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Drax sells fleet of UK gas plants to Vitol subsidiary

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Drax sells fleet of UK gas plants to Vitol subsidiary

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Drax's biomass plant in North Yorkshire. The company plans to invest proceeds from the gas sale in its wood pellet supply chain.
Source: Drax

Drax Group PLC has struck a deal to sell its fleet of combined-cycle gas-fired power plants in the U.K. to a unit of energy and commodities trader Vitol Holding BV, flipping the assets just over two years after acquisition to redirect investments into its biomass business.

Drax said Dec. 15 that it agreed to sell Drax Generation Enterprise Ltd., a subsidiary that holds its ownership in four combined-cycle gas turbines, or CCGTs, to Vitol's VPI Holding Ltd. for a consideration of £193.3 million. The transaction, subject to antitrust approval, is expected to close by Jan. 31, 2021.

The deal covers the 812-MW Damhead Creek, 715-MW Rye House, 420-MW Shoreham and 60-MW Blackburn Mill assets. It also includes £29 million associated with the option to develop a new CCGT project, the 1,800-MW Damhead Creek 2 plant, which will only be payable if certain triggers are satisfied.

Drax acquired the assets alongside several hydropower plants from Spanish utility Iberdrola SA's Scottish Power Ltd. subsidiary in late 2018, paying £702 million for the combined portfolio. But the company said that while the gas plants have performed well since then, they no longer fit into the group's strategy based on biomass generation and contracts to provide system support to the national grid.

"As we focus on a renewable and flexible portfolio, it is right that we divest these gas generation assets and in doing so create value for our shareholders," Drax CEO Will Gardiner said in a statement announcing the deal. Gardiner pointed out that the sale would also reduce Drax's carbon emissions. The company is planning to shut its last coal plant next year.

Vitol is betting that efficient gas plants will remain a key part of the power supply in the U.K. as intermittent renewables keep expanding. The company said the acquisition will make it one of the leading CCGT operators in the U.K. with a combined portfolio of 3,300 MW. VPI already owns the 1,240-MW VPI Immingham plant in Lincolnshire, England.

New gas plant projects, although numerous, have had a hard time getting off the ground in the U.K. amid tough economics for large-scale baseload generation. A legal challenge also briefly forced Drax to halt plans to convert its last remaining coal unit into a CCGT earlier this year. The company continues to pursue that project and is also developing open-cycle gas turbines, which typically run for shorter times to provide peaking capacity when demand is high.

Biomass investments

Drax is planning to use the proceeds from the sale to further develop its supply chain for biomass, which it sources from suppliers and through its own production facilities in the U.S. and burns in former coal units at Britain's largest power plant. The company wants to become a carbon-negative business by 2030, using carbon-capture technology to store emissions directly from its smokestacks.

Drax says it will need to invest about £600 million to bring costs for biomass down to competitive levels and expand its supply chain of wood pellets from 1.5 million tonnes today to 5 million tonnes by 2027, when U.K. subsidies for the technology are scheduled to run out.

Drax is holding on to the pumped storage and run-of-river hydro stations acquired from Iberdrola, as well as some other assets currently held by the subsidiary that will be sold to Vitol.

The company said the sale price agreed with Vitol represents a premium over the book value of the power plants, which had gross fixed assets of £182 million as of June 30. The plants, which contributed £18 million to Drax's adjusted EBITDA during the first half of the year, are also expected to receive £89 million of income from Britain's capacity market for backup power between 2021 and 2024.

Drax said its trading and operational performance during the second half of 2020 has remained "robust" and it expects adjusted EBITDA for 2020 to be in line with analyst expectations of £397 million.