Ask Andy: Does Drax offer a vision of the future?
Picture this. It's 2016 and amazingly Tottenham Hotspur are playing Barcelona in the European Championship final. I didn't get tickets so I'm down my local watching it with the lads. It's nil-nil in the last seconds and John Bostock is one-on-one with the goalie when the power goes off.
Ludicrous? Perhaps not. As the Daily Mail recently reported, Britain faces years of blackouts and soaring energy bills, quoting Derek Birkett, a former National Grid control engineer and author of When Will The Lights Go Out?
One of the most onerous legacies the new Government has been given is the agreement to produce 15% of all energy consumed in the UK from renewable sources by 2020.
This includes industry, transport and household energy and not just the production of electricity. But focusing on renewable energy sources neglects security of our energy supply or affordability because most renewable sources are intermittent and need a greater overall capacity to provide back-up. This got me thinking about Drax.
Based in Selby, North Yorkshire, Drax is the country's largest coal-fired power station and provides 7% of our electricity. Burning coal to make electricity goes against the spirit of recent legislation, but coal is ideal not only for providing base load electricity for usual consumption levels but also for enabling the station to change capacity in line with demand fluctuations within ten seconds. As older coal and nuclear plants are closed under European law, more of Britain's generating system's flexibility is being taken out. This means Drax's assets should be revalued by the Government.
To hit the 2020 targets, plans are afoot to increase wind power, but as we saw last winter the lowest temperatures are also associated with the calmest weather, showing that we cannot rely on wind power in a time of peak demand. And while the Government has reiterated its commitment to increasing nuclear energy, which will provide a good base load of electricity, this is neither flexible nor renewable and is unlikely to come onstream until 2021.
In the meantime, Drax has been looking at ways to cut its reliance on coal while maintaining its flexibility. It has already built the infrastructure to allow biomass - plant-based material - to be fed into the furnaces with the coal as fuel for the generation process.
According to Drax's 'field to furnace' life-cycle analysis, which gives the total carbon footprint of the biomass burnt by Drax, much less CO2 is released compared with gas-fired plants, even if the biomass is imported. The company has been working with different types of biomass since 2003 and is confident that it could convert one of its six units to burn 100% biomass. So what is stopping it?
Since biomass fuels are more expensive than fossil fuels, renewable subsidies are needed and so far the Government will not say what will happen beyond 2013. But sooner or later the reliability offered by Drax will be properly remunerated and that fact is not yet fully reflected in the shares. If Drax can keep the lights on so I can see that winning Tottenham goal, the shares have to be a buy.
Traded on: Main market
Ticker: DRX
Contact: 01757 612230 or draxpower.com
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