Drax Group Plc (LON:DRX) has taken a significant step forward in securing the future of its biomass units with a newly agreed support mechanism. Longspur Research highlights that this development ensures the company’s continued role in the UK’s decarbonisation strategy while maintaining financial strength.
Strategic Support for Biomass Operations
Drax has successfully negotiated heads of terms with the UK Government, securing support for its biomass units from April 2027 to March 2031. The deal operates under a Contract for Difference (CfD) mechanism, offering an adjusted strike price of approximately £170/MWh, compared to the previous £100/MWh (2012 terms). While total output will be reduced from 14TWh to 6TWh, the company retains the ability to sell additional merchant power, particularly during peak periods, creating potential for strong profitability.
Earnings Potential and Gain Share Mechanism
Longspur Research notes that the new agreement allows for flexibility and potential upside through a gain share mechanism. If annual cash operating profit exceeds £160 million, Drax will share 30% of the excess, rising to 60% above £210 million. The company has provided EBITDA guidance of £100 million to £200 million, with Longspur Research suggesting that market tightness from FY27 could drive peak prices higher, enhancing merchant revenue opportunities.
