Drax rules out domestic energy retail, but keen to eat B2B suppliers’ lunch

July 19, 2017

Thompson: Strong profits in SME energy retail

Drax, owner of the UK’s largest power station, sees further growth in energy retail and plans to take market share from incumbent business-to-business suppliers. However, it has ruled out entering the politically-charged domestic retail market.

Meanwhile, in its generation business, according to first half results, earnings growth continues from security of supply and ancillary services contracts as opposed to purely merchant revenues.

Retail

In retail, the firm is making most margin from the small and medium enterprise (SME) market, a result of its acquisition of Opus Energy last year. Meanwhile, Haven Power, which focuses on larger businesses, is no longer loss making.

While foreign utilities appear to be keen to enter the UK energy retail market, Drax is confident that it has acquired the scale and operational efficiency to take market share from existing players.

“We expect to deliver continued growth at Opus Energy at attractive margins and improving profitability at Haven Power,” said CEO Dorothy Thompson.

While the likes of Vattenfall are eying both business and domestic retail markets, Thompson, noting potential government intervention on standard variable tariffs, said “our retail focus remains on the B2B market”.

Generation and earnings

The H1 report shows earnings up 72% to £121m before interest, taxes, deductions and amortisation (ebitda) but a loss of £83m once some of those items, plus exchange rates, are factored in.

The company said its biomass businesses, both generation and pellet supply (pellet production up 46%), are performing well.

“We estimate that we produced 17% of the UK’s renewable electricity” in the first six months of the year, stated Thompson. That output came from three of the power station’s six units. Drax has run trials to see if a fourth unit could be converted to 100% biomass but will return it to coal fuel for the winter.

As well as Roc and CfD support for its biomass generation, the company has capacity market agreements for coal generation. Capacity payments worth £80m are secured until 2021, said the firm. Meanwhile, it earned £21m from ancillary services in the first half, up from £20m the previous year.

The company aims to build four new rapid response gas plants, two of which should be ready for the February 2018 capacity market auction, plus two for the following year. Thompson said it has also “identified potentially attractive options to repurpose our remaining coal assets”. At least one of these could be converted to gas, said the firm.

Thompson stated that Drax continues to focus on “improving the quality of earnings whilst reducing exposure to commodity market volatility”.

The company’s share price dropped on the announcement this morning before partially recovering.