28 November 2014
DRAX GROUP PLC
(Symbol: DRX)
Drax Reaches Settlement with Ofgem over CESP Non-compliance
Drax (or the "Company") has today reached a settlement with the energy regulator, Ofgem, following the Company's non-compliance with its obligation under the government's Community Energy Saving Programme ("CESP"). Drax has agreed to a total of £28 million in settlement, which would see up to £20 million benefit vulnerable energy consumers through a programme of work to be developed with the charity, National Energy Action, and the remaining £8 million to be paid as a fine or delivered as further consumer redress measures.
Ten energy companies had CESP obligations and six, three of which are independent generators, did not deliver their CESP obligation in full. These six companies have been subject to investigation by Ofgem. Drax has co-operated at all times with the investigation.
From the outset, Drax voiced its concerns over the inclusion of independent generators in the CESP given their lack of experience in the delivery of energy efficiency schemes, and the lack of any direct relationship with domestic electricity consumers.
For these reasons, Drax had little option but to outsource the delivery of its obligation to a third party provider operating in the energy efficiency sector. Unfortunately, the chosen provider failed to deliver the obligation in full and despite procuring additional measures Drax did not comply with its obligation by the end of the obligation period. Drax has also reached settlement of its action for breach of contract against the third party, on confidential terms.
Ofgem acknowledges that independent generators had no prior experience in the installation and contracting of domestic energy efficiency services and has recognised this as a mitigating factor in the fine imposed. Independent research undertaken on behalf of DECC following completion of the CESP has subsequently questioned the appropriateness of including independent generators in the scheme. It is noteworthy that the Energy Company Obligation ("ECO"), the successor scheme to the CESP, only applies to electricity and gas suppliers, not generators.
Dorothy Thompson, Chief Executive of Drax said: "We take our statutory obligations very seriously and in the case of the CESP we always sought to maintain a compliant position. We believe the design of the CESP was flawed and significant problems were encountered with scheme delivery, the CESP market and the complex arrangements.
"We are deeply disappointed with the magnitude of the fine. However, we believe it is in our shareholders' interests to settle this matter and, as the nation's single largest power provider, focus on delivering a reliable supply of electricity this winter.
"We are pleased to be working with National Energy Action to develop a package of measures which would benefit vulnerable energy consumers, which is in line with the original objectives of the CESP.
"Our core competence is in electricity generation and that is the best way for us to serve the needs of the UK in terms of carbon savings. Through undertaking the largest decarbonisation project in Europe, Drax will deliver carbon savings of around 12 million tonnes a year through burning sustainable biomass in place of coal. Our target under the CESP was to deliver carbon savings of less than one million tonnes over the lifetime of the energy efficiency measures. By comparison, our biomass conversion will deliver hundreds of millions of tonnes of carbon savings over the same time frame. It is clear to anyone where our efforts are best deployed."
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Notes to Editors:
(1) The Community Energy Saving Programme ("CESP") obliged certain electricity and gas suppliers and certain electricity generators to deliver energy saving measures to domestic consumers in specified low income areas of Great Britain during the period 1 October 2009 to 31 December 2012.
(2) Drax outsourced the delivery of its CESP obligation to a third party provider at an agreed total cost of £17 million; that figure being based on DECC's impact assessment. The third party failed to comply fully with its obligation under the agreement leaving a significant shortfall against Drax's CESP obligation.
(3) Drax entered into further agreements with other third parties in order to rectify the shortfall so far as practicable. By the end of the obligation period Drax had expended the full £17 million, but due to unexpected CESP market conditions (particularly the scarcity of schemes), this expenditure delivered 37.1% of Drax's total CESP obligation instead of the full obligation.
(4) The £28 million settlement will be included in the Company's 2014 income statement together with the amount recovered from our third party provider. Drax will exclude the net impact of these items from the calculation of underlying earnings for the period. Our current distribution policy is to return 50% of underlying earnings to shareholders each year.
Enquiries:
Drax Investor Relations: Michael Scott / Mark Strafford
+44 (0) 1757 612 230 / +44 (0) 1757 612 491
Media:
Drax External Communications: Melanie Wedgbury
+44 (0) 1757 612 438
Brunswick: Richard Jacques / Nina Coad
+44 (0) 207 404 5959
Website: www.drax.com
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