Drax announces £2 billion investment in 900MW dedicated biomass
In one of the largest renewable energy deals of this year, Drax Group announced an investment of up to £2 billion (€2.5/$3.2bn) into 900 MW of dedicated biomass baseload power, together with Siemens Project Ventures GmbH. This is one of several multi-billion dollar biomass investments announced so far this year, making the bio-power sector the leading renewable energy sector once again. This single investment will supply an estimated 15% of all of the UK's planned renewable power and generate clean energy for 1.3 million British households.
In its ambitious 'Biomass Growth Strategy' Drax, which operates Europe's largest power plant, says it plans to build three new 300MW power plants in the UK that will exclusively burn biomass, including energy crops and agricultural or forestry waste such as elephant grass, straw and peanut husks.
The plants will be built in partnership with Siemens of Germany, with Drax owning 60 per cent of the project and operating the plants and Siemens owning 40 per cent and supplying the technology. It is proposed that the plants will use Siemens' turbine technology. Drax will manage the biomass supplies.
Building on Drax's expertise in biomass co-firing, the expansion of its renewables business is expected to deliver significant attractive long-term growth opportunities. Each plant meets a mid-teens equity return hurdle based on current market scenarios; and each plant is expected to have a pay-back period of within 6 years from commencement of operations, which is fast, compared to any other type of renewable energy venture.
The new plants once operational will deliver essential baseload generation capacity to the UK electricity market, both making a significant contribution to the UK's renewables target and supporting national security of supply requirements. Note that none of the other major renewables offer baseload power, and remain dependent on fossil fuels.
The reasons as to why Drax chose to go for biomass are manifold. Biomass-fired generation has a strong strategic fit with Drax's existing business and will enable the company to deliver additional value from its core competencies of production, trading, biomass procurement and handling and project execution:
energy :: sustainability :: co-firing :: energy crops :: waste :: biomass :: bioenergy :: renewables :: baseload ::
Drax already produces power by co-firing biomass and is well advanced in its project to increase its biomass co-firing capability to 500MW by mid-2010, which will make Drax Power Station the largest biomass co-firing plant in the world.
Drax has an established biomass business management team in place and already purchases significant volumes of biomass in accordance with its established sustainable sourcing policy. No commitments to construction contracts or financing have been made to date and Drax expects to finalise these arrangements over the next 12-18 months.
Drax has already secured rights to port sites at Immingham and Hull for two of the proposed biomass plants. The Company is also progressing a number of options for the third site, including land at Drax Power Station. The planning application process for each of the two secured sites, including required consents, has recently commenced.
Current estimates of the total capital cost of the investment programme are around £2bn, including investments in ancillary biomass logistics and processing facilities. Construction of the first plant is targeted to commence in late 2010, following execution of the construction and financing contracts and agreed capital commitment, with the first plant expected to be operational in 2014.
In order to fund the expansion of the biomass business, Drax today also announces a change to its distribution policy. For 2008 and 2009, the Company will distribute all excess cash generated from operations after meeting business requirements in each year. Any refinancing proceeds will be used to fund Drax's equity investment in the new biomass business. For 2010 and beyond, Drax will target a pay-out ratio of 50% of underlying earnings in each year, adjusted for non-cash accounting items (principally accounting for derivative contracts).
References:
Drax Group Plc: Biomass Growth Strategy - October 23, 2008.
In its ambitious 'Biomass Growth Strategy' Drax, which operates Europe's largest power plant, says it plans to build three new 300MW power plants in the UK that will exclusively burn biomass, including energy crops and agricultural or forestry waste such as elephant grass, straw and peanut husks.
The plants will be built in partnership with Siemens of Germany, with Drax owning 60 per cent of the project and operating the plants and Siemens owning 40 per cent and supplying the technology. It is proposed that the plants will use Siemens' turbine technology. Drax will manage the biomass supplies.
Building on Drax's expertise in biomass co-firing, the expansion of its renewables business is expected to deliver significant attractive long-term growth opportunities. Each plant meets a mid-teens equity return hurdle based on current market scenarios; and each plant is expected to have a pay-back period of within 6 years from commencement of operations, which is fast, compared to any other type of renewable energy venture.
The new plants once operational will deliver essential baseload generation capacity to the UK electricity market, both making a significant contribution to the UK's renewables target and supporting national security of supply requirements. Note that none of the other major renewables offer baseload power, and remain dependent on fossil fuels.
We are strongly of the view that investment in the generation sector will provide attractive returns. We believe our venture into dedicated biomass-fired generation underpins our commitment to reducing the carbon footprint of electricity generation from the continued, but necessary, reliance on fossil fuels, whilst delivering secure and reliable supplies of electricity. - Dorothy Thompson, Chief Executive of DraxBased on current estimates, once all three plants are operational Drax will be responsible for supplying at least 15% of the UK's renewable power and up to 10% of total UK electricity. Of all the large EU member states, the UK has been slowest in taking up the implementation of renewables and is behind schedule to meet its EU targets. This biomass investment however changes its position.
The reasons as to why Drax chose to go for biomass are manifold. Biomass-fired generation has a strong strategic fit with Drax's existing business and will enable the company to deliver additional value from its core competencies of production, trading, biomass procurement and handling and project execution:
energy :: sustainability :: co-firing :: energy crops :: waste :: biomass :: bioenergy :: renewables :: baseload ::
Drax already produces power by co-firing biomass and is well advanced in its project to increase its biomass co-firing capability to 500MW by mid-2010, which will make Drax Power Station the largest biomass co-firing plant in the world.
Drax has an established biomass business management team in place and already purchases significant volumes of biomass in accordance with its established sustainable sourcing policy. No commitments to construction contracts or financing have been made to date and Drax expects to finalise these arrangements over the next 12-18 months.
We believe that the development of dedicated biomass plant will make a significant contribution to the renewable energy needs of the UK going forward and importantly help to address the challenge of climate change facing the sector. As a leading technology company we are used to providing solutions to such important issues. - Dr. Wolfgang Bischoff, Managing Director of Siemens Project VenturesDrax also announced a new distribution policy: the company will distribute excess cash generated from operations in 2008 and 2009 and then target a pay-out ratio of 50% of underlying earnings from 2010 onwards to complement the expected growth potential of the group.
Drax has already secured rights to port sites at Immingham and Hull for two of the proposed biomass plants. The Company is also progressing a number of options for the third site, including land at Drax Power Station. The planning application process for each of the two secured sites, including required consents, has recently commenced.
Current estimates of the total capital cost of the investment programme are around £2bn, including investments in ancillary biomass logistics and processing facilities. Construction of the first plant is targeted to commence in late 2010, following execution of the construction and financing contracts and agreed capital commitment, with the first plant expected to be operational in 2014.
In order to fund the expansion of the biomass business, Drax today also announces a change to its distribution policy. For 2008 and 2009, the Company will distribute all excess cash generated from operations after meeting business requirements in each year. Any refinancing proceeds will be used to fund Drax's equity investment in the new biomass business. For 2010 and beyond, Drax will target a pay-out ratio of 50% of underlying earnings in each year, adjusted for non-cash accounting items (principally accounting for derivative contracts).
References:
Drax Group Plc: Biomass Growth Strategy - October 23, 2008.
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