energy

Drax to withdraw from coal use, cutting 230 jobs

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Drax, the FTSE 250 power company, said it would draw a line under its use of coal in 2022, ahead of the UK’s 2025 deadline, as it battles to make its biomass energy model viable for the future.

The closure of Drax’s coal plants in 2022 will lead to the loss of up to 230 jobs, the company said on Thursday.

Drax reported £410m in adjusted earnings before interest, tax and depreciation and amortisation, up from £250m the year before, and in line with consensus. Adjusted earnings per share increased from 10p to 28p, which tallies with investor guidance.

Under the company’s proposals, commercial generation from coal will end in March 2021 but the two coal units will remain available to meet the government’s energy requirements until September 2022.

“It absolutely makes sense for this company to be closing its coal production,” said Mark Freshney, an analyst at Credit Suisse. “My only surprise is that they didn’t announce they were closing earlier last year.”

Shares in the group rose 2 per cent in early London trading on Thursday.

Coal represented around 3 per cent of Drax’s power generation in 2019, down from 30 per cent in 2016.

“Overall, we believe the company is well prepared for low power prices in 2020,” Mr Freshney added, noting that the company’s fundamentals were “more favourable than we expected”.

The company announced a 47 per cent reduction in CO2 emissions from its business activities last year, as it seeks to become the world’s first carbon-negative business in less than 10 years by soaking up more carbon dioxide than it emits — a plan which depends heavily on the success of Carbon Capture and Storage (CCS) technology.

Mr Gardiner, who was finance director before taking the top job, is in a battle to extend the prospects of a company whose main asset, the UK’s biggest power plant, provides 5 per cent of the country’s electricity from Selby, North Yorkshire.

Four of the plant’s six generating units produce power by burning wood pellets, which the UK government counts as renewable, attracting subsidies that added up to 19 per cent of Drax’s £4.2bn revenues last year. But in 2027 these subsidies will expire, so Mr Gardiner must find an alternative financial model.

“The real crucial part of the investment case is what cost level they can get biomass to by 2027,” explained Martin Young, an analyst at Investec. “It’s more important in the shorter term than any plans to build gas.”

The company announced some incremental steps in reducing biomass costs on Thursday, including a cost reduction of $5 per tonne delivered of biomass pellets last year, as well as targets for bringing costs down further.

Drax announced an operating profit of £62m for 2019, up from £60m in 2018, but representing a third of the consensus forecast of £192m.

Although biomass — electricity generated from organic material — is classified in the UK as a renewable energy source, it is strongly opposed by some environmentalists, who argue it can in some cases be more damaging than burning fossil fuels.

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