Ofgem’s Inquiry Into Drax Exposes Reporting Issues

In May of last year, Ofgem initiated an investigation into the type of wood being utilized by Drax in its biomass energy facilities, leading to a significant drop of £150 million in the company’s market value.

Investors were primarily concerned that following a deep dive into Drax’s «profiling data,» Ofgem’s chief, Jonathan Brearley, might uncover alarming revelations. The foremost worry was whether Drax was truly sourcing 70 percent of its biomass sustainably, a critical requirement tied to the subsidies from the renewables obligations certificates that amounted to £548 million over the past year.

The investigation posed a potential risk for Drax, as it could inadvertently support the claims of environmental activists, like Biofuelwatch, who have labeled the company’s biomass operation as a «greenwash scam,» criticizing their reliance on diesel-powered ships to import wood pellets.

Despite the concerns, the investigation’s conclusion turned out to be relatively favorable for Drax. Ofgem identified «technical» failures related to reporting from April 2021 to March 2022, resulting in a £25 million «voluntary» payment and mandated an independent audit of Drax’s international supply chain. Brearley emphasized Drax’s «weak procedures, controls and governance» that led to inaccurate data regarding the types of forestry and sawlog contents used.

However, Drax’s CEO Will Gardiner stated that Ofgem «found no evidence that our biomass did not meet the sustainability criteria of the renewable obligation scheme.» This finding positions Drax favorably for a subsidy extension when the current scheme concludes in 2027. Drax’s biomass facility contributed 4 percent of the UK’s electricity last year and is set to integrate new carbon capture technology. Following the news, Drax’s shares only dipped 0.4 percent to 651p, with analysts from Jefferies commenting that Ofgem had alleviated some pressures on the stock.

Nonetheless, there remain critical questions regarding Ofgem’s assurances. How can the regulator confirm that Drax meets all sustainability requirements when it admits to being «unable to provide» credible data on «forestry type and sawlogs for Canadian shipments»?

Both Ofgem and Drax have attempted to differentiate between the sustainability concerns and its inadequate reporting regarding «additional biomass characteristics,” such as whether the pellets came from fallen branches or saw logs, data that isn’t used to issue ROCs. This distinction complicates matters and blurs the lines in the ongoing debate.

This situation is particularly relevant as over 40 green advocates from countries that export wood pellets, including the US, Canada, Portugal, Estonia, and Latvia, are urging UK Energy Secretary Ed Miliband to eliminate subsidies for «wood-burning power stations» due to environmental and deforestation worries. Additionally, the National Audit Office criticized the government in January for failing to demonstrate that the biomass sector is maintaining high sustainability standards.

Questions persist regarding Drax’s entitlement to subsidized status within the energy portfolio alongside renewable sources like wind and solar, especially in light of ongoing scrutiny. Hence, transparency about its wood sourcing practices is critical going forward.

PRS Reit Developments

This week has seen a surge of reunions, with the notable return of a duo from Hipgnosis Songs Fund, as drummer Rob “Scrappy Doo” Naylor pairs up with vocalist Christopher “Megaphone” Mills to reenter the spotlight. Their recent endeavor focuses on PRS Reit, a publicly traded investor dedicated to high-quality, new-build family homes for rental.

The duo’s current strategy emerges from frustrations regarding PRS’s performance. Rallying support from 17.3 percent of PRS investors, they aim to call an extraordinary general meeting to oust chairman Stephen Smith and non-executive director Steffan Francis, both of whom have been in their roles since the company’s IPO in 2017. In a familiar twist, Naylor seeks to assume the chairman role while Mills flexes his influence as a non-executive, underscoring his determination.

Investor dissatisfaction is evident, as many seek justification for PRS’s 35 percent discount to its net asset value over the past year. This pressure has been catalyzed by a recent increase in shares to 94p, but concerns persist that PRS cannot increase its equity beyond the £560 million raised since its IPO to expand its portfolio of 5,400 homes.

The decision to prolong the contract with investment manager Sigma until June 2029 has faced scrutiny, as critics argue that the primary role of collecting rent could be handled more cost-effectively in-house. Mills, involved as an investor through Harwood Capital, labeled the fee structure «obscene,» advocating for potential buybacks and property sales.

PRS is preparing its response, having noticed that one of Mills’s funds trades at a 28 percent discount to its NAV. A competitive environment is evolving, as stakeholders are gearing up for a fight in the coming weeks.

Mineral Resources and Workplace Policies

At Mineral Resources, founder Chris Ellison has made headlines with his controversial stance that emphasizes in-office work, dismissing remote work as unproductive. This raises questions about workplace culture within the organization and whether employees may seek alternatives to avoid his approach.