Drax’s investors got a scare on Thursday. The British power generator’s stock fell as much as 12 per cent on news that its carbon capture project failed to make a priority list published by the UK government. It later recovered on hopes that approval might simply be delayed. This roller-coaster ride highlights how vital carbon capture from biomass is for Drax. In its absence, using biomass to generate electricity makes little sense.
It is not clear why the government chose not to proceed with any biomass carbon capture projects right away. Its target of capturing 5mn tonnes of carbon a year from bioenergy (a technology known as BECCS) by 2030 remains intact.
Securing support matters for Drax because BECCS is a big chunk of its equity story. Government subsidies for the biomass units at its power plant in Yorkshire run out in 2027. Without enabling them to capture carbon, the case for extension looks weak.
BECCS is crucial for the valuation of Drax, which has earmarked £2bn of investments to fit the technology at two units. The value of each capture project comes to around £330mn, says Credit Suisse. Together they are worth £1.60 a share, over a quarter of today’s price. No wonder the stock initially tanked on fears about the project’s viability.
Concerns have been raised — including by Lex — about the sustainability of biomass. Drax points out that 75 per cent of it is shavings otherwise burnt or sent to landfill. But regardless, it looks costly.
Biomass provides dispatchable renewable power at some $160/MWh, according to Credit Suisse estimates. A recent report by Systemiq posits that — under favourable conditions — solar power with battery storage might already cost less than $50/MWh.
Where biomass in power does make sense is if the plants are then fitted with carbon capture facilities. The result creates “negative” emissions, capturing carbon dioxide that would otherwise escape into the atmosphere.
Any threat to BECCS is clearly a sensitive issue for shareholders. With UK power prices down by nearly half this year, the nervousness should continue.
