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UK's Drax seeks to boost biomass self-supply to 8 million mt

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UK's Drax seeks to boost biomass self-supply to 8 million mt

Highlights

Supply to support post-subsidy viability

Opportunity to service wood-pellet market

Goal of GBP50/MWh biomass cost

London — Drax is looking to boost its annual self-supply of wood pellets by 3 million to 8 million mt by 2027, the UK generator said Tuesday in a trading update.

Increasing self-supply would help reduce pellet costs 30% to GBP50/MWh ($64.74/MWh) and keep the company's Selby generation site in North Yorkshire viable after 2027, when current subsidies end, it said.

"We plan to supply 80% of our biomass from our own sources -- a significant increase on the 20% we currently self-supply," Drax CEO Will Gardiner said.

Drax has 2.6 GW of converted biomass-fired capacity across four units at Selby. It plans to convert two remaining coal units there to combined cycle gas generation.

"Supplying more of our own biomass will cut costs and reduce supply chain risks, ensuring our biomass power generation remains viable in the long term. When combined with carbon capture it will also enable negative emissions, helping the UK on its path to net zero by 2050," he said.

Drax has self-supply of 1.5 million mt a year of wood pellets to its North Yorkshire generation site. In its first-half 2019 results it announced a GBP50 million investment in its three US Gulf wood pellet sites, adding 350,000 mt of capacity by 2021.

It is now "evaluating options" to deliver an additional 3 million mt of capacity to the 5 million mt goal it already has for 2027.

"These options are expected to deliver returns significantly in excess of the Group's cost of capital, with strong cash flow generation and a fast payback," it said.

They would enable Drax to develop an unsubsidized biomass generation business by 2027, with the option to service wood pellet demand in Europe, North America and Asia, it said.

There was no material update on Drax's "Repower" plans to convert two coal units at Selby to gas, other than that it would consider partnering in gas-fired capital investments.

In October, the UK government approved the plans.

The generator needs to secure a 15-year capacity market agreement to underpin the investment, it said.

If developed, a first, 1.8-GW tranche of new combined cycle capacity could be available from October 2023.

In total the Repower conversion aims to deliver up to 3.6 GW of gas capacity and 200 MW of battery storage at Selby.

Drax has four 299-MW open cycle gas turbine projects approved at Abergelli and Hirwaun in Wales, at Rookery Pitin Bedfordshire and at Eye Airfield in Norfolk.

Those OCGT projects also need capacity market support to proceed.

UNCHANGED OUTLOOK

Drax kept its adjusted EBITDA expectations unchanged for full year 2019, with the latest analyst consensus at GBP409 million.

During the summer Drax completed planned outages on two of its four biomass units. Following a delayed return to service, "the plan is to run all four Renewable Obligation-supported units at high utilization levels in the fourth quarter of 2019," it said.

The outlook for coal generation was "challenging" with Drax noting once again that all unabated UK coal generation must close by 2025.

Finally, Drax was due GBP75 million of 2019 capacity payments following suspension of the Capacity Market last year. It expected the market to be re-instated shortly, with full retrospective payments made for capacity provided.

-- Henry Edwardes-Evans, henry.edwardes-evans@spglobal.com

-- Edited by Jonathan Dart, jonathan.dart@spglobal.com