Drax strikes CfD deal with government for power generation beyond 2027
By Josh White
Date: Monday 10 Feb 2025
(Sharecast News) - Drax Group announced a preliminary agreement with the UK government to continue operating its North Yorkshire power station beyond 2027 on Monday, under a new low-carbon, dispatchable Contract for Difference (CfD) scheme.
The FTSE 250 company said the proposed CfD set a strike price of £113 per megawatt-hour (MWh), indexed to the consumer price index, and would apply to all four of Drax's biomass units.
It said the contract would span from April 2027 to March 2031, with an annual generation collar of approximately six terawatt-hours (TWh).
Under the arrangement, Drax said it would generate around six TWh of electricity annually, selling power against a season-ahead reference price.
The firm said it planned to leverage the flexibility of its biomass units to increase generation during periods of high demand and reduce output when demand is low, supporting UK energy security.
It said the agreement also encompassed provisions for system support and ancillary services.
Drax said it was targeting an average adjusted EBITDA of £100m to £200m per year from the power station during the contract period.
That projection included a gain-share mechanism but excluded potential additional revenue from merchant generation above the established collar.
The agreement mandated that Drax sources 100% of its woody biomass from sustainable sources, an increase from the previous requirement of 70%.
Materials from primary and old-growth forests would be excluded from subsidies, with penalties imposed for non-compliance.
The government reportedly expected the revised subsidy structure to save consumers about £170m annually compared to alternative options like natural gas procurement.
Drax said the agreement remained subject to parliamentary procedures, including the passage of the requisite statutory instruments and the completion of the subsidy control process.
On finalisation, Drax said it intended to keep all four biomass units operational beyond March 2027 while exploring long-term investments such as bioenergy carbon capture and storage (BECCS) and data centres.
Separately, Drax said it was continuing to target over £500m in adjusted EBITDA per annum post-2027 from its flexible generation and pellet production segments.
The company said it was developing a pipeline of sales opportunities in North America, Asia, and Europe, including a heads of terms agreement to supply over one million tonnes per annum of biomass pellets to Pathway Energy for a sustainable aviation fuel project in Texas, expected to start operations in 2029.
"The government's low-carbon dispatchable CfD framework for biomass, announced today, is an investment in UK energy security, which will result in a net saving for consumers and support the delivery of Clean Power 2030," said chief executive officer Will Gardiner.
"Analysis from Baringa indicates the proposed agreement will result in a £1.6bn to £3.1bn reduction in electricity system costs, versus the construction of new fossil fuel power stations, and Government has concluded today that Drax offers the lowest cost option for bill payers during this period.
"Drax Power Station is the UK's largest power station and provides secure capacity equivalent to over 80% of Hinkley Point C."
Gardiner said the station plays a "critical role" in UK energy security, providing around 10% of all UK renewable energy and over 50% at certain times of peak demand, with enough reliable power for five million homes - equivalent to every home in London, or Wales and Scotland combined.
"Under this proposed agreement, Drax can step in to increase generation when there is not enough electricity, helping to avoid the need to burn more gas or import power from Europe, and when there is too much electricity on the UK grid, Drax can turn down and help to balance the system.
"The size, flexibility and location of the power station makes it important for UK energy security and the proposed agreement helps protect the jobs and skills of today and the future, creating options for billions of pounds of investment in growth across Britain, including the development of large-scale carbon removals and data centres."
Drax said it would release its full-year results for 2024 on 27 February.
At 1058 GMT, shares in Drax Group were up 3.7% at 658.5p.
Reporting by Josh White for Sharecast.com.
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