Drax Group announces £150m share buyback and lower capex outlook

Drax Group has announced a £150m share buyback alongside a cut in investment forecasts after investment in a major carbon capture project was paused.

The power generation company plans to begin the buyback program sometime in the second quarter and complete it by the end of 2023.

It said the decision to return cash to investors was partly a reflection of lower net debt levels and the UK government’s recent decision not to proceed with accelerated financing talks on Drax’s BECCS project.

Last July, the company published a plan to build two bioenergy units with CO2 capture and storage at its power station in North Yorkshire. Work will start as early as 2024.

According to Drax, the plan would be the largest of its kind worldwide and be capable of removing at least 8 million tons of carbon dioxide from the atmosphere once fully operational.

Investments in BECCS were suspended last month until the company could clarify what financial support it would receive from the government.

Drax hopes to receive some of the £20bn funding earmarked for carbon capture and storage technology announced by Chancellor of the Exchequer Jeremy Hunt during his budget speech in March.

But shortly afterward, the Department of Energy Security and Net Zero said BECCS would not be among the eight future projects for formal funding talks.

Following this, Drax has reduced its expected capital expenditure for this year from £570m to £630m to between £520m and £580m.

However, the company revealed on Wednesday that “formal bilateral talks” had begun with the government about advancing BECCS.

Drax Group has warned that without government funding, its operations could become unviable after 2027, when its current renewable energy subsidy schemes expire.

Chief executive Will Gardiner said the company “remained excited about the opportunity to do BECCS in the UK” while making “good progress in screening options” on more than 10 such projects in the US.

The company’s latest trade update comes a day after it officially ceased coal-fired production at its Yorkshire plant, after operating for nearly five decades.

Once the largest coal-fired power station in Western Europe, it is now a major producer of biomass, for which Drax receives hundreds of millions of pounds a year in taxpayer subsidies.

Many MPs and green campaigners have called on the government to reconsider its financial support for the FTSE 250 firm due to the huge profits made last year and doubts about the environmental benefits of burning wood as a fuel compared to other energy sources such as nuclear power, sun and wind.

Documents obtained on the basis of a Freedom of Information (FOI) request showed that Drax was investigated by the UK’s energy regulator last year for compliance with sustainability rules.

This is reported by the Financial Times that Ofgem hired an outside group, consulting firm Black and Veatch, to audit the company’s claims about the Canadian wood biomass it used in 2021 and 2022.

Drax has said it only uses sustainable wood and its power station’s emissions are offset by the trees it plants, meaning the electricity it generates is carbon neutral.

Drax Group Shares were 2.2 percent higher at 632.8 p late Wednesday afternoon and have about tripled over the past three years.