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Bought in here based on good positive momentum.
Plenty of positives including forecast profit growth and a good yield.
Several things to note, on solar and wind my point was that the costs (to build) of solar and wind keeps falling (along with that of batteries). My second point is not so much that we won't have biomass, it is that it is difficult to foresee a repeat of DECCs' (now BEIS) blunder with that GBP116/MWh biomass CFD! (no clawback for excess rents, unlike Hinkley Point C, and even then the clawback at HPC came thanks to the EU who oversaw that CFD approval). So yes you may have biomass post 2027, but not printing money like today. If you read the Drax annual report you will find that the USD Fx hedge expires in 2024, management's objective of lowering biomass costs to GBP50 is for 2027 (the year the subsidies expire). You will also read that the 50 pound target is based on 1.45 USD Fx. Finally if you assume that forwards area at say 50/60/70 it would leave you with a profitability (based on short run marginal costs) of 0, 10 or 20 (Drax calls this the 'bark spread' , like the dark spread of coal or spark spread of gas). 0, 10 or 20 is not the same as 116 (CFD revenue) minus 75 (biomass costs), one unit is thus on an almost 40GBP bark spread today. The ROC supported units get a bit less but also may face a fall in profitability even if (conditionality) management brings down biomass costs to 50.
The only way out of an earnings cliff here is for the company to do what it does best: Lobby for subsidies. Without subsidies the future post 2027 looks bleak. Again having said that there have been times when the valuation of the actual and expiring subsidised cashflows, NPV'd to today has looked attractive. By the way the future energy system is not just wind and solar, and Drax, we also have existing nuclear, new nuclear build and gas plants - its a simple yet complicated story -
Yes, some very good points - biomass is basically combustion and releases particulates but then again, so is gas (albeit a bit cleaner) and look how many gas plants run. You're right though, wind and solar certainly are pushing prices down (in some cases causing negative wholesale prices) but, in terms of 'prudent' generation mix, I personally think biomass with be around for some time yet. Some reports think biomass usage could triple globally. Even if the majority of GB demand was to be met solely by renewables such as wind and solar (Ireland are heading for 90% SNSP), I suspect units such as those at Drax may still have to support in some way - at min gen or something (I could be wrong?). Mustn't forget that wind farms also get ROCS - often a significant revenue component - so they have that risk too.
As for forex risk, I would have thought a company such as Drax would have some of this hedged going forward as part of their normal business activities?
Personally I think they're heading in the right direction. Still better than coal!
In terms of batteries , many traditional thermal power plants already use them to provide support services to the grid - do Drax have some too?
Anyway, interesting times. I'm happy to hold for the time being as I think the share price has more to go. Time will tell. Fingers-crossed!!
There is a difference, wind and solar don't produce particulates at source (like the combustion of biomass does), these can be detrimental to human health. Then there' the amount of time to recapture the carbon released when combusting biomass. Finally recall in April 2027 the CFD and ROC taxpayer support for biomass goes away, ends. Even if reinstated I doubt the government will be so generous as in the past (current biomass CFD for Drax is circa 116GBP/MWh vs a cost of 75), and yes whilst the company plans to reduce its cost of biomass to 50GBP (to try to make it viable without subsidies) this is based on a 1.45 dollar rate -according to Drax's 2019 annual report- (so a 14% headwind there already on current spot cable) furthermore the pressures to wholesale electricity prices are deflationary (because wind and solar are technologies whose cost keeps falling) so come 2027 technology should have placed even more downward pressure on power prices. Finally one could also expect the price/cost of batteries to fall and the integration of batteries with solar/wind to have increased (addressing he issue of intermittency). One to keep an eye on as there are levels at which the NPV of the expiring (in 80 months time) subsidies vs the EV of the company may look attractive.
Good to see the share price moving north last week although, in my opinion, I think there's more to go. Renewables like wind etc., are fine but there are only so many can be accommodated on the grid and, generally speaking, don't provide things like inertia. At least biomass is an alternative renewable. Fingers-crossed for another good week. GLA.