UK Low-Carbon Mandates Will Expand Renewable Markets Despite Risks

Key Takeaways

• Drax is poised to outperform earnings expectations due to its key role in grid support, regulatory clarity, and dominant position in negative emissions and carbon removal markets.
  
• Its infrastructure and export capabilities offer transformational growth from new revenue streams, power agreements, and expanding renewable energy demand across multiple sectors.
  
• Mounting regulatory, market, and execution risks threaten Drax's long-term profitability amid growing competition, policy uncertainty, and substantial capital spending requirements.

Catalysts

Engages in renewable power generation in the United Kingdom.

• Analysts broadly agree that the CfD bridge agreement provides visibility to £100–£200 million of EBITDA per year through 2031, but with the regulatory and legislative groundwork now fully in place ahead of schedule and risk of contract fallback all but eliminated, actual EBITDA delivery could exceed £200 million per year, directly boosting recurring earnings well above current consensus.
  
• Analyst consensus targets £600–£700 million of adjusted EBITDA post-2027, yet this likely understates the value of Drax's dominant position in grid system support and flexibility, which is rapidly becoming indispensable for the UK's low-carbon transition and could deliver upside through higher realized prices and margin accretion, leading to significant outperformance of both revenue and net margin expectations.
  
• Accelerating carbon pricing and the formal inclusion of carbon removals in regulated emissions schemes like the UK and EU ETS will unlock a massive, high-certainty revenue stream for BECCS and negative emissions services, positioning Drax as a global leader in monetizing negative emissions credits and driving rapid growth in top-line and cash flow beyond current scenario planning.
  
• Substantial, underappreciated value exists in Drax's grid connection rights and potential to repurpose power station infrastructure for high-demand sectors, such as large-scale data centers and AI zones, which could enable transformational power offtake agreements and new multi-decade, inflation-linked cash flows, materially lifting earnings and supporting further capital returns.
  
• Global pullback from coal and persistent disruptions in fossil fuel supply chains are spurring "just-in-case" demand for reliable, dispatchable renewable baseload, and with Drax's vertically integrated, export-eligible pellet production network, the company stands to capture emerging spot LNG-replacement and SAF market contracts-sustaining export revenues, supporting higher utilization, and driving structural expansion of gross margin over the next decade.

Drax Group Future Earnings and Revenue Growth

Assumptions

• This narrative explores a more optimistic perspective on Drax Group compared to the consensus, based on a Fair Value that aligns with the bullish cohort of analysts.
• The bullish analysts are assuming Drax Group's revenue will grow by 3.1% annually over the next 3 years.
• The bullish analysts assume that profit margins will shrink from 7.2% today to 3.1% in 3 years time.
• The bullish analysts expect earnings to reach £193.6 million (and earnings per share of £0.6) by about August 2028, down from £407.7 million today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the price target of the more bullish analyst cohort, the company would need to trade at a PE ratio of 18.7x on those 2028 earnings, up from 5.9x today. This future PE is greater than the current PE for the GB Renewable Energy industry at 6.6x.
• Analysts expect the number of shares outstanding to decline by 6.55% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 8.42%, as per the Simply Wall St company report.

Drax Group Future Earnings Per Share Growth

Risks

• Stricter climate policies and increasing public scrutiny on the carbon lifecycle of biomass could undermine Drax's business model and endanger critical subsidies, creating significant risk to revenue stability and future earnings.
  
• Rapid cost declines and scaling in wind, solar, and battery storage threaten the competitive position of biomass, with management openly acknowledging high competition and uncertainty about expanding pellet capacity, putting long-term EBITDA and margins under pressure.
  
• Drax's pellet business faces future supply-demand imbalance as in-house generation needs fall and other European generators transition away, which the company admits could result in excess pellet supply, downward pricing pressure, and potential underperformance of the pellet segment-negatively affecting earnings and net margins.
  
• Heavy reliance on government support, including CfDs and capacity market payments, exposes Drax to future policy changes or subsidy withdrawals; a shift in political priorities or market frameworks could produce abrupt downside in both revenue and cash flow.
  
• Substantial capital expenditure requirements for BECCS, battery investments, and power station repurposing (including data center ambitions) create near-term pressure on free cash flow and increase execution risk, especially as many of these projects remain in the business development phase and have uncertain returns, potentially muting long-term earnings growth.

Valuation

• The assumed bullish price target for Drax Group is £10.0, which is the highest price target estimate amongst analysts. This valuation is based on what can be assumed as the expectations of Drax Group's future earnings growth, profit margins and other risk factors from analysts on the bullish end of the spectrum.
  
• However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of £10.0, and the most bearish reporting a price target of just £6.2.
  
• In order for you to agree with the bullish analysts, you'd need to believe that by 2028, revenues will be £6.2 billion, earnings will come to £193.6 million, and it would be trading on a PE ratio of 18.7x, assuming you use a discount rate of 8.4%.
  
• Given the current share price of £6.9, the bullish analyst price target of £10.0 is 31.0% higher. Despite analysts expecting the underlying buisness to decline, they seem to believe it's more valuable than what the market thinks.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.