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Investing.com -- Shares of Drax Group (LON:DRX) climbed 4% as the company announced a new Contract for Difference (CfD) agreement with the UK government, ensuring a low carbon dispatchable supply from Drax Power Station until March 2031.
The CfD, set to operate from April 2027 to March 2031, guarantees a contracted price of approximately £170/MWh, based on 2012 prices indexed to the Consumer Price Index (CPI).
Under the terms of the agreement, Drax is expected to generate a collar of approximately 6 terawatt-hours (TWh) across four units of its power station, with a higher output of around 4TWh in winter and roughly 2TWh in summer. This strategic move is anticipated to guide Drax’s EBITDA to between £100 million and £200 million annually throughout the duration of the contract.
The agreement allows Drax to optimize its asset performance, particularly by maximizing generation during the winter when prices are higher and by providing system support and ancillary services. Furthermore, Drax retains the flexibility to operate beyond the contracted 6TWh on a merchant basis, which could potentially lead to earnings exceeding the current guidance.
A revenue sharing mechanism is also in place, with a 30% share factor kicking in above a £160 million threshold, increasing to 60% above £210 million. This mechanism is designed to have a limited impact, as Drax would not trigger it with an EBITDA of £200 million and capital expenditures of £60 million.
The CfD is not expected to have a direct impact on Drax’s pellet business. The power station’s 6TWh of generation will require around 3 million tonnes of pellets, compared to the current 7.5 million tonnes.
Drax produces about 4 million tonnes of pellets annually, half of which is supplied to its own power station and the remainder to third-party customers. Even as third-party agreements expire, the company does not anticipate a significant effect on pellet prices.
Analysts have responded positively to the news, with RBC commenting, "We see this announcement as a significant positive for Drax."
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