Drax's (LON:DRX) sharp drop in H1 EBITDA to £70m from £120m, while disappointing, was well flagged by management and signposted by commodity moves. Of far more interest, we believe, are the impending regulatory changes that will modify Drax’s earnings profile. The company expects to hear about state aid on contracts for difference (CFDs) this autumn. This will mark a continuation of Drax’s transformation from its historic earnings sensitivity to swings in electricity, coal and carbon prices to a more stable, regulated earnings profile. Provided the regimes introduced are profitable, we believe regulatory certainty and enhanced profitability will drive a stock re-rating.
From coal-fired generation to renewable energy
Drax has converted two of its six generation units from coal to biomass since 2013 and is in the process of converting a third. H116 saw it generate 70% of its output from renewable sources. Drax was also the largest single renewable generator in the UK generation mix over the same period. In addition, it sources biomass from global suppliers according to five sustainability principles to ensure, eg it will ‘never cause deforestation’ meaning the stock is increasingly relevant to an SRI audience.
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