- Drax Group PLC (LON: DRX) is subject to vague but significant political risk
- The Drax business is now mostly all in on biomass which seems an entirely reasonable sector
- But biomass is wholly reliant upon political fashion for its very existence
Drax can be described in a pencil sketch as being the old coal-fired power station now converted to burning biomass, plus the expansion of the wood ship and pellet business that supplies that biomass. As we’ve pointed out before the business itself, as an ongoing process, has its merits.
However, the entire structure depends upon biomass being accepted as a useful method of dealing with climate change. This is not something that is universally accepted and so if that political fashion changes then so does the prospect for Drax as a business.
Also Read: The Best UK Renewable Energy Stocks
We are beginning to see at least some pushback on the biomass idea. Here and here for example. It’s even possible to claim – as some do – that burning biomass creates more CO2 emissions than if Drax simply used the bed of coal that the plant sits atop. The emissions from preparing and transporting the wood pellets are higher than are saved by using wood not coal.
The point here is not to take sides as to whether that’s true. Rather, the entire edifice depends upon the current legal structure about emissions remaining in place. If, instead, those concerns about biomass not being a contribution to dealing with climate change come to the fore then there isn’t really much of a business for Drax to be doing.
This is, of course, a long-term worry. It was well over a decade ago that the green groups – Greenpeace, FoE and so on – finally came around to the correct view that biofuels are not contributors to dealing with climate change. Yet the US ethanol program continues, the move from E5 to E10 has just happened here in the UK. Just because something doesn’t help, even if it’s positively contra-indicated as a solution, doesn’t stop politics insisting upon it being done anyway.
The question then becomes, well, how long is this going to be true? Again, this is not to say that Drax is in fact adding to climate change, even if some say it is. Nor that it’s the bees knees of a solution. As investors, we just want to know whether the business will be allowed to carry on with its current plans. Which is that political risk.
Drax, as a business, not a plant, exists purely because of the legal structure around what counts as emissions, what gets taxed or subsidised. That being so, any change in those rules and laws is a risk to the Drax business.
Whether it will happen or when is entirely unknown. But the major risk to Drax is a change in the law and taxation of biomass in energy production. That’s what needs to be monitored when considering Drax shares, therefore.