Drax Group (LSE:DRX) will pay a penalty of £25 million to the energy watchdog's redress fund after an investigation found it provided inaccurate data on the types of wood it uses in its biomass burners as part of the UK renewable energy regime.
Shares in the FTSE 250-listed group spiked 1.6% to 666p in early trade on Thursday morning, with the regulator's rap not as tough as some investors may have been fearing, with analysts saying the announcement removed an "overhang" from the shares, though they fell into the red later.
Ofgem carried out a probe into the company after it was accused of burning wood from some of the world’s most precious forests, with a report finding that timber was taken from rare forests in Canada despite them being designated as 'no go areas'.
The investigation looked into whether Drax had breached annual reporting requirements relating to the UK Renewables Obligations Certificate scheme, as well as other related matters.
But in concluding the probe, Ofgem today said it found "an absence of adequate data governance and controls in place" at Drax, leading to the company misreporting data in its annual submission for 2021-2022.
Drax was also unable to provide the regulator with sufficient evidence demonstrating how it had arrived at the figures in its submission, and was unable to support the reliability of its profiling data reporting of forestry type and sawlogs for Canadian wood deliveries.
But Ofgem said it found no evidence suggesting that Drax was issued with ROCs incorrectly or that the company failed to meet the government's sustainability threshold for biomass, which requires a minimum of 70% of biomass to come from sustainable sources to receive funding from the ROC scheme.
However, earlier this year the National Audit Office concluded that the rules for checking on bioenergy companies aren’t robust enough to rule out environmental harm, casting a cloud over the £22 billion of public subsidies doled out to them and possibly Ofgem's ruling today.
Tighter reporting from now on
Drax accepted the findings of the investigation, Ofgem said, and as well as the payment to the Energy Industry Voluntary Redress Fund will re-submit a new annual profiling submission in respect of forestry type and saw log proportions.
It will also commission an independent external audit of the international supply chain for the period from April 2023 to March 2024, covering 98% of its supply chain, which will be published.
Ofgem chief Jonathan Brearley said: "Energy consumers expect all companies, particularly those receiving millions of pounds annually in public subsidies to comply with all their statutory requirements.
"There are no excuses for Drax's admission that it did not comply with its mandatory requirement to give Ofgem accurate and robust data on the exact types of Canadian wood it utilises. The legislation is clear about Drax's obligations - that's why we took tough action."
He said Drax accepted that it had "weak procedures, controls and governance which resulted in inaccurate reporting of data" and while the regulator currently has no reason to believe there have been further instances of non-compliance it "won't hesitate to act if required".
Drax boss Will Gardiner said "it is welcome that Ofgem has found no evidence that our biomass failed to meet the sustainability criteria of the Renewables Obligation (RO) scheme, nor that the ROCs we received for the renewable power we produced had been provided incorrectly".
A spokesperson for the Department for Energy Security and Net Zero said: "We expect full compliance with all regulatory obligations – consumers rightly expect the highest standard of accountability from generators."
They said that the £25 million redress payment "underscores the robustness of the regulatory system and the requirement that generators abide by both the spirit and the letter of the regulations" but stressed that the details of the investigation and subsequent findings "are a matter for Ofgem".
'Difficult to prove'
More robust criticism came from elsewhere, with Matt Williams, senior advocate for the Natural Resources Defense Council, who said Drax was an example of a major company "taking billions from the public – in this case via energy bills – but failing to follow basic rules to protect the environment".
Coming after the National Audit Office report and BBC Panorama investigation that found that Drax is logging old forests in Canada, the Ofgem ruling "shows how difficult it is to prove that burning wood from forests is good for the environment", he said.
"The £25 million fine Drax have volunteered to pay is a drop in the ocean compared to the billions they're asking for in new subsidies. The Energy Secretary Ed Miliband MP must see – it's not worth paying even more of the public's money to a company that can't play by the rules.”
Russ Mould, investment director at AJ Bell, felt the regulator issued some "pointed criticism" of the company’s data governance and controls and the redress payment, but the company and investors will overall be relieved.
*** Update: Adds further background and reaction ***