Drax group is a UK electrical power generation company supplying 5% of the UK’s electricity. It currently operates one coal power-fired plant with 4GW of generation capacity. The Drax power station is the largest in the UK and twice the size of the next largest plant. Drax's total revenue was £1,476 million in 2009, down 16% from 2008. Net income was $111 million, down 66% from 2008. 
Drax is expanding its business beyond its single power station. Three 290MW dedicated biomass-fired power stations are being constructed in partnership with Siemens Project Ventures. The first plant is due to be completed at the end of 2010, but financing and EU emissions regulations stand in the way of the completion of all three plants. 
Drax currently operates a single power plant and sells the power generated through contracts with larger suppliers and generators in the UK. Its plant burns predominately coal to produce power. Drax plans to construct three smaller biomass burning plants starting in 2010. Besides power generation, Drax supplies a small amount of its generated power directly to consumers through its subsidiary Haven Power.
|Year||Operating Revenue (millions)||Operating Profit (millions)||Operating Margin|
The 2008 financial crisis affected Drax’s business because decreased demand for power led to lower total revenue. In 2009 revenue declined 15.8% and operating income declined 62.7% compared to 2008. Power sales were £1.34 billion in 2009 compared to £1.69 billion in 2008 with only 22.6TWh of power sold in 2009, compared to 25.4TWh in 2008. Decreased demand for power led to lower power prices in the UK and because fuel costs remained unchanged, margins declined. Drax's 2009 average achieved electricity price declined 11% from 2008 to £52.0 per MWh. operating margin was reduced to 12% compared to 26% in 2008. 
As a result of a poor year 2009, Drax locked in forward contract through 2012 providing them with a hedge and higher future margins . They also reached an agreement with Centrica to provide them with 300MW of generated power through 2015. 
Drax generates power via the coal-fired Drax Power Station in Yorkshire, England. It has a capacity of 4GW and is the largest power plant in the UK. It has one of the highest load factor in the UK averaging 75% over the past 5 years. It also ranks the highest in CO2 emissions because of its size and usage of coal. Under EU CO2 emissions regulations Drax has an allocation of 9.5 million tonnes of CO2 emissions allowances per year. Its CO2 emissions allowances requirement for the year 2009 was 10.3 million tonnes compared to 12.8 million tonnes in 2008. Drax purchases CO2 emissions allowances under fixed price contracts therefore reducing CO2 emissions reduces costs. Drax saved 1 million tonnes of CO2 in 2009 through biomass and upgraded turbines and its new biomass plants would cut Drax’s CO2 emissions 17.5% compared to 2006 levels according to their 2009 annual report. The first 400MW biomass plant represents a £80 investment and the turbine upgrade represents a £100 million investment. 
Haven Power is Drax's supply arm acquired in 2009 from Welsh Power for £12 million. Drax sells its generated power through contracts with larger suppliers and generators, but Haven gives Drax a direct supply channel. Haven supplies electricity to around 24,000 small and medium sized businesses equating to 1.1TWh per year. Haven' supple business provides another route to market for electricity generated by Drax and secures term contracts with customers. According the their 2009 annual report Drax is seeking to expand its sales to the industrial and commercial market through Haven. 
As a result of the global recession worldwide gas prices decreased in 2009. Because of the decrease in demand there is now a gas surplus worldwide. In the UK, because of plentifully supply, gas and power prices have fallen in 2009. Coal, which fuels the Drax power station, remained stable in price in 2009. The average cost of fuel per mwh (excluding cO2 emissions allowances) was £25.4 for the year ended 31 December 2009, compared to £25.1 in 2008. Because of the lower price that generated power was sold for and stable coal prices paid to produce that power, Drax suffered from low margins in 2009 with a gross margin of 34.2% down from 35.5% in 2008. Operating margins were 12% in 2009, down from 26% in 2008. 
Looking ahead, forward commodity prices for 2010 traded based on a strong recovery in commodity prices, so Drax purchased 2010, 2011 and 2012 forward contracts locking in improved spreads at levels above the average spreads for 2009. This provides Drax with a hedge for 2010 through 2012 against movements in the commodity markets. 
EU and UK emissions regulations targets power generating companies restricting the amount of harmful gasses released into the atmosphere. Changes in these regulations leads to possible increases capital expenditure, lower generation levels, and compliance fines. Under EU CO2 emissions regulations Drax has an allocation of 9.5 million tonnes of CO2 emissions allowances per year. Its CO2 emissions allowances requirement for the year 2009 was 10.3 million tonnes compared to 12.8 million tonnes in 2008. Drax purchases CO2 emissions allowances under fixed price contracts therefore reducing CO2 emissions reduces the cost of purchasing these contracts. Reductions in CO2 emission requires significant investment but reduces Drax's future costs. Drax spent £80 million and saved 1 million tons of CO2 in 2009 through biomass and upgraded turbines at its plant. Its new biomass plants would cut Drax’s CO2 emissions by 3.5 million tons a year (17.5% compared to 2006 levels according to their 2009 annual report). 
In June 2010, the UK government met to discuss its emergency budget and a proposed minimum price for CO2 permits. This would be achieved through a 'tax for difference' in which when the market price for CO2 is below the minimum price set be the government, power producers would pay the difference in tax. An announcement on this is a downside risk for Drax, but the decision was pushed until Fall 2010. 
In 2008 Drax announced plans to develop three biomass-fired generation plants totaling 900 MW in capacity. This would add to its current 100MW of biomass capacity and make Drax's fleet more environmentally friendly as biomass is carbon neutral. According to Sean Ebnet, Drax's Director of New Business, "Biomass can make a valuable contribution towards the UK’s commitment to renewable energy and deliver considerable savings in CO2 emissions. We have identified significant volumes of sustainable biomass, including residues from agricultural and forestry products, and purpose grown energy crops in the UK.“ The three plants would supply 15% of the UK's renewable power and up to 10% of total UK electricity. Drax will run the power stations and own 60% of the venture, with Siemens owning the rest. The first plant is expected to be completed at the end of 2010 at an £80 million investment cost but permits still need to be aproved for the progression of the project. Drax also needs to find an appropriate capital structure and secure equity and/or debt to fund the development of the second and third plants. If all three plants are completed they will cut Drax’s CO2 emissions 17.5% compared to 2006 levels and contribute to the UK’s target of 15% renewable energy by 2020 according to Drax.  
Government regulations are impacting the completion of Drax's three biomass plants. During 2010 the UK government will discuss the amount of subsidies given to biomass plants. This affects Drax’s plans because biomass costs 30% more than coal to power their plants therfore subsidies are needed. According to figures from Drax, it costs it £31 per megawatt to produce energy from coal compared to £40 per megawatt for biomass.  It would remain cheaper for Drax to burn coal and purchase extra emission allowances under the European emission trading scheme than it was to switch to biofuel if subsidies were too low. Peter Emery, Drax's Production Director, said that a four-year government subsidy was inhibiting investment in the project and the subsidies were enough to cover the costs of operating the plants. In February 2010 he told BBC, "We hope to be in a position towards the end of this year to make a decision whether to proceed or not, but unless the government changes its policies and gives us the guaranteed regulatory framework over a longer period of time then we will have difficulty raising the finance to build these plants."
Within the UK, Drax Group competes with small independent utility companies. The big six vertically integrated companies are E.ON AG (EON), Electricité de France (EDF), RWE AG (RWE-FF), Scottish & Southern Energy, Centrica (LON:CNA), and Scottish Power.
All data is from 2009 based on UK business operations.
|Company||Revenue (£millions)||Generating Capacity||Power Stations (wind farms)||Profit (before tax)|
|Drax Group||1,475 ||4.0 GW ||1 ||173 |
|International Power||1,173 ||3.7 GW ||6 ||447 |
|GDF Suez||-||2.1 GW ||2||-|
|Welsh Power||-||1.2 GW ||2 ||-|
|AES Power||-||0.5 GW ||1 ||-|
Drax has a 5% share in the generation capacity market. The UK total generation capacity is 75 GW and Drax has a capacity of 4 GW. Drax's biomass project would add 900MW to its capacity increasing its market share approximately 1%.