Tag: electricity generation

What causes power cuts?

16 January 2019

Power generation

On the night of 5 December 2015, 61,000 homes and properties across Lancaster were plunged into darkness. Storm Desmond had unleashed torrents of rain on Great Britain, causing rivers to swell and spill over. With waters rising to unprecedented levels, the River Lune began threatening to flood Lancaster’s main electricity substation, the facility where transformers ‘step down’ electricity’s voltage from the transmission system so it can be distributed safely around the local area.

To prevent unrepairable damage, the decision was taken to switch the substation off, cutting all power across the region. Lights, phones, internet connections and ATMs all went dead across the city. It would take three days of intensive work before power was restored.

It was a bigger power outage than most, but it offers a unique glimpse into the mechanisms behind a blackout – not only how they’re dealt with, but how they’re caused.

What causes blackouts in Great Britain?

When the lights go out, a common thought is that the country has ‘run out’ of electricity. However, a lack of electricity generation is almost never the cause of outages. Only during the miners’ strikes of 1972 were major power cuts the result of lack of electricity production.

Rather than meeting electricity demand, power cuts in Great Britain are more often the result of disruption to the transmission system, caused by unpredictable weather. If trees or piles of snow bring down one power line, the load of electric current shifts to other lines. If this sudden jump in load is too much for the other lines they automatically trip offline to prevent damage to the equipment. This in turn shifts the load on to other lines which also then trip, potentially causing cascading outages across the network.

Last March’s ‘Beast from the East’, which brought six days of near sub-zero temperatures, deep snow and high winds to Great Britain, is an example of extreme weather cutting electricity to as many as 18,000 people.

High-winds brought trees and branches down onto powerlines, while ice and snow impacted the millions of components that make up the electricity system. Engineering teams had to fight the elements and make the repairs needed to get electricity flowing again.

Lancaster was different, however. With the slow creep of rising rainwater approaching the substation, the threat of long lasting damage was plain to see in advance, and so rather than waiting for it to auto-trip, authorities chose to manually shut it down.

Getting reconnected

Electricity North West is Lancaster’s network operator and after shutting down the substation, it began the intensive job of trying to restore power. On Monday 7 December, two days after the storm hit, the first step of pumping the flooded substation empty of water had finally been completed and the task of reconnecting it began.

To begin restoring power to the region 75 large mobile generators were brought from as far away as the West Country and Northern Ireland and hooked up to the substation, allowing 22,000 customers to be reconnected.

Once partial power was restored, the next challenge lay in repairing and reconnecting the substation to the transmission network. While shutting the facility had prevented catastrophic damage, some of the crucial pieces had to be completely replaced or rebuilt. After three days of intensive engineering work the remaining 40,000 properties that had lost power were reconnected.

Preventing blackouts in a changing system

The cause and scale of Lancaster’s outage were unusual for Great Britain’s electricity system but it does highlight how quickly a power cut may arise. In a time of transition, when the grid is decarbonising and the network is facing more extreme weather conditions because of climate change, it could create even more, new challenges.

Coal is scheduled to be taken entirely off the system after 2025, making the country more reliant on weather-dependent sources, such as wind and solar – potentially increasing the volatility of the system.

On the other hand, growing decentralised electricity generation may reduce the number of individual buildings affected by outages in the future. Solar generation and storage systems present on domestic and commercial property may also reduce dependency on local transmission systems and the impact of disruptions to it.

The cables and poles that connect the transmission system will always be vulnerable to faults and disruptions. However, by preparing for the future grid Great Britain can reduce the impact of storms on the electricity system.

If you’re experiencing a power cut in your area, please call the toll-free number 105 (in England, Scotland and Wales) to reach your local network operator.

The inside of a cooling tower looks like no place on earth

29 November 2018

Power generation

The silhouette of cooling towers on the horizon is one of the most recognisable symbols of electricity generation around the world. But inside these massive structures is an environment unlike any other.

When cooling towers are in operation, torrents of warm water cascade down to a huge pond at its base, the air cooling it as it falls. Plumes of water vapour rise through the structure and into the air.

But when shut down – for maintenance, for example – the inside of a cooling tower is a very different place. The vast emptiness of the space can be eerily silent. Even the smallest noise echoes around its concrete shell.

Standing at over 114 metres high, each of Drax’s 12 cooling towers are 86 metres in diameter at their base, 53 metres at their summit, and could comfortably fit the Statue of Liberty inside. Everything about them is huge, but they are not the unsophisticated masses of concrete they appear from afar.

“Look at a cooling tower and you might think it’s a substantial, thick structure. It’s not,” explains Nick Smith, a civil engineer at Drax. “It’s basically like an egg shell. It is the shape that gives it its strength.” For the majority of their height, a typical cooling tower is between just 178 and 180 mm – or 7 inches – thick.

It’s a testament to the original design and construction that they require such limited maintenance more than half a century after plans were first drawn up. Especially considering they are in daily use.

What does a cooling tower do?

Water is an essential part of thermal electricity generation. It is turned into high-pressure steam in the extreme temperatures of a boiler before being used to spin turbines and generate electricity. Water within the boiler is ‘de-mineralised’ and purified to prevent damage to the turbine blades and infrastructure.

Once it leaves the turbine, the steam is cooled to pure water again in the condenser so it can be reused in the boiler. To do this the steam is passed over pipes containing cold water from the cooling towers, which cools and condenses the steam while also heating up the cold water to roughly 40 degrees Celsius, the temperature it is at when it enters the cooling tower.

Inside the towers the warm water is poured over what’s known as the cooling tower pack, a series of stacks of corrugated plastic that sit roughly 30 metres up the tower. The heat and the tower’s height create a natural draught. This pulls air in from the cavities at the base of the tower – called the throat – which cools the water to around 20°C as it cascades down the stack into a pond below. It is then returned to the condenser where the cooling cycle starts all over again.

Only around 2% of the water escapes through the top of the cooling towers as water vapour – which is what can be seen exiting the top of the towers – with a further 1% returned to the River Ouse to control water levels. These small losses are replenished with water taken from the Ouse. It highlights the genius of the towers’ design that their shape alone can cool water so efficiently on an industrial scale with minimal environmental impact.

A lasting design

A cooling tower’s iconic shape is known as a hyperboloid, referring to its inward curve. This makes them very stable, but to make them strong enough to last as long as they have, Drax’s cooling towers have the added assistance of reinforced concrete.

“Concrete is very strong in compression, but it has hardly any tensile strength,” says Smith. “Therefore our cooling towers have both vertical and horizontal hoop reinforcement to take any tensile forces generated. It is the concrete and steel working together that gives the reinforced concrete its strength.”

The level of design and engineering of Drax’s cooling towers are all the more impressive considering their age. “The construction of our first tower was completed in 1970 and designed in the mid 1960s,” says Smith, pointing out, “they were designed at a time where there wasn’t huge computing processing power, so they would likely have been designed by hand.”

“They were constructed to a very high degree of accuracy even when a lot of the equipment used would have been manual,” he adds.

Designing and building a cooling tower today, he adds, would require significant computing power and sophisticated setting-out equipment to ensure the accuracy of the construction. However, the underlying principles of the towers’ shape and how well they have continued to perform since their construction would give little reason to deviate from the current design.

In fact, that consistent performance means that even as the nature of generating electricity develops to include new fuels and technologies, cooling towers remain an integral part of the process. Drax’s Repower project– which could see the conversion of the plant’s remaining coal units to gas and the installation of a giant battery facility – is a significant step forward in the evolution of power generation, yet the design and purpose of the cooling towers would remain the same.

The structures that will shape the landscape of the future of electricity generation may include wind turbines, biomass domes and solar panels. But the enduring functionality of natural draught concrete cooling towers means they will still play a role in producing the country’s electricity – even as generation diversifies.

Watch Inside a cooling tower

Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola

16 October 2018

Investors

RNS Number : 1562E
Drax Group PLC

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

A unique portfolio of pumped storage, hydro and gas-fired generation assets
Compelling strategic rationale
- Growing system support opportunity for the UK energy system
- Significant expansion of Drax’s flexible, low-carbon and renewable generation model
- Diversified generation capacity – multi-site, multi-technology
- Opportunities in trading and operations
Strong financial investment case
- High quality earnings
- Expected returns significantly ahead of Weighted Average Cost of Capital (WACC)
- Expected EBITDA⁽¹⁾ of £90-110 million in 2019
- Debt facility agreed, net debt/EBITDA expected to be around 2x by the end of 2019
- Supportive of credit rating and reduced risk profile for Drax
- Strengthens ability to pay a growing and sustainable dividend

Will Gardiner, CEO, Drax Group

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

“I am excited by the opportunity to acquire this unique and complementary portfolio of flexible, low-carbon and renewable generation assets. It’s a critical time in the UK power sector. As the system transitions towards renewable technologies, the demand for flexible, secure energy sources is set to grow. We believe there is a compelling logic in our move to add further flexible sources of power to our offering, accelerating our strategic vision to deliver a lower-carbon, lower-cost energy future for the UK.

“This acquisition makes great financial and strategic sense, delivering material value to our shareholders through long-term earnings and attractive returns.

“We are combining our existing operational expertise with the specialist technical skills of our new colleagues and I am looking forward to what we can achieve together.”

A flexible, low-carbon and renewable portfolio

The Portfolio consists of Cruachan pumped storage hydro (440MW), run-of-river hydro locations at Galloway and Lanark (126MW), four CCGT⁽²⁾ stations: Damhead Creek (805MW), Rye House (715MW), Shoreham (420MW) and Blackburn Mill (60MW), and a biomass-from-waste facility (Daldowie).

Attractive high quality earnings and returns

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million, from gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs⁽³⁾. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio. Further information is set out in Appendix 2 of this Announcement.

Capital expenditure in 2019 is expected to be in the region of £30-35 million.

For the year ended 31 December 2017, the Portfolio generated EBITDA of £36 million⁽⁴⁾. EBITDA in 2019 is expected to be higher due to incremental contracted capacity payments (c.£42 million), no availability restrictions (Cruachan’s access to the UK grid during 2017 was limited by network transformer works) (c.£8 million), a lower level of corporate cost charged to the portfolio (c.£9 million) and revenues from system support services and current power prices. Gross assets as at 31 December 2017 were £419 million⁽⁵⁾.

The Acquisition represents an attractive opportunity to create significant value for shareholders and is expected to deliver returns significantly in excess of the Group’s WACC and to be highly accretive to underlying earnings in 2019.

The Acquisition strengthens the Group’s ability to pay a growing and sustainable dividend. Drax remains committed to its capital allocation policy and to its current £50 million share buy-back programme, with £32 million of shares purchased to date.

Financing the Acquisition

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility agreement to finance the Acquisition. Assuming performance in line with current expectations, net debt to EBITDA is expected to fall to Drax’s long-term target of around 2x by the end of 2019.

Drax expects its credit rating agencies to view the Acquisition as contributing to a reduced risk profile for the Group and to reaffirm their ratings.

Conditions for completion

The Acquisition is expected to complete on 31 December 2018 and is conditional upon the approval of the Acquisition by Drax’s shareholders and clearance by UK Competition and Markets Authority (the “CMA”). A summary of the terms of the Acquisition agreement (the “Acquisition Agreement”) is set out in Appendix 1 to this announcement.

Drax trading and operational performance

Since publishing its half year results on 24 July 2018 Drax has commenced operation of a fourth biomass unit at Drax Power Station, which is performing in line with plan, and availability across biomass units has been good.

Biomass storage domes at Drax Power Station

Taking these factors into account, alongside a strong 2018 hedged position and assuming good operational availability for the remainder of the year, Drax’s EBITDA expectations for the full year remain unchanged, with net debt to EBITDA now expected to be around 1.5x for the full year, excluding the impact of the Acquisition.

Biomass generation is now fully contracted for 2019.

Contracted power sales at 30 September 2018

	2018	2019	2020
Power sales (TWh) comprising:	18.6	11.5	5.7
TWh including expected CfD sales	18.6	15.6	11.2
– Fixed price power sales (TWh)	18.6	11.0	5.1
At an average achieved price (per MWh)	at £46.8	at £50.4	at £48.3
– Gas hedges (TWh)	-	0.5	0.6
At an achieved price per therm	-	43.5p	47.4p

Drax intends to hedge up to 1TWh of the commodity exposures in the Portfolio ahead of completion in line with the Group’s existing hedging strategy.

Other matters

In light of the Acquisition and the expected timing of the general meeting to approve it, Drax will postpone the planned Capital Markets Day on 13 November 2018.

Drax expects to announce its full year results for the year ending 31 December 2018 on 26 February 2019.

Enquiries:
Drax Investor Relations: Mark Strafford
+44 (0) 1757 612 491
+44 (0) 7730 763949

Media:
Drax External Communications:
Matt Willey
+44 (0) 7711 376087

Ali Lewis
+44 (0) 77126 70888

J.P. Morgan Cazenove (Financial Adviser and Joint Corporate Broker):
+44 (0) 207 742 6000
Robert Constant
Jeanette Smits van Oyen
Carsten Woehrn

Royal Bank of Canada (Joint Corporate Broker):
+44 (0) 20 7653 4000
James Agnew
Jonathan Hardy

Acquisition presentation meeting and webcast arrangements

Management will host a presentation for analysts and media at 9:00am (UK Time), Tuesday 16 October 2018, at FTI Consulting, 200 Aldersgate, Aldersgate Street, London EC1A 4HD.

Would anyone wishing to attend please confirm by e-mailing [email protected] or calling Christopher Laing at FTI Consulting on +44 (0) 20 3727 1355 / 07809 234 126.

The meeting can also be accessed remotely via a live webcast, as detailed below. After the meeting, the webcast will be made available and access details of this recording are also set out below.

A copy of the presentation will be made available from 9am (UK time) on Tuesday 16 October 2018 for download at: www.drax.com/uk>>investors>>results-reports-agm>> #investor-relations-presentations or use the link below.

Event Title:	Drax Group plc: Acquisition of flexible, low-carbon and renewable UK power generation from Iberdrola
Event Date:	Tuesday 16 October 2018
Event Time	9:00am (UK time)
Webcast Live Event Link	https://www.drax.com/uk/investors/16-oct-2018-webcast
	020 3059 5868 (UK)
	+44 20 3059 5868 (from all other locations)
Start Date:	Tuesday 16 October 2018
Delete Date:	Monday 14 October 2019
Archive Link:	https://www.drax.com/uk/investors/16-oct-2018-webcast

For further information please contact Christopher Laing on +44 (0) 20 3727 1355 / 07809 234 126.

Website: www.drax.com/uk

Acquisition of the Portfolio from Iberdrola

Drax Smart Generation Holdco Limited (“Drax Smart Generation”), a wholly owned subsidiary of Drax, has entered into the Acquisition Agreement with Scottish Power Generation Holdings Limited (the “Seller”), a wholly-owned subsidiary of Iberdrola S.A., for the acquisition of ScottishPower Generation Limited (“SPGEN”), for £702 million in cash.

Strong asset base

The Portfolio principally consists of 2.6GW of assets which are highly complementary to Drax’s existing generation portfolio and play an important role in the UK energy system. The assets include:

Cruachan Pumped Storage Hydro

440MW of large-scale storage and flexible low-carbon generation situated in Argyll and Bute, Scotland.

Cruachan provides a wide range of system support services to the UK energy market, in addition to providing merchant power generation. Cruachan has £35 million of contracted capacity payments for the period 2019 to 2022.

Cruachan, which provides over 35% of the UK’s pumped storage by volume, can provide long-duration storage with the ability to achieve full load in 30 seconds, which it can maintain for over 16 hours, making it a strategically important asset remunerated by a broad range of non-commodity based revenues.

Galloway and Lanark Run-of-River Hydro

126MW of stable and reliable renewable generation situated in South-west Scotland.

Both locations benefit from index-linked ROC revenues extending to 2027 and Galloway, in addition to renewable power generation, operates a reservoir and dam system providing storage capabilities and opportunities for peaking generation and system support services. It also has £4 million of contracted capacity payments for the period 2019 to 2022.

Combined Cycle Gas Generation (CCGT)

1,940MW of capacity at Damhead Creek (805MW), Rye House (715MW) and Shoreham (420MW) all strategically located in South-east England.

These assets provide baseload and/or peak power generation in addition to other system support services and benefit from attractive grid access income associated with their location. The three plants have contracted capacity payments of £127 million for the period 2019 to 2022.

Damhead Creek also benefits from an attractive option for the development of a second CCGT asset, Damhead Creek II, which provides additional gas generation optionality alongside Drax’s existing coal-to-gas repowering and OCGT(6) projects. All options could be developed subject to an appropriate level of support. Damhead Creek II is eligible for the 2019 capacity market auction along with two of Drax’s existing OCGT projects.

Other smaller sites

The portfolio also includes a small CCGT in Blackburn (60MW) and a 50K tonne biomass-from-waste facility in Daldowie, which benefits from a firm offtake contract agreement with Scottish Water until 2026.

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

The UK has a target to reduce carbon emissions by 80% by 2050. The transition to a low-carbon economy requires decarbonisation of heating, transport and generation. This will in turn require additional low-carbon sources of generation to be developed in the UK. As much as 85%⁽⁷⁾ of future generation could come from renewables – predominantly wind and solar. This will lead, at times, to high levels of power price volatility and increasing demand for system support services. Managing an energy system with these characteristics will only be possible if it is supported by the right mix of flexible assets to manage volatility, balance the system and provide crucial non-generation services which a stable energy system requires.

The Acquisition is closely aligned with this structural need and the operation of Drax’s existing biomass and gas options which provide the flexibility required to enable higher levels of intermittent renewable generation.

The Acquisition is in line with these system needs and when combined with Drax’s existing flexible, biomass generation and gas options offers the Group increased exposure to the growing need for system support and power price volatility.

Increased earnings potential aligned with generation strategy and UK energy needs

High quality earnings

Two thirds of the gross profits of the Portfolio is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs, in addition to power generation activities. Due to the expected growing demand for these assets and the contract-based nature of many of these services Drax expects to improve long-term earnings visibility through structured non-commodity earnings streams, whilst retaining significant opportunity to benefit from power price volatility.

When combined with renewable earnings and system support from existing biomass generation, the Acquisition is expected to lead to an increase in the quality of earnings.

Diversified generation and portfolio benefits

Wood pellet storage domes at Drax Power Station, Selby, North Yorkshire

The Acquisition accelerates Drax’s development from a single-site generation business into a multi-site, multi-technology operator.

With the acquisition of this portfolio, a fall in gas prices could be mitigated by an increase in gas-fired generation reflecting the relative dispatch economics of the different technologies.

Drax expects to benefit from the management of generation across a broader asset base, leveraging the Group’s expertise in the operation, trading and optimisation of large rotating mass generation.

Drax believes that the team operating the Portfolio has a strong engineering culture which is closely aligned with the Drax model and will enhance the Group’s strong capabilities across engineering disciplines.

Around 260 operational roles will transfer to Drax as part of the Acquisition, complementing and reinforcing Drax’s existing engineering and operational capabilities.

Financing and capital structure

Drax has entered into a fully underwritten £725 million secured acquisition bridge facility to finance the Acquisition, with a term of 12 months from the first date of utilisation of the facility (with a seven-month extension option) and interest payable at a rate of LIBOR plus the applicable margin (the “Acquisition Facility Agreement”). The facility is competitively priced and below Drax’s current cost of debt.

Drax will consider its options for its long-term financing strategy in 2019.

Assuming performance in line with current expectations, net debt to EBITDA is expected to return to Drax’s long-term target of around 2x by the end of 2019.

Drax expects credit rating agencies to view the Acquisition as supportive of the rating and contributing to a reduced risk profile for the Group.

Process and integration plan

Drax is progressing a detailed integration plan to combine the Acquisition as part of the existing Power Generation business.

The transaction is subject to shareholder approval. A combined Shareholder Circular and notice of General Meeting will be posted as soon as practicable.

The transaction is expected to complete on 31 December 2018.

Notes:

^{(1) 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. 2019 EBITDA is stated before any allocation of Group overheads.}^{(2) Combined Cycle Gas Turbine.}^{(3) Renewable Obligation Certificates.}^{(4) 2017 EBITDA is unaudited and based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies.}^{(5) On an unaudited historic cost basis, inclusive of an historic write down and other changes arising from the application of Drax’s accounting policies, and incorporating intercompany debtors which will be replaced by Drax going forward.}^{(6) Open Cycle Gas Turbines.}^{(7) Intergovernmental Panel on Climate Change. In a 1.5c pathway renewables are projected to be 70-85% of global electricity in 2050.}

IMPORTANT NOTICE

^{The contents of this announcement have been prepared by and are the sole responsibility of Drax Group plc (the “Company”).}

^{J.P. Morgan Limited (which conducts its UK investment banking business as J.P. Morgan Cazenove) (“J.P. Morgan Cazenove”) and RBC Europe Limited (“RBC”), which are both authorised by the Prudential Regulation Authority (the “PRA”) and regulated in the United Kingdom by the FCA and the PRA, are each acting exclusively for the Company and for no one else in connection with the Acquisition, the content of this announcement and other matters described in this announcement and will not regard any other person as their respective clients in relation to the Acquisition, the content of this announcement and other matters described in this announcement and will not be responsible to anyone other than the Company for providing the protections afforded to their respective clients nor for providing advice to any other person in relation to the Acquisition, the content of this announcement or any other matters referred to in this announcement.}

^{J.P. Morgan Cazenove, RBC and their respective affiliates do not accept any responsibility or liability whatsoever and make no representations or warranties, express or implied, in relation to the contents of this announcement, including its accuracy, fairness, sufficient, completeness or verification or for any other statement made or purported to be made by it, or on its behalf, in connection with the Acquisition and nothing in this announcement is, or shall be relied upon as, a promise or representation in this respect, whether as to the past or the future. Each of J.P. Morgan Cazenove, RBC and their respective affiliates accordingly disclaims to the fullest extent permitted by law all and any responsibility and liability whether arising in tort, contract or otherwise which it might otherwise be found to have in respect of this announcement or any such statement.}

^{Certain statements in this announcement may be forward-looking. Any forward-looking statements reflect the Company’s current view with respect to future events and are subject to risks relating to future events and other risks, uncertainties and assumptions relating to the Company and its group’s, the Portfolio’s and/or, following completion, the enlarged group’s business, results of operations, financial position, liquidity, prospects, growth, strategies, integration of the business organisations and achievement of anticipated combination benefits in a timely manner. Forward-looking statements speak only as of the date they are made. Although the Company believes that the expectations reflected in these forward looking statements are reasonable, it can give no assurance or guarantee that these expectations will prove to have been correct. Because these statements involve risks and uncertainties, actual results may differ materially from those expressed or implied by these forward looking statements.}

^{Each of the Company, J.P. Morgan Cazenove, RBC and their respective affiliates expressly disclaim any obligation or undertaking to supplement, amend, update, review or revise any of the forward looking statements made herein, except as required by law.}

^{You are advised to read this announcement and any circular (if and when published) in their entirety for a further discussion of the factors that could affect the Company and its group, the Portfolio and/or, following completion, the enlarged group’s future performance. In light of these risks, uncertainties and assumptions, the events described in the forward-looking statements in this announcement may not occur.}

^{Neither the content of the Company’s website (or any other website) nor any website accessible by hyperlinks on the Company’s website (or any other website) is incorporated in, or forms part of, this announcement.}

Appendix 1

Principal Terms of the Acquisition

The following is a summary of the principal terms of the Acquisition Agreement.

Acquisition Agreement

Parties and consideration

The Acquisition Agreement was entered into on 16 October 2018 between Drax Smart Generation and the Seller. Pursuant to the Acquisition Agreement, the Seller has agreed to sell, and Drax Smart Generation has agreed to acquire, the whole of the issued share capital of SPGEN for £702 million, subject to certain customary adjustments in respect of cash, debt and working capital.

Drax Group Holdings Limited has agreed to guarantee the payment obligations of Drax Smart Generation under the Acquisition Agreement. Scottish Power UK plc has agreed to guarantee the payment obligations of the Seller under the Acquisition Agreement.

Conditions to Completion

The Acquisition is conditional on:

the approval of the Acquisition by Drax shareholders, which is required as the Acquisition constitutes a Class 1 transaction under the Listing Rules (the “Shareholder Approval Condition”); and
the CMA having indicated that it has no further questions at that stage in response to pre-Completion engagement by Drax or the CMA having provided a decision that the Acquisition will not be subject to a reference under the UK merger control regime.

Completion is currently expected to occur on 31 December 2018 assuming that the conditions are satisfied by that date.

Termination for material reduction in available generation capacity

Drax Smart Generation has the right to terminate the Acquisition Agreement upon the occurrence of a material reduction in available generation capacity at any of the Cruachan, Galloway and Lanark or Damhead Creek facilities which subsists, or is reasonably likely to subsist, for a continuous period of three months. The right of Drax Smart Generation to terminate in these circumstances is subject to the Seller’s right to defer Completion if the relevant material reduction in available generation capacity can be resolved by end of the month following the anticipated date of Completion.

Break fee

A break fee of £14.6 million (equal to 1% of Drax’s market capitalisation at close of business on the day before announcement) is payable if the Shareholder Approval Condition is not met, save where this is as a result of a material reduction in available generation capacity as described above.

Pre-completion covenants

The Seller has given certain customary covenants in relation to the period between signing of the Acquisition Agreement and completion, including to carry on the SPGEN business in the ordinary and usual course. The Seller will carry out certain reorganisation steps prior to completion.

Pension liabilities

Drax Smart Generation has agreed to assume the accrued defined benefit pension liabilities associated with the employees of the SPGEN group as at the date of signing the Acquisition Agreement. Following Completion, the SPGEN group will continue to participate in the Seller’s group defined benefit pension scheme, known as the ScottishPower Pension Scheme (“SPPS”) for an interim period of 12 months unless agreed otherwise (the “Interim Period”) while a new pension scheme is set up by the SPGEN group for the benefit of its employees (the “New Scheme”).

At the end of the Interim Period, the SPPS trustees will be requested to transfer from the SPPS to the New Scheme an amount of liabilities (and corresponding share of assets) agreed between the Seller and Drax Smart Generation (or failing agreement, an amount determined by an independent actuary) in respect of the past service liabilities relating to the SPGEN group employees. If the amount of assets transferred to the New Scheme does not match the amount agreed (or independently determined), there will be a true-up between the Seller and Drax Smart Generation.

If the SPPS trustees do not make any transfer to the New Scheme within the period of 18 months following the Interim Period (unless this was caused by a breach of the Acquisition Agreement by the Seller), Drax Smart Generation has agreed to pay £16 million (plus base rate interest) to the Seller as compensation for the SPPS liabilities not taken on by the New Scheme.

Seller’s warranties, indemnities and tax covenant

The Seller has provided customary warranties in the Acquisition Agreement. The Seller also has provided Drax Smart Generation with indemnities in respect of certain specific matters, including for any losses associated with the reorganisation referred to above. A customary tax covenant is also provided in the Acquisition Agreement.

Transitional Services Agreement

The Seller and SPGEN will enter into a transitional services agreement effective at Completion. The specific nature, terms and charges relating to the services to be provided will be agreed between the Seller and SPGEN prior to Completion. The Seller will also provide assistance in relation to the extraction and separation of the SPGEN group from the systems of the Seller and integration of the SPGEN group onto the systems of the Drax Group.

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

The Portfolio is expected, based on recent power and commodity prices, to generate EBITDA in a range of £90-110 million (“Profit Forecast”), and gross profits of £155 million to £175 million, of which around two thirds is expected to come from non-commodity market sources, including system support services, capacity payments, Daldowie and ROCs. Pumped storage and hydro activities represent a significant proportion of the earnings associated with the portfolio.

For the purpose of the Profit Forecast, EBITDA is stated before any allocation of Group overheads (as these will be an allocation of the existing Drax Group cost base which is not expected to increase as a result of the acquisition of the Portfolio).

Basis of preparation

The Profit Forecast has been compiled on the basis of the assumptions stated below, and on the basis of the accounting policies of the Drax Group adopted in its financial statements for the year ended 31 December 2017. Subsequent accounting policy changes include the application of IFRS15 and IFRS9 which are not initially expected to change the EBITDA results of the Portfolio. It also does not reflect the impact of IFRS16 which would apply in respect of the 2019 Annual Report and Accounts.

The Profit Forecast has been prepared with reference to:

Unaudited 2017 financial statements based on the audited financial statements of Scottish Power Generation Limited and SMW Limited, adjusted to exclude results of assets that do not form part of the Portfolio and restated in accordance with Drax accounting policies
The audited financial statements of the entities forming the Portfolio for the year ending 31 December 2017
The unaudited management accounts of the Portfolio for the nine months ending 30 September 2018
And on the basis of the projected financial performance of the Portfolio for the year ending 31 December 2019

The Profit Forecast is a best estimate of the EBITDA that the Portfolio will generate for a future period of a year in respect of assets and operations that are not yet under the control of Drax. Accordingly the degree of uncertainty relating to the assumptions underpinning the Profit Forecast is inherently greater than would be the case for a profit forecast based on assets and operation under the control of Drax and/or which covered a shorter future period. The Profit Forecast has been prepared as at today and will be updated in the shareholder circular.

The forecast cost base reflects the expectations of the Drax Directors of the operating regime of the Portfolio under Drax’s ownership and the central support it will require.

Principal assumptions

The Profit Forecast has been prepared on the basis of the following principal assumptions:

Assumptions within management’s control

There is no change in the composition of the Portfolio.
There is no material change to the manner in which these assets are operated.
There are no material changes to the existing running costs / operating costs of the Portfolio.
There will be no material restrictions on running each of the assets in the Portfolio other than those that would be envisaged in the ordinary course.
No material issues with the migration of services including trading and information technology from Scottish Power to Drax.
No hedges are transferred as part of the Transaction.
Transaction costs and one-off costs associated with the Integration are not included.

Assumptions outside of management’s control

The acquisition of the Portfolio is completed on 31 December 2018.
There is no material change to existing prevailing UK macroeconomic and political conditions prior to 31 December 2019.
There are no material changes in market conditions in electricity generating market and no change to the UK energy supply mix.
There are no material changes in legislation or regulatory requirements (e.g. ROCs, capacity market, grid charges) impacting the operations or accounting policies of the Portfolio.
There are no changes to recent market prices for clean spark spread, power, carbon and other commodities.
There is no material change from the historical 10-year average rainfall.
There are no material adverse events that have a significant impact on the financial performance of any of the acquired assets, including any more unplanned outages than would be expected in the ordinary course.
Prior to completion, the business will be operated in the ordinary course.
There are no material issues with the transitional services provided by Scottish Power to Drax pursuant to the TSA, including the migration of such services to Drax.
There is no material change in the management or control of the Drax group.

END

Chief Executive’s review

Will Gardiner, Chief Executive Officer, Drax Group

21 March 2018

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/uk/truckdumps and www.drax.com/uk/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/uk/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

Operational review

Overall, we delivered a good performance during 2017 and maintained a strong safety performance.

We completed a major planned outage on the unit supported by the CfD contract. This unit provides stable and reliable baseload renewable electricity to the network and long-term earnings visibility for the Group. The safe and efficient completion of these complex works is a credit to those involved and reflects our continued focus on opportunities for improvement and efficiencies.

The entire organisation has responded to a number of challenging unplanned events. Most notably, in December we experienced a fire on a section of conveyor at our biomass rail unloading facility and consequently an unplanned outage from late December 2017 to mid-January 2018. Following investigation and recommissioning, the facility has returned to service with enhanced operating procedures. Although this issue did not relate to the operation of the biomass-generating units, the resulting restriction on fuel deliveries by rail required the optimisation of generation across our biomass units, resulting in lower EBITDA and full year biomass availability than our target for the year.

Financial results

Financial performance has significantly improved, with EBITDA of £238 million (2016: £174 million), principally due to the CfD mechanism.

Value from flexibility was below our target for the year, principally reflecting a lower level of Ancillary Service payments versus 2016.

Our operational performance drives the results. The financial impact of the unplanned outage on the rail unloading facility was mitigated by optimisation of our available biomass and the use of additional generation capacity retained for self-insurance purposes. However, this incident is a reminder of the need to invest appropriately to maintain a high level of operational availability and flexibility.

At the operating cost level, we have reduced costs reflecting the efficient single outage and our focus on the implementation of lean management techniques.

Power Generation financial performance

	2017 £m	2016 £m
Revenue	2,719.6	2,490.9
Cost of power purchases	(891.2)	(904.4)
Grid charges	(62.9)	(69.4)
Fuel and other costs	(1,367.1)	(1,180.1)
Cost of sales	(2,321.2)	(2,153.9)
Gross profit	398.4	337.0
Operating costs	(160.9)	(163.2)
EBITDA	237.5	173.8

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Biomass unit technical availability	%	Below target	Below target
Operations	Value from flexibility	£m	88	N/A

Looking ahead

We aim to optimise returns from our core assets, through reliable, flexible, low-carbon energy solutions which provide a long-term solution to the UK’s energy needs. Alongside this, value in the generation market will be created from an ability to execute agile decisions and capture value from volatile short-term power markets.

We will also continue to explore opportunities for lower carbon generation, to exploit our strengths and create opportunities for the long term. To that end we will continue to develop options for gas and pursue efficiencies through our biomass supply chain.

Performance review: B2B Energy Supply

Our B2B Energy Supply business – comprised of Opus Energy and Haven Power – is the fifth largest B2B power supplier in the UK. 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. The key factors influencing our business are regulation, competition and our operational performance.

Regulation and competition

The UK Government’s main focus has been on what it sees as unfair treatment of domestic consumers on legacy standard variable tariff (SVT) contracts. The Government will take forward legislation which will provide the regulator Ofgem with the authority to cap these domestic tariffs. SVTs are not a feature of our business. Our focus remains on the B2B market. At the microbusiness end of the market, which is closer in proximity to domestic, most of our customers are on fixed price products and are actively rather than passively renewing their power supply contracts.

The B2B market remains competitive with 65 different suppliers across the market. Our Haven Power and Opus Energy businesses offer customer-centric power, gas and services. We offer simplicity and flexibility across our products and actively engage with customers to help them manage their energy requirements and reduce carbon emissions.

STRATEGY IN PROGRESS

An innovative energy supplier

90% of the electricity that Opus Energy supplied last year came from clean, renewable sources, at no extra cost to their predominantly small and medium-sized business customers. For those customers who want it, 100% renewable energy contracts are also available.

This was exactly what All Saints Church in Ascot was looking for to power their business.

Assistant Church Warden, Chris Gunton, commented:

“We wanted to move to a greener energy supplier, without paying a premium, so approached an energy broker for guidance. They advised us that Opus Energy were a reliable company with a good reputation, and when we asked for a quote they were the most competitive.”

It was a similar story for the Salisbury Museum, in Wiltshire. Nicola Kilgour-Croft, Finance Manager, said:

“We were looking for an energy supplier that offered great value, combined with the right length of contract and good ethics. Opus Energy ticked all these boxes for us.”

Alongside supplying customers, Opus Energy has Power Purchase Agreements with over 2,300 independent UK renewable energy generators. These could be anything from a single wind turbine owned by a village community, to Europe’s greenest zoo, Hamerton Zoo Park.

Commented Andrew Swales, Director of Hamerton Zoo:

“Working with Opus Energy has given us competitive prices, considerably better documentation and a highly efficient service. We’d happily recommend them.”

Operational review

We have remained focused on delivering an excellent standard of customer service, which is central to our proposition.

February 2017 saw the completion of the acquisition of Opus Energy, which has made good progress integrating into the Group supported by a dedicated team, who have been working on systems, people and commercial projects to ensure our processes work effectively together.

In March we completed the purchase of a new office facility in Northampton, enabling the consolidation of four Opus Energy offices into one and the centralisation of the operational teams.

Sales volumes at Opus Energy were lower than target, reflecting our focus on margin which has remained strong and customer renewal rates were towards the high end of expectation. This reflects the continued commitment to a strong level of customer service and in recognition of this Opus Energy was awarded Utility Provider to Small Businesses of the Year 2017 at the British Business Awards.

At Haven Power we have continued to focus on value-adding flexible products and services particularly to Industrial & Commercial customers whose needs extend beyond commodity supply.

This is demonstrated through our ability to help customers manage and optimise their power consumption profiles through collaboration with our carefully selected partners. Through better systems and services, customer targeting and a keener focus on cost to serve we are driving efficiencies and improved margin at Haven Power.

Following the acquisition of Opus Energy the major Enterprise Resource Platform (ERP) system upgrade was re-planned which has led to a revised timeline from Q2 2018 onwards.

We continue to actively manage credit risk by assessing the financial strength of customers and applying rigorous credit management processes, with a strong focus continuing to be placed on billing and cash collection.

Health and safety remains an area of focus for the business and we continue to target a reduction in the level of recordable incidents.

Financial results

Financial performance has significantly improved, with EBITDA of £29 million in line with our guidance (2016: £4 million negative). This was principally due to the acquisition of Opus Energy, which added 10 months of EBITDA, but also improved financial performance from Haven Power, which was ahead of plan.

Third Party Costs (TPCs) include grid charges, the cost of meeting our obligations under the Renewable Obligation (RO) and small-scale Feed-in-Tariff schemes. Grid charges include distribution, transmission and system balancing costs. TPCs have continued to increase and now account for 50% of revenue.

Total operating costs have risen with the acquisition of Opus Energy. We remain confident that over time the benefits of common platforms and knowledge sharing will lead to efficiencies.

B2B Energy Supply financial performance

	2017 £m	2016 £m
Revenue	1,999.0	1,326.4
Cost of power purchases	(883.7)	(688.9)
Grid charges	(435.8)	(310.4)
Other retail costs	(562.1)	(303.6)
Cost of sales	(1,881.6)	(1,302.9)
Gross profit	117.4	23.5
Operating costs	(88.0)	(27.8)
EBITDA	29.4	(4.3)

Key performance indicators

Area	KPI	Unit of measure	2017	2016
Operations	Implementation of new ERP (Haven Power)	Date	Q2 2018	N/A
Operations	Sales volume (Opus Energy)	TWh	5.7	N/A
Operations	Renewal rate (Opus Energy)	%	Above Target	N/A

Looking ahead

In 2018 we will focus on Opus Energy on-boarding, systems development and the roll out of smart meters.

We continue to see opportunities for EBITDA growth in the B2B markets, which we will deliver through our customer-focused supply proposition.

Outlook

Our focus in 2018 remains on the delivery of our strategy and long-term ambitions for earnings growth, underpinned by safety, sustainability, operational excellence and expertise in our markets. We also recognise that being the most efficient operator in each of our markets is a key factor in our success.

Our objective in Pellet Production remains the commissioning of LaSalle, the production of good quality pellets at the lowest cost, cross-supply chain optimisation and identifying attractive options to increase self-supply.

Our biomass proposition is strong – reliable, flexible, low-carbon renewable electricity and system support which, combined with an effective fuel hedging strategy, will provide long-term earnings visibility. We remain focused on ways to increase supply chain efficiency and make biomass competitive beyond 2027. As part of this we remain focused on the optimisation of our assets in the US Gulf and reduction in pellet cost. To support this focus we are moving our US headquarters from Atlanta to Monroe, Louisiana, which benefits from a much closer proximity to these assets.

In Power Generation, we continue to explore ways to optimise our existing operations, whilst meeting the needs of the changing UK electricity system.

We remain supportive of the UK Government’s decarbonisation targets and will continue our work to deliver four OCGTs and a low-cost biomass unit conversion utilising existing infrastructure at Drax Power Station, alongside developing the option to repowering the remaining coal units to gas.

In B2B Energy Supply, we will continue to grow our B2B offering, with significant opportunities to grow market share. At the same time, we will invest in supporting infrastructure to ensure we can continue to grow, offer market-leading digital propositions and smart metering services.

2018 priorities

Pellet Production

Commissioning of LaSalle Bioenergy
Development of options for optimisation and efficiencies
Consistent production and quality of pellets
Continued cost reduction and improvement in EBITDA

Power Generation

Reliable biomass generation
Development of fourth biomass unit
System support services
Development of OCGT options
Development of coal-to-gas repowering option
Continued cost reduction and growth in EBITDA

B2B Energy Supply

Development of value-added services
Continued cost reduction and growth in EBITDA
Investment in systems to support growth and Smart compliance

We have made good progress on the delivery of our strategy and will continue to build on this as we progress our targets for 2025, whilst playing an important role in our markets and helping to change the way energy is generated, supplied and used.

Read the Drax Group plc annual report and accounts 2017

Electricity has been causing clocks in Europe to run slowly. This is why

16 March 2018

Electrification

On ‘the continent’ – in the cultured, sun-blushed terraces of the Mediterranean, time moves slowly. Or at least, that’s the view from the grey British Isles. It turns out, however, it’s true.

Or at least for the first weeks of 2018, it was true. At first, it was small – perhaps too small to notice. But by early March, electrical clocks in Europe were running nearly six minutes slow. What caused this mass scale time loss? Electricity.

But to understand how electricity was causing clocks to lose time, you first need to understand how it helps them keep time.

How does electricity keep time?

Almost all clocks (save for the earliest sundials and hourglasses), measure time using a simple dynamic: oscillation – the repetitive and rhythmic movement of something between two points.

For example, in a pendulum clock, each swing (or oscillation) of a suspended weight between two points shifts a single tooth of a gear, which in turn shifts other gears and eventually the hands of a clock face. Because that movement is consistent and regular, it can be used as a measurement of time.

Clock technology has advanced beyond the abilities of a pendulum, but it remains driven by this principle of measuring oscillation. A quartz clock measures the vibration (or oscillation) of a piece of quartz, an atomic clock measures the vibration of atoms and electrons, and an electrical clock measures the oscillation of electricity – otherwise known as its frequency.

The fundamentals of electrical frequency

In the UK and across Europe, all electricity operates at a frequency of 50 hertz (Hz), which is determined by the number of directional changes alternating current (AC) electricity makes every second. A synchronous electrical clock – the kind found in ovens, microwaves and digital alarm clocks – uses this consistent oscillation to measure seconds and tell time.

Electrical clocks have been designed this way because electricity’s frequency is consistent – it needs to be. Any slight deviations above or below 50 Hz can damage electrical devices and equipment. In Great Britain, National Grid and service operators around the country – including Drax Power Station – work to maintain this consistent frequency through a service called frequency response, which instructs generators to either increase or decrease generation depending on overall network demand, which in turn controls frequency.

This is because frequency is regulated by keeping generation and demand across a network perfectly balanced. Too much generation drives frequency higher, not enough causes it to fall.

It’s this that caused Europe’s electrical clocks to run slowly. But to understand the source of the frequency imbalance, you first need to understand how Europe’s grid works.

How six minutes dropped off the map

The ‘Continental Europe’ power system connects 25 countries from Spain to Turkey in one synchronous electrical network which runs on the same frequency and can all share power.

Within this there are smaller transmission system operators (TSOs) that balance the power supply of smaller groups of countries like National Grid does for GB’s network.

One of these zones includes Serbia, Macedonia and Montenegro, a region with well-known longstanding political tensions. Kosovo declared independence from Serbia in 2008, however Serbia refuses to recognise its sovereignty – a feeling which extends to some parts of Kosovo’s population.

Night view of Pristina, capital city of Kosovo.

In the Northern parts of Kosovo (along the Serbian border) the population is largely of Serbian origin and side with Serbia on the question of Kosovo’s independence. They also refuse to pay for its power. This leaves the rest of the country – who are largely of Albanian descent – to pay the cost of the country’s overall electricity, which they do via subsidies added to their bills.

But when Kosovo’s energy regulator removed the subsidy earlier this year it led to a sudden hole in the money paying generators, which in turn led to a fall in how much electricity was being generated. Crucially, however, demand didn’t fall with it.

Instead, Kosovo was using more power than it was generating, causing electrical frequency on the network to drop. And because Kosovo is part of a shared and synchronous network that stretches across the continent, that frequency imbalance (although incredibly small) spread across the network.

Overall frequency dropped 0.01% drop over the Continental European grid – too small to trigger a full system shut down, but big enough to mean that every second electrical clocks were counting was slightly slower than it should be. Big enough to mean that over time Europe lost six minutes.

As of 8 March an agreement has been met between the countries to meet demand and so, although the power that wasn’t being generated hasn’t been ‘replaced’, there is no longer an ongoing imbalance.

Frequency has normalised and clocks – now reset – are running on time.

How electricity is made

25 January 2018

Power generation

Every morning we take electricity as a given. We switch on lights, charge phones and boil kettles without thinking about where this power comes from.

The electronic devices and appliances that make up our daily routines are not particularly energy intensive. Boiling a kettle only uses 93 watts, toasting for three minutes only requires 60 watts, while cooking in a microwave for five minutes takes 100 watts.

However, when people are waking up and making breakfast in almost 30 million households around the UK, those small amounts soon create a significant demand for electricity. On a typical winter’s morning, this combined demand spikes to more than 45 gigawatts (GW).

So this is what it takes to power your breakfast – from the everyday toaster in your kitchen backwards through thousands of miles of cables to the hundreds of thousands of tonnes of machinery in wind farms, hydro-electric dams and at power stations such as Drax where electricity generation begins.

The grid

The journey starts in the home where all our electricity usage is tracked by meters. These are becoming increasingly ‘smart’, displaying near real-time information on energy consumption in financial terms and allowing more accurate billing. There are already 7.7 million smart meters installed around the UK, but that number is set to triple this year, paving the way for a smarter grid overall.

What brings electricity into homes is perhaps the most visible part of the energy system on the UK’s landscape. The transmission system is made up of almost 4,500 miles of overhead electricity lines, nearly 90,000 pylons and 342 substations, all bringing electricity from power stations into our homes.

Making sure all this happens safely and as efficiently as possible falls to the UK’s nine regional electricity networks and National Grid. Regional networks ensure all the equipment is in place and properly maintained to bring electricity safely across the country, while National Grid is tasked with making sure demand for electricity is met and that the entire grid remains balanced.

The station cools down

One of the most distinctive symbols of power generation, cooling towers carry out an important task on a massive scale.

Water plays a crucial role in electricity generation, but before it can be safely returned to the environment it must be cooled. Water enters cooling towers at around 40 degrees Celsius, and is cooled by air naturally pulled into the structure by its unique shape.

This means those plumes exiting from the top of the towers are, rather than any form of pollution, only water vapour. And this accounts for just 2% of the water pumped into the towers.

Drax counts 12 cooling towers, each 114 metres tall – enough to hold the Statue of Liberty with room to spare. Once the water is cooled it is safe to re-enter the nearby River Ouse.

The station’s bird’s-eye view

The control room is the nerve centre of Drax Power Station. From here technicians have a view into every stage of the power generation process. The entire system controls roughly 100,000 signals from across the power station’s six generating units, water cooling, air compressors and more.

While once this area was made up of analogue dials and controls, it has recently been updated and modernised to include digital interfaces, display screens and workstations specially designed by Drax to enable operators to monitor and adjust activity around the plant.

The heart of power generation

At the epicentre of electricity generation is Drax’s six turbines. These heavy-duty pieces of equipment do the major work involved in generating electricity.

High-pressure steam drive the blades which rotates the turbine at 3,000 revolutions per minute (rpm). This in turn spins the generator where energy is converted into the electricity that will eventually make it into our homes.

These are rugged pieces of kit operating in extreme conditions of 165 bar of pressure and temperatures of 565 degrees Celsius. Each of the six turbine shaft lines weighs 300 tonnes and is capable of exporting over 600 megawatts (MW) into the grid.

One of the most important parts of the entire process, turbines are carefully maintained to ensure maximum efficiency. Even a slight percentage increase in performance can translate into millions of pounds in savings.

Turning fuel to fire

To create the steam needed to spin turbines at 3,000 rpm, Drax needs to heat up vast amounts of water quickly and this takes a lot of heat.

The power station’s furnaces swirl with clouds of the burning fuel to heat the boiler. Biomass is injected into the furnace in the form of a finely ground powder. This gives the solid fuel the properties of a gas, enabling it to ignite quickly. Additional air is pumped into the boiler to drive further combustion and optimise the fuel’s performance.

Pulveriser

How do you turn hundreds of tonnes of biomass pellets into a powder every day? That’s the task the pulveriser take on. In each of the power plant’s 60 mills, 10 steel and nickel balls, each weighing 1.2 tonnes, operate in extreme conditions to crush, crunch and pulverise fuel.

These metal balls rotate 37 times a minute at roughly 3 mph, exerting 80 tonnes of pressure, crushing all fuel in their path. Air is then blasted in at 190 degrees Celsius to dry the crushed fuel and blow it into the boiler at a rate of 40 tonnes per hour.

The journey begins: biomass arrives

Biomass arrives at Drax by the train-load. Roughly 14 arrive every day at the power station, delivering up to 20,000 tonnes ready to be used as fuel.

These trains arrive from ports in Liverpool, Tyne, Immingham and Hull and are specially designed to maximise the efficiency of the entire delivery process, allowing a full train to unload in 40 minutes without stopping.

The biomass is then taken to be stored inside Drax’s four huge storage domes. Each capable of fitting the Albert Hall inside, the domes can hold 300,000 tonnes of compressed wood pellets between them.

Here the biomass waits until it’s needed, at which point it makes its way along a conveyor belt to the pulveriser and the process of generating the electricity that powers your breakfast begins.

Trading update

12 December 2017

Investors

RNS Number: 0238Z
DRAX GROUP PLC
(Symbol: DRX)

Trading and Operational Performance

Since publishing its half year results on 19 July 2017, trading conditions in the markets in which Drax operates have remained in line with expectations.

Generation

A major planned outage on the CfD⁽¹⁾ unit was completed in November 2017 and the unit has now returned to service. Both biomass and coal operations are currently performing well.

Retail

Retail operations remain in line with expectations, with the integration of Opus Energy progressing well and continued improvement in profitability at Haven Power.

US biomass self-supply

At the Morehouse and Amite pellet plants, the installation of a further 150K tonnes of capacity – allowing access to incrementally cheaper local wood residues – as part of the previously announced plans to optimise operations, is now complete.

The third pellet plant at LaSalle began commissioning in November 2017, with pellets now being produced and an increase in production scheduled through 2018.

Taking these factors into account and based on good operational availability for the remainder of the year, our expectations remain unchanged.

Contracted Power Sales for 2017 and 2018

As at 7 December 2017, the power sales contracted for 2017 and 2018 were as follows:

	2017	2018
Power sales (TWh) comprising:	20.1	16.8

– Fixed price power sales (TWh)	20.1	15.9
at an average achieved price (per MWh)	at £46.9	at £44.1

– Gas hedges (TWh)(2)	-	0.9
at an achieved price (per therm)	-	44.4p

Strategy Update

Drax continues to develop options for 1.2GW of new Open Cycle Gas Turbine (OCGT) capacity, providing peaking power and system support services to the grid. The first two projects – Progress Power and Hirwaun Power – will participate in the next capacity market auction in February 2018. Negotiations for engineering and construction contracts are progressing well, with competitive tenders received from a number of providers.

If developed, these projects would be underpinned by a fifteen year, index-linked capacity market contract, extending earnings visibility into the 2030s.

Drax also continues to develop options for its remaining coal assets, including further low cost biomass and coal-to-gas conversions, the latter of which is progressing through a public planning consultation.

Through these options for growth and improved earnings Drax continues its transformation, helping change the way energy is generated, supplied and used for a better future.

Other matters

As part of its core market focus Drax completed the sale of BBE⁽³⁾ to AMPH⁽⁴⁾ in October 2017. Drax retains an equity holding in AMPH⁽⁴⁾.

Drax will announce its full year results for the year ending 31 December 2017 on 27 February 2018.

Enquiries

Drax Investor Relations:

Mark Strafford

+44 (0) 1757 612 491

Media

Drax External Communications

Matt Willey

+44 (0) 1757 612 285

Ali Lewis

+44 (0) 1757 612 165

Website: www.drax.com/uk

Notes:

Contract for Difference.
Structured power sales (and equivalents) include forward gas sales, providing additional liquidity for forward sales, highly correlated to the power market and acting as a substitute for forward power sales.
Billington Bioenergy.
Aggregated Micro Power Holdings.

END

What you need to know about Britain’s electricity last quarter

17 August 2017

Power generation

For an hour over lunch on Wednesday, 7^th June, more than 50% of Britain’s electricity came from renewables. It was only the second time this had ever happened – the first had come just two months earlier, in April.

The second quarter (Q2) of 2017 was a period largely made up of firsts for Britain’s electricity system. While there were only two instances of renewable power tipping the 50% mark between April and June, overall, wind, solar, biomass and hydro energy made up more than a quarter of all Britain’s electricity for the first time ever.

These findings come from Electric Insights, research on Britain’s power system, commissioned by Drax and written by top university academics. Over the past year, the quarterly report has shown breaking renewable records is becoming the new normal for Britain’s electricity. Last quarter was no different.

Here, we look at the key findings from Q2 2017 and what they mean for the changing nature of the energy sector.

More than half Great Britain’s electricity came from renewables. Twice

Wind, solar, biomass and hydro accounted for 51.5% of the UK’s electricity for an hour on 7^th June, generating 19.1 gigawatts (GW). Combined with nuclear power and imports from France, low-carbon output was a record 28.6 GW – a massive 89% of total demand. This followed 30^th April, when Britain’s electricity edged over the 50% renewable mark for a shorter, but no less significant, period.

The percentage of renewables making up our power supply is set to grow as additional renewable capacity comes onto the grid. There is currently 6 GW of additional wind capacity being constructed in Britain. Solar capacity has already hit 12.4 GW – more solar panels than analysts thought would be installed by 2050. Plans to convert more of Britain’s coal units to biomass will increase the availability of renewable power further, still.

Electricity was cleaner than ever

There was a key date in the history of coal during Q2. On 21^st April, Britain recorded the first full day it had gone without burning any coal since 1882 – the year Holborn Viaduct power station became the world’s first coal-fired public electricity station.

While that date is symbolic of the UK’s shift away from coal, in practice, it means carbon emissions are also dropping to historically low levels. Carbon intensity reached a new low in Q2, averaging 199 g/kWh over the quarter – 10% lower than the previous minimum set last year. For context, carbon intensity averaged 740 g/kWh in the 1980s and 500 g/kWh in the 2000s.

An important indicator of this falling carbon intensity is that Britain’s electricity now regularly drops below 100 g/kWh, and reached an all-time low of 71 g/kWh on the sunny and windy Sunday of 11^thJune.

Electric cars are cleaner than before

One of the greatest decarbonisation challenges moving forward is how we transform transport. Electrification is the primary driver of change in this sector, and Q2 saw Britain hit a significant milestone as the total number of electric vehicles (EVs) in the country surpassed 100,000.

The potential of EVs in cleaning up transport is significant, but there are also concerns they could, in some cases, increase CO₂ levels due to pollution from power stations. However, as the last quarter’s data shows, EVs are in fact twice as carbon efficient as conventional cars thanks to the amount of renewable and low carbon electricity on the system.

“According to our analysis, looking at a few of the most popular models, EVs weren’t as green as you might think up until quite recently,” says Dr Iain Staffell From Imperial College London. “But now, thanks to the rapid decarbonisation of electricity generation in the UK they are delivering much better results.”

The most solar power a quarter has ever seen

The longer days in Q2 enabled solar power to become a key source of electricity, and for eight hours over the quarter it generated more than all fossil fuels combined. It also set output records by supplying 25% of total demand on 8^th April, and producing 8.91 GW on 26^th May.

While wind remains the largest source of renewable energy generation in the UK, solar’s influence is growing – especially as decentralisation of the power system continues to proliferate.

Of Britain’s 12.4 GW solar capacity, 57% is concentrated in 1,400 solar farms of around 5 MW each, while the rest is distributed across almost one million rooftop arrays in homes, businesses and other institutions. In fact, during June, 10% of all Britain’s electricity came from these sorts of decentralised sources – sources of power not on the national grid.

This is unlikely to spell a fundamental shift to an entirely decentralised power grid in the short term, but it does hint at the changes the sector is seeing. From its carbon profile, to its variety, to its flexibility, Britain’s power system is changing – and that’s a good thing.

Explore the data in detail by visiting ElectricInsights.co.uk

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.

Understanding the pounds behind the power

Will Gardiner, Chief Executive Officer, Drax Group

26 July 2017

Opinion

Editor’s note: On 21^st September 2017 the Board announced that Will Gardiner would replace Dorothy Thompson as Chief Executive, Drax Group as of 1^st January 2018. Read the announcement to the London Stock Exchange. This story was written by Will two months prior to that announcement and remains unedited below.

The UK electricity market used to be simpler. Coal, gas and nuclear plants generated energy and fed power into the National Grid. Retail companies then delivered that power to homes and businesses across the country thanks to regional distribution network operators. Today, it’s not as simple. The energy system of Great Britain has grown more complex – it needed to.

The push to lower carbon emissions led to the introduction of an array of different power generation technologies and fuels to the energy mix. These all generate power in different ways, at different times and in different conditions. Added to this are government schemes that have changed how this is all funded. In short, our electricity market is now more complex.

Drax Group has transformed itself to align with this new system. It is now an energy company with complementary operations across its supply chain – sourcing fuel, generating 17% of Great Britain’s renewable power and then selling much of that electricity directly to business customers in the retail market. This has fundamentally changed both how we do business and the financial mechanisms behind the business.

Where are we now?

Drax’s financial and operating strategies are very much inter-linked. Shifting how we generate energy changes how we generate revenue. The company is structured according to a set of distinct business segments, each of which is treated in a slightly different way.

The generation business

Drax has adapted its business model to the UK government’s regulatory framework, which through successive administrations has broadly promoted investment in renewable and low carbon power generation. Three of our six electricity generation units – accounting for 68% of our output in the first half of 2017 – have been upgraded from coal to produce renewable electricity from sustainable compressed wood pellets. These units are a core part of Britain’s renewable energy mix. Guaranteed income from the third unit conversion has given us a significantly higher degree of earnings visibility and reduced our exposure to commodity prices.

H1, 2017: 10.7 TWh total generation; 7.3 TWh biomass generation

Our coal generation units no longer provide 24/7 baseload electricity. This means we primarily use our coal generation as a support system. When the grid needs it we can ramp up and down coal generation responding to demand and ancillary service needs. Our renewable generation units do this too. Ultimately, however, our long-term goal is to convert the remaining coal units – either to renewables or to gas. Our Research and Innovation team is currently looking into how we might be able to do this, but early indications show that coal-to-gas conversion could be an attractive option for delivering flexible and reliable generation capacity for the UK.

Drax Power is doing well and generated £137m of EBITDA in the first half of this year, a £51m increase compared to the first half of 2016.

We are confident about the projected growth of our power generation business to £300 million EBITDA by 2025. That plan is aided by our move into rapid response gas – a technology that can meet urgent needs of a power system that includes an increasing amount of weather-dependent renewables. Two of the four rapid response gas projects we’re developing are ready to bid for 15-year capacity market contracts this coming February. They are designed to start up from cold faster than coal and combined cycle gas turbine (CCGT) units. These small-yet-powerful plants will respond to short-term power market price signals and be capable of providing other, ancillary services to further enhance security of supply.

These projects should add an attractive additional source of earnings to our generation business. They also will have attractive characteristics, as a significant element of their earnings will come from the capacity market – guaranteed government income for 15 years.

The retail business

We directly serve the retail market through Haven Power, which supplies renewable electricity primarily to industrial and commercial customers. Last week we announced that Haven Power was able to break-even six months ahead of schedule. Retail is an area we’re growing, and in February 2017 we acquired Opus Energy, the largest non-domestic UK energy company by meters installed outside the Big Six. This has had a marked effect – today we’re the largest challenger B2B energy retailer in the UK.

There is a healthy and regular annuity coming in through the existing retail business, and we believe this can generate £80 million of EBITDA by 2025, which, together with our growing biomass supply business, will make up a third of our earnings. We demonstrated good progress in the first half of the year, earning £11m of EBITDA.

The biomass business

Our two operational wood pellet manufacturing plants in Louisiana and Mississippi are progressing well. They are both still ramping up to full production and have seen marked improvements in pellet quality and production.

We are looking to grow our US business and as part of this we’ll need to build on the recent addition of LaSalle BioEnergy with further acquisitions. Expansion will grow our capacity for the self-supply of pellets from 15% to 30% of Drax Power Station’s requirements, adding an additional one million tonnes of production.

In the second half of 2017, we expect the profitability of Drax Biomass to increase. LaSalle will be commissioned in the first half of 2018 and reach capacity in 2019.

What’s next?

The energy landscape continues to change and we’ll need to change with it. Phasing out coal entirely is priority number one. For this we’ll continue to look at options. How and when we can convert more units to sustainable biomass depends on trials that we are conducting at Drax Power Station during 2017-18. The right government support would also make further conversions cost effective.

We also recognise that it’s important to look at alternative possibilities for our remaining coal units. This is why we are seeking planning permission to convert one or more of our 645 MW (megawatt) coal units to 1,300 MW of gas. Such an upgrade would be at a discount to a new-build, combined cycle gas turbine (CCGT) power station of equivalent capacity. And that’s simply because we would use much of the existing infrastructure and equipment.

Another major prospect is in the technology space and so we’re continuing to invest in research and innovation. Batteries and storage are a huge opportunity for us – both in how they could benefit our retail customers, and how they could provide solutions for large-scale centralised energy systems. In short, it’s an area with huge potential. We welcome the government’s recent initiatives designed to stimulate the development of battery technology, as well as encourage the use of electric vehicles.

Drax has gone through a period of considerable change and that will continue as we meet the UK’s low-carbon energy demands. We are improving the quality of our earnings, reducing our exposure to commodities, and positioning to take advantage of future opportunities. As we told investors in June, if we deliver on these plans, we can expect >£425 million of EBITDA in 2025.

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What causes blackouts in Great Britain?

Getting reconnected

Preventing blackouts in a changing system

If you’re experiencing a power cut in your area, please call the toll-free number 105 (in England, Scotland and Wales) to reach your local network operator.

What does a cooling tower do?

A lasting design

Watch Inside a cooling tower

RNS Number : 1562E Drax Group PLC

THIS ANNOUNCEMENT CONTAINS INSIDE INFORMATION

Highlights

Commenting on today’s announcement Will Gardiner, Chief Executive Officer of Drax Group, said:

A flexible, low-carbon and renewable portfolio

Attractive high quality earnings and returns

Financing the Acquisition

Conditions for completion

Drax trading and operational performance

Contracted power sales at 30 September 2018

Other matters

Acquisition presentation meeting and webcast arrangements

Acquisition of the Portfolio from Iberdrola

Strong asset base

Cruachan Pumped Storage Hydro

Galloway and Lanark Run-of-River Hydro

Combined Cycle Gas Generation (CCGT)

Other smaller sites

Benefits of the Acquisition

A leading provider of flexible, low-carbon and renewable generation in the UK

Increased earnings potential aligned with generation strategy and UK energy needs

High quality earnings

Diversified generation and portfolio benefits

Financing and capital structure

Process and integration plan

Notes:

IMPORTANT NOTICE

Appendix 1

Principal Terms of the Acquisition

Acquisition Agreement

Parties and consideration

Conditions to Completion

Termination for material reduction in available generation capacity

Break fee

Pre-completion covenants

Pension liabilities

Seller’s warranties, indemnities and tax covenant

Transitional Services Agreement

Appendix 2

Profit Forecast

Profit forecast for the Portfolio for the year ending 31 December 2019 including bases and assumptions.

Basis of preparation

Principal assumptions

Assumptions within management’s control

Assumptions outside of management’s control

Market background

Our strategy

Summary of 2017

Political, regulatory and economic background

Safety, sustainability and people

Research and innovation

Performance review: Pellet Production

Operational review

CASE STUDY

Low-cost, high-impact capacity increase

CASE STUDY

Locational benefits of Gulf cluster

Financial results

Pellet Production financial performance

Key performance indicators

Looking ahead

Performance review: Power Generation

STRATEGY IN PROGRESS

Gas power station development

Regulatory framework

Generation capacity and system support

STRATEGY IN PROGRESS

Repowering away from coal

RNS Number : 1562E
Drax Group PLC

RNS Number: 0238Z
DRAX GROUP PLC
(Symbol: DRX)