The latest research note from Drax Group (LON:DRX) by Longspur Research highlights a further step forward in the company’s flexibility strategy, following the announcement of a second tolling agreement linked to a major battery energy storage system project.
Drax has signed a 15 year tolling agreement with Zenobe Coalburn, covering a 200MW four hour duration battery energy storage system in South Lanarkshire. According to Longspur, the site is strongly positioned north of the B6 grid boundary and close to the Coalburn grid supply point, in an area with significant wind generation.
Research Analyst Adam Forsyth writes, “Drax’s second tolling agreement brings exposure to a four hour BESS project and will drive additional volumes for the recently acquired Flexitricity business. We expect broadly similar economics to the agreement signed with Fidra Energy and see more potential for Drax to take advantage of developers seeking long term agreements in order to attract project financing.”
CEO: Building A Gigawatt Scale Pipeline
Commenting on the agreement, Will Gardiner, Chief Executive Officer of Drax Group, said: “Flexible Generation technologies like battery storage support a secure, affordable and clean energy system for British homes and businesses. This new BESS tolling agreement, alongside our other recent tolling agreement and acquisitions of Flexitricity and three battery storage developments, shows we are building momentum in delivering a gigawatt-scale pipeline of battery storage opportunities.
“We are focused on allocating capital to growth and value creation opportunities across our FlexGen portfolio that are aligned with the UK’s energy needs, underpinned by strong cash generation and attractive returns for shareholders.”
His comments underline Drax’s strategy of expanding its flexibility offering, not only through ownership but also through long term operational agreements that enhance earnings visibility.
A 15 Year Agreement With Strategic Value
Under the 15 year agreement, Drax will have full operational control and dispatch of the asset, while Zenobe remains responsible for construction, maintenance and availability. The project already has planning permission and a protected grid connection, with a targeted commercial operation date of 2028.
Zenobe currently has 1,135MW of batteries live or under contract, highlighting the scale of its development activity.
Forecast Changes And Valuation
Longspur has adjusted its forecasts to reflect expectations that the West Burton deal will contribute from the middle of FY28. EBITDA in that year rises to £638m from £629m, and to £713m from £687m in FY29.
As a result, Longspur’s central case valuation increases to 1093p from 1082p. The valuation range now stands at:
- Low case, 942p
- Central case, 1093p
- High case, 1237p
The central case is based on a WACC of 8.8 percent.
Financial Highlights
Longspur’s forecasts point to continued profitability and dividend growth:
- FY24 revenue of £6,163m, EBITDA of £1,053m
- FY25 revenue of £5,133m, EBITDA of £905m
- FY28 EBITDA projected at £637m
- Dividend per share rising from 26.0p in FY24 to 38.2p by FY28
- Dividend remains covered throughout the forecast period
The note also observes that pricing drops revenue in FY24 but profitability remains, and that net interest is balanced between cashflow and capex.
Strategic Context
Drax owns over 6GW of grid connected power capacity in the GB market, spanning biomass generation, pumped storage, hydro assets and flexible gas generation. This diversified portfolio allows the group to respond to growing demand for flexible, lower carbon power as the UK electricity system evolves.
Longspur identifies supportive factors including low carbon spinning reserve, long duration fast reacting storage and exposure to carbon capture and storage at scale, while also acknowledging regulatory and policy risks.
Final Thoughts
The latest research note from Longspur Research presents Drax Group as continuing to strengthen its flexibility platform through long term agreements and disciplined capital allocation. With a second tolling agreement secured, an increased central valuation of 1093p and a visible dividend trajectory, the company appears focused on aligning growth with the UK’s energy transition and shareholder returns.
