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Drax to buy 2.6 GW gas, hydro generation portfolio from Scottish Power for £702M

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Drax to buy 2.6 GW gas, hydro generation portfolio from Scottish Power for £702M

British power producer Drax Group PLC is buying almost 2.6 GW of pumped storage, run-of-river hydro and gas-fired generation in the U.K. from Iberdrola SA subsidiary Scottish Power for £702 million.

The acquisition would advance Drax's shift away from coal power and towards a more diversified and flexible generation portfolio while completing Scottish Power's transition from carbon-emitting power plants.

Drax Smart Generation Holdco Ltd. would take over Scottish Power Generation Ltd. under the deal, which both companies are aiming to complete by the end of the year, pending Drax shareholder approval and a signoff from the U.K.'s competition watchdog, they announced Oct. 16.

For Drax, which has been transitioning the country's largest coal power plant to burning biomass, the dispatchable nature of the assets will position the company for a changing power system that has to cope with an increasing share of renewables, CEO Will Gardiner said.

"We're very much focused on this dispatchable aspect of the market. ... It's unlikely that we'll move into wind or solar at this point," he said during an Oct. 16 news conference.

Drax, which owns Britain's largest power station, has been trying to move away from coal as the country looks to phase out unabated coal-fired generation — plants without carbon-capture technology — by 2025. The company had confirmed in September that it was talking to Scottish Power about a potential deal.

The portfolio consists of the 440-MW Cruachan pumped storage plant, 126 MW of run-of-river hydro assets in Galloway and Lanark, the four combined-cycle gas power stations — 805-MW Damhead Creek, 715-MW Rye House, 420-MW Shoreham and 60-MW Blackburn Mill, as well as a biomass-from-waste facility.

Drax said the plants would reduce its exposure to commodity prices and open up new business areas in system support services, such as market balancing. The company has converted four of six units at its 3,900-MW power plant in North Yorkshire from burning coal to using wood pellets and is seeking permission to convert the remaining two as well.

Gardiner has emphasized that he sees Drax's place in the U.K. power market as supplementary to wind and solar plants, which are supposed to make up the majority of generation in the future.

"If we are to achieve the reductions [in CO2 emissions] ... you need a power system with 85% solar and wind, but you also need a dispatchable system," he told the BNEF Future of Energy Summit in London on Oct. 1.

"The system will need this 15% of dispatchable power," he added. "Solving that problem of how do you support that system is what Drax is all about."

Drax expects the Scottish Power portfolio to generate EBITDA in a range of £90 million to £110 million from gross profits of £155 million to £175 million, the company said in a news release. Two-thirds of its gross profits are expected to come from non-commodity market sources including system support services, capacity payments, the biomass-from-waste facility and Renewable Obligation Certificates, with a significant proportion of earnings coming from pumped storage and hydro.

The company said it had secured bridge funding of £725 million to finance the deal and expects no impact on its previous guidance for full-year EBITDA.

Gardiner said the company also sees opportunities for capacity expansion at several of the sites. "We need to look at those and assess them. ... It'll be all about risk and return, and we'll be very disciplined on those," he said.

Following the deal, Scottish Power will only retain wind power assets and become the first vertically integrated U.K. energy company to shed all of its coal and gas generation, Iberdrola said in a news release. Scottish power closed all of its coal plants over the last decade, it said, and is investing £5.2 billion to 2022, focusing on renewables, enhanced grid networks and smart technology.

"This is a pivotal shift for ScottishPower as we realize a long-term ambition. We are leaving carbon generation behind for a renewable future powered by cheaper green energy," Scottish Power CEO Keith Anderson said in a statement.

The company has 2,700 MW of wind power capacity operating or under construction in the U.K., as well as a project pipeline of more than 3,000 MW, of which 2,900 MW is offshore. The divestment to Drax is part of the €3 billion asset rotation plan that Iberdrola announced last February, the company said.