Drax to take a £60m hit due to COVID-19 pandemic as demand falls

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DRAX is estimating that it is to take a £60 million hit from the impact of COVID-19 as its Customers business feels the decreasing demand.

The company has outlined that its Customers business, which supplies power, gas and energy services to the C&I and SME markets, has seen a “significant” reduction in demand, with the SME market expected to be particularly hard hit moving forwards.

Will Gardiner, Drax Group CEO, commented on the news: “With our strong balance sheet, robust trading and operational performance, and resilient sustainable biomass supply chain, Drax is in a strong position to support its employees, business customers and communities during the Covid-19 crisis, while continuing to generate returns for shareholders.”

Drax operates both Haven Power and Opus Energy, both of which are focused on B2B energy supply.

In its Customers business, the consequences of COVID-19 are expected to lead to reduced demand and a potential increase in bad debt, which represents a major sensitivity, particularly in the SME market.

As a result, Drax has significantly increased its expectation of potential customer business failures and higher bad debt.

Assuming the continued impact of COVID-19 throughout 2020, Drax now expects a full year Adjusted EBITDA loss for the Customers business.

Reductions in demand are also affecting the Generation arm of the company, as Drax’s expectations for the full year reflect a reduction in ROC recycle prices due to reduced demand.

Drax expects to partially offset this through increased activity in system support services across its generation portfolio.

The performance of the Generation business is dependent on the continuation of biomass deliveries to Drax Power Station, as a protracted suspension of the supply chain could lead to lower levels of biomass generation and result in a reduction in the Group’s expectations for the full year.

The company states that at present COVID-19 hasn’t had an impact in this regard and the there is a good supply of biomass throughout the supply chain.

Reductions in demand are also affecting the Generation section of the company, with its expectations for the full year reflecting a reduction in Renewable Obligation Certificate recycle prices.

However, Drax is looking to partially offset this through increased activity in system support services across the generation portfolio.

There are also worries about the continuation of the biomass supply chain, with the performance of its Generation business hinging on dependable supplies.

Four units of company’s flagship Drax Power Station operate using biomass, whilst the other two are to stop using coal in 2021.

The company has stated that there has been no impact on the biomass supply chain at present as they have suppliers across both North America and Europe, and 300,000 tonnes of biomass storage capacity at the Drax Power Station.

This, alongside the biomass currently in its supply chain, means Drax has visibility over one million tonnes of biomass in transit, which would allow it to operate its Contracts for Difference unit for over four months.

As a whole, across the first three months of 2020 Drax’s generation portfolio “performed well”, and has a strong forward power sales position through 2022, providing a high level of earnings visibility, the company said.

The company also pointed out that its hydro assets have performed well, particularly the pumped storage business, primarily driven by activity in the system support services market.