The Drax Group (LSE:DRX) share price was sharply lower today (28 August) after news emerged that it was being investigated for possible breaches of the UK’s Listing Rules and Disclosure Guidance and Transparency Rules. By early afternoon, its shares were down 8%. At one point during the morning, they had been 10.9% lower.
Drax describes itself as a “renewable energy company engaged in renewable power generation, the production of sustainable biomass and the sale of renewable electricity to businesses“. It’s the largest renewable electricity generator in the UK and supplies 5% of the country’s energy needs. Its biggest asset is the Drax Power Station in North Yorkshire.
Over the years, I think it’s fair to say that the group’s operations have been controversial. In 2024, Ofgem found that the company had submitted inaccurate data on where its wood pellets came from. The head of the energy regulator said the group “accepted that it had weak procedures, controls and governance which resulted in inaccurate reporting of data about the forestry type and sawlog content being used“. The company made a voluntary £25m payment.
Today’s announcement that the Financial Conduct Authority (FCA) is investigating “certain historical statements” made in its 2021, 2022, and 2023 annual reports has clearly spooked investors.
The company will cooperate with the work of the FCA.
Never a good time
Whatever the findings, news like this is always unfortunate. Like a dark cloud, the investigation will hang over the company until it’s concluded.
But I think the group faces other challenges. Like most in the sector, it’s reliant on government subsidies. These are scheduled to end in 2027. What (if anything) replaces them is unclear at this stage.
And irrespective of where it’s sourced from, the burning of wood to produce electricity is controversial. Greenpeace has an article on its website with the headline: “10 reasons to stop subsidising Drax power station“. Published in November 2024, it claims that the company is the UK’s largest emitter of carbon.
Not for me
Even with today’s pullback in the share price, I don’t want to take a stake in the company.
I acknowledge that from a financial perspective, it’s doing okay. It’s profitable and a large proportion of its revenue is secured via contracts. And despite operating in a sector where capital expenditure can be significant, it has a relatively low level of debt. At 30 June, the group’s net debt was equal to its adjusted EBITDA (earnings before interest, tax, depreciation, and amortisation).
Also, it plans to increase its 2025 dividend to 29p a share. On this basis, those investing today could enjoy a yield of 4.5%. Of course, there are never any guarantees when it comes to dividends.
But there’s too much uncertainty surrounding the group, which makes me uncomfortable. The FCA investigation is a concern but it’s the government’s approach to subsidies that worries me the most.
Although the group has agreed terms in principle regarding a possible agreement around future contracts for difference (from April 2027 to March 2031), it acknowledges that it’s non-binding. Drax says the “proposed agreement remains subject to Parliamentary procedures… and also anticipates a tightening of biomass sustainability requirements“.
There are too many moving parts for my liking.
