As the owner and operator of the largest coal fired plant (4000MW) in Western Europe, FTSE 100 constituent Drax Power receives its fair share of comments about the amount of carbon dioxide it emits into the atmosphere. There are plenty of other facts about Drax Power that should be noted too.
The Drax Power station provides approximately 7% of the total electricity used in the United Kingdom, and is the most efficient coal fired plant in the country. In recent years, Drax Power has been expanding its fuel mix too. Biomass, like wood, seeds and agricultural waste, are now a standard part of the fuel burned at Drax Power. The company has also announced that it will undertake a steam turbine modernisation project which is projected to cut its annual carbon dioxide output by 1 million tonnes per annum. So despite often being associated with "dirty" coal, Drax has continued to invest heavily in cutting its carbon footprint.
Recently Drax announced another initiative - a plan to construct three 300MW Biomass Power Plants. To put the Biomass projects into perspective, Drax reckons that when complete, it will generate three times more renewable energy than the London Array - the largest offshore wind farm development in Europe. The three plants will also generate around 15% of the UK's total renewable energy output. In other words, the three projects represent a significant portion of the new renewable energy capacity earmarked to come online before 2015. For Drax, the logic is simple. It is already an expert at generating electricity from coal, and biomass involves a very similar process. Drax has clearly put quite a bit of thought into this too.
All three plants will be built short distances from deep water ports along the east coast of England, so that locally sourced material can be blended with biomass imported from overseas. The biomass will travel from the port to the plant via conveyor belts, keeping transportation costs to a minimum. Biomass can apply to any organic material with an energy content, but for Drax Power, the emphasis will be on sustainable sources, including willow, bamboo, peanut husks, agricultural waste and grass. In all Drax has already tested over 70 different sources of energy, and has dwindled it down to a handful of materials that meet the requirements.
Drax isn't going it alone on the project either - Siemens is taking a 40% stake, and will supply the turbines and other associated technology for the development of the plants. Drax Power will be in charge of operating the plants and sourcing the feedstock. Once complete, Drax reckons its combined coal + biomass plants will produce around 10% of the UK's total electricity output. The first Biomass plant is expected to move into operation in late 2014, assuming construction commences in late 2010. Between now and late 2010, the Drax and Siemens need to pin down the exact costs, secure long lead items and finance. The JV has already stated that the "fully loaded" cost will be around £2 billion. While the project looks likely to move ahead, Drax has been keen to emphasise that it would not jeopardise its credit rating to secure financing. Instead, the company has already announced that it will be cutting its dividend from 2010 to help fund a chunk of the capital expenditure from internal cash. Even with the dividend cut, Drax still intends to return 50% of earnings from 2010 onwards - suggesting the yield will still be better than many other constituents of the FTSE 100.
The renewable energy sector has delivered more than its fair share of disappointments in recent years. There are a number of reasons for lack of progress, including grid availability issues, planning permission hurdles, and a large proportion of the players in the market being undercapitalised companies who cannot withstand material changes in their business models. AIM in particular has witnessed a number of spectacular failures, especially from the wind and biodiesel sectors. By comparison, Drax Power is a well established player in the utility market and has decades of operational experiences. Combined with a strong balance sheet, excellent cash flow and a very big partner (Siemens) suggests that this "dirty" power company may be the best one to deliver viable, sustainable and reliable clean fuel in the future.