Drax is no stranger to being in the headlines. Last year, a report from the think tank, Ember, found its Selby power station – the largest power plant in the UK – produced four times more carbon emissions than the UK’s last remaining coal-fired plant in 2023, and was Britain’s single largest carbon emitter, despite taking more than £500m in clean-energy subsidies.
Meanwhile, papers obtained by the BBC’s Panorama reportedly showed Drax took timber from rare forests in Canada it had claimed were “no-go areas” for its wood pelleting business. Ofgem subsequently concluded a 15-month investigation into Drax’s biomass profiling data covering reporting from the acquisition of a Canadian business in April 2021 through March 2022, finding “technical flaws” in its data and controls process.
This hasn’t stopped investment management firm, Orbis Investments, from owning 5% of the company – “or maybe 6% now”, according to fund manager, Alec Cutler. The headlines around Ofgem’s investigation, he insisted, missed the two key conclusions: Ofgem found no evidence suggesting that Drax’s biomass fell short of the government’s sustainability requirements, and found no evidence to suggest Drax had been issued with Renewable Obligation Certificates incorrectly.
Here, Cutler explains why he believes biomass critics conveniently ignore its “inherent carbon-neutrality”, and laments the “bipolar nature” of the British public’s “myopic focus” on particular elements of Drax’s business model, despite enjoying the luxury of lighting and heating provided by “a super-important national asset”.
How sustainable is biomass fuel?
According to the International Energy Agency, modern bioenergy is the largest source of renewable energy globally today, accounting for almost 55% of renewable energy (excluding traditional use of biomass) and over 6% of global energy supply. Its Net Zero Emissions by 2050 Scenario envisages a rapid increase in the use of bioenergy to displace fossil fuels by 2030.
Specifically, bioenergy used for electricity generation is expected to provide “dispatchable, low-emissions power” to complement generation from variable renewables, with its use nearly doubling from generating about 700 terawatt hours (TWh) of electricity in 2023 to around 1250 TWh by 2030.
Critics have pointed to the fact that biomass combustion releases more greenhouse gas emissions than conventional fossil fuels, including coal. Indeed, a Chatham House research paper, updated in 2023, states that burning wood for energy “usually emits more greenhouse gases per unit of energy produced than is the case with fossil fuels”, since it is generally less energy-dense than fossil fuels, and contains higher quantities of moisture and less hydrogen.
However, measuring carbon emissions only at the exhaust stack ignores the inherent carbon neutrality of the biomass cycle, argued Cutler.
“Trees remove carbon from the atmosphere as they grow and return it to the atmosphere when they die. Nature handles that through decay or wildfires. Or, the trees can be harvested for useful purposes, like building things or producing energy. Biomass’ naturally near-carbon-neutral cycle is widely recognised by relevant governmental environmental agencies, but still attracts criticism for the spectre of cutting down trees.
“Trees don’t grow forever. At a certain stage of maturity, a tree’s carbon consumption decreases, just as old people eat less. An optimal process would plant trees, grow them to the point of diminishing carbon consumption, and then harvest them for useful products. Removing mature trees allows new trees to get the light and nutrients needed to grow and fulfill their destiny as useful products and storers of carbon.”
To illustrate his point, Cutler pointed to the timberlands of the US Southeast, where landowners typically plant pine or poplar trees that reach maturity after 22 years, at which point they are cut down, with saplings put in their place. The harvested trees are stripped of limbs, trimmed and debarked, then graded for the best, most profitable, use. The best logs are turned into utility poles, and most of the rest are milled for lumber.
Inevitably some trees are assessed as being too bent or too diseased to make any other useful product. Unusable trees, along with the limbs, tops and bark, used to be thrown in piles to burn or rot, Cutler explained. With the advent of pelletisation, timberland owners and mill operators are now paid for what used to be a costly waste product, changing the economics of the whole industry. As a result, landowners in the US Southeast have been shifting acreage from carbon-intensive cotton to timberland, leading to growth – not shrinkage – in timberland acreage.
“Thus, relative to the past, biomass energy improves timberland economics, converts waste wood into electricity generation, encourages the growth of timberland and displaces more carbon-intensive coal-fired power plants,” concluded Cutler.
It is worth noting, however, that this argument is disputed. The Chatham House paper addresses this point, saying it “implies that what happens to trees later – whether they are left to grow further, or harvested and made into wood products, or harvested and burnt for energy – somehow makes no difference to carbon concentrations in the atmosphere. This is obviously not the case.”
Furthermore, it “ignores the carbon sequestration forgone from harvesting the trees: they would have continued to grow and absorb carbon if left un-harvested, and the uptake of carbon therefore falls when they are logged, whether or not the forest is sustainably managed.
Extended subsidies ‘a big win’ for all stakeholders
From an investment perspective, recently, the UK government decided to extend its contract to provide subsidies to the Selby power plant to 2031, but only half as much as before and with different conditions. All subsidised generation must use “100% sustainable biomass”, up from 70% previously, for example. The decision was based on a need for energy security, according to the government.
Prior to the announcement, Cutler asserted that, as fundamental investors, Orbis would probably not hold shares in Drax at all if it were properly valued and that current sentiment towards Drax’s biomass power plant is so negative that its other units – pumped hydro, new gas peaker plants and the pellet business – are together worth more than the entire enterprise value of the company.
“That means we get one of the UK’s biggest and most strategically located baseload generators for free,” Cutler stated. His views have become even more bullish since the government’s subsidy extension, something he described as “a big win” for the UK and the government, as well as shareholders and Drax itself.
“Halving the subsidy is effectively halving the output that Drax has to give the government,” said Cutler – a decent public relations win for them. But, at the same time, it maintains the plant through to 2031.
“It’s the biggest conventional power plant in the UK, and that’s with two of its units mothballed. If it fired up units five and six, it’d be one of the biggest power plants in the world. I bet that, in 2031, the UK may well find that it’s still short of electricity, given a potential rise in demand by as much as 30%. They talk about nuclear, and they talk about SMRs [small modular reactors] – they aren’t a 2032 thing, they’re a 2040 thing, realistically. And the power isn’t going to continue coming from France or Norway either, because they need that power too. So, barring a collapse of the artificial intelligence zeitgeist and the drive to electrify and digitise everything, they’ll probably look at that Selby power plant and recognise it’s worth much more to them in 2031 than it is in 2025.”
A power-hungry planet
As well as maintaining the plant through to 2031 at the earliest, Drax is free to sell the other half of the power it generates to non-governmental entities, at a time when power demand is set to soar.
“Nobody in their valuations was accounting for continued cash flow from the Selby power plant past 2027 for reasons of conservatism. So, while the government can say they’ve halved the subsidies, we shareholders look at it and say we’ve just got a four-year extension on this asset, representing 100 to 200 million in cash flow every year to 2031 that we didn’t have in our models.
“Also, anybody watching what’s happening in the United States – where Microsoft, Google, Amazon, OpenAI and Tesla are asking every power company if they have any spare capacity they can sell to them – Drax now has all this spare capacity they can contract out to these kinds of businesses.”
For Cutler, the picture even looks rosy beyond 3031. The Selby site sprawls across almost 195 acres of land, representing a prime opportunity for the development of a data centre park because of something called ‘powered acreage’ – an area of land directly served by a power source.
“After 2031, Selby becomes incredibly valuable real estate because it has proximity to a power source and is also very close to major fibre optic transmission lines – both things a data centre needs to operate. Given that the government has a stated ambition to make the UK a leader in artificial intelligence, and you need data centres for that, and you need massive amounts of power to operate those data centres. So, not only is it an asset as a power producer, but also as a magnet for massive amounts of investment in this tech revolution the government says it wants.”
Axe Drax?
Despite these perceived benefits, activist groups such as Axe Drax plan to disrupt the company’s annual shareholder meeting this year, as they did last year.
“It just drives me crazy”, Cutler exclaimed. “Everyone’s so focused on CO2, but no one remembers that burning coal also produced sulphur dioxide, nitrous dioxide and other nasty particulates that caused acid rain. Everyone was really excited to go to wood, a fuel source without these horrible particulates. And then Greta Thunberg and the ESG movement came along, and suddenly everyone’s fighting against wood as well. Actually, I’ve spoken to at least one major anti-Drax environmentalist group to ask them why they’re targeting Drax, despite it being the most responsible player in biomass globally. They literally said ‘yes, but they’re the biggest and they’re in the UK, so we’re going after them’.
“I think it will calm back down and people will agree that biomass is a good thing once they realise the benefits. But it’s really irritating to see how some people never let facts get in the way of a good story.”
