Drax secures UK government CfD for biomass energy

LONDON - Drax Group plc (Symbol: LON:DRX) has reached a preliminary agreement with the UK government to continue operating its Drax Power Station (DPS) post-2027, under a new low-carbon dispatchable Contract for Difference (CfD) scheme. This arrangement aims to bolster UK energy security while potentially saving consumers billions in electricity costs.

The non-binding heads of terms, announced today, propose a CfD with a strike price of £113/MWh (2012 prices) indexed to the UK Consumer Price Index. The contract, covering all four biomass units at DPS, is set to run from April 2027 to March 2031, with an annual generation target collar of approximately 6 terawatt-hours (TWh).

Consultancy firm Baringa has estimated that the agreement could lead to a reduction of £1.6-3.1 billion in electricity system costs compared to the alternative of constructing new fossil fuel power stations. The government has recognized Drax as offering the lowest cost option for electricity consumers within this period.

Drax Power Station is the UK’s largest, providing secure capacity equivalent to over 80% of the Hinkley Point C nuclear power station. It accounts for about 10% of the UK’s renewable energy and can supply reliable power to 5 million homes. The station’s flexibility allows it to adjust generation in response to fluctuations in electricity demand, contributing to grid stability.

Drax aims for an average adjusted EBITDA of £100-200 million per annum from DPS during the contract period, not including potential additional earnings from merchant generation above the generation collar. The company also continues to target over £500 million adjusted EBITDA per annum post-2027 from FlexGen and Pellet Production.

The agreement also anticipates stricter biomass sustainability requirements, which Drax supports and is prepared to comply with.

The CfD arrangement is subject to the completion of required Parliamentary procedures, including passing a Statutory Instrument and the Subsidy Control process, as well as finalizing the contract. Drax has committed to keeping all four units operational beyond March 2027, supporting UK energy security, and is exploring long-term investments in Bioenergy Carbon Capture and Storage (BECCS) and data centers.

This news follows Drax’s December 2024 announcement of a heads of terms agreement to supply over 1 million tonnes per annum of biomass pellets to Pathway Energy for a sustainable aviation fuel project in Texas, with potential future expansions.

Drax’s capital allocation policy remains focused on value creation opportunities. The company is scheduled to issue its full-year results for 2024 on February 27, 2025.

This article is based on a press release statement from Drax Group plc.

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