DRAX Group: Turning Up the Heat, Sustainably

Drax generates around 9.8% of the UK’s renewable electricity and, at times of peak demand, over 50% of the country’s renewable dispatchable power. Its 2.6GW Drax Power Station ensures critical system stability as wind and solar fluctuate. This gives it national strategic importance and policy alignment with the government’s decarbonisation goals. With 4 units operating under a new low-carbon CfD agreement through 2031, Drax has both regulatory support and long-term earnings clarity.

Through over 20 production sites in North America and Europe, Drax is the world’s second-largest biomass pellet producer. These assets not only ensure self-supply for Drax Power Station but also offer growing optionality in third-party sales for use in power generation, industrial heat, and potentially sustainable aviation fuel (SAF). With 5 million tonnes of capacity, Drax’s control of the value chain insulates it from supply shocks and positions it to benefit from emerging carbon removal markets.

Drax’s fully integrated supply chain from forest to furnace offers security and margin control. Its global infrastructure includes ports, shipping logistics, and proprietary pellet technology. In an era of geopolitical uncertainty and energy instability, this resilience is invaluable. Combined with growing flexible generation assets like pumped hydro and OCGTs, Drax has the tools to support grid stability and the energy transition while delivering consistent cash flow and earnings growth.

Finalisation of Low-Carbon CfD: Completion of contracts for all four Drax units would cement post-2027 earnings visibility and remove investor uncertainty.

New BECCS/SAF Announcements: New partnerships or pilot projects in carbon removals or sustainable aviation fuel could re-rate the perceived optionality in biomass beyond power.

OCGT & Cruachan Expansion Online: Commissioning of flexible gas and pumped hydro assets will enhance earnings stability and provide upside from capacity market auctions.

Data Centre Integration: Progress on behind-the-meter AI data centres at the Drax site would highlight value of grid access and land assets, boosting NAV sentiment.

BECCS Rollout in the UK & EU: Securing government or private-sector offtake for carbon removals would monetise a large, new revenue stream and support expansion.

ETS Inclusion of Removals: Regulatory clarity on carbon credits under the UK/EU ETS for CDRs would broaden market access and underpin BECCS economics.

Drax’s business model is deeply intertwined with UK energy policy. The low-carbon CfD through 2031 mitigates some risk, but future extensions depend on continued government support. Additionally, global biomass production and shipping depend on stable geopolitical dynamics in the US South and Canada, where Drax sources the majority of its fibre.

While the CfD offers price stability, a portion of Drax’s earnings remains merchant exposed, particularly in its FlexGen and legacy ROC units. UK power prices are subject to volatility due to weather patterns, gas market dynamics, and regulatory intervention. While Drax is well hedged into 2027, price compression could weigh on longer-term margins.

Despite classification as renewable, biomass faces criticism around carbon neutrality and land use. NGOs and regulators in Europe and beyond increasingly challenge its sustainability claims. This presents a long-term reputational and regulatory risk that could limit subsidy availability or curb demand from customers seeking carbon neutrality.