Drax Group Plc · LSE:DRX
Drax — Investor Day (October 2013)
13 slides from Drax's investor day presentation, Oct 17, 2013
Slide 1: Regulatory Briefing
Regulatory Briefing Capital Markets Day 17 October 2013
Slide 2: Agenda
Agenda Andrew Koss – Director of Strategy Damien Speight – Head Trader Renewables Obligation Contracts for Difference Levy Control Framework Capacity Mechanism Implications for Drax Drax Group plc 2
Slide 3: Renewables Obligation (RO)
Renewables Obligation (RO) Drax announced conversion plans and financing predicated on three units under the RO scheme Support mechanism for renewables since 2002 • Well established, functioning market Closes to new projects in March 2017 “Conversion (…) to sustainable • Replaced by CfDs(1) biomass
Slide 4: RO – Economics
RO – Economics Strategic objective to contract biomass on long-term basis Converted units have an inbuilt (imperfect) “ROC hedge” of fuel exposures Biomass fuel cost • Absent in coal-fired generation hedged by: Analysis of biomass generation at 1 ROC with power price range • With minimum gas prices
Slide 5: RO – Pros and Cons
RO – Pros and Cons Advantages Disadvantages Well established and functioning market × Exposure remains to power price falls, driven by gas prices or removal / re-profiling of the carbon price floor Potential to benefit from positive power price movements (e.g. capacity squeeze) × Some political
Slide 6: CfDs – Background
CfDs – Background Future support regime for low carbon Draft CfD Strike Prices generation £/MWh (1) 2014-15 2015-16 2016-17 2017-18 2018-19 CfD characteristics • Private law contract Onshore Wind 100 100 100 95 95 • Term of support limited to 2027 for converted units Offshore Wind 155 155 150 140 13
Slide 7: CfDs – Investment Contracts and Enduring
CfDs – Investment Contracts and Enduring (2) Early CfDs – run under the FID process ‘Standard’ CfDs – the enduring CfD process • Known as ‘Investment Contracts’ • Targeted for applications in H2 2014 • Drax second and third unit conversion being • Drax units not operating under RO or considered by D
Slide 8: CfDs – Pros and Cons
CfDs – Pros and Cons Advantages Clarity on regulatory position likely to happen in stages Bilateral contract with a Government owned counterparty CfDs could be an attractive option for Drax • Reduce political risk Reduced political risk • Provide more earnings / cash certainty Provides revenue
Slide 9: Levy Control Framework (LCF)
Levy Control Framework (LCF) Covers RO, CfDs, FiT(1) but not capacity payments Sets a cap on the impact of renewable support schemes on consumer bills Flexibility provisions • 20% headroom to total cap allowed on annual basis Biomass projections within cap • Priority on low cost projects • Under Nat
Slide 10: Capacity Mechanism
Capacity Mechanism Capacity mechanism being developed under EMR Ensure security of supply in the face of falling reserve margins Proposed process now published • Two auction processes to be held – four years ahead and one year ahead of delivery year • All generators mandated to go through pre-qualif
Slide 11: Implications for Drax
Implications for Drax Capacity Mechanism RO and CfD-accredited units excluded from capacity mechanism Work to do to create value for Drax RO Plans for conversion developed and financed under the RO Investment case remains strong CfDs Potential upside from CfDs if risk / return balance attractive vs.
Slide 12: Slide 12
Slide 13: Appendix: RO Mechanics
Appendix: RO Mechanics Obligation on suppliers – set annually by DECC Buy-out Price and Recycle Values • Includes fixed 10% headroom Obligation Buy-out price Recycle value Suppliers present ROCs to demonstrate Period per ROC per ROC compliance 2010-11 £37 £14 • Where insufficient ROCs presented, sup