Drax Secures Low-Carbon Dispatchable CfD Agreement with UK Government
Why we think this is good
The RNS announcement from Drax Group plc outlines a positive development with the UK Government, securing a long-term low-carbon dispatchable CfD agreement for the operation of its Drax Power Station. The agreement provides revenue visibility and stability, with a CfD strike price that is expected to result in significant savings for consumers. Additionally, the flexible operation of the power station supports UK energy security. While the relatively short 4-year term of the agreement and the gain share mechanism may limit the upside potential, the overall impact on Drax's financial performance and valuation is expected to be positive.
Key Points
- Heads of terms agreed with UK Government for low-carbon dispatchable CfD agreement for Drax Power Station post 2027
- CfD scheme with a strike price of £113/MWh (2012) applied to all four biomass units
- c.6TWh pa generation collar with flexible operation to support high and low demand periods
- Contract period from Apr-27 to Mar-31
- Baringa estimate £1.6-3.1 billion of saving to consumers
- Targeting average Adj. EBITDA of £100-200 million pa from DPS over the agreement period
- Continuing to target over £500 million of post 2027 Adj. EBITDA from FlexGen and Pellet Production
Summary
Drax Group plc has agreed heads of terms with the UK Government for a low-carbon dispatchable CfD agreement for the operation of Drax Power Station (DPS) post 2027. The key highlights of the agreement include:
- CfD scheme with a strike price of £113/MWh (2012) applied to all four biomass units
- c.6TWh pa generation collar with flexible operation to support high and low demand periods
- Contract period from Apr-27 to Mar-31
- Baringa estimate £1.6-3.1 billion of saving to consumers
Drax is targeting average Adj. EBITDA of £100-200 million pa from DPS over the agreement period, and is continuing to target over £500 million of post 2027 Adj. EBITDA from FlexGen and Pellet Production.
The broker targets indicate a generally positive outlook, with 3 out of 4 brokers having a Buy or Outperform recommendation and price targets ranging from 434p to 1,100p.