Drax Group's (LSE:DRX) move into battery storage makes strategic sense, according to RBC Capital, which keeps its “outperform” rating and 950p price target, implying about 35% upside from the current share price.
The group’s purchase of three battery sites in Scotland and northern England adds 260MW of two-hour storage capacity to its portfolio, a size that RBC calls the current “sweet spot” for the UK market.
The assets should generate about £30m of annual earnings before interest, tax, depreciation and amortisation once they are up and running.
The bank expects trading revenues, rather than grid services or capacity payments, to become the main source of profit as power market volatility grows.
Drax also holds an option on another eight battery sites, though RBC sees more value in the larger initial assets. The bank believes Drax’s experience managing flexible generation will help it make the most of widening spreads as more renewable power comes online.
Beyond storage, RBC continues to see unrecognised value in Drax’s main power station, particularly after 2031 when current biomass subsidies expire.
The analysts highlight residual asset value and a £450m cash inflow due in 2027 as potential catalysts. With net debt expected to stay below one times earnings, Drax has room to invest or return cash.
For investors, the case for Drax remains one of transformation: a former coal giant now positioning itself as a cornerstone of Britain’s low-carbon grid.