T he best way to describe the chief executive of Drax power station Dorothy Thompson is to say that she is poised – a quality that will undoubtedly come in handy when it comes to navigating a path through energy markets beset with low demand and ever more onerous climate change targets.
When one meets Thompson, it is immediately apparent that she is more reserved than your average top chief executive. Yet as she settles into her seat in Meeting Room B at Drax’s tasteful corporate office, there is equally no doubting her status as queen of an impressive North Yorkshire empire.
Drax – Europe’s largest coal-fired power plant and a member of the FTSE 250 – covers 1,800 acres and its six turbines and 12 115-metre cooling towers that dominate the surrounding landscape generate 4,000 megawatts of power, or seven per cent of the UK’s electricity, enough to keep all the lights on in Greater Manchester.
The power station is also the UK’s single biggest carbon emitter, releasing 20m tonnes into the atmosphere every year. However, the plant, along with the rest of the country’s power stations, has pumped a little less pollution into the air over the last year because the UK’s energy consumption has fallen six per cent over the last 12 months.
This is highly unusual because, even in downturns, energy consumption usually rises by one to 1.5 per cent every year. Thompson says: “This has been a very severe recession, and it has lead to less demand because big users such as the steel and the car industry have cut back on production, and even closed plants for lengthy periods.”
This slump in consumption combined with low gas prices, which makes gas fired plants cheaper, explains why Drax’s half year profits slumped 28 per cent to £150m in August. Profits fell even though it hiked its average selling price 11 per cent to £53.6 per megawatt hour. This brought Drax, which has a market capitalisation of £1.5bn, a 25 per cent increase in half-year revenues to £801m.
During this six-month period Drax produced 13 terawatt hours of electricity — eight per cent more than the previous year.
Apart from coal, Drax’s biggest costs are paying for carbon credits, which it shells out as a penalty for the pollution it creates. In 2008 it paid £223m for its carbon credits, a huge amount given that its coal costs were around £590m.
Thompson explains: “This is a fundamental part of our business. Every move we make we weigh up how much this will cost us in carbon credits. It is an integral part of our business that carbon emissions have to be reduced.”
The way the plant, which takes its name from a nearby village, calculates its profit is the difference between the price of electricity against the cost of the 10m tonnes of coal it uses a year and the amount of carbon credits it must buy.
However, the price of carbon credits has fluctuated wildly over the last four years as the market administered by European Union (EU) regulators has tried to find its feet. Over this period the price of a credit has swung from just a few cents to the current price of around €14 (£12.62).
Thompson says: “The EU got this wrong to begin with, and issued too many credits and they could be traded very cheaply. Part of the problem with this market is that it is a construct of EU policy, and unlike a classic market it is difficult to test how flexible supply really is. But in the last 18 months the price has begun to settle down.”
However, Thompson is busy getting the plant to cut back on the amount of coal it burns, which in turn will mean it buying fewer costly carbon credits. She has a three-pronged strategy to achieve this.
First, Drax is investing £100m in upgrading the efficiency of its turbines to shave 1m tonnes of its carbon emissions, which is the equivalent to 275,000 cars being taken off the road.
Thompson says: “We are halfway through this, and are on time and on budget. Three of our six turbines have been made more efficient. The remaining three are set to be completed by 2011.”
Secondly, the power station has made good progress on an £80m programme to switch Drax from burning coal to a mix of coal and biomass products like oat husks and olive cakes. It plans to move from the 400,000 tonnes it currently burns to 1.5m tonnes, or 12.5 per cent of its output, by next June.
Drax’s third green project is its biggest. It has drawn up plans with German industrial firm Siemens to build three biomass plants for £2bn by 2016. But Thompson says that unless the government relaxes its rules on how new biomass production is accounted for by established players, the plants are unlikely to go ahead.
She says: “The investment case is yet to be made for our investors. Biomass demand needs to be built up over time before entirely new plants can be built.”
The main asset of Drax is its power station, which was built in 1974, and doubled in size in 1986, by the Central Electricity Generating Board. It became part of National Power on privatisation and was later sold to US group AES in a highly leveraged deal. However, AES bought Drax on the back of a long-term sales contract with TXU Europe, which went into liquidation as part of Enron’s collapse in 2001. After the contract collapsed, AES could no longer service its debts and abandoned the business to its creditors.
So when Thompson, who spent the first 10 years of her career in banking, arrived in 2005, her task, along with the then chairman Gordon Horsfield, was to financially restructure the company.
She says: “It was important we did this, because at the time we struggled to find the cash to carry out the maintenance of the plant and power it efficiently.”
Thompson and Horsfield snubbed three takeover approaches, convinced creditors to convert much of their debt into equity, and floated the firm in December 2005.
But rather than looking back, Thompson has been keeping a watchful eye on the current climate change conference in Copenhagen this week.
She largely backs Europe’s proposals to cut emissions by 20 per cent from 1990 levels, rising to 30 per cent if – which seems increasingly unlikely at present – a binding global deal can be reached.
“The EU has taken a strong leadership position,” she says. “These are ambitious targets, but the world needed a strong reference point. Even if a deal is not reached at Copenhagen momentum will have been achieved and that will eventually lead to action.”
But in the meantime Thompson is busy trying to get her great coal-fired monster to burn more biomass, because that transfers tens of millions from the firm’s costs to its profits. And that is the sort of thing that makes investors purr, even in the age of Copenhagen.
CV | DOROTHY THOMPSON
Work: 2005 to present: chief executive of the Drax power station; 1998 to 2005: head of the European business of InterGen, the power generation arm of Shell and Bechtel; 1993 to 1998: Powergen; 1983 to 1993: worked for the Commonwealth Development Corporation, the National Development Bank of Botswana, and American Express
Education: St Mary’s Shaftesbury, a girls convent school in Dorset; the London School of Economics where she read economics and maths
Family: Married with two children
Lives: A flat in York, a house in Islington