Britain’s gas crisis could add half-a-billion pounds to the market value of the energy company Drax as the company prepares to sell its biomass electricity at record market prices.
The FTSE 250 owner of the Drax power plant in North Yorkshire has climbed to its highest share value in almost seven years, as wholesale prices have spiralled to all-time highs, claiming seven small energy suppliers in the past seven weeks.
The company is not exposed to the cost of gas, which has quadrupled on the UK markets in the last year, but it will benefit from the impact of rising UK wholesale electricity prices, which were already some of the highest in Europe.
Drax is poised to reap big profits from the crisis, alongside North Sea gas companies including Norway’s state-backed oil company, Equinor, and independent UK producer Serica Energy, which will be able to sell the gas they produce at record rates.
Drax is expected to generate an earnings boom in 2022 and 2023 from contracts it has sold in advance for the electricity it generates from burning biomass wood chips, which it claims is carbon neutral.
The company is also expected to benefit from electricity produced in its last remaining coal units which it sold directly to the market to help meet demand in recent weeks. On some days this has earned the company up to £4,000 a megawatt-hour or 100 times the typical market price for electricity.
Drax’s share price went above 500p a share for the first time since late 2013 this week, up from 412p two weeks ago, to value the company at £1.97bn. HSBC has set a target share price of 620p a share for the company, implying an increase in value of more than £500m.
“This ‘crunch’ has demonstrated the need for the UK to develop alternative, renewable, flexible sources of power generation, apart from intermittent wind and solar, to ensure security of supply,” said Verity Mitchell, an analyst at HSBC.
Meanwhile, Drax earnings a share are expected to climb by 26% next year, and 28% in 2023, by selling electricity based on the “forward” market price which soared in line with short-term trading.
In addition to its lucrative electricity sales Drax may benefit from the UK’s carbon dioxide shortage, Mitchell added, which was triggered by the shutdown of two major fertiliser factories in the north of England earlier this month due to the rocketing price of the gas they rely on to function.
The factories primarily produce ammonia but also sell carbon dioxide as a by-product, which makes up 60% of the UK’s CO2 supplies that are essential to the country’s food, drink and meat production industries.
The government has agreed a multimillion-pound deal with the factories’ US owner, CF Industries, to reopen for three weeks while food producers arrange for new supply chains, but the debacle is likely to spur investment in more diverse CO2 sources, which could benefit Drax.
“If Drax is a beneficiary of support to build bioenergy with carbon capture and storage as a member of the East Coast low-carbon consortium, it could be extracting carbon dioxide for commercial use from 2027,” Mitchell said.
“Drax has demonstrated that it can provide a solution to a number of key issues for the government. Its future growth rate looks increasingly assured.”