Drax Group PLC
LSE:DRX
Earnings Call Analysis
Q2-2023 Analysis
Drax Group PLC
The company remains robustly positioned with its strategy tailored to enabling a zero-carbon, lower-cost energy future. Its operational model integrates shareholder value with climate, nature, and societal benefits, specifically targeting net zero and climate solutions such as dispatchable renewable power and sustainable pellet production. In pursuit of these goals, the company has earmarked a £7 billion investment in strategic initiatives like BECCS (bioenergy with carbon capture and storage), biomass supply, and pumped storage across the upcoming decade. This also includes the expansion of pumped storage assets at Cruachan, Scotland, which received recent approval. Meanwhile, their commitment to safety culture intensifies, aiming to reduce the Total Recordable Incident Rate (TRIR) which saw a minor increase to 0.47 from 0.41 in the prior first half.
Financially, the company has made stunning inroads with an EBITDA increase of over 100% at £453 million. This robust financial performance is driving strong cash flows, paving the way for reinvestment into their strategic vision. The resilience is further boosted by a healthy dividend increment proposed for the full year to 23.1 pence per share, which marks a rise of around 10%. Additionally, the company's share buyback program is well underway, reaching 80% completion and signifying a strong vote of confidence from the board. On the balance sheet, liquidity remains solid with £586 million in cash and undrawn facilities, and leverage is maintained well below the target ratio of 2 times.
Despite a challenging environment resulting in marginal volume decreases, the pellet production business has improved, with EBITDA increasing by 7% to £48 million. The company's newest pellet production site at Demopolis has ramped up well, helping offset losses from temporary suspensions at other plants due to external factors such as wildfires. Cost pressures remain in utilities, labor, and raw materials, but have been balanced by increased revenue. The company continues its development efforts with new pellet plants in Aliceville and Longview, which are expected to contribute to capacity growth and long-term business viability.
Operationally, the company continues its legacy as a leading renewable power source in the U.K., providing around 9% of the nation's renewable power. Even though output levels were impacted by major plant outages, ongoing investments in system support services have been flourishing, especially at Cruachan hydroelectric power station. A strategic emphasis on dispatchable renewable generation assets underscores the importance of such versatility amidst increasing energy security concerns and the challenges of renewable intermittency.
The company eagerly anticipates the release of the U.K. Bioenergy Strategy Review, which is expected to underpin the commitment and development of BECCS. A carbon negative CFT (Contract for Difference) and the inclusion of greenhouse gas removal in the U.K. Emissions Trading Scheme (ETS) are critical government strategies that could boost the commerciality of BECCS projects. In response to these developments, the company has deferred further investment in U.K. BECCS seeking more government clarity, expected within the next 12 months. However, global plans for BECCS expansion show promise with the aim to remove more than 20 million tons of CO2 annually by 2030, demonstrating the company's proactive approach to seize evolving opportunities in the carbon removal space.
The company's sustained focus on a capital allocation policy complemented by strong financial performance allows for continued investments in growth while also allotting generous returns to shareholders. The intent to boost dividends coupled with a £150 million share buyback program, of which £122 million is already cash settled, manifests this balance. The £7 billion investment cadence will focus on aligning with positive climate outcomes, carefully weighing the cost of capital and project risks against expected returns.
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Ladies and gentlemen, welcome to the Drax Group Announcement of Half Year Results. My name is Ziko, and I will be the operator for your call this morning. [Operator Instructions]
I will now hand over the call to Will Gardiner, Chief Executive Officer. Over to you.
Thank you and good morning, everyone.
I'm going to start on Page 5. Our purposes, I think you're all familiar with is to enable a zero carbon, lower cost energy future. And to do that, we're building a business that's fully aligned with fighting climate change. We have a business model that aligns shareholder returns with positive outcomes for nature, the climate, and people.
We have a strategic asset base aligned with climate solutions and net zero, which includes dispatchable renewable power in the U.K. that is critical to the system in the Drax Power Station in Cruachan and 5 million tons of pellet capacity with increasing value as markets for BECCS, SAF and other uses for sustainable pellets begin to accelerate. And a plan to deliver low-cost differentiated carbon removals, which we think could be a $1 trillion market.
We have delivered proven financial performance over time and we generate significant amounts of cash, which we have greater opportunities to invest. And as always, Andy will I think make clear that we will be quite disciplined in how we do that.
So turning to the highlights, first just a word on safety where our TRIR for the half year was 0.47 versus 0.41 in the prior first half year, which is not good enough, frankly, and we need to improve that. We're very focused on it. Part of that is due to the way we report. So we've widened scope to include some contractors in parts of North America, which were not there before, as well as a function of improved reporting of incidents in our pellet production business.
We've implemented a health and safety and environmental improvement plan across North America and are investing in training people and capital to deliver improved performance as well as driving increased levels of leadership site engagement. Again, to be very clear, we are committed to a strong safety culture across the Group, and we're very focused on improving our performance.
Turning to the financials, our EBITDA before EGL was £453 million, which is an increase of over 100% on the first half of last year and after EGL it was £417 million. In our power business, we are at 9% of the U.K.'s renewable power and our system support business is doing very well, utilizing our flexible vertically integrated biomass supply chain and other dispatchable generation assets for supporting U.K. security of supply. I'm particularly pleased with our performance in pumped storage and hydro as well as in customers. And I would highlight also that we've had a good performance in our pellet business in what has been a difficult environment, which I'll get into in a minute.
But, overall, the strong financial performance is generating cash flows, which we expect to reinvest in our strategy in U.K. and globally, with attractive returns and we've outlined a £7 billion on program of investment opportunities across the decade in BECCS, pumped storage and biomass supply. And you will have seen earlier this week that we have received our Section 36 approval in Scotland for expansion of our pumped storage assets at Cruachan, and we're very excited about that.
Through the evidence of the Board's confidence in our business and the opportunities in front of us, we expect to increase the dividend per share for the full year to 23.1p, an increase of about 10%. And in addition, our £150 million buyback program is about 80% complete.
Turning to Page 8 and the performance of our pellet production business. The business is performing well in a challenging environment. EBITDA of £48 million is up 7%, which while it reflects production volumes that are marginally lower than the prior year and also an increase of about - in our cost base, that's all been offset by higher revenue. And notwithstanding the good incrementally positive financial performance, I want to highlight some of the challenges that we face.
We've had outages at several - three sites. We've had temporary suspension of production at plants due to wildfires. We've had wind damage to the floating systems at our Port of Baton Rouge, where the repairs are currently underway. But all of that has also been offset by higher production at Demopolis. Demopolis is our newest site and commissioned recently. I'm very pleased with how well the team there is bringing production up to speed.
We continue to see cost pressures in transport and utilities, in addition to increase in labor cost maintenance and a small increase in fiber costs. And as I mentioned, the impact of these costs has been balanced by an increase in our revenue. We continue to progress our new developments at Aliceville and Longview, and as I said at the top, are very bullish on the long-term value of biomass and the role of our integrated supply chain.
Turning to our generation operations on Page 9, our generation continues to perform very well and against the backdrop of energy security, increasing electrification, and renewable intermittency, the role of dispatchable renewable generation has never been more important.
Overall, our output was lower this year due primarily to a major plant outage on a biomass unit and there is a second one of those planned in the second half of the year. We continue to be the largest source of renewable power in the U.K. by output and across the year, provided around 9% of U.K.'s renewable power and on some days we were well over 50%.
Our system support performance was very strong, particularly at Cruachan, which I'll talk more about on the next page. As we've said repeatedly, we expect the value of system support to increase over time as the energy system becomes more dependent upon intermittent and inflexible generation. And finally, I'd note, our coal units formerly closed in March, with no generation in 2023 and decommissioning is now well underway.
Turning to Page 10, our hydro and pumped storage operations have performed very well. And through the actions we have taken, we've positioned the units to provide more of the services the system needs when it needs them. This includes flexible power generation, but also a wide range of non-generation services, which not all generating assets can provide. We believe that the U.K. needs more renewable electricity and more flexibility in its energy system, both to turn up and to turn down when there's too much or too little wind on the system, and also to store that energy when it's not needed.
Through electrification, the retirement of dispatchable thermal plant and the increase in wind farm system, the need for these assets will increase and we believe so will their value, which again highlights why we're extremely excited about getting our Section 36 approval earlier this week. So all of those pieces inform the investment case for more pumped storage and we're very excited about our plans to expand Cruachan by 600 megawatts, subject to the right investment framework, which we, I think, are expecting next year. We continue to target an FID on that expansion in 2025, to begin operations in 2030, with an investment of around £500 million.
Finally turning to our customer business, Page 11, it's performed well. It's increasingly focused on the high-quality I&C customer base which is more aligned with our corporate purpose of enabling a zero carbon lower cost energy future.
We're using our I&C business and deliver flexibility to the power system through demand side response, creating value for our customers, the system and ourselves. And we were the second largest provider in the demand flexibility service. All of those customers are consumers of renewable power increasingly in demand in the U.K., and there is a significant premium, as you know, for renewable power, which positions us well.
Final theme that's emerging is that there is increasing demand from our clients for electric vehicle services, which is one of our suite of decarbonization services and we see this as an interesting opportunity for growth.
And now I'll turn it over to Andy to provide the financial review.
Thanks, Will, and good morning, everyone.
So starting on Slide 13, the financial summary. The strong half-year results we're announcing today reflects the benefits of the Group's flexible, vertically integrated biomass supply chain and dispatchable generation assets. Earlier this week, we published the company collected consensus for adjusted EBITDA and for EGL. We are reporting EGL as a levy within gross profit and accordingly, we've presented adjusted EBITDA including and excluding EGL. Our expectations for 2023 are unchanged and are based on continued good operational performance in the remainder of the year.
So, adjusted EBITDA excluding EGL of £453 million for the first half was broadly doubled compared to the prior year with improved contribution from all areas of the Group. Our cash generated from operations of £404 million compared with £185 million. We have strong liquidity with cash and committed undrawn facilities at the end of the period of £586 million and our leverage remains significantly below our stated objective of 2 times.
Our strong financial performance is generating cash flows, which is supportive of our capital allocation policy, positioning us well to invest in our core business, progress our strategic growth plans, and support sustainable and growing returns to our shareholders.
Consistent with our policy to pay a dividend, which is sustainable and expected to grow, the Board has resolved to pay an interim dividend of 9.2 pence per share and we expect this to be 40% of a full-year dividend of 23.1 pence per share, an increase of 10% subject to continued good operational performance in the remainder of the year.
Moving on to Slide 14, the adjusted EBITDA bridge. In pellet production, EBITDA of £48 million is up 7%. It's a strong performance against a challenging operational backdrop with lower production volumes and increased production costs. Volumes of 1.9 million tons were 5% lower than the first half of last year as we experienced a higher forced outage rate on a number of plants and curtailments due to wildfires at our Entwistle in Canada. These factors were partially offset by higher production at our new Demopolis plant.
In July, operations at Burns Lake, Smithers and Houston, and British Columbia were also curtailed due to wildfires and industrial action by Longshoremen at the Port of Vancouver and Prince Rupert in British Columbia. This higher forced outage rate led to increased maintenance cost in the period, but we expect these costs will reduce in the second half of the year as planned outages address some of the underlying operational challenges. In addition to fuel surcharges and utility costs that remain at elevated levels, inflation of labor cost and some increase in fiber prices have contributed to the higher production costs.
Our development is underway on two pellet plants, which will add almost 600,000 tons of capacity by 2025. The first of 450,000 ton new build plant at Longview in Washington State provides the Group with access to new fiber baskets in the Pacific Northwest and a new port for the opportunity to consolidate additional capacity in the future.
The second is an expansion of our Aliceville site in Alabama. Our existing operations, combined with these developments get Drax the network of 18 pellet plants, around 5.4 million tons of capacity and access to by five deepwater ports on the East Coast and West Coast of North America. Together, taken with our focus on cost reduction, we continue to expect the profitability in our pellets business will grow over time.
In generation, adjusted EBITDA of £457 million, excluding EGL, has grown from £205 million. It reflects strong system support and renewable power generation performance across the portfolio, providing high levels of dispatchable renewable and low-carbon electricity and system support services, which offset incrementally higher biomass costs.
While energy prices have reduced recently, they remained substantially higher than historic long-term averages, and achieved power prices reflect the reliable and consistent hedging strategy for the ROC units, which would otherwise be more exposed to forward price movements.
The current operating environment increases importance of appropriate investment to ensure good operational performance and availability. In May, we had a five-week forced outage due to a transformer on one biomass unit, which has now returned to service. In July, we completed a major planned outage program on one of the units with a second to commence shortly. The program represents a significant undertaking with each outage taken around three months to complete.
Reflecting these factors, our biomass units produced around 50% more power in the winter months compared to the summer months. Prioritizing biomass supplies to generate more in the winter, allows us to support the U.K. power system when demand is greater and capture higher prices. The global biomass market remains under pressure and while a large proportion of the biomass we use is under long-term contracts, we have incurred some additional costs that underpin our supply chain.
In pumped storage and hydro, our operations performed strongly in the first half. Adjusted EBITDA excluding EGL of £154 million grew significantly compared to £53 million. The primary driver of this increase was a high level of activity at Cruachan where delivered system support services and power generation. As power prices and peak, off-peak spreads have reduced, we expect a lower level of adjusted EBITDA in the second half of the year.
The location flexibility and range of services that Cruachan can provide makes it strategically important to the U.K. power system and it underpins our plans for a potential investment in the expansion of the site, increasing total capacity to around 1 gigawatt. As Will mentioned, we recently received planning approval and continue to target operations from 2030.
The construction of our three new build Open Cycle Gas Turbine project continues. The plants will combine capacity of around 900 megawatts and will earn income from 15-year capacity market agreements that commence in 2024 and income from peak power generation and system support services. Development CapEx is in the region of £100 million per plant and we continue to assess options for these assets, including their potential sale.
In customers, our adjusted EBITDA of £37 million has increased 54% in the first half of the year and it represents an EBITDA margin of around 1.4% of revenue, which is in line with that achieved in the first half of last year, but ahead of the full-year EBITDA margin of 0.6%. In the first half of this year, the business has benefited from the resale of excess forward hedge power and lower balancing costs. In the first half of 2022, we also benefited from the resale of excess forward hedge power. As in the prior year, we don't expect that this benefit will recur in the second half of the year.
Careful management of our debt book remains a priority and bad debt expense in the first half of £19 million reduced from £26 million. Bad debt risk is typically higher within the SME sector of this business. However, we remain vigilant to stretch this across a wider portfolio.
Turning on to Slide 15 and capital investment. We expect CapEx to be in the range of £520 million to £580 million in the full year, reflecting that we paused investment on U.K. BECCS subject to further clarity on support for BECCS Drax Power Station. Our maintenance CapEx of £120 million to £140 million includes recurring and one-off maintenance across the Group.
The first of two major planned biomass outages, as I mentioned, is already completed. Our strategic and growth CapEx of £340 million to £380 million includes £220 million in respect of the three OCGT projects and we expect the development cost of each will be in the region of £100 million.
We're using the deferred letters of credit to manage timing of payments with the impact of deferring around £100 million for two years. The balance of the strategic CapEx primarily relates to our new build pellet plant at Longview and expansion at Aliceville that I mentioned earlier.
There are some costs in the first half in respect to U.K. BECCS, which were committed prior to announcing the pause in further investments and the reduction in expectations for the year reflects the reduced BECCS spend as we're not capitalizing costs for the U.S. BECCS at this stage.
Moving on to Slide 16 and the balance sheet, we maintain a strong focus on cash flow discipline and maintenance of a robust balance sheet and available cash and committed undrawn facilities of £586 million provides substantial headroom over our requirements. We continue to carefully manage increased demand on counterparty trading lines and cash collateral requirements that are associated with higher commodity prices.
And at the end of the first half, cash collateral placed to support these exchange-traded contracts totaled £183 million compared to £234 million that was placed at the start of the year. As associated trades mature, there'll be a corresponding working capital inflow. However, market movements and new trades will determine future cash collateral requirements. As I noted earlier, we expect to be significantly below 2 times net debt to adjusted EBITDA after the EGL at the end of this year.
We have a committed £300 million revolving credit facility and a £200 million liquidity facility as a backup to manage unforeseen events and support working capital movements. The £300 million RCF expires in January '25 with a one-year extension option. No cash is being drawn under this RCF since its inception. And no amounts were drawn on the £200 million liquidity facility throughout the period.
Our customers business have access to a facility, which enables it to accelerate cash flows associated with receivables from energy supply customers on a non-recourse basis. The facility of £300 million extends to January '27 and is increased to £400 million until January of next year. It was fully utilized at the end of June and at the end of December '22. And during the period, our credit ratings were affirmed as BB+ by Fitch and S&P and as BBB low by DBRS with a stable outlook in each case.
So, finally, on to Slide 17 and capital allocation. Our capital allocation policy was launched in 2017, and it remains unchanged. Strong financial performance and cash generation is supportive of maintaining our credit ratings, paying a growing and sustainable dividend, but it also positions us well to invest in our core business and progress our strategic growth plans in the U.K. and globally.
We've outlined a £7 billion program of investment this decade across BECCS, pumped storage and biomass supply and we'll be disciplined in allocating capital, ensuring that we have high levels of confidence over project returns and cash flows and strong commercial contracts that appropriately manage project risks.
The proposed dividend per share for the year of 23.1 pence is reflective of that policy and an increase of just over 10%. Annual growth since inception of our policy is around 11%. In addition, our £150 million buyback program is well progressed with £110 million cash settled in the first half and £122 million cash settled to date. All in all, combined returns to shareholders announced in respect of 2023 are in the region of £240 million.
With that, I'll hand back to Will.
Thank you, Andy.
And I'm - just as a reminder, you all know, our strategy has three pillars, right, to be a global leader in carbon renewables, to be a global leader in pellet production, and to be the U.K. leader in dispatchable renewable power.
And as we outlined at our Capital Markets Day recently, we have lots of attractive opportunities to invest for long-term growth. We think the £7 billion opportunity we've got have very attractive returns from significantly above our cost of capital and they are all aligned with positive people, nature, and climate outcomes.
And I just wanted to recap here. I mean, we continue to make good progress. Frankly, not a whole lot of new news in the last couple of months, but fundamentally, we have opportunities to invest about £6 billion in carbon removal. And as you know, our current ambition is to remove more than 20 million tons using BECCS, targeting 14 million tons per year by 2030.
We selected two sites in the U.S. South, which could deliver 6 million tons by 2030. We're also evaluating additional sites for both greenfield and brownfield BECCS in the U.S. We agreed MOUs for the sale of more than 2 million tons of CDRs, some of those in the $300 plus per ton range.
In the Drax Power Station, we continue to be excited about the opportunity to take out 8 million tons of CO2 by 2030 there. In our pellet business where we expect to invest about £0.5 billion, we're targeting 8 million tons of production capacity by 2030 and we have attractive opportunities in multiple different markets to solve 4 million tons to third parties, also by 2030.
Finally, in terms of dispatchable renewable power, our investment plans are again about £0.5 billion and we think that the expansion at Cruachan, again as I mentioned before, that 600 megawatts is extremely attractive and we're targeting operations there in 2030.
As all of you are aware, we also have our three Open Cycle Gas Turbine projects that should start to come online next year. Again, we think those are quite attractive, although they are non-core for us and if running in 2021-2022, they would have earned about £150 million of EBITDA across those two years. So it is an attractive investment and it should attract some significant interest.
Turning to U.K. BECCS, just a quick update on what has happened over the first half of the year. The Bioenergy Strategy Review, we are expecting any day. To preempt question, I don't have more information than you would have seen publicly as to why that has not yet happened, but several things have happened, which I think are quite important. First, the greenhouse gas or GGR consultation has confirmed the government policy support that's needed to enable investment in BECCS and has confirmed a carbon negative CFT as the preferred model. So that's an important step.
Secondly, and probably more fundamental longer term, that there has been a consultation on the U.K. Emissions Trading Scheme or the U.K. ETS. And again, the idea that greenhouse gas removal will be included there, provides an important long-term statutory compliance market for the negative emissions produced by GGRs. And directly, in terms of what we're up to, as you know, we're working closely with the government now on sort of three different pieces.
First of all, a bridging mechanism to make sure that that power station is economically viable between 2027 and 2030 when we expect the BECCS programs to begin. We're also working with them on the BECCS business model and heads of terms for that. And the third stream of work that we're working on transport and storage. And I expect more details to come on Track 1 expansion and Track 2 later this year. And I think as Andy has mentioned, we paused our further investment in U.K. BECCS until we have more clarity, which we would expect to have in the next 12 months, although crystal ball gazing in terms of the government and the political scenario, it's probably not something I would be too much - as we would expect.
Finally, turning to global BECCS, I guess, just wanted to reiterate that we are extremely excited about the opportunity here. We've got a full team now up to speed in the U.S. We are investing in people, we're investing in sites, we're investing in fiber, investing in land options, et cetera. So we're making a lot of progress there. And I would say the long-term demand continues to be very clear.
The IPCC again reiterating its view that we will need significant amount of BECCS by 2050 in order to get to net zero and by 2030 to actually get on the right path. There have been announcements of about 20 million tons of BECCS-type projects by 2030 and probably, more importantly, again as we've talked about before, some real substantive deals that have been announced, the most interesting one being Microsoft and Orsted in Denmark. So again, we're extremely excited and we are making a lot of good progress in delivering that program.
So in summary, on Page 22, over the last couple of decades, we have dramatically repositioned Drax in the marketplace. We now have a business model that's completely aligned with delivering U.K. energy security as well as combating climate change. This is enabling us to deliver significant volumes of renewable electricity and system support services using our vertically integrated supply chain and dispatchable generating assets.
The strong cash flow we are generating from these activities supports growing returns to shareholders as we've demonstrated with a significant increase in our dividend and the ongoing share buyback program as well as the development of a pipeline of projects that I've talked about, the £7 billion investment program that's aligned with climate solutions, net zero and energy security.
The final point I'll make again is, I'm sure you all have questions about the buyback. We will continue to implement our capital allocation policy. We haven't announced something new because we're continuing on with what we're doing now, but as and when it becomes appropriate, we will look at that and make the decisions as appropriate.
So that finishes our prepared remarks, and over to questions.
Thank you very much. [Operator Instructions] The first question is from the line of Martin Young with Investec. Please go ahead with your question.
Yes, good morning to everybody. A couple of questions, if I may. The first relates to Slide 20. In the past and I appreciate there is an element of having to dust off the crystal ball here, but if I look at all of the things that need to sort of fall into place to progress BECCS, the biomass strategy, the bridging mechanism and ultimately the pellet BECCS model, could you give us some kind of indication of the ideal timeline for these things to fall into place with particular reference of the interaction of the bridge and where you go with pre-coal full for the capacity market for 2027, 2028? And then the second one is one for Andy. I didn't fully capture what you were saying around CapEx and the potential of deferring some of that CapEx into next year or beyond. So if you could just repeat what you said there, Andy, I'd be very grateful. Thank you.
Okay, Martin. So in terms of the - where we want to get to on the sort of bridging mechanism in terms of where we want to get on BECCS business model, transport and storage and all those pieces, right. There are a couple of milestones that are coming and we can debate sort of when they may come into structure. I don't to be precise, given the vagaries of government policies, et cetera.
But - so the bioenergy strategy, the next piece of the puzzle and we're expecting that shortly. We expect it to be supportive of BECCS. We expect it to have sustainability criteria. There might be some revisions there, which we expect again to be supportive of what we want to do in terms of making sure that we have the world-leading sustainability set up here in the U.K.
We're expecting it also to potentially also have a now two-division mechanism. We'll see if that's part of that also. And then specifically talking about how does the government see unabated biomass running over the course of the 2030 time. So that's sort of the first piece.
The funding envelope, for how sort of - for something that says, you know, there is a sort of government funding commitment to BECCS is something we're also looking for and that could come this year, it could come next year, but that's another key piece of this, because that will sort of indicate intense.
Third piece of this is, again it's more substantive agreement on what the bridging mechanism looks like. We're actively working on that. And again, it could be end of the year, it could be sort of first half of next year, but again we think that those discussions are moving well. I would - and then BECCS business more comes back, right.
And then fundamentally the BECCS business model, I think we pretty much know what it - at a high level, we know what that's going to look like. Actually getting to a final contract on a BECCS deal, that's going to take some time. That's probably a several-year event. The first pieces that I've just mentioned, and to this year, first half of next year, we think those are things that we should be getting increasing confidence in over time, right.
To come back to the specific question then and how we are approaching this, I mean, it is very important for us and we've emphasized this in our discussions with government that we got increasing levels of certainty over the course of this year and over the next - over the course of the rest of this year. And why is that?
Well, one of them is, providing more qualification and how that looks. We've got a bunch of different ways of dealing with that. So you'll see that when it comes through, but I think again the government has - we've been very clear with the government that we need to sort of understand where we are, when we have to make - or commit our position to that, right.
Second thing I'd say is that we are continuing to look at the best use of our pellets and I probably should have called this out more explicitly, but one of the things we talked about in our announcement is that we've got heads of terms to sell an additional 0.5 million tons over the next five years of pellets into Japan. So not only are we are bullish about the long-term opportunities in that market, we are actively looking to sell pellets now, right.
And that's important again because, as a group, our pellets are a very attractive asset and they need to be replaced then in the most economically beneficial way for us as a Group, right. So again, good ongoing discussions. I think we are sort of - it's important to us that we're able to make the long term commitments we need to make to make sure we can deliver BECCS in the U.K., which again we think is a top priority project and we're having good discussions with the government on doing so.
And on your second question, Martin, it was just to flag the difference between book and cash CapEx. So the OCGTs started last year and then we deferred the payments for what we spent last year to this year and we've deferred in some of the cash that we spend this year to next year. So that's the use of these deferred letters of credit, but if you look at book CapEx and you look at working capital uses of funds, it's worth noting that.
Okay, thank you.
May we move to the next question?
Yes.
Our next question is from the line of Hamish Moore from CS. Please go ahead.
Hi, thank you for taking my questions. Three questions from me, please. So to start with, on the point of, if you're able to get support to extend the unabated biomass burn, can you please provide some more color as to how you envisage that scenario? So, i.e., with reference to CfD levels currently at £100 per megawatt hour and would that be on 3 units? And is there potential for biomass - for moving biomass back to the CfD unit later on in the financial year?
My second question is, how our unit costs for your own biomass production looking in H1 2023 versus H2 2022? And finally, if you have confidence in your business plan, arguably the best investment option would be to buy back your own shares. So we're wondering under what criteria would you consider a share buyback to take you up to the full 10% you're allowed to buy back in the current period? Could we see when later on in the year if shares remain at the current level? Thanks.
So unfortunately, Hamish, I have to be quite brief on your questions. So I don't have any information I can share on where we think the sort of the discussions with the government will come out. It will be some form of - I think it's likely to be modeled on something that they are now, sort of something probably some sort of CfD I would guess. But I'd rather - it's probably not helpful to either speculate because we don't know yet. And secondly, we're in the middle of those discussions. Sorry, apologies on that.
On the third one, we think our - buying back our shares is attractive. That's why we're doing it at pace and we will continue to look at opportunities to do more of that as and when it looks the right thing to do.
Maybe Andy can talk about biomass costs.
So on biomass cost H1 versus H2, there is no material change in the underlying biomass costs. I think when we talk about production costs at our pellet plants, we do expect they will be slightly lower in the second half because some of these additional maintenance costs will reduce.
Great. Thank you.
Thank you. Our next question is from the line of Dominic Nash with Barclays. Please go ahead.
Good morning. Can you hear me, all?
We can, Dom. Welcome.
Hi, there. Couple of questions from me actually, although I probably would have asked also three, in line with that last one. So congratulations on getting the kind of permission for Cruachan through couple of days ago. I think in your press release alongside that you said you also now need government support for Cruachan to get to FID. And I just wanted to know exactly what government support would you be looking for, because it seems to be very profitable as is?
Secondly, when you start to build Cruachan, will it be like, I don't know, an EPC contract with a fixed price contract or will be taking capital construction risk? And finally, one on the CfD question. I didn't hear anything in your presentation. I didn't hear about presentation about the CfD terawatt hours that you'll be burning in the second half. Your overall, your burn rate for biomass being lower through 2023 than in previous years and I'm just wondering why you don't start burning CfD alongside your ROs and spares or pellets knocking about in the market at the moment? Thank you.
There was two, Dom. On Cruachan, fundamentally, Dominic, the plan has been from the very beginning that the government is doing a consultation on long-duration storage. We expect them to come out with that I think next year and I think the direction of travel we believe is sort of some sort of capping mechanism which we think is prudent, given the - both the quantum but also the timing or the duration of that investment, i.e., it's five-year build program and obviously the returns - the payback there is quite long.
So that's what we're looking for and we think it - I agree, it's very effective. And then I think we will continue to exercise our optimization strategy across the three RO units across our pellet supply chain and across CfD. And that's - I think it's difficult for me to predict now regarding how that will play out in terms of CfD versus how we are running in the second half of the year.
It's not so much optimization as I'm talking about total numbers, i.e., what stops you?
The total number, I guess, in the first half of the year - total numbers were down in the first half of the year fundamentally because of the outages, right. I mean, the outages, as Andy mentioned, one planned outages, so the maintenance we didn't have any of those in 2022 and we also have the four-week outage due to the transformer challenge we had on the unforced. So that's the reason for that in the first half of the year.
Okay. Thank you.
Thank you. [Operator Instructions] Our next question is from the line of Pavan Mahbubani from JPMorgan. Please go ahead.
Hi, everyone, morning. Thank you for your presentation and for taking my question. I just have one, please, on the bridging mechanism. And I appreciate the discussions are ongoing, but can you clarify if these discussions are only happening for the two units that you expect to convert to BECCS or is it for all four biomass units? And can you remind us, by 2030, what you expect in terms of Drax Power Station to look like? So two BECCS units and then is it two units running merchant or hopefully with a long-term contract? Any color on that, please? Thanks.
So I would say that maybe also do it at a conceptual level. I mean, the bridging - the discussions around the bridging mechanisms are designed to make sure that the Drax Power Station is viable between 2027 and 2030. And so the number of units, I think, will all be sort of embedded in how we manage that. It is not sort of yet clear whether that's one, two, three, four, to be honest. But at the end of the day, the objective is to make sure the station is vital and also to make sure we get the lowest cost option for consumer instruments.
And then in terms of the 2030 running, I mean, I would not expect we would have a government contract post 2030 on merchant - on the non-BECCS units, but just two BECCS units and then what we decide to do with the other ones will be a function of where we are relative to power prices and carbon prices and economics when we get there.
Okay. Thank you. That's very clear. Thank you.
Thank you. Our next question is from the line of Harrison Williams with Morgan Stanley. Please go ahead.
Hi there. Thanks for the presentation and for taking my question. Just one from me as well. As regarding this consultation regarding the U.K. emission trading scheme and the possibility of including carbon removals into that, so, I mean, firstly it'd be interesting to hear your thoughts around the likelihood of that. Obviously, we saw them remove from the European ETS only a few years ago. And then secondly, if this were to happen, does that significantly change the remuneration framework you're looking for from the U.K. government or was the sale of these CDRs are kind of on top of that anyway? Thanks.
So from my perspective, including GGRs or CDRS in the ETFs is absolutely the right thing to be doing. And that's also the direction of travel in Europe. I mean, they have offsets, which are fundamentally different out of the system in Europe. So at the end of the day, if you think about removing a ton of CO2, it should be treated as absolutely the inverse or the reverse of emitting one, right.
And that's the way we'll get the best outcome for consumers and the lowest cost. And for me, it's a very important and I think we'll be an - should be and I think will be an important part of the puzzle, both in the U.K. and in Europe. But it - and it will have to then be considered in the design of the CfD mechanism. So just in the same way that sort of - at the end of the day, the government is - power CfD is providing a sort of a guaranteed price above and below sort of we would need to pay them or the reverse. The same thing would happen in a negative CDR or GGR CfD.
That's great. Thanks.
Thank you. Our next question is from the line of Martin Young with Investec. Please go ahead.
Yes, hi again. Just a quick follow-up from me. And could you update us on where things are at with Ofgem's investigation into the classification of biomass? Thanks.
So again, I mean, as we've said, they are - and they published during the investigation, we are working closely with them on that and we - again I think - but really not much news to report on that, Martin.
Okay, thanks.
Thank you. This concludes the question-and-answer session. We do have a participant in the queue. Would you like to take the question?
Yes.
Okay. Our next question is from the line of Dominic Nash with Barclays. Please go ahead.
Hi, there. Yes. Sorry about that. Just very quick one from me as well. What price did you put through your books for your biomass price for the ETL level in half one, please?
That's not a number we've disclosed, Dominic. But when you look at what was incurred in the first half and when you think about the full-year cost, I guess you need to think about sort of higher prices in the second half of the year. And as I said, the biomass cost underlying is not materially different and volumes play into that as well, yes.
Okay, thank you.
Thank you. This concludes our question-and-answer session. I would like to turn the conference back over to Will Gardiner for closing remarks.
Well, thank you all and I think - frankly, we think we delivered a good strong set of results in line with where people were expecting. We continue to be excited about our investment opportunities. We continue to, I would say, operate our capital allocation strategy in line with what I've said. And look forward to getting more questions and interacting with all you guys over the course of the next few weeks. So thanks very much for joining.
Thank you. Ladies and gentlemen, this concludes today's conference. Thank you for joining. You may now disconnect. Goodbye.