Drax : Annual Report and Accounts 2023

Committed to the world's energy transition

Drax Group plc Annual report and accounts 2023

Shareholder information

Shareholder information Alternative performance measures glossary Glossary

Company information

Financial statements

62

72 Financial statements contents Independent Auditor's report to the members of Drax Group plc

Strategic report

Total basic earnings per share

142.8 pence

(2022: 21.3 pence)

Cash generated from operations

£1,111m

(2022: £320m)

Total recordable incident rate

0.38

(2022: 0.44)

Group carbon emissions Scope 3

3,534 ktCO2e

(2022: 3,123 ktCO2e)

(1) Adjusted financial performance measures are described on page 206

(2) Net debt is described in Alternative performance measures on page 209

(3) Electricity Generator Levy (EGL) of £205m

Read more at drax.com

Financial/ESG highlights

Total revenue

£8,125m

(2022: £7,775m)

Total operating profit

£908m

(2022: £146m)

Percentage of total UK renewable electricity generated

8%

(2022: 11%)

Group carbon intensity

39 tCO2e/GWh

2022: 49 tCO2e/GWh)

Wood pellets produced

3.8Mt

(2022: 3.9Mt)

Contents

Adjusted EBITDA(excluding EGL) (1) (3)

£1,214m

(2022: £731m)

Dividend per share

23.1 pence

(2022: 21.0 pence)

Net debt (1) (2)

£1,084m

(2022: £1,206m)

Group carbon emissions Scope 1 and 2 (location-based)

486 ktCO2e

(2022: 669 ktCO2e)

Employee engagement score

79%

(2022: 79%)

Delivering dispatchable, renewable power

An electricity generator produces dispatchable power when the power can be ramped up and down, or switched on or off, at short notice to provide a flexible response to changes in electricity demand. Biomass, pumped storage, coal, oil, and gas electricity generation can meet these criteria and hence can be Dispatchable Power sources. Nuclear can be dispatched against an agreed schedule but is not flexible. Wind and solar electricity cannot be scheduled and hence are not Dispatchable. An electricity system requires sufficient Dispatchable Power to operate and remain safe. Renewable power is derived from natural sources that are replenished at a higher rate than they are consumed.

Content

Strategic report		People Positive
At a glance	2	Biomass sourcing
Taskforce on Climate Related
Market context	4
Financial Disclosures (TCFD)	78
Business model	6
Verification statements	91
Chair's Statement	8
Viability Statement	92
CEO's Review	10
Principal risks and uncertainties	94
Carbon removals	16
Sustainable biomass	18	Governance
Energy security	20	Letter from the Chair	110
Financial Review	22
Board of Directors	114
Remuneration at a glance	28
Corporate Governance report	118
Key Performance Indicators	30
Nomination Committee report	127
Stakeholder engagement	32
Audit Committee report	132
Section 172 Statement	32
Remuneration Committee report	144
Sustainable Development	42
Directors' report	161
Climate Positive	50
Directors' responsibilities statement	165
Nature Positive	56

166

168

282

285

287

289

Contents

Strategic report

Our purpose

is to enable a zero carbon, lower cost energy future

Through our strategic pillars, that are aligned to net zero targets, we are delivering on our promise. This is how we are creating impact:

To be a global leader in carbon removals

To be a global leader in sustainable biomass pellets

To be a UK leader in dispatchable, renewable generation

Strategic pillar Page 16	Strategic pillar Page 18		Strategic pillar Page 20

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Strategic report

At a glance

We are committed to enabling a zero carbon, lower cost energy future. Our strategic aims are to be a global leader in both sustainable biomass pellets and carbon removals, and to be a UK leader in dispatchable, renewable generation.

Drax is the second largest producer of sustainable biomass globally, and the UK's largest source of renewable power by output. We are progressing options for carbon removals using bioenergy with carbon capture and storage (BECCS).

Our integrated flexible and renewable value chain

Pellet Production

Sustainably sourced biomass is a renewable, low-carbon source of energy and a key element in the road to net zero. This is at the heart of our purpose. The material we use to make pellets includes sawmill and other wood industry residues and forest residuals (which includes low grade roundwood, thinnings, branches and tops). They provide a sustainable, low-carbon fuel source that can be safely and efficiently delivered through our global supply chain.

The forests from which we source our biomass are managed in accordance with standards designed to support the health and growth of these forests over the long term. Based in the US South and in Western Canada, we have 18 operational and development sites with nameplate capacity of around 5.4Mt once expansions are complete.

We have US$3.7 billion of long-term contracted sales to third parties across Asia and Europe. Our Generation business also uses sustainably sourced pellets from our Pellet Production sites to make flexible, renewable electricity for the UK.

We are committed to sourcing sustainable biomass that achieves both decarbonisation and positive forest outcomes. You can read more about this in the Sustainable Development section on page 44.

Employees

781

Adjusted EBITDA

£89m

(2022: £134m)

Pellets produced

3.8Mt

(2022: 3.9Mt)

Generation

Our portfolio of flexible, low-carbon and renewable UK power assets - biomass, hydro, and pumped storage generation - provides dispatchable, renewable power and system support services to the electricity grid.

Our dispatchable power assets - which can be turned up or down, or switched on or off, at short notice to provide (or dispatch) a flexible response to changes in electricity demand - have an important role to play in enabling the transition to more renewable energy and a more flexible energy system: generating renewable electricity when the sun doesn't shine and the wind doesn't blow.

We are the UK's largest source of renewable power by output, and Drax Power Station is the UK's largest single source of renewable electricity by output.

Our portfolio provides long-term earnings stability and opportunities to optimise returns from the transition to a low-carbon economy.

We are developing options for BECCS at Drax Power Station in the UK and exploring options for global BECCS.

Employees

675

Adjusted EBITDA (excluding EGL)

£1,138m

(2022: £696m)

Percentage of total UK renewable electricity generated

8%

(2022: 11%)

Customers

Our Customers business sells renewable electricity to industrial and commercial customers in the UK.

The business also offers non-generation system support and energy management services to help customers cut costs and reduce their emissions.

This includes the provision of decarbonisation services, such as vehicle fleet electrification, implementing a charging infrastructure, or optimising electric assets. It also helps customers to sell any renewable power they generate.

Opus Energy sells renewable electricity and gas, powering a portfolio of mainly small and medium-sized enterprise (SME) customers, as well as some larger corporate businesses, across the UK. The provision of renewable sourced electricity as standard supports customers with the achievement of their sustainability goals.

Employees

892

Adjusted EBITDA

£72m

(2022: £26m)

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Strategic report

Where we operate

Canada

							NW TERRITORIES
		BRITISH
	COLUMBIA	High Level
		Smithers			ALBERTA
Westview			Houston
					Prince George
(Prince			Burns Lake
Rupert)
						MANITOBA
				Meadowbank	Entwistle
				Williams Lake
						Armstrong	SASKATCHEWAN
Vancouver						Lavington
				Princeton
	WASHINGTON
	Longview				NORTH
							MINNESO
							DAKOTA
Ports			18 operational and development sites,
Developments			with nameplate capacity of around
Operational plants	5.4Mt once expansions are complete.
Corporate offices

US

	MISSOURI			NORTH
		TENNESSEE	CAROLINA
	ARKANSAS	SOUTH
OKLAHOMA
Monroe	MISSISSIPPI	ALABAMA	CAROLINA
	Russellville
	Leola		Aliceville	GEORGIA
	Morehouse		Demopolis
TEXAS	LaSalle	Amite

LOUISIANA

		Mobile
Houston	Baton Rouge

Torreón	Monterre
	y

Five deep water ports, including one in development, accessing Asian and European markets.

UK

Cruachan Power Station

Glasgow

Daldowie Fuel Plant

Lanark Hydro Scheme

Galloway Hydro Scheme

Drax Power Station

Northampton

Ipswich

London

Dispatchable, renewable power generation - biomass, hydro, and pumped storage - and supply to UK industry.

Japan

Tokyo

Pumped storage hydro generation Biomass from waste Hydro-electric generation Biomass generation

Customers business - sales and energy management services Corporate offices

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Strategic report

Market context

Our role in energy security, tackling climate change, and a Just Transition

The world is navigating a complex interplay of technological, geopolitical, environmental, and social factors, requiring global co-operation and innovative solutions. Trade tensions, technological competition, and ideological differences contribute to a delicate balance of power that influences international politics and economics. As societies grapple with

the challenges, the pursuit of sustainable and inclusive development must remain a shared goal. This is summarised as the energy trilemma - how to maximise decarbonisation and ensure energy security, whilst minimising the cost (maximising the benefit) to society.

The global commitment to address climate change is reflected in initiatives like the Paris Agreement and the agreement to transition away from fossil fuels reached at COP28 in Dubai, but the implementation of sustainable practices and the transition to renewable energy sources have faced increasing challenges from wider economic pressures, such as higher interest rates and in some regions political hesitancy.

Energy security

In the two years since the Ukraine-Russia war started, energy security has become increasingly important, with countries and organisations facing a tough balancing act between emissions cuts and energy security. During this time, Drax has continued to play an important role in preserving the UK's energy security. In 2023 across its pumped storage, hydro and biomass assets, Drax provided 8% of the UK's renewable power and Drax Power Station in North Yorkshire was the largest single source of renewable power by output in the UK, whilst also supporting thousands of jobs across the country both directly and through our supply chain.

With the growth in the electrification of heating and transport likely to lead to a significant increase in the demand for electricity, there is a clear need for the development of new capacity. This will likely come from wind and will drive a need for a more flexible power system. This is at the heart of our flexible, renewable model. Drax helps to keep the lights on when the wind doesn't blow and the sun doesn't shine. Unlike wind or solar, our sites provide secure, dispatchable, renewable power whatever the weather - supporting grid stability.

8%

In 2023 across its pumped storage, hydro and biomass assets, Drax provided 8% of the UK's renewable power

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Strategic report

The Global Role of BECCS

and Carbon Dioxide

Removals (CDRs)

Leading scientists agree that reducing emissions alone isn't enough to achieve global climate goals, and that carbon capture and storage (CCS) will be crucial in global efforts towards reaching net zero. BECCS is currently the only credible large-scale technology that could generate renewable power and deliver carbon removals.

The Intergovernmental Panel on Climate Change (IPCC) is the world's leading authority on climate science. It states that carbon dioxide removal (CDR) methods, including BECCS, are needed to mitigate residual emissions and keep the world on a pathway to limit warming to 1.5°C.

9.5bn

Up to 9.5bn tonnes of carbon dioxide removals, via BECCS, could be required annually by 2050.

The illustrative mitigation pathways assessed in the IPCC's latest report use significant volumes of CDRs, including BECCS, as a tool for mitigating climate change. IPCC modelling shows that between 0.5 and 9.5 billion tonnes of CDRs, via BECCS, could be required annually by 2050 to reach global net zero targets. The UN-backed Principles for Responsible Investment estimate that the CDR market could be worth over a trillion dollars by 2050. More supply is required to meet the scale of the challenge, and the IPCC estimates a requirement for 80Mt of BECCS by 2030 (IPCC's median case) compared to just 20Mt of projects in development for 2030.

The UK sits in an advantageous position to realise the potential of CCS. Not only does it possess 25% of Europe's geological storage opportunity for carbon, it also holds an infrastructure, skills, and engineering advantage due to the legacy associated with the oil and gas industry. To take advantage of this position, the UK must act fast, requiring action by the Government, business, and the investment community. This includes finalising CCS business and financial models, confirming the role of the UK Emissions Trading Scheme (UK ETS) scheme and voluntary carbon markets in supporting investment in CCS, and providing a near-term incentive for prospective storage operators to appraise storage locations building on recent North Sea Transition Authority licensing rounds.

The international environment for BECCS continued to develop favourably in 2023. A growing number of governments and

key stakeholders around the world recognise that deploying BECCS at scale will be critical to delivering on climate targets. In the US and Canada, policies to support deployment of renewables and carbon capture technologies are under development and Drax continues to engage with policymakers at the federal, state/provincial, and local level to ensure our sustainability and supply chains are well understood, and to educate on how biomass and BECCS can contribute to grid stability, economic development, and emissions targets.

The EU carbon removal certification framework aims to scale up carbon removal activities and whilst still going through the legislative process, it classifies BECCS as a permanent solution. The Industrial Carbon Management consultation outcome, published in November 2023, demonstrated a high level of support for carbon removals (71%) and BECCS in particular as the highest- ranked technology (76%). Several governments have announced carbon management strategies, research and development funding schemes or grants. On biomass, two pieces of legislation published in 2023 - the Renewable Energy Directive (RED III) and the EU Regulation on Deforestation-free products - could impact our supply chains and impose additional requirements relating to the trade of wood pellets into and from the EU. We remain engaged on these as the EU works on implementation, to help ensure the rules are practical and implementable and that trade into and from the EU can continue.

We expect the momentum behind BECCS to continue in 2024. This could include the development of detailed roadmaps to deliver net zero targets and international negotiations on carbon markets.

A Just Transition

The global energy market continued to see a transition to cleaner and more sustainable energy sources, advancements in technology, and a growing emphasis on digitalisation. Environmental concerns, enhancing energy security, and meeting the evolving demands of a changing world remain high priorities for governments across the world.

Socially, conversations about diversity, equity, and inclusion are gaining prominence, influencing corporate policies, public discourse, and political agendas. Movements advocating for social justice and equality continue to reshape cultural norms and challenge systemic inequalities.

Against this backdrop policymakers need to address all three elements of the energy trilemma in order to minimise the cost, maximise the benefits, and deliver a Just Transition.

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Contents

Strategic report

Business model

A leading UK-based renewable energy company with global growth opportunities aligned to net zero targets.

Our assets

People

Supportive, diverse and inclusive culture where colleagues feel they belong

Resilient supply chain

Geographically diversified biomass supply chain

Innovation

Developing options for large- scale carbon removal technologies

Financial strength

Clear capital allocation policy to support the strategy

Customer services

Decarbonisation services to high-quality business customers

Power generation

11.5TWh

Biomass generation

0.8TWh

Hydro generation

Driven by our purpose

Our purpose is to enable a zero carbon, lower cost energy future

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on the climate, nature, and people

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Strategic report

How we add value						Stakeholders
Supporting the		Supporting the energy		Workforce
UK's energy security		transition - secure,		See Page 33
- stable, resilient		renewable, dispatchable
energy supply	UK power generation		Shareholders
							and investors
							See Page 33
							Communities
							See Page 34
							Government, political
							bodies and regulators
							See Page 35
No.1	No.2
		Customers and suppliers
UK's largest source	Second largest
of renewable power	supplier of sustainable		See Page 36
by output (8%)	biomass globally

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Contents

Strategic report

Chair's statement

Andrea Bertone, Chair

Enabling a secure and sustainable future, together with you.

People and values

Since joining the Board, I have already spent time with many colleagues across the Group. I have visited several sites, and I look forward to visiting more during 2024 as I continue to learn about Drax.

I am pleased to present my first Chair's statement for the Group. I joined the Drax Board in August 2023 and assumed the role of Chair in January 2024.

I have spent most of my executive career working in power generation, primarily in North and South America. What drew me to Drax, among other things, was the Group's strong sense of purpose

in enabling a zero carbon, lower cost energy future.

Over the last 15 years Drax has transitioned from a UK-basedcoal-fired power generator to an international renewable energy company. With the development of carbon removal opportunities utilising BECCS technology, I believe that Drax is at the forefront of the energy transition, and I am excited to be a part of that.

On a personal note, I am grateful to Philip Cox for his support during my introduction to the Company and I would like to thank him on behalf of the Board for his nine years of service to the Group, as a Non-Executive Director and Chair.

During his stewardship, the business has completed its transition from coal to biomass power generation, our Pellet Production business has grown, and we have progressed opportunities for BECCS.

These actions have been driven by the Group's continuing commitment to deliver our purpose and contribute to the fight against climate change.

I have been impressed with the commitment and enthusiasm of colleagues I have met, and the strong sense of pride in what we are doing. This extends to making sure we do what is right in the way we work, that we support one another, and that we actively engage with stakeholders.

Sustainability is at the heart of the Group, and we believe that achieving a positive economic, social, and environmental impact helps us create sustainable long-term value. We welcome healthy discussion and challenge about what we do, and we acknowledge that there is always room for continued improvement.

The Board remains committed to building a supportive, diverse, and inclusive working environment where all colleagues feel comfortable contributing to healthy debate to achieve the best results. In our latest colleague engagement (My Voice) survey we received positive outcomes on measures, such as inclusion and safety, with an overall engagement score of 79% (2022: 79%). You can read more about this on page 64. I am also pleased to report that as at 1 January 2024, 56% of the Board were women.

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