Shares in British power group Drax have rallied 13% in the last week following news that the electricity provider has initiated a £300 million share buyback. Drax provides an estimated 5% of the UK’s current electricity requirements.
Despite its large profits, Drax LON:DRX relies on British government subsidies which are due to come to an end in 2027.
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Drax is known to be lobbying the government for a three year extension to the subsidies regime so that it can implement carbon capture technology. At this stage it is not clear whether the new government is going to provide Drax Group with the assurances that it needs.
Drax is the UK’s biggest CO2 emitter
Drax imports wood pellets from North America which it burns at its power station in North Yorkshire. The company has received more than £6 billion in subsidies for its biomass plant which is considered to be the UK’s biggest single emitter of carbon dioxide.
Matt Williams, campaigner for Cut Carbon Not Forests and Senior Advocate for the Natural Resources Defense Council, said:
“It is unacceptable that this company is burning the world’s forests and making money hand over fist from environmental harm. A large part of those profits come from public subsidies Drax is given by claiming that burning forests is good for the planet. Worse than that, Drax has told the Government it needs more subsidies after 2027 – at the same time as handing hundreds of millions of pounds to shareholders. Every time you pay your energy bill, you help pay Drax’s subsidies.”
Williams said that a key early test of the Labour Government’s promise to deliver clean power, lower bills, and energy independence will be whether it ends the burning of trees in power stations.
Will UK Govt give Drax time to install carbon capture?
Currently Drax seems to be banking on its new scheme which is built around the introduction of carbon capture technology. However, this looks like it will require further government subsidies, although the scheme has received the backing of the National Grid and the UK’s independent climate change committee.
Solid results from the company have helped to boost the share price last week. Adjusted earnings have risen to £515 million for the six months to the end of June.
Drax has said it will be buying back £300 million in shares. In addition dividends are going to be increased by 12.6%.
Shares in Drax Group have risen by over 30% in the last month. The shares are still relatively cheap with the PE ratio of 3.86x.
The inherent risk of Drax shares is the danger that government subsidies might be withdrawn. The company looks as if it will be facing further controversy as there is additional scrutiny over its climate-friendly credentials.
As fund managers face yet further pressure from investors about the companies in their portfolios, Drax could face further selling pressure from institutional investors in the future.
