK Renewable Electricity Generated – 15%
(2016: 16%)
Wood pellets produced – 822kt
(2016: 607kt)
Meter Points – 376k
(2016:41k)

Share Repurchase Programme

20 April 2018

Investors

RNS Number : 5390L
Drax Group PLC

Drax Group plc (the Company) today announces that it is commencing a £50 million share buy-back programme of the Company’s shares of 11 ¹⁶/₂₉ pence each (the Programme). The purpose of the Programme is to reduce the Company’s share capital. The shares purchased by the Company will be held in treasury pending cancellation or re-issue.

The maximum number of shares that may be repurchased by the Company under the Programme is 40,670,254. The Programme is expected to be completed no later than 21 January 2019.

The Company has entered into an agreement with J.P. Morgan Securities plc (JPMS plc) pursuant to which it has issued an irrevocable instruction to JPMS plc to manage the Programme. JPMS plc will carry out the Programme through the acquisition of ordinary shares in the Company within certain pre-defined parameters for subsequent repurchase by the Company. The arrangement agreed is in accordance with Chapter 12 of the UKLA Listing Rules and Article 5 of the Market Abuse Regulation 596/2014/EU dealing with buy-back programmes.

JPMS plc may undertake transactions in shares (which may include sales and hedging activities, in addition to purchases which may take place on any available trading venue or on an over the counter basis) in order to manage its market exposure under the Programme. Disclosure of such transactions will not be made by JPMS plc as a result of or as part of the Programme, but JPMS plc will continue to make any disclosures it is otherwise legally required to make.

Enquiries:

Investor Relations:

Mark Strafford

+44 (0) 1757 612 491

Media:

Ali Lewis

+44 (0) 1757 612 165

Website: www.drax.com

END

Europe’s kicking its coal habit

19 April 2018

Power generation

From Roman mines to the fuel behind the continent-wide industrial revolution, Europe has a long history with coal. But with reducing carbon and other greenhouse gas emissions, now firmly on the global agenda, Europe’s love for coal is rapidly declining.

Collectively, the EU aims for renewable sources to account for 20% of gross final energy consumption by 2020 and 27% by 2030. Countries in and outside the EU, as well as businesses and organisations, are setting ambitious targets to phase out coal as part of the UK and Canada-led Powering Past Coal Alliance, which Drax recently signed up to.

European Countries	Coal-free date (according to Europe Beyond Coal updated September 2020)
Austria 🇦🇹	2020
France 🇫🇷	2022
Portugal 🇵🇹	2023
UK 🇬🇧	2024
Ireland 🇮🇪 Italy 🇮🇹	2025
Greece 🇬🇷	2028
Finland 🇫🇮 Netherlands 🇳🇱	2029
Denmark 🇩🇰 Hungary 🇭🇺 Portugal 🇵🇹	2030
Germany 🇩🇪	2038
Czech Republic 🇨🇿 Spain 🇪🇸	Phase out under discussion
Bosnia Herzegovina🇧🇦 Bulgaria 🇧🇬 Croatia 🇭🇷 Kosovo🇽🇰Montenegro 🇲🇪 Poland 🇵🇱 Romania🇷🇴Serbia🇷🇸 Slovakia 🇸🇰Slovenia 🇸🇮 Spain 🇪🇸 Turkey 🇹🇷	No phase out date
Belgium 🇧🇪 Cyprus 🇨🇾 Estonia 🇪🇪 Iceland 🇮🇸 Latvia 🇱🇻 Lithuania 🇱🇹 Luxembourg 🇱🇺 Malta 🇲🇹 Norway 🇳🇴 Sweden 🇸🇪Switzerland 🇨🇭	No coal in electricity mix

This movement is not only being fuelled by an increased capacity in wind and solar generation, but also by other low-carbon energy sources enabling countries to kick their coal habits.

Aiming for 100% renewable

As myth after myth is dispelled about renewables, there are countries proving it is possible to power a modern developed nation entirely through renewable energy sources.

Up in the northern-most reaches of Europe, Iceland already generates all its electricity from renewable sources. This is split between 75% hydropower and 25% geothermal power. Geothermal not only offers a renewable source of electricity but also hot water for heating the volcanic island nation.

A geothermal power station steams on a cold day in Iceland

Hydropower is also a key contributor to Norway’s renewable ambitions. With more than 31 gigawatts (GW) of installed hydropower capacity, Norway is able to rely on it as a source of electricity and export its plentiful oil and natural gas reserves to countries still dependent on fossil fuels.

Many parts of Europe are well suited to hydropower, with reliable rainfall and the mountainous topography necessary to construct dams and power stations. Parts of Austria, Romania and Georgia also make substantial use of hydropower as a source of electricity.

Artificial Lake behind the Bicaz Dam at sunset, Romania

For countries without this access to large-scale hydropower, it’s the increased installation of renewables that holds the key to eliminating the need for coal.

Growing renewable generation

Last year saw electricity generation from renewable sources overtake that from coal for the first time thanks to continuous expansion of wind, solar and biomass capacity around the continent.

Between 2010 and 2017, generation from wind, solar and biomass installations in EU countries more than doubled from 302 terawatt hours (TWh) to 670 TWh, according to Eurostat, driven primarily by an increase in wind capacity. As a source of renewable electricity wind has already proved capable of generating major portions of a country’s demand –managing to meet 44% of Denmark’s overall demand in 2017. This was after previously producing a 40% electricity surplus one day for the country, allowing it to export the emission-free electricity to neighbours.

Wind turbines on the east coast of Sweden

Across the EU, generation from wind more than doubled from 150 TWh to 364 TWh from 2010 to last year, while solar generation grew five times from 23 TWh to 119 TWh and biomass jumped from 129 TWh to 196 TWh. By contrast, coal and lignite fell from 818 TWh to 669 TWh.

These renewable electricity sources, along with hydropower, now account for 30% of EU countries’ collective electricity generation. And while coal generation continues to drop, other low carbon energy sources, particularly nuclear, still play essential roles in many European energy systems.

From coal to low carbon

Sweden is one of the leaders in renewable electricity generation, setting 2040 as the date to move to totally renewable energy. However, while it currently counts 6.5 GW of wind capacity installed and has already exceeded its 2020 renewable generation goals, the country’s 10 nuclear reactors still make up 40% of its electricity output. Sweden aims to phase-nuclear out of its energy mix, but this will force it to import more power from neighbours to meet demand.

France is even more dependent, with nuclear making up 75% of its electricity production and earning more than €3 billion a year for the country in exports. It aims to reduce its nuclear generation to 50% with president Emmanuel Macron claiming continued nuclear generation offers “the most carbon-free way to produce electricity with renewables.”

Fessenheim Nuclear and Hydroelectric Power Plants in Alsace, France

As a reliable and low-carbon source of electricity, the most modern nuclear power stations add a certain amount of flexibility to grids enabling greater adoption of intermittent renewable sources. Across the EU nuclear made up a quarter of electricity generation in 2017.

Gas in the transition

Much more flexible than nuclear, gas plays an essential role in many countries. It accounted for 19% of electricity generation in the EU last year and produces around half the CO₂ and just one tenth of the air pollutants of coal. Gas turbines can begin generating electricity at full power in just 30 minutes from a cold start, or 10 minutes from warm standby, allowing it to plug any gaps in demand left by intermittent renewables. Its ability to provide many system services such as reserve power and frequency response will see it play an important transition role over the coming decades, until cleaner technologies are able to take over.

Artist’s impression of a Drax rapid-response gas power station (OCGT) with planning permission

Coal is not gone yet, making up 11% of EU’s electricity generation in 2017, but the momentum behind decarbonisation is keeping Europe on track to meet its ambitious emissions target and take the final step away from coal.

The Beast from the East

Iain Staffell, Imperial College London

18 April 2018

Opinion

Thursday 1 March was the coldest spring day on record, averaging –3.8°C. The six days from 26 February to 3 March (highlighted in blue) were the coldest Britain has been since Christmas 2010.

This pushed electricity demand up 10%, as people used more electric heating to keep warm. The evening peak demand on 1 March was the highest in three years, and so was not stretching the system to its limits.

Electricity prices rose to five times the average for the quarter. They peaked at £990 per megawatt hour (MWh) for half an hour, and also fell to –£150 per MWh as the market became volatile.

Coal generation surged for the weeks surrounding the cold spell. Not because more output from conventional plants was needed, but rising gas prices made it more economical to burn than gas. Total generation from fossil fuels remained around 20–25 GW.

Biomass and hydro ran solidly throughout the cold spell. Wind output was particularly high when it was most needed, ranging from 11.8 to 13.8 GW during 1 March. Whilst wind certainly helped, the lights would not have gone off without it, as up to 19 GW of spare gas capacity was available if needed.

Britain’s links to other countries were not so helpful. We exported to France through much of the cold spell. French electricity demand is more impacted by temperature than British, as more French homes use electric heating.

Looking in more detail at the UK’s links to other countries:

Britain had been largely importing from France all year, but then exported solidly through 27–28 February, when power prices were higher in France.
Prices remained lower in the Netherlands, so Britain continued importing from them.
Britain and Ireland traded power back and forth to help balance their systems. On 3 March the East-West link between North Wales and Dublin was taken offline for (unrelated) maintenance.

Download the PDF version

Read the press release

Explore this data live on the Electric Insights website

Commissioned by Drax, Electric Insights is produced independently by a team of academics from Imperial College London, led by Dr Iain Staffell and facilitated by the College’s consultancy company – Imperial Consultants.

The electric transport revolution

16 April 2018

Electrification

With rapid technological improvements and falls in battery prices, improving performance and reducing the cost, experts predict that by 2050, 90% of new-build cars will be powered by electricity.

However, it’s not only roads where transport is decarbonising; electricity may soon power more of the world’s trains, plus its planes and boats.

Taking trains forward

The electrification of the rail industry has arguably been in the making for a lot longer than EVs but there’s still progress to be made. Trains are already one of the most-efficient modes of long-distance transport, and Network Rail claims electric models’ carbon emissions are 20% to 35% lower than diesel trains. Electric trains also accelerate and brake faster than diesel-powered models, and cause less wear to tracks.

Electrified trains are already commonplace in many parts of the world – Japan’s famously fast and reliable Shinkansen railways are electric. Meanwhile in the UK, less than 50% of the rail network is electrified, with Transport Secretary Chris Grayling’s recent ‘pause’ on development casting doubts on previous ambitious plans to electrify 850-miles of track.

Nevertheless, advancements are still being made to enable the sector to utilise solar energy as an alternative to the national power grid. The concept would prove cost effective and reduce the carbon footprint of trains even further.

According to a report by climate change charity 10:10 and researchers at Imperial College’s Energy Futures Lab, rail companies could cut their annual running costs by millions of pounds through installing their own trackside solar panels to power electric trains directly. With companies spending around £500 million a year on power, the savings on self-generation would enable them to cut fares for passengers, as well as emissions.

Take off for electric planes

Of all transport modes, air travel has made the least progress in electrification but there’s hope yet. Airbus, Rolls-Royce and Siemens recently teamed up to develop the technology needed to create electrically-powered aircraft. The companies plan to fly a demonstrator aircraft with one of its existing jet engines replaced by an electric unit in 2020.

Paul Stein, chief technology officer at Rolls-Royce, said: “Aviation is the last frontier of the electrification of transport. It could lead to a step change in the way we fly with greater efficiency and less noise.”

These proposed hybrid-electric aircraft are not powered by on-board batteries like EVs but with a gas turbine that generates electricity to drive the propellers. This could reduce fuel consumption by up to 10%, predicted Mark Cousin, head of flight demonstration at Airbus.

Moving to electric aircraft would also help the aviation industry meet EU targets of a 60% reduction in emissions of carbon dioxide (CO₂) by 2020, as well as 90% less nitrogen oxides and a noise reduction of around 75%.

UK-based airline EasyJet also announced it could be flying electric planes within a decade and is teaming up with US firm Wright Electric to build battery-powered aircraft.

According to EasyJet, the move would enable battery-powered aeroplanes to travel short-haul routes such as London to Paris and Amsterdam, and Edinburgh to Bristol. Wright Electric is aiming for an aircraft range of 335 miles, which would cover the journeys of about a fifth of EasyJet passengers. The challenge comes in making lithium-ion batteries light and safe enough for the air.

The airline said this was the next step in making air travel less harmful for the environment, after cutting carbon emissions per passenger kilometre by 31% between 2000 and 2016. Wright Electric claims that electric planes will save up to 15% in fuel burn and CO₂ emissions, be 50% quieter and 10% cheaper for airlines to buy and operate, with the cost saving potentially passed on to passengers.

Testing new waters

There’s a lot of buzz coming out of the maritime industry too. Every year marine transport emits 1,000 million tonnes of CO₂, which is why the International Maritime Organization (IMO) has agreed that a reduction of 50% should come by 2050 compared with 2008 levels. Although the deal fell short of more ambitious targets preferred by those ranging from the European Union to environmental NGOs, the IMO did also commit to pursue efforts toward phasing out CO₂ emissions entirely.

As Paris Agreement goals to cut carbon dioxide emissions loom, businesses around the world are innovating.

Small fleets of battery-powered boats designed for fjords and inland waterways in Norway, Belgium and the Netherlands are preparing to set sail, including some able to run autonomously without a crew.

Dutch company Port-Liner is also gearing up to launch the first fully-electric, emission-free barges in Europe. Dubbed ‘Tesla’ ships, Port-Liner Chief Executive Officer Ton van Meegen claims these barges would be the first in the world to sail on carbon-neutral batteries. The first six barges alone are expected to remove 23,000 trucks from the roads annually in the Netherlands, replacing them with zero-emission methods of transport.

China also recently launched an electric cargo ship to haul coal which, whilst not doing much for its ambitions to cut pollution, will at least eliminate shipping emissions from diesel engines. Electric ships may not yet be the norm globally but progress is underway to cut the 2.5% of global greenhouse emissions that result from the maritime transport industry.

Once a far-flung fantasy in some areas, electrified transport is fast becoming a reality. EVs and rail are leading the way, but it’s clear the electric transport revolution has a long way to travel.

Annual report and accounts 2017 [PDF]

21 March 2018

Annual report

https://www.drax.com/wp-content/uploads/2018/03/Drax-Group-plc-2017-annual-report.pdf

Sustainability reporting 2017

Sustainable business

Sustainability information

Our Approach

Through our integrated value chain and flexible lower-carbon energy proposition … [Read more]

Achieve together with our people

We are nothing without our people and we take our commitment to provide a safe and healthy workplace … [Read more]

Deliver for our customers

We focus relentlessly on improving our service and developing stronger relationships with our customers … [Read more]

A lower-carbon company

We are committed to enabling a low-carbon future by moving away from coal … [Read more]

Responsible sourcing

Our commitment to sourcing natural resources responsibly is underpinned by our sustainability policy … [Read more]

Reduce our environmental impact

Our responsibility for the environment as a major power supplier goes beyond reducing carbon dioxide … [Read more]

Positive social impact

Our contribution to the community takes many forms, from our direct role in areas … [Read more]

Sustainability case studies

Building a sustainable business

The boundaries between users, suppliers and generators are blurring, writes CEO Will Gardiner … [Read more].

The sustainable development goals

Improved performance has guided our business purpose for over four decades … [Read more]

Commitment to the UNGC

Reporting on the 10 principles of the UN Global Compact … [Read more]

Drax Biomass invests in greenhouse gas efficiencies

Truck dumps, a new train line and use of sawmill residues are helping our own biomass producer … [Read more].

Gamlingay community turbine

Opus Energy works with thousands of renewable electricity generators. Find out more in this purchase power agreement … [Read more]

Partnering to build a Northern Powerhouse

We are passionate about supporting the economy of the North of England … [Read more]

Customer service excellence

Excellent customer service is at the heart of our business … [Read more]

Collaborating for biodiversity protection and enhancement

Drax is committed to protecting biodiversity and playing an active role in habitat enhancement … [Read more]

Drax Biomass creates value in the United States

In many US States, including those in which Drax Biomass operates, there is a system of local taxation … [Read more]

American Tree Farm

The oldest sustainable family woodland system in the US … [Read more]

People strategy

We continue to strengthen, develop and deliver our people strategy across the Group … [Read more]

Listening to local communities

We strive to make a positive impact on local communities to ensure we understand the potential impacts … [Read more]

The Sustainable Biomass Program

The Sustainable Biomass Program’s (SBP) vision is an economically, environmentally and socially sustainable … [Read more]

Working with our suppliers

Working with Pinewells, a supplier of sustainable wood pellets in Portugal … [Read more]

The Bettercoal initiative

Ensuring industry respects people’s rights and makes a positive contribution to the social and economic … [Read more]

Restoring Brickmakers’ Wood

Haven Power employees have worked with the Eden-Rose Coppice Trust to help transform a woodland … [Read more]

Chairman’s statement

Philip Cox, Chairman, Drax Group

Annual report

In 2017 we made significant progress with the strategy we announced in December 2016.

First, we completed the acquisition of Opus Energy – a leading challenger brand in the UK Small and Medium-sized Enterprise (SME) energy market; second, we acquired a third biomass pellet plant (LaSalle Bioenergy), which significantly increases our pellet production capacity; and third, we continued to develop options for flexible gas generation at four sites around the UK.

We also began developing longer-term options for growth, with the exploration of coal-to-gas repowering at Drax Power Station, as we look to provide new sources of flexible generation backed up by long-term capacity contracts. To support our strategy, we completed a refinancing in May and announced a new dividend policy in June.

At the same time, we have continued to provide a significant amount of the UK’s renewable electricity. With confirmation of Government support for further biomass generation at Drax Power Station we plan to continue our work to develop a low-cost solution for a fourth biomass unit conversion, allowing us to provide even more renewable electricity, whilst supporting system stability at minimum cost to the consumer.

Opus Energy performed well, delivering on the plans we set out at the time of acquisition and, in North America, LaSalle Bioenergy is successfully commissioning. This performance alongside safety, sustainability and expertise in our core markets acts as a strong base from which the business can grow and deliver long-term sustainable value.

We have a major role to play in supporting the UK energy system, as it becomes increasingly ambitious in decarbonising, first the electricity sector and subsequently transport and heating. In doing so, through our flexible, low-carbon and customer- focused approach we aim to deliver higher quality earnings, with a reduction in commodity exposure alongside opportunities for growth.

Our people – employees and contractors – remain a key asset of the business. Their safety remains at the centre of our operational philosophy and we have performed well in this regard, although we continue to work to improve our performance across the Group.

Results and dividend

EBITDA in 2017 of £229 million was significantly ahead of 2016 (£140 million).

This increase was principally from producing high levels of renewable power from sustainable biomass. We also benefited from our growing B2B Energy Supply and Pellet Production businesses. Through these activities we are improving the visibility of our earnings.

At the 2017 half year results we confirmed an interim dividend of £20 million (4.9 pence per share) representing 40% of the full year expected dividend of £50 million (12.3 pence per share) (2016: £10 million, 2.5 pence per share). Accordingly, the Board proposes to pay a final dividend in respect of 2017 of £30 million, equivalent to 7.4 pence per share. In addition, the Board has decided to announce a £50 million share buy-back programme, which will take place during 2018, which is consistent with our capital allocation policy.

Corporate governance

In September, Dorothy Thompson CBE announced her intention to stand down as Group Chief Executive Officer (CEO). I would like to thank Dorothy for her enormous contribution to the Group over the last 13 years. During her tenure Dorothy led the transformation of the business and leaves the Group in a strong position with a clear strategy that lays the foundations for further success in a changing energy sector.

Dorothy is succeeded by Will Gardiner, who was previously Group Chief Financial Officer (CFO) and a key architect of the strategy. His appointment follows a thorough review of internal and external candidates and is a natural progression after two years working alongside Dorothy developing a strategy which I am confident will create significant benefits for all Drax’s stakeholders.

A process to appoint a permanent CFO is underway and Den Jones has been appointed as Interim CFO. Den is highly experienced, having previously served as CFO of both Johnson Matthey and BG Group. Drax remains committed to the highest standards of corporate governance. The Board and its committees play an active role in guiding the Company and leading its strategy. We greatly value the contribution made by our Non-Executive Directors (NEDs) and during a time of transition their role is especially important.

We indicated last year that we were seeking additional NEDs with experience in sustainability and energy supply to complement our already experienced Board. I am therefore delighted to welcome two new NEDs to the Drax Board. Firstly, David Nussbaum, whose in-depth knowledge of sustainability will support our continued focus in this area; and secondly, Nicola Hodson, whose experience in technology, business transformation and energy, will provide real value as the Group delivers its strategy.

Sustainability remains at the heart of the business, both the specific sustainability of biomass and more broadly the long-term sustainability of the business. As such I am pleased to note that alongside this year’s annual report and accounts the Group has published a comprehensive overview of our sustainability progress in 2017 on our website.

Full details of our corporate governance can be found on page 64 of the 2017 annual report.

Our people

As the Group grows I would also like to welcome colleagues from Opus Energy and our other developments. On-boarding is proceeding well and by working together in our common goal to help change the way energy is generated, supplied and used, we are creating real value for all stakeholders.

I must thank all the employees and contractors who have worked so hard to help the Group succeed in the last 12 months. It is through their skill, expertise and hard work that we are able to deliver our strategy for the business.

My sincere thanks to colleagues for their commitment and hard work.

Read the Drax Group plc annual report and accounts 2017

Chief Executive’s review

Will Gardiner, Chief Executive Officer, Drax Group

Annual report

Market background

The UK is undergoing an energy revolution – a transition to a low-carbon economy requiring new energy solutions for power generation, heating, transport and the wider economy. Through our flexible, lower carbon electricity proposition and business to business (B2B) energy solutions, the Group is positioning itself for growth in this environment. More details can be seen on page 4 of our annual report.

Our strategy

Our purpose is to help change the way energy is generated, supplied and used.

Through addressing UK energy needs, and those of our customers, our strategy is designed to deliver growing earnings and cash flow, alongside significant cash returns for shareholders.

Our ambition is to grow our EBITDA to over £425 million by 2025, with over a third of those earnings coming from Pellet Production and B2B Energy Supply to create a broader, more balanced earnings profile. We intend to pay a sustainable and growing dividend to shareholders. Progression towards these targets is underpinned by safety, sustainability, operational excellence and expertise in our markets.

Summary of 2017

We made significant progress during 2017, but were below our expectations on the challenging scorecard targets we set ourselves in pellet production and biomass availability, the latter reflecting the significant incident we experienced on our biomass rail unloading facilities at the end of 2017, which extended into January 2018. Energy Supply performed well with Opus Energy in line with plan and Haven Power exceeding its targets. Through a combination of this performance and the progress of our strategy we have delivered EBITDA of £229 million, significantly ahead of 2016 (£140 million) and with each of our three businesses contributing positive EBITDA for the first time.

The Group scorecard is reported in full in the Remuneration Report (pp. 81-107 of our annual report) and the KPIs are also shown below. They reflect the diversity of our operations and our need to maintain clear focus on delivering operational excellence.

On a statutory basis we recorded a loss of £151 million, which reflects unrealised losses on derivative contracts, previously announced accounting policy on the accelerated depreciation on coal-specific assets as well as amortisation of newly- acquired intangible assets in Opus Energy. We also calculate underlying earnings, a profit after tax of £2.7 million, which excludes the effect of unrealised gains and losses on derivative contracts and, to assess the performance of the Group without the income statement volatility introduced by non-cash fair value adjustments on our portfolio of forward commodity and currency futures contracts.

During the year we refinanced our existing debt facilities, reducing our debt cost. We also confirmed a new dividend policy which will pay a sustainable and growing dividend (£50 million in respect of 2017), consistent with our commitment to a strong balance sheet and our ambitions for growth. At year end our net debt was £91 million below our 2x net debt to EBITDA target, providing additional headroom. There is more detail on our financial performance in the Group Financial Review on page 46 of our annual report.

In the US, our Pellet Production operations recorded year-on-year growth in output of 35%, with our first two plants now producing at full capacity. During the second half of 2017 we also completed the installation of additional capacity enabling our Morehouse and Amite facilities to handle a greater amount of residue material, supporting efforts to produce good quality pellets at the lowest cost.

As part of our target to expand our biomass self-supply capability we completed the acquisition of LaSalle Bioenergy (LaSalle) adding pellet production capacity. LaSalle commenced commissioning in November 2017 and due to its close proximity to our existing US facilities, once complete, will provide further opportunities for supply chain optimisation.

As in 2016, we benefited from the flexibility of self-supply. This often overlooked attribute of our supply chain enables us to manage biomass supply across the Power Generation business’ planned outage season and to benefit from attractively priced biomass cargoes in the short-term spot market.

In Power Generation, we experienced a significant incident on our biomass rail unloading facilities, including a small fire on a section of conveyor. We fully investigated the incident and following repairs over the Christmas period have now recommissioned the facility, with enhanced operating procedures. This is a timely reminder of the combustible nature of biomass and the need for strong controls and processes to protect our people and assets.

Our biomass units continued to produce high levels of renewable electricity from sustainable wood pellets for the UK market – Drax produced 15% of the UK’s renewable electricity – enough to power Sheffield, Leeds, Liverpool and Manchester combined. In doing so, we are making a vital contribution to the UK’s ambitious targets for decarbonisation across electricity generation, heating and transport – an 80% reduction by 2050 vs. 1990 levels.

We benefited from the first year of operation of our third biomass unit under the Contract for Difference (CfD) scheme which provides an index-linked price for the power produced until March 2027. The unit underwent a major planned outage between September and November, with a full programme of works successfully completed.

The flexibility, reliability and scale of our renewable generation, alongside an attractive total system cost, means we are strongly placed to play a long-term role in the UK’s energy mix. To that end we continue to see long-term biomass generation as a key enabler, allowing the UK Government to meet its decarbonisation targets and the system operator to manage the grid.

The UK Government recently confirmed support for further biomass generation at Drax Power Station and we now plan to continue our work to develop a low-cost solution for a fourth biomass unit, allowing us to provide even more renewable electricity, whilst supporting system stability at minimum cost to the consumer.

Our heritage is coal, but our future is flexible lower-carbon electricity. We are making progress with the development of four new standalone OCGT plants situated in eastern England and Wales and our work to develop options for coal-to-gas repowering with battery technologies. If these options would be supported by 15-year capacity market contracts, providing a clear investment signal and extending visibility of contract-based earnings out to the late 2030s.

In B2B Energy Supply, we completed the acquisition of Opus Energy, a supplier of electricity and gas to corporates and small businesses. The transaction completed in February 2017 and Opus Energy has continued to operate successfully within the Group, achieving its targets and making an immediate and significant contribution to profitability. Alongside this good performance we have also implemented the operational steps necessary to realise further operational benefits of the acquisition, and we now source all of Opus’ power and gas internally.

Haven Power delivered a strong performance with the sale of large volumes of electricity to industrial customers. Through our customer focus and efficiencies, margins have improved and the business generated a positive EBITDA for the first time.

Together, our B2B Energy Supply business now has over 375,000 customer meters, making it the fifth largest B2B power supplier in the UK.

We are delivering innovative low-carbon power solutions, with 46% of our energy sold from renewable sources. As the power system transforms, we will be working closely with our customers to help them adapt to a world of more decentralised and decarbonised power. We see this as a significant opportunity for the Group in the medium to long term.

In October 2017 we completed the sale of Billington Bioenergy (BBE) to Aggregated Micro Power Holding (AMPH). Consideration for the transaction was £2.3 million, comprised of £1.6 million of shares in AMPH and £0.7 million of cash.

The sale of BBE is aligned with our strategy to focus on B2B energy supply. However, through our shareholding in AMPH, we will retain an interest in the UK heating market, whilst gaining exposure to the development of small-scale distributed energy assets.

Political, regulatory and economic background

We continue to operate in a changing environment. The full impact of the UK’s decision to leave the EU is still unknown.

The immediate impact on the Group was a weakening of Sterling and an associated increase in the cost of biomass, which is generally denominated in other currencies. Through our utilisation of medium-term foreign exchange hedges the Group protected the cash impact of this weakness. In 2017, Sterling has generally strengthened, and we have been able to extend our hedged position out to 2022 at rates close to those that we saw before Brexit.

In terms of UK energy policy, the Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. SVT are not a common feature of the B2B market. At the microbusiness end of this market, which is closer in size to domestic, most of our customers are on fixed price products and are active in renewing contracts.

The UK Government’s response to its consultation on the cessation of coal generation by 2025 has confirmed an end to non-compliant coal generation by October 2025.

We believe our assets, projects and ability to support our customers’ electricity management will support the Government’s ambition to maintain reliability when coal generation ceases.

Running a resilient, reliable grid is not simply about meeting the power demand on the system; there are also system support services which are essential to its effective operation. As the grid decentralises and becomes dependent on smaller, distributed generation, the number of plants able to provide these services is reducing. Biomass generation, our proposed OCGTs and our repowering project would allow us to meet these needs, but this will not come for free. A reliable, flexible, low-carbon energy system will require the right long-term incentives.

In November 2017, the Government confirmed that the UK will maintain a total carbon price (the combined UK Carbon Price Support – CPS – and the European Union Emissions Trading Scheme – EU ETS) at around the current level. CPS has been the single most effective instrument in reducing the level of carbon emissions in generation and we continue to support the pricing of carbon, a view echoed in a report prepared for the UK Government by the leading academic Professor Dieter Helm.

Against this backdrop we continue to make an important contribution to the UK economy. According to a study published by Oxford Economics in 2016, Drax’s total economic impact – including our supply chain and the wages our employees and suppliers’ employees spend in the wider consumer-economy was £1.7 billion, supporting 18,500 jobs across the UK.

Safety, sustainability and people

The health, safety and wellbeing of our employees and contractors is vital to the Group, with safety at the centre of our operational philosophy. We also recognise the growing need to support the wellbeing of our employees and their mental health.

During the year we continued to use Total Recordable Injury Rate (TRIR) as our primary KPI in this area. Performance was positive, at 0.27, but we expect this to improve in the coming year.

The incident at our biomass rail unloading facilities in December did not lead to physical injuries but was nonetheless a significant event and caused disruption into 2018.

We consequently launched an incident investigation to ensure our personal and process safety management procedures are robust.

To promote greater awareness around wellbeing we have embedded this in our new people strategy and expect to focus more energy and resources on this important area during 2018.

Strong corporate governance is at the heart of the Group – acting responsibly, doing the right thing and being transparent. As the Group grows the range of sustainability issues we face is widening and recognising the importance of strong corporate governance, we have published a comprehensive overview of our sustainability progress in 2017 on our website. This also highlights future priorities to broaden our approach to sustainability and improved reporting of environment, social and governance (ESG) performance. We have also completed the process which allows us to participate in the UN Global Compact (UNGC) – an international framework which will guide our approach in the areas of human rights, labour, environment and anti-corruption.

During 2017 we published our first statement on the prevention of slavery and human trafficking in compliance with the UK Modern Slavery Act. We have added modern slavery awareness to our programme of regular training for contract managers and reviewed our counterparty due diligence processes.

We have continued to maintain our rigorous and robust approach to biomass sustainability, ensuring the wood pellets we use are sustainable, low-carbon and fully compliant with the UK’s mandatory sustainability standards for biomass. The biomass we use to generate electricity provides a 64% carbon emissions saving against gas, inclusive of supply chain emissions. Our biomass lifecycle carbon emissions are 36g CO₂ / MJ, less than half the UK Government’s 79g CO₂ / MJ limit.

Our people are a key asset of the business. Through 2017 we developed a new people strategy. The strategy focuses on driving performance and developing talent to deliver the Group’s objectives. We have established Group-wide practices, including a career development and behaviour framework focused on performance and personal development.

Research and innovation

A key part of our strategy is to identify opportunities to improve existing operations and create options for long-term growth. To that end we have established a dedicated Research and Innovation (R&I) team led by the Drax engineers who delivered our world-first biomass generation and supply chain solution.

We are actively looking at ways to improve the efficiency of our operations, notably in our biomass supply chain.

Biomass is our largest single cost and as such we are focused on greater supply chain efficiency and the extraction of value from a wide range of low-value residue materials.

In B2B Energy Supply we are using our engineering expertise to help offer our customers value-adding services and products which will improve efficiency and allow them to optimise their energy consumption.

In the following sections we review the performance of our businesses during the year.

Performance review: Pellet Production

Our pellets provide a sustainable, low-carbon fuel source – one that can be safely and efficiently delivered through our global supply chain and used by Drax’s Power Generation business to make renewable electricity for the UK. Our manufacturing operations also promote forest health by incentivising local landowners to actively manage and reinvest in their forests.

Operational review

Safety remains our primary concern and we have delivered year-on-year reduction in the level of recordable incidents.

Output at our Amite and Morehouse pellet plants increased significantly, although was below our target for the year.

We have remained focused on opportunities to improve efficiencies and capture cost savings as part of our drive to produce good quality pellets at the lowest possible cost. We still have more work to do in this area to optimise quality and cost, as our performance was below target for the year.

As part of our plans to optimise and improve operations we added 150k tonnes capacity at our existing plants, bringing total installed capacity to 1.1 million tonnes and increasing the amount of lower cost sawmill residues we are able to process and used in our pellets.

CASE STUDY

Low-cost, high-impact capacity increase

By-products of higher value wood industries, such as sawdust from sawmills, offer a low-cost source of residues for use in our pellet production process and during 2017 we added an additional 150k tonnes of capacity at our pellet plants to allow us to use more of this material. By investing in giant hydraulic platforms known as ‘truck dumps’, operators at Amite and Morehouse can unload a 50-foot truck carrying either sawdust or wood chips and weighing 60 tonnes in less than two minutes, increasing processing capacity, reducing the cost of processing and increasing the use of lower cost residues.

Find out more: www.drax.com/truckdumps and www.drax.com/sustainability/sourcing

At our Baton Rouge port facility greater volumes of production from our facilities drove higher levels of throughput with 17 vessels loaded and dispatched during the year (2016: 11 vessels).

In April, in line with our strategy to increase self-supply, we acquired a 450k tonne wood pellet plant – LaSalle Bioenergy (LaSalle). Commissioning of the plant began in November 2017 and we expect to increase production through 2018. LaSalle is within a 200-mile radius of our existing facilities. By leveraging the locational benefits of these assets we aim to deliver further operational and financial efficiencies.

CASE STUDY

Locational benefits of Gulf cluster

The location of our operations allows us to leverage benefits of multiple assets and locations for operational efficiencies

All sites within 200-mile radius

Operational efficiencies

Common plant and joint strategic spare parts
Maximise reliability, minimise capital outlay
Flexibility through outage cycle
Human capital

Shared logistics to Baton Rouge

Rail and road
Increased port throughput

Complementary fibre sourcing

Optimisation of supply between plants

Find out more: www.draxbiomass.com

Financial results

There was a significant improvement in 2017, with EBITDA of £5.5 million (2016: £6.3 million negative EBITDA), driven by increasing volumes of wood pellets produced and sold to the Power Generation business. Sales of pellets in the year ending 31 December 2017 totalled £136 million, an increase of 84% over 2016.

Gross margin increased, reflecting higher production volumes. Raw fibre procurement, transportation and processing comprised the majority of cost of sales and as such this remains an important area of focus and an opportunity for the business. Through incremental investment in plant enhancements we expect to see further benefits from efficiencies and greater utilisation of lower cost residues.

Total operating costs have increased, reflecting an increase in operations at Amite, Morehouse and the Port of Baton Rouge, alongside the addition of LaSalle.

We acquired LaSalle for $35 million and have invested an additional $27 million as part of a programme to return the unit to service.

Pellet Production financial performance

	2017 £m	2016 £m
Revenue	135.7	73.6
Cost of sales	(96.7)	(55.5)
Gross profit	39.0	18.1
Operating costs	(33.5)	(24.4)
EBITDA	5.5	(6.3)

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Fines at disport	%	9.6	7.6
Operations	Output	,000 tonnes	822	607
Financial	Variable cost/tonne	$/tonne	77	82

Looking ahead

Through 2018 we expect to continue to deliver growth in EBITDA from our existing assets. Our focus is on the commissioning of LaSalle alongside opportunities for optimisation and efficiencies in our processes, to deliver good quality pellets at the lowest cost.

We remain alert to market opportunities to develop further capacity as part of our self-supply strategy.

Performance review: Power Generation

Drax Power Station remains the largest power station in the UK (almost twice the size of the next largest). During the year the station met 6% of the UK’s electricity needs, whilst providing 15% of its renewable electricity, alongside important system support services.

With an increase in intermittent renewables and a reduction in the responsive thermal generation historically provided by coal, the system of the future will require capacity which is reliable, flexible and able to respond quickly to changes in system demand and provide system support services. These long-term needs inform our biomass generation and the development of options for investment in gas – Open Cycle Gas Turbines (OCGTs) and coal-to-gas repowering.

STRATEGY IN PROGRESS

Gas power station development

We are developing options for four new OCGT gas power stations, two of which already have planning permission and could be on the system in the early 2020s, subject to being awarded a capacity agreement.

A high-tech new control room at Drax Power Station will allow engineers to have real time remote control of our OCGT assets via a fibre-optic cable network. Able to fire up from cold and produce power in minutes rather than hours, our OCGTs will help maintain system security as intermittent renewable sources of power increase and older thermal plants close.

Investment case

Option to develop 1.2GW of new OCGT gas
Investment decisions subject to 15-year capacity agreement
Multiple revenue streams, with high visibility from capacity contract
Low capital and operating cost
Attractive return on capital
Broader generation asset base and location

Find out more: www.drax.com/about-us/#our-projects

Regulatory framework

In October the Government published its Clean Growth Plan, setting out its plans for delivery of its legally binding target to reduce 2050 carbon emissions by 80% versus 1990 levels across electricity generation, heating and transport. This reinforces the Drax proposition – flexible, reliable, low-carbon electricity.

In November the Government updated its intentions regarding the future trajectory of UK Carbon Price Support (CPS), indicating that the total cost of carbon tax in the UK (the total of CPS and the EU Emissions Trading Scheme) would continue at around the current level (the tax is currently set at £18/tonne) whilst coal remains on the system.

We believe that CPS has been the single most effective instrument in reducing carbon emissions from generation and that having an appropriate price for carbon emissions is the right way to provide a market signal to further reduce emissions in support of the UK’s long-term decarbonisation targets.

The UK Government has now confirmed an end to non-compliant coal generation by 2025. We support this move subject to an appropriate alternative technology being in place. With this in mind we have continued to develop options for our remaining coal assets to convert to biomass or gas, to provide the reliable, flexible capacity which we believe will be required to manage the increasingly volatile energy system of the future.

Most recently with confirmation of Government support for further biomass generation at Drax Power Station we plan to continue our work to develop a low-cost solution for a fourth biomass unit, accelerating the removal of coal-fired generation from the UK electricity system, whilst supporting security of supply.

Generation capacity and system support

2017 saw the first full year of operation of our biomass unit under the Contract for Difference (CfD) mechanism, which provides index-linked revenues for renewable electricity out to 2027.

Our other biomass units are supported by the Renewable Obligation Certificate (ROC) mechanism which, similar to the CfD, is also index-linked to 2027. This acts as a premium above the price of power we sell from these units. We sell power forward to the extent there is liquidity in the power markets which, combined with our fuel hedging strategy, provides long-term earnings and revenue visibility.

Lower gas prices, higher carbon costs and the continued penetration of intermittent renewables have kept wholesale electricity prices subdued.

With increasing levels of intermittent renewables we are continuing to see opportunities to extract value from flexibility – short-term power and balancing market activity, the provision of Ancillary Services and the value achieved from out-of-specification fuels. To capture value in this market we continue to focus resource on optimising availability and flexibility of both coal and biomass units. This whole process requires a high level of teamwork between the operational and commercial teams across the Group to capture and protect value.

Over the period 2017 to 2022 we expect to earn £90 million from a series of one-year capacity market contracts for our coal units, demonstrating that they still have a role to play. The first of these contracts commenced in October 2017, adding £3 million to EBITDA.

Lastly, we continue to source attractively priced fuel cargoes – out-of-specification coals and distressed cargoes, which help keep costs down for the business and consumers. We do this for both coal and biomass. This is a good example of how our commercial and operational teams work together to identify opportunities to create value for the business, as these fuels typically require more complex handling processes.

You can follow the market and see prices at electricinsights.co.uk

STRATEGY IN PROGRESS

Repowering away from coal

Options for Drax Power Station to operate into the late 2030s and beyond moved up a gear in 2017 with the development of an option to repower two coal units to gas. Drax gave notice of the nationally significant infrastructure project to the Planning Inspectorate in September 2017. One of the units could be eligible for the capacity market auction planned for December 2019.

Local community consultations began in November 2017 and continued in February 2018 on options including up to 3.6GW of new gas generation capacity, a gas pipeline and 200MW of battery storage in line with Government plans to end non-compliant coal generation by 2025 and Drax Group’s strategy of playing a vital role in the future energy system.

Find out more: repower.drax.com