Drax Group and Mitsubishi Heavy Industries to Join Forces for a BECCS Project

Summary

• Drax Group is likely to launch a pilot project based on BECCS technology
• The company would use its around 66 per cent of biomass plants capacity to capture carbon emissions
• The group delivered a robust performance in the first quarter of 2020 and was having a dividend yield of 5.06 per cent

FTSE 250 listed electricity company, Drax Group Plc (LON:DRX) is set to launch a pilot project based on BECCS (bioenergy with carbon capture and storage) concept, in collaboration with Mitsubishi Heavy Industries Group this autumn. Drax Group would reportedly use 66 per cent of its biomass plants capacity to capture carbon emissions. Mitsubishi Heavy Industries Group would be providing the solvent which would be used to dissolve the captured carbon dioxide and help in keeping it in liquid state.

As per the main part of the project, the Drax Group would use its biomass plants to capture carbon dioxide, which would lead to carbon negative power plants in the future. Energy companies are seeking ways to reduce carbon dioxide emissions, while also providing constant supplies of electricity through renewable energy sources.

The BECCS project is expected to capture tonnes of carbon dioxide which would be used productively. This innovative technology has the potential to make huge strides in the nation’s effort to tackle climate change while offering stimulus to foster an entirely new cutting-edge industry.

Drax Group is the pioneer in this technology, and the stored carbon could be used productively in industrial applications. Industry experts believe that similar innovative technologies are needed to help in meeting the environmental standards issued by the International Paris climate agreement and contain global warming. The efficient use of the stored carbon dioxide could help this innovative technology to become more economically feasible as the technology might require huge capital investment initially.

The extracted carbon dioxide in liquid form can be injected into rocks, former oil & gas fields, several kilometres below the earth’s surface in order to increase the amount of crude oil for sustainable use of fossil fuels, a technology widely used in the United States. The technology could help to reduce up to 16 million tonnes of carbon emissions every year, according to some reports. The UK aims to become a carbon zero state by 2050. Drax Group is looking forward to a coal-free future.

The British government has already imposed a ban on coal-fired electricity generation effective from 2025. From March 2021 onwards, Drax Group is likely to halt coal-powered electricity production due to its proactive strategy. The company aims to achieve a carbon negative status by 2030. However, the company might have to axe a few jobs. The company would be switching to use of wood pellets or biomass instead of coal for electricity generation.

However, according to local campaigners, use of wood pellets could lead to deforestation, which could further fuel the climate crisis. Tonnes of wood pellets would be required to produce electricity. Due to lessened economic activity in the wake of the novel coronavirus, the demand for energy has gone down substantially. It is imperative of the energy companies to switch to deploy cleaner methods of electricity generation.

Business overview: Drax Group Plc

Drax Group Plc ( LON: DRX) is a Selby, the United Kingdom based electricity generation company that is engaged in the production of wood pellets from forestry residues, generation of low carbon and renewable power in the United Kingdom, as well as energy supply to Industrial and commercial to small and medium-sized business clients. The company’s flagship projects include the Drax power station, Cruachan power station, as well as two hydro-electric power stations and combined cycle gas turbines. In terms of its renewable power generation, the company has two biomass production projects which are Daldowie Fuel Plant which processes sludge from a wastewater treatment plant and converts it into wood pellets and Drax Biomass projects, which also produces wood pellets. The company is also into B2B energy supply and energy solutions to other businesses.

Recent Business performance of Drax Group Plc

In the first quarter of 2020, the company revealed a robust trading and operational performance, with Adjusted EBITDA in line with expectations for the year 2020. For the first three months of 2020, the group’s power generation segment and pellet production performed well. Drax Group has a strong balance sheet, with cash of GBP 454 million and its net debt declined to GBP 818 million as on 31 March 2020. The Group remained focused on the expansion of the supply chain and reduction of costs. The net debt to EBITDA stood at around 2x for the full year. The Group has GBP 663 million of available cash and committed facilities. In addition, the company has access to GBP 315 million RCF (Revolving Credit Facility).

With a resilient, sustainable biomass supply chain and strong balance sheet, the Company has delivered a strong trading and operational performance. In the current period, the Company has reduced its net debt. Moreover, it seeks to ensure its biomass power generation stays viable in the long term.

Stock price performance: Drax Group Plc

Daily Chart as on 24th-June-20, before the market close (Source: Thomson Reuters)

While writing (as on 24th June 2020, at 02:45 PM GMT +1), Drax Group Plc’s shares were trading at GBX 233.13 per share; lower by 0.26 per cent as compared to the previous day closing price level. The company’s market capitalisation was around £924.02 million.

Drax Group Plc’s shares have clocked a high of GBX 364.60 (as on 13 December 2019) and a low of GBX 118.90 (as on 23 March 2020) in the past year. At the current price point, as quoted in the price chart, the company’s shares were trading 36.42 per cent below the 52-week high price point and 94.95 per cent above the 52-week low price point. The company has a dividend yield of 5.06 per cent.

At the time of writing, the stock’s volume before the market close stood at 293,960. The company’s stock beta (180 days) was 1.79, which makes it far more volatile in comparison to the benchmark index. In the past one year, Drax Group Plc’s shares have delivered a negative price return of 15.41 per cent. Also, on a YTD (Year-to-Date) time interval, the stock plunged by approximately 25.43 per cent.