Drax pellet production, generation costs up: Update

Market: Biomass, Electricity
16/12/22

Adds table

UK utility Drax expects pellet production costs to be higher in 2022 and 2023, according to a trading update today. As a result, it expects the cost of burning pellets for power to rise.

Pellet production costs in North America continued to rise in the second half of 2022, and combined with costs incurred in providing supply-side flexibility, this supported overall production costs for the business, Drax said.

The increased costs have been considered in "an adjusted transfer price, which was implemented in the second half of 2022".

Drax has incurred additional costs in the second half of 2022 in order to secure biomass for power generation, as spot wood pellet prices increased significantly in the year. The utility expects its all-in contracted cost of biomass for generation in the UK to be over £100/MWh in 2023, it said. It added that this was above historic averages, partly reflecting higher transportation and fuel costs, inflation and the weakening pound.

These factors, alongside a windfall tax on generators, "could make generation at certain times less economic and is expected to restrict the group's purchase of additional biomass cargoes at spot prices", Drax said.

Optimisation

Drax continued to optimise biomass generation across its four units, including the contract for difference (CfD) unit 1 and renewable certificate origin (ROC) units 2 and 3 — "maximising generation in the winter, based on system need and sustainable biomass supply", it said.

Lower gas and power prices in October resulted in Drax buying back "certain existing forward-sold power sales for 2022 on its ROC units. As a result, Drax has taken steps to reprofile and optimise biomass supplies between own-use and third-party supply".

National Grid data show generation at Drax ROC units dropped to a combined 684MW on an hourly average in October, well below 1.2GW a year earlier. Unusually warm weather in October limited biomass-fired generation, cutting into power-sector demand for biomass in the UK and elsewhere in northwest Europe, which in turn weighed on spot industrial wood pellet prices for deliveries to northwest Europe (see chart).

Drax said its pumped storage and hydropower assets "performed strongly" in the second half of 2022.

As of 8 December, Drax had 28.3TWh of contracted power sales between 2022 and 2024 on its ROC and hydropower generation assets, at an average price of £135.80/MWh, with a further 1.4TWh equivalent of gas sales and "additional sales under the CfD mechanism".

By Erisa Senerdem

Drax's contracted power sales as of 8 December 2022
	2022	2023	2024

ROC (TWh)	10.7	11.1	6.1
- Average achieved £ per MWh	90.2	154.5	159.0
Hydro (TWh)	0.3	<0.1	-
- Average achieved £ per MWh	255.6	-	-
Gas hedges (TWh equivalent)	-	0.1	1.3
- Pence per therm	-	153.2	133.9
— Drax Group
Note: Lower expected levels of ROC generation in 2023 due to major planned outages on two units.

cif NWE spot index at record highs in 2022 $/t

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