Drax Faces FCA Probe Over Biomass Disclosures

Investor Confidence Shaken as Scrutiny Grows Around Sourcing Transparency

FCA Launches Investigation into Drax’s Wood Pellet Disclosures

The UK’s Financial Conduct Authority (FCA) has opened a formal investigation into renewable energy provider Drax Group, raising serious concerns about how the company sources biomass for its energy production. The investigation follows whistleblower allegations and could have implications for the company’s relationship with the government and its stock market performance.

Timeframe and Scope of the FCA Inquiry

The FCA probe covers the period from January 2022 to March 2024, and is specifically examining whether Drax’s annual reports from 2021 through to 2023 complied with listing, disclosure, and transparency rules required of publicly listed firms.

• Drax confirmed it is cooperating fully with the FCA.
• The company’s shares fell sharply—dropping nearly 9% in London trading following the announcement.
• The probe follows an earlier Ofgem review, which concluded without any findings of misconduct.

Whistleblower Allegations Spark the Investigation

The scrutiny comes on the heels of accusations from Rowaa Ahmar, Drax’s former head of public affairs and policy. As part of her unfair dismissal claim, Ahmar alleged that Drax made misleading statements about its sourcing of biomass. While Drax denies the accusations, the timing of the FCA’s action suggests the regulator is taking the claims seriously.

• Drax and Ahmar have since reached a legal settlement.
• No clear reason has been provided by the FCA for initiating the probe at this time.

Market Analysts Weigh In

Financial analysts have begun assessing the potential impact of the FCA’s move.

• RBC Capital Markets’ Alexander Wheeler noted that the FCA's focus would likely centre around annual report disclosures, and not on renewable contracts such as ROCs (Renewables Obligation Certificates) or CfDs (Contracts for Difference), areas outside its jurisdiction.
• Wheeler added the investigation could cast a shadow over ongoing negotiations with the UK government on a final subsidy agreement for the Drax power station.

Meanwhile, Jefferies analysts emphasised the early stage of the probe and suggested that the FCA may be looking into issues similar to those Ofgem previously considered, though now with an added emphasis on financial transparency.

Political and Environmental Pressure Builds

Drax has long faced criticism from environmental groups, which accuse the company of sourcing wood from ecologically sensitive areas, despite its insistence that all biomass is sustainably and legally sourced.

Recently, the UK government extended subsidies for Drax’s North Yorkshire power station, which produces around 5% of the UK’s electricity. The new agreement:

• Halves existing subsidies
• Introduces a profit-sharing mechanism
• Has attracted criticism from campaigners who argue funding should be diverted to cleaner energy sources such as wind and solar

Conclusion: What’s Next for Drax?

The FCA investigation places Drax under a critical spotlight just as it attempts to finalise future subsidy agreements with the government. While the probe may not impact renewable contracts directly, it introduces uncertainty at a time when investor confidence is already under pressure.

The key takeaways:

• Regulatory scrutiny could affect government support for the company post-2027.
• Share volatility is likely in the short term.
• Increased pressure from both political and environmental groups could lead to operational or strategic shifts at Drax.

In summary, the outcome of the FCA investigation will be closely watched not only by investors but also by policymakers and environmental advocates. The future of Drax’s market valuation and its role in the UK’s energy mix could hinge on what is revealed in the months ahead.

Sources: (Investing.com, Reuters.com)