Drax Reports Bumper Profits on Record High UK Power Prices

(Bloomberg) -- UK electricity generator Drax Group Plc almost doubled its profits last year as it locked in soaring power prices driven by Europe’s energy crisis.

The company beat estimates, posting £731 million ($882 million) adjusted earnings before interest, taxes, depreciation and amortization, according to a statement Thursday. That’s above the average analyst expectations of £700 million compiled by Bloomberg. 

The company, like other power producers, has benefitted from a surge in energy prices, prompting public backlash and windfall taxes. That’s come despite rising costs of biomass — Drax’s main source of generation — that it needs to import to burn in its flagship power station in Yorkshire, northern England, where workers have been on strike over a pay dispute.

Shares were down by 3.8% at 8:42 a.m. London time after management didn’t include formal guidance for the coming year. Drax did publish an analyst consensus showing estimates for record earnings of more than £1 billion this year, after it was able to lock in higher prices for its electricity sales for the coming years.

While Drax saw growth in its biomass pellet production and customer businesses, the main driver of its profits was generation, which was 95% of earnings. It’s already locked in sales of more than 23 terawatt-hours of power for the next two years at an average of £153 per megawatt-hour, roughly triple the normal price before the energy crisis.

Rising fuel and shipping ccosts have added some small dents to its balance sheet. Biomass production costs jumped 6% from the year before, with 35% rises for utility costs and a 20% increase for barge and rail transport.

“The concern now for Drax is that we’ve had a bout of inflation,” said Mark Freshney, a London-based analyst at Credit Suisse Group AG. “Will biomass costs come down with the price of gas? Or do they stay stuck up high?”

Drax is looking to develop bioenergy with carbon capture projects in the UK which will require billions of pounds of investment and government subsidies. It’s vital the government accelerates its support for those projects to deliver on net zero targets, Chief Executive Will Gardiner said on a media call. The company is also exploring opportunities for BECCS in Poland, he added.

Drax has also faced headwinds after a BBC documentary in October said it sourced some biomass by cutting down primary forest. The company denied the claim, saying it burns offcuts from forestry that would otherwise go to waste. The episode raised criticism from policymakers but has had little effect on Drax’s balance sheet. 

Drax is waiting for the government to release its bioenergy strategy, expected in the second quarter of the year, which will be crucial to determining the role the company’s generation will play in the future.

(Updates with share drop and CEO comments.)

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