Shares in Drax Group (LSE:DRX) have room to grow, according to analysts at Jefferies, who restarted coverage of the UK power generator with a call ‘buy’ and a price target of 750p.
Best known for running the UK’s largest power station, Drax has pivoted from coal to biomass, burning wood pellets rather than fossil fuels to generate electricity.
It also earns a significant chunk of revenue from contracted sales and trading its energy.
But the company’s long-term prospects are now being driven by a technology called bioenergy with carbon capture and storage (BECCS), which removes carbon dioxide from the atmosphere during power generation.
Jefferies believes this could be a major growth area, especially as governments step up support for technologies that help cut emissions. The firm sees BECCS as offering Drax a chance to generate returns well above its cost of capital, with “multiple levers” to enhance long-term value.
While some investors remain cautious about the sustainability and cost-effectiveness of biomass, Jefferies said Drax is likely to secure additional support from the UK government for its BECCS rollout.
It expects a final investment decision on UK BECCS in 2025, with significant policy momentum building on both sides of the Atlantic.
Alongside its UK operations, Drax is expanding its US presence. It plans to build up to three BECCS facilities across North America, where the policy landscape is particularly supportive. Jefferies highlighted US incentives like the Inflation Reduction Act as key drivers of value.
There are risks, including the scale of upfront investment and the evolving regulatory environment, but Jefferies sees the market underestimating Drax’s future earnings potential. If BECCS lives up to expectations, the firm believes the group could deliver 15–20% returns from its US projects alone.
Mid-afternoon, the shares were flat at 659p.