Drax Group Annual Report 2022

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FY2022 Annual Report · Drax Group

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Delivering dispatchable,
renewable power

Drax Group plc Annual report and accounts 2022

Financial/ESG highlights

Adjusted revenue(1)

Total revenue

£8,159m

(2021: £5,174m)

Percentage of total UK renewable
electricity generated

11%

(2021: 12%)

£7,775m

(2021: £5,088m)

Dividend per share

21.0 pence

(2021: 18.8 pence)

Earnings per share

Net debt (2)

21.3 pence

(2021: 20.0 pence)

Adjusted EBITDA from continuing and
discontinued operations(1)

£731m

(2021: £398m)

£1,206m

(2021: £1,108m)

Total operating profit(1)

£146m

(2021: £197m)

Total recordable incident rate

Employee engagement score

0.44

(2021: 0.22)

79%

(2021: 79%)

Group carbon intensity

Wood pellets produced

49 tCO2e/GWh

(2021: 78 tCO2e/GWh)

3.9Mt

(2021: 3.1Mt)

Group carbon emissions Scope 1 and 2

Group carbon emissions Scope 3

669 ktCO2e

(2021: 1,255 ktCO2e)

3,123 ktCO2e

(2021: 3,121 ktCO2e)

(1) We calculate Adjusted financial performance

measures, which are Drax specific and exclude
income statement volatility from derivative
financial instruments and the impact of
exceptional items, to provide additional
information about the Group’s performance.
Adjusted financial performance measures are
described more fully on page 179, with a
reconciliation to their statutory equivalents in note
2.7 to the Consolidated financial statements on
page 205. Throughout this document we
distinguish between Adjusted measures and Total
measures, which are calculated in accordance with
International Financial Reporting Standards (IFRS).

References to financial performance measures
throughout this Annual Report and Accounts refer
to continuing operations, unless otherwise stated.
Further details of discontinued financial
performance is included in note 5.4 to the
Consolidated financial statements on page 240.
(2) We define Net debt as borrowings, including the

impact of hedging instruments, less cash and cash
equivalents. Net debt is more fully described on
page 180. A reconciliation of Net debt is provided
on page 207. Borrowings is defined as per the
Group’s Consolidated balance sheet on page 183
and does not include lease liabilities, pension
obligations or other financial liabilities.

Read more about our

sustainability activities on pages
36 to 74

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These benefits will only be possible
with the right biomass – biomass that
is sourced sustainably. At Drax we are
committed to using the right biomass,
that can deliver positive outcomes for the
climate, nature, and people, and we have
put in place policies, controls, and reviews
to support this.

Through our strategy we are creating
exciting opportunities for growth
aligned to global decarbonisation efforts.
Our investments in these areas are
underpinned by high quality earnings and
cash flows, which continue to support
our commitment to a sustainable and
growing dividend.

Summary of 2022
Safety remains a primary focus and,
in 2022, the Total Recordable Incident
Rate was 0.44 (2021: 0.22). This is not
where we want our safety performance
to be. However, as reported at the half
year, the increase is explained in part by
two developments. Firstly, a widening of
the scope to include contractor incidents.
Secondly, improvements in the recording
of incidents in our Pellet Production
business, including the Pinnacle sites
we acquired in 2021.

Since the acquisition we have
implemented a health, safety and
environmental (HSE) improvement plan
across our North American operations
and invested in training, human resource,
and capital projects to deliver improved
performance. We are committed
to a strong safety culture across the
Group and remain focused on embedding
these improvements to uplift
performance accordingly.

Adjusted EBITDA of £731 million
represents an 84% increase compared to
2021 (£398 million). This reflects increased
pellet sales, a strong system support and
renewable power generation performance
across the portfolio, and improved
profitability in our Customers business.

Our balance sheet is strong, with total cash
and committed facilities of £698 million
and Net debt of £1,206 million.

Operationally, the Group’s biomass,
pumped storage, and hydro assets have
continued to support UK security of
supply, providing power system stability
at a time of higher gas prices and volatility
on the power system.

We have used our pellet production and
international supply chain to reprofile
biomass from the summer to winter,
maximising generation when it is most
needed, based on system need and
sustainable biomass supply.

While supporting UK security of supply,
we have also progressed our options
for BECCS in the UK and continued
developing new opportunities for the
technology in North America.

Drax is a signatory to the UN Global
Compact (UNGC) and we are committed
to promoting the UNGC principles
concerning respect for human rights,
labour rights, the environment, and
anti-corruption.

Electricity Generator Levy
In December 2022, the UK Government
confirmed the details of a windfall
tax – the Electricity Generator Levy (EGL)
– on renewable and low-carbon generators,
due for implementation in 2023. The levy
will apply to the three biomass units
operating under the Renewables
Obligation (RO) scheme and our run-of-
river hydro operations. However, it does
not apply to the Contract for Difference
(CfD) biomass unit, pumped storage hydro,
or coal generation.

Through the second half of 2022,
we engaged with the UK Government
on the issue of windfall taxes, and their
impact on the industry, to ensure a
balanced approach. While we do not
believe a levy on renewables is
appropriate, we welcome clarity and
the recognition that the cost base for
biomass is different to intermittent
renewables such as wind. This is an
important distinction, as it means the
EGL should not have an adverse impact
on biomass generation.

Operational performance

Pellet Production
In North America, our Pellet Production
business reported Adjusted EBITDA of
£134 million, up 56% (2021: £86 million).
This primarily reflects higher levels of
production and sales, as well as revised
transfer pricing in the second half of 2022.

Pellet production was 3.9 million tonnes
(Mt), an increase of 27% (2021: 3.1Mt).
This reflects a full 12 months’ worth of
production from Pinnacle’s plants
following the acquisition in April 2021.
It also reflects increased capacity at
Morehouse and LaSalle, both in Louisiana,
following their expansion.

In addition, we commissioned three new
plants during 2022: Demopolis in Alabama,
plus Leola and Russellville (both in
Arkansas). In September 2022,
we acquired a 90 kiloton (kt) pellet plant
in Princeton (British Columbia) from
Princeton Standard Pellet Corporation.
These four plants combined will add over
500kt of production when at full capacity.

In December 2022, the Group took a Final
Investment Decision (FID) to develop two
new pellet production projects. The first is
a 450kt new-build pellet plant at Longview
(Washington State) that includes the
development of a new port facility at the
location. The second is a 130kt expansion
of our Aliceville site (Alabama). The
combined investment in these projects
is expected to be in the region of
$300 million, inclusive of the effect
of inflation on construction costs.

The development of the new plant at
Longview will provide the Group with
access to a new fibre basket and we
will also develop port infrastructure at the
Port of Longview, adding a fifth port to
the Group’s North American supply chain,
with the opportunity to consolidate
additional capacity in the future.

The US Pacific North-West will be the
Group’s fourth major area of fibre supply
alongside the US South; British Columbia;
and Alberta. The new facility is expected
to support further diversification of the
Group’s fibre sourcing production and
export capacity, supporting sales into
Asian and European markets, as well
as own-use.

Taken together, existing operations and
developments will give Drax a network
of 18 pellet plants, with access to five
deep-water ports on the East Coast and
West Coast of North America.

In addition to our own-use of biomass,
the Group also has contracts to supply
22Mt of biomass to Asian and European
counterparties. These contracts extend
into the 2030s, with total revenues of
over $4.1 billion.

Inflationary pressures, primarily in
transportation and utilities in North
America during 2022, contributed to
an increase in our pellet production costs.
Together with costs incurred in providing
supply-side flexibility, production costs
for the Pellet Production business are
expected to be higher in 2023. These
increased costs have been considered
in an adjusted transfer price implemented
in the second half of 2022.

We remain focused on opportunities
to reduce the cost of biomass but will
balance this against the need to optimise
our supply chain to deliver value for
the Group.

Drax Group plc Annual report and accounts 2022 13

Strategic report

Chief Executive’s Review continued

Generation
Adjusted EBITDA of £696 million from
continuing operations was an increase
of 87% on 2021 (£372 million, inclusive
of £20 million from discontinued CCGT
operations). This reflects a strong system
support and renewable power generation
performance across the portfolio,
providing high levels of dispatchable
renewable and low-carbon electricity
and system support services, more than
offsetting incrementally higher biomass
costs and grid charges. In addition, there
was no major planned outage undertaken
in 2022, compared to one in 2021.

Against the backdrop of increasing
concern around European energy security,
we have optimised our biomass generation
and logistics, buying back positions in
the first half of the year and reprofiling
to the second half. These actions provided
additional security of supply to the UK
at times of expected higher demand.

The process of moving generation
between lower and higher demand periods
has resulted in an incremental increase
in achieved power prices – although this
has not been without cost.

We have incurred direct logistics costs
associated with changing our delivery
programme and managed an increased
number of rail delivery cancellations
in the UK due to driver availability.

Over the past 12 months, the cost of
biomass in the European spot market has
increased significantly, making it more
challenging to procure and generate
additional power with a margin. As a result
of higher biomass prices, this created
opportunities for the sale of biomass
in addition to generation.

Most of the biomass we use is under
long-term contracts. However, as we
flagged during 2022, inflationary
pressures in certain aspects of our supply
chain have led to some cost increases
and we expect this to continue in 2023.

Our pumped storage and hydro operations
– Cruachan Pumped Storage Power
Station and the Lanark and Galloway
hydro assets – performed strongly helping
to provide system stability. Together with
the Daldowie energy from waste plant,
Adjusted EBITDA was £171 million
(2021: £68 million).

To move towards net zero, the UK
needs to reduce its reliance on fossil
fuel generation from unabated gas.
It also needs to increase the amount
of renewables, likely from intermittent
wind and solar. In this context, the role
of flexible, dispatchable renewables like
biomass, pumped storage, and hydro has
never been more important. They are
dispatchable and dependent on neither
the weather nor the price of gas. As such,
we believe they represent a long-term part
of the UK power mix.

This underpins our plans for a potential
investment in the expansion of Cruachan
Pumped Storage Power Station, and we
continue to expect to take a FID in 2024.
You can read more about this opportunity
on page 32.

In July 2022, at the request of the
UK Government, Drax entered into an
agreement with National Grid, to provide
a “winter contingency” service to support
the UK power system via its legacy coal
units. The units will not generate
commercially for the duration of the
agreement and will only operate if, and
when, instructed to do so by National Grid.

How does Drax support Government Net Zero Strategy ?
Government milestones

2012

2019

2020

2021

2022

2023

2024

2030

2035

2050

UK Government publishes a Bioenergy
Strategy outlining policy support for
bioenergy to deliver genuine carbon
reductions and to help meet UK carbon
emissions objectives to 2050 and beyond

UK becomes first major
economy to set a
legally binding target to
deliver net zero
greenhouse gas
emissions across all
sectors by 2050

12.6% of total
electricity generated
from biomass. Fossil
fuel generation
reaches a record low,
dropping from 75.4%
2010 to 37.7% in 2020

Government launches
a submission process
for power BECCS projects
to be considered for business
model support

Renewable capacity
grows fivefold since
2010, driven by the
deployment of wind,
solar and biomass.
Glasgow hosted
COP26 and published
the Net Zero Strategy

Government selects
East Coast Cluster
as a priority Track 1
CCUS cluster

Drax milestones

2012

2013-2018

2019

2020

2021

2022

Drax completes
the largest
steam turbine
modernisation
programme in UK
history at Drax
Power Station
(DPS) upgrading
high- and
low-pressure
turbines

Conversion of four
generating units
to run on
sustainable
biomass alongside
development of
new biomass
receipt, storage
and distribution
system at DPS

Drax acquires hydro
assets in Scotland,
including the second
largest pumped hydro
storage site in the UK
– Cruachan

DPS becomes the
largest single site
generator of renewable
power in the UK
producing 14.1 TWH

Drax carbon emissions
drop by over 90% since
2012 – CO2 emissions
per unit of electricity
were just 9% of their
2012 amount

Drax ends commercial coal
generation January 2022

Coal operations extended by six
months at the request of UK
Government to support winter
energy security. Final closure
expected March 2023

Planning applications to build
UK’s first BECCS project at
DPS and to expand pumped
storage hydro capacity
at Cruachan

Drax Group plc Annual report and accounts 2022

Universal support for

energy bills for

Coal-fired power

generation to end

domestic and business

in the UK

consumers end in

March. Targeted

support to replace from

April onwards

Government to

introduce policy to

support Large Scale

Long Duration Storage

technologies including

pumped hydro

UK Carbon Budget

UK power generation

target for 57%

to be completely

reduction in emissions.

decarbonised.

Ambition to deploy at

least 5 Mt of CO2 per

year of engineered

carbon removals

UK Carbon Budget

target for 78%

reduction in emissions

UK aims

to reach

net zero

emissions

2024

Building BECCS at DPS

begins. subject to being

granted a Development

Consent Order. Drax

completes

refurbishment of

Galloway hydro

stations

2024-2025

Cruachan expansion:

construction begins,

subject to favourable

policy framework

First BECCS unit at DPS

operational, capturing

4Mt of CO2 per year

2027

2030

Second BECCS unit at DPS

operational. The two units aim

to capture a combined total of 8Mt

of CO2 per year by the end of 2030

Cruachan expansion operational

Drax aims to become carbon

negative by 2030

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Our assets produced
on average 19% of the
UK’s renewables at times
of peak demand across
the year and up to 70%
on certain days. This
underlines the important
role that Drax plays in
security of supply
in the UK.

To date National Grid has not instructed
the units to run, other than for testing.
The contract, which covers the period
October 2022 to March 2023, provides a
fixed fee for the provision of the units with
National Grid remunerating Drax for costs,
including the coal and carbon associated
with any generation.

The winter contingency service agreement
is not expected to interfere with our plans
for developing BECCS at Drax Power
Station. Site preparation works for BECCS
are ongoing and will continue following
formal closure of the coal units at the end
of March 2023 on conclusion of the
contract with National Grid.

In March 2022, the Group signed a
development agreement with Engineering,
Procurement and Construction (EPC)
contractor Mytilineos for the development
of three 299MW Open Cycle Gas Turbines
(OCGTs). Each plant is expected to require
investment in the region of £100 million
across the period 2022 to 2024. This
investment is underpinned by a 15-year
Capacity Market agreement for delivery
between 2024 and 2039. We are
continuing to evaluate options for these
projects, including their potential sale.

Customers
Our Customers business has performed
well in 2022 with Adjusted EBITDA
of £26 million (2021: £6 million). The
performance is an improvement on 2021,
when Covid-19 had an impact – principally
in the area of the business working
with small or medium-sized enterprise
(SME) customers.

Over the past two years, we have
restructured the Customers business.
This has included streamlining operations,
with the closure of offices in Oxford and
Cardiff, and rebranding the Haven Power
Industrial & Commercial (I&C) business
to Drax Energy Solutions. These changes
will support the development of our core
I&C supply business, which has performed
well with growth in the contracted sales
position to high-quality customers.

We see an important role in supporting
the decarbonisation of I&C businesses
through the supply of renewable energy,
asset optimisation, electric vehicle
services, and carbon offset certificates,
which we believe could evolve in the
future to the provision of carbon removals.

How does Drax support Government Net Zero Strategy ?

Government milestones

UK Government publishes a Bioenergy

UK becomes first major

12.6% of total

Strategy outlining policy support for

bioenergy to deliver genuine carbon

economy to set a

electricity generated

legally binding target to

from biomass. Fossil

reductions and to help meet UK carbon

emissions objectives to 2050 and beyond

deliver net zero

greenhouse gas

fuel generation

reaches a record low,

dropping from 75.4%

emissions across all

sectors by 2050

2010 to 37.7% in 2020

COP26 and published

Government launches

a submission process

for power BECCS projects

to be considered for business

model support

Renewable capacity

grows fivefold since

2010, driven by the

deployment of wind,

solar and biomass.

Glasgow hosted

the Net Zero Strategy

Government selects

East Coast Cluster

as a priority Track 1

CCUS cluster

2012

2013-2018

2019

2020

2021

2022

Conversion of four

generating units

Drax acquires hydro

assets in Scotland,

DPS becomes the

largest single site

Drax carbon emissions

Drax ends commercial coal

drop by over 90% since

generation January 2022

programme in UK

biomass alongside

storage site in the UK

producing 14.1 TWH

– Cruachan

including the second

generator of renewable

2012 – CO2 emissions

largest pumped hydro

power in the UK

per unit of electricity

were just 9% of their

2012 amount

Drax milestones

Drax completes

the largest

steam turbine

modernisation

history at Drax

Power Station

(DPS) upgrading

high- and

low-pressure

turbines

to run on

sustainable

development of

new biomass

receipt, storage

and distribution

system at DPS

Coal operations extended by six

months at the request of UK

Government to support winter

energy security. Final closure

expected March 2023

Planning applications to build

UK’s first BECCS project at

DPS and to expand pumped

storage hydro capacity

at Cruachan

2012

2019

2020

2021

2022

2023

2024

2030

2035

2050

Universal support for
energy bills for
domestic and business
consumers end in
March. Targeted
support to replace from
April onwards

Coal-fired power
generation to end
in the UK

Government to
introduce policy to
support Large Scale
Long Duration Storage
technologies including
pumped hydro

UK Carbon Budget
target for 57%
reduction in emissions.
Ambition to deploy at
least 5 Mt of CO2 per
year of engineered
carbon removals

UK power generation
to be completely
decarbonised.
UK Carbon Budget
target for 78%
reduction in emissions

UK aims
to reach
net zero
emissions

2024

Building BECCS at DPS
begins. subject to being
granted a Development
Consent Order. Drax
completes
refurbishment of
Galloway hydro
stations

2024-2025

Cruachan expansion:
construction begins,
subject to favourable
policy framework

2027

First BECCS unit at DPS
operational, capturing
4Mt of CO2 per year

2030

Second BECCS unit at DPS
operational. The two units aim
to capture a combined total of 8Mt
of CO2 per year by the end of 2030

Cruachan expansion operational

Drax aims to become carbon
negative by 2030

Drax Group plc Annual report and accounts 2022 15

Strategic report

Chief Executive’s Review continued

Our Customers business has seen some
increase in bad debt, reflecting the
impacts of higher prices. We have robust
processes in place to manage this.

Strategy
Our strategy is designed to realise our
purpose of enabling a zero carbon, lower
cost energy future and our ambition to be
a carbon negative company by 2030.

The strategy includes three complementary
strategic pillars, closely aligned with global
energy policies. These pillars are to be
a global leader in sustainable biomass
pellets; to be a global leader in carbon
removals; and to be a UK leader
in dispatchable, renewable power.

A global leader in sustainable
biomass pellets
We believe the global market for
sustainable biomass will grow significantly,
creating international opportunities for
sales to third-parties, BECCS, generation
and other long-term uses of biomass.

To support this expected growth in
demand for biomass products, Drax
is targeting 8Mt of pellet production
capacity by 2030. This will require the
development of over 3Mt of new biomass
pellet production capacity to supplement
existing capacity and developments.
We are developing a pipeline of organic
projects, principally focused on North
America, which includes the recently
announced Longview project. We will
also look at other opportunities
where appropriate.

Drax is differentiated as a major producer,
supplier and user of biomass, active in all
areas of the supply chain, with long-term
relationships and 20 years of experience
in biomass operations. The Group’s
innovation in coal-to-biomass engineering,
together with the development of
a leading position in carbon removals,
can be deployed alongside its large,
reliable and sustainable supply chain
to support customer decarbonisation
journeys with long-term partnerships.
We expect to sell all the biomass we
produce at an appropriate market price
(both for own use at Drax Power Station
and to third-parties), typically under
long-term contracts.

2022, we announced a Memorandum
of Understanding (MoU) with Respira,
which could see the largest volume of
carbon dioxide removals (CDRs) traded
so far globally. Under the MoU, Respira
could purchase up to 2Mt of CDRs over
a five-year period from our North
American BECCS projects.

The regulatory environment for BECCS
in the US continued to develop in 2022,
with the inclusion of BECCS as an eligible
technology under the Department of
Energy climate goals funding scheme and
the increase in 45Q support to $85 per
tonne of CO2 captured, under the Inflation
Reduction Act (2022).

Furthermore, a recent National Renewable
Energy Laboratory report highlights that,
by 2035, the US could need around 100Mt
of carbon removals from BECCS to offset
remaining carbon emissions in the power
sector. In addition, recent State level
developments in Louisiana and California
have both been supportive of the
development of BECCS.

Research by the Intergovernmental Panel
on Climate Change (IPCC), the world’s
leading authority on climate science,
is also supportive. The IPCC’s research
states that CDR methods, including
BECCS, are needed to mitigate residual
emissions and keep the world on a
pathway to limit warming to 1.5oC.

The illustrative mitigation pathways
assessed by the IPCC use significant
volumes of CDRs, including BECCS,
as a tool for mitigating climate change.
IPCC modelling shows that between
0.5 and 9.5 billion tonnes of CDRs,
via BECCS, could be required annually
by 2050 to reach global net zero.
The UN-backed Principles for Responsible
Investment estimate that the CDR market
could be worth over a trillion dollars
by 2050.

We believe there are significant growth
opportunities linked to BECCS in North
America. To progress these opportunities
in 2023, the Group expects to invest
in development expenditure in the region
of £30 million with a view to advancing
these opportunities to a FID. We expect
to update on progress with these
opportunities in 2023.

A global leader in carbon removals

BECCS – UK
We continue to develop options for BECCS.
We plan to transform Drax Power Station,
through the addition of post combustion
carbon capture to two of the existing
biomass units, using sustainable biomass
and technology from Drax’s technology
partner, Mitsubishi Heavy Industries (MHI).
Captured carbon dioxide (CO2) will be
transported and stored by the Group’s
partners in the East Coast Cluster. By 2030
the project aims to permanently remove
8Mt of CO2 per annum. An investment
decision could be taken in 2024, subject
to the right investment framework.

In addition, Drax awaits the outcome
of its bid into the “Track 1” Power BECCS
submission process and publication of the
Government’s Biomass Strategy.

Alongside MHI’s technology, we are
supporting other innovative options for
carbon capture. For example, Drax is an
equity shareholder in C-Capture Limited,
which is developing a solvent technology
that could be used for BECCS and other
applications. We believe this could deliver
significant long-term cost savings for
future projects.

BECCS – North America
We want to capitalise on our belief in the
global need for BECCS and the technical
expertise gained from our Drax Power
Station project. Our ambition is to deliver
4Mt of carbon removals each year from
BECCS outside of the UK by 2030.
Accordingly, we are developing models
and locational preferences for global
BECCS developments, with a primary
focus on North America.

Opportunities under consideration include
new-build BECCS power stations, as well
as developing options for a pellet plant
with carbon capture, and using BECCS
as an exportable solution, for example
in coal-to-biomass-to-BECCS on
non-Drax assets.

Key considerations for these opportunities
include proximity to sustainable biomass
fibre, carbon capture and storage (CCS)
infrastructure, regulatory support,
commercial potential, and technology.

We are currently evaluating a range
of potential financial models for these
projects. These could include long-term
Power Purchase Agreements (PPAs),
long-term Carbon Dioxide Removal (CDR)
offtake agreements, and government
investment frameworks. In September

Drax Group plc Annual report and accounts 2022

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Outlook
The Group is continuing to play an
important role in supporting energy
security of supply in the UK, using our
supply chain and flexible, renewable
generation portfolio to provide large
volumes of reliable renewable power
and system stability at a time of higher
gas prices.

Our long-term focus remains on
progressing our strategy and our ambition
to become a carbon negative company
by 2030, underpinned by the development
of BECCS. The potential for the growth
in carbon removals, and the opportunity
this could afford BECCS in the UK and
our plans for North America, is significant
and we expect to make further progress
on these options during 2023.

Through these strategic objectives,
we expect to create opportunities
for long-term international growth
underpinned by strong cash generation
and attractive returns for shareholders,
and to deliver value for our other
stakeholders.

Will Gardiner,
Chief Executive Officer

Drax supports these forest economies
by providing incremental secondary
revenues to forest landowners through
the purchase of material which is not
otherwise merchantable to a sawmill
and has limited alternative uses.
These materials include bark, branches,
low-grade wood and woody matter from
forest management activities (thinning),
in addition to purchasing sawmill residues.
This reduces the risk of wildfire and the
spread of disease, and allows for
replanting of the forest. Where there
would otherwise be no demand for
these materials, they are sometimes
burned at the roadside, as happens
in British Columbia.

If forests were not thinned, the revenue
from sawlogs would be reduced and
landowners may consider other uses
for their land, such as agricultural crops
and livestock farming. The management
of forestland to produce sawlogs ensures
forests are growing vigorously and
absorbing carbon, which means forests
remain a carbon sink.

Forests in the areas where Drax sources
material are subject to national and
regional regulation and typically supported
by, and independently monitored for
compliance by, forest certification
schemes. These include the Forestry
Stewardship Council (FSC® C119787),
the Sustainable Forestry Initiative (SFI),
and the Programme for the Endorsement
of Forest Certification (PEFC)
(PEFC/16-37-1769).

We supplement this regulation through
our own Responsible Sourcing Policy and
supply chain checks, with third-party
verification under the Sustainable Biomass
Program (SBP), in respect of woody
biomass used at Drax Power Station.

A UK leader in dispatchable,
renewable generation
The UK’s plans to achieve net zero
by 2050 will require the electrification
of sectors such as heating and transport
systems, resulting in a significant increase
in demand for electricity. We believe that
intermittent renewable and inflexible
low-carbon energy sources – wind,
solar and nuclear – could help meet
this demand. However, this will only be
possible if the remaining power sources
can provide the dispatchable power and
non-generation system support services
required to ensure security of supply and
to limit the cost to the consumer.

Long-term biomass generation and
pumped storage hydro can provide these
increasingly important services and we are
developing an option for new pumped
storage – the expansion of Cruachan
Power Station – to provide an additional
600MW of dispatchable long-duration
storage to the power system. A planning
application was submitted in May 2022,
and any investment remains subject
to the right investment infrastructure
and support.

The location, flexibility and range of
services Cruachan can provide makes it
strategically important to the UK power
system. A final investment decision could
be taken in 2024 and the development
operational by 2030. Any investment
decision will depend on the right
regulatory framework.

Biomass sustainability
Delivering positive outcomes for the
climate, nature, and people are central
to our plans. Ensuring that we only use
biomass that is sourced sustainably is key
to this ambition. You can read more about
biomass sourcing in Sustainable
Development on pages 36 to 74.

Biomass, when sustainably sourced,
supports good forestry, is a renewable
source of energy, and we believe
represents an important part of both UK
and international renewable energy policy.

Drax sources its biomass from well-
established forestry markets mainly in
the US and Canada, as well as Europe.
The main output from these markets
is sawlogs, which are processed for use
in construction and manufacturing. When
used in this way, these materials represent
a source of long-term carbon storage and,
when the forest regenerates or
is replanted, the growing trees absorb
carbon from the atmosphere.

Drax Group plc Annual report and accounts 2022 17

Strategic report

Key performance
indicators

Our Strategic Pillars:

To be a global leader
in sustainable
biomass pellets

To be a global leader
in carbon removals

To be a UK leader in
dispatchable, renewable
generation

Measure

Definition/why it matters

Performance

Target

Strategic link

Link to risks

Link to remuneration

Adjusted
EBITDA
(£million)

Adjusted
basic EPS
(pence)

Average
Net debt
(£million)

Dividends
(pence per
share)

Total
recordable
incident rate
(TRIR)

Biomass
generation
availability

Group carbon
emissions
Scope 1, 2
and 3 (ktCO2e)

Pellets
produced (Mt)

This is our principal financial performance metric, combining
the earnings of each business to give a Group outcome.

The reconciliation of statutory earnings to Adjusted EBITDA
is on page 206.

This is an important measure of our profitability – showing adjusted
earnings on a per share basis.

The calculation of Adjusted basic EPS is on page 208.

This is a key measure of our liquidity and our ability to manage
our current obligations.

This is a primary measure of our value creation for our shareholders.

Keeping our people safe is a core principle. TRIR is an industry
standard measure of fatalities, lost time injuries and medical
treatment injuries per 100,000 hours worked.

You can read more about health, safety, and wellbeing in People
Positive on page 68.

This is an important measure of the amount of time our biomass
generation assets are available to generate electricity or provide
system support services.

This is calculated as the full capacity of the biomass units,
less planned outages and unplanned outages, as a percentage
of full capacity.

We are focused on reducing carbon emissions – as measured
by Scope 1, 2 and 3 – which enables us to track progress towards
our carbon negative ambition. You can read more about this
in Climate Positive on page 61.

This measures a key part of our strategy – to increase our pellet
production capacity and output.

This represents the number of pellets produced in millions
of tonnes.

Cost of
production
($/t)

This measures a key part of our strategy – to reduce the cost
of biomass produced.

This is calculated as the weighted average of the cost per tonne
of pellets produced.

Employee
engagement
score (%)

An engaged and motivated workforce is a critical component
in delivering our strategy. This is measured through our annual
engagement survey.

You can read more about employee engagement in People Positive
on page 66.

Drax Group plc Annual report and accounts 2022

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

398

412

26.5

29.6

731

85.1

1,117

1,002

849

21.0

18.8

17.1

0.22

0.29

0.44

87%

88%

87%

3,135

3.9

3.1

152

143

153*

2022 669

3,123

2021

1,255

3,121

2020

3,080

Scope 1 and 2

Scope 3

1.5

2022

2021

2020

2022

2021

2020

* Excludes Pinnacle

2022

2021

2020

TRIR of 0.20 per

100,000 hours worked.

Safety acts as a bonus modifier for the 2022

scorecard, underpinning the overall bonus award

To grow the Adjusted

EBITDA of the Group

to support investment

in the strategy.

To grow Adjusted basic

EPS of the Group.

Long-term target of

Net debt to EBITDA

of around 2.0 times.

To pay a growing and

sustainable dividend.

High level of biomass

availability when

required.

To be carbon negative

by 2030 across our

direct business

operations globally.

8Mt p.a. of production

capacity by 2030.

Continue to identify

opportunities to

reduce the cost of

biomass produced.

Maintain employee

engagement

year-on-year.

The Adjusted EBITDA performance measure has

a 40% weighting on the bonus scorecard.

See page 147

Cumulative Adjusted basic EPS is a performance

condition of the LTIP and has a 50% weighting

and is measured over a three-year period.

See page 132

The leverage (Average Net debt) performance

measure has a 20% weighting on the bonus

scorecard.

See pages 147 and 148

Dividends are a strong indicator of total shareholder

return (TSR). TSR is a performance condition of the

LTIP and has a 50% weighting over three years

relative to the FTSE 350.

See page 132

for all employees.

See page 147

The availability of the biomass generation assets

has a direct impact on Adjusted EBITDA and

Adjusted basic EPS.

The 2022 bonus scorecard has a 13.3% weighting

on measures focused on reducing Drax’s carbon

emissions, including the development of a low carbon

pellet mill and UK BECCS.

See pages 147 and 148

Increasing the pellet production capacity is a key

component in growing reported Adjusted EBITDA

results. In addition, the 2022 bonus scorecard

includes a 6.7% weighting on the development

of a low carbon pellet mill.

This metric is a key driver of Adjusted EBITDA

and Adjusted basic EPS performance measures,

which impact the overall bonus award and LTIP.

The Inclusion Index, which forms part of the employee

engagement score and measures how included

colleagues feel about working at Drax, is a KPI in the

bonus scorecard and has a 6.7% weighting.

See pages 147 and 148

Measure

Definition/why it matters

Performance

Target

Strategic link

Link to risks

Link to remuneration

Type:

Our Risks:

Financial

Non-Financial

Environment,
Health & Safety

Trading &
Commodity

Political &
Regulatory

Information
Systems & Security

Strategic

Climate
Change

Biomass
Acceptability

Plant
Operations

People

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Adjusted

EBITDA

(£million)

Adjusted

basic EPS

(pence)

Average

Net debt

(£million)

Dividends

(pence per

share)

Total

recordable

incident rate

(TRIR)

Biomass

generation

availability

Group carbon

emissions

Scope 1, 2

and 3 (ktCO2e)

Pellets

produced (Mt)

Cost of

production

($/t)

Employee

engagement

score (%)

This is our principal financial performance metric, combining

the earnings of each business to give a Group outcome.

The reconciliation of statutory earnings to Adjusted EBITDA

is on page 206.

This is an important measure of our profitability – showing adjusted

earnings on a per share basis.

The calculation of Adjusted basic EPS is on page 208.

This is a key measure of our liquidity and our ability to manage

our current obligations.

398

412

26.5

29.6

This is a primary measure of our value creation for our shareholders.

Keeping our people safe is a core principle. TRIR is an industry

standard measure of fatalities, lost time injuries and medical

treatment injuries per 100,000 hours worked.

You can read more about health, safety, and wellbeing in People

Positive on page 68.

This is an important measure of the amount of time our biomass

generation assets are available to generate electricity or provide

system support services.

This is calculated as the full capacity of the biomass units,

less planned outages and unplanned outages, as a percentage

of full capacity.

0.22

0.29

We are focused on reducing carbon emissions – as measured

by Scope 1, 2 and 3 – which enables us to track progress towards

2022 669

3,123

our carbon negative ambition. You can read more about this

2021

1,255

3,121

in Climate Positive on page 61.

2020

3,080

Scope 1 and 2

Scope 3

This measures a key part of our strategy – to increase our pellet

production capacity and output.

This represents the number of pellets produced in millions

of tonnes.

1.5

This measures a key part of our strategy – to reduce the cost

of biomass produced.

of pellets produced.

This is calculated as the weighted average of the cost per tonne

An engaged and motivated workforce is a critical component

in delivering our strategy. This is measured through our annual

engagement survey.

on page 66.

You can read more about employee engagement in People Positive

2020

* Excludes Pinnacle

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

2020

2022

2021

1,117

1,002

849

21.0

18.8

17.1

731

85.1

0.44

87%

88%

87%

3,135

3.9

3.1

152

143

153*

To grow the Adjusted
EBITDA of the Group
to support investment
in the strategy.

To grow Adjusted basic
EPS of the Group.

Long-term target of
Net debt to EBITDA
of around 2.0 times.

To pay a growing and
sustainable dividend.

TRIR of 0.20 per
100,000 hours worked.

High level of biomass
availability when
required.

To be carbon negative
by 2030 across our
direct business
operations globally.

8Mt p.a. of production
capacity by 2030.

Continue to identify
opportunities to
reduce the cost of
biomass produced.

Maintain employee
engagement
year-on-year.

The Adjusted EBITDA performance measure has
a 40% weighting on the bonus scorecard.

See page 147

Cumulative Adjusted basic EPS is a performance
condition of the LTIP and has a 50% weighting
and is measured over a three-year period.

See page 132

The leverage (Average Net debt) performance
measure has a 20% weighting on the bonus
scorecard.

See pages 147 and 148

Dividends are a strong indicator of total shareholder
return (TSR). TSR is a performance condition of the
LTIP and has a 50% weighting over three years
relative to the FTSE 350.

See page 132

Safety acts as a bonus modifier for the 2022
scorecard, underpinning the overall bonus award
for all employees.

See page 147

The availability of the biomass generation assets
has a direct impact on Adjusted EBITDA and
Adjusted basic EPS.

The 2022 bonus scorecard has a 13.3% weighting
on measures focused on reducing Drax’s carbon
emissions, including the development of a low carbon
pellet mill and UK BECCS.

See pages 147 and 148

Increasing the pellet production capacity is a key
component in growing reported Adjusted EBITDA
results. In addition, the 2022 bonus scorecard
includes a 6.7% weighting on the development
of a low carbon pellet mill.

This metric is a key driver of Adjusted EBITDA
and Adjusted basic EPS performance measures,
which impact the overall bonus award and LTIP.

The Inclusion Index, which forms part of the employee
engagement score and measures how included
colleagues feel about working at Drax, is a KPI in the
bonus scorecard and has a 6.7% weighting.

See pages 147 and 148

Drax Group plc Annual report and accounts 2022 19

Strategic report
Strategic report

Financial Review
Financial Review

We benefited from
the integrated nature
of our business model

Andy Skelton, Chief Financial Officer

2022 financial highlights
• Strong financial performance –

Adjusted EBITDA from continuing
and discontinued operations of
£731 million (2021: £398 million)

• Closing Net debt to Adjusted EBITDA

of 1.6 times (2021: 2.8 times),
reducing to 1.3 times excluding cash
collateral posted (2021: 3.2 times)

• Total operating profit from continuing

operations of £146 million
(2021: £197 million)

• Cash generated from operations

of £320 million (2021: £354 million)

• Strong liquidity – cash and committed

facilities of £698 million
(2021: £549 million)

• 12% increase in total dividend
to 21.0 pence per share, a total
cost of £84 million

Introduction
Consolidated Adjusted EBITDA
of £731 million (2021: £398 million)
reflects a strong contribution from all
business units as we benefited from the
integrated nature of our business model,
against a backdrop of volatile
macroeconomic conditions. Cash
generated from operations of £320 million
(2021: £354 million) is stated after
cash collateral outflows of £407 million
during the year, associated with forward
sales of power (2021: inflows of
£168 million). Excluding the impact
of these cash collateral outflows,
the underlying cash generated from
operations grew significantly, reflecting
the increase in Adjusted EBITDA.

Closing Net debt to Adjusted EBITDA of
1.6 times (2021: 2.8 times) is significantly
below the Group’s long-term target
of 2.0 times and reduces to 1.3 times
if collateral posted of £234 million
is adjusted for (2021: 3.2 times,
collateral held of £173 million).

Total operating profit was £146 million
(2021: £197 million). Total gross profit
increased by £132 million to £1,023 million
(2021: £891 million) but this was offset by
increases in operating and administrative
expenses, impairment losses on financial
assets, increased depreciation charges,
and impairment of non-current assets.

Capital expenditure of £255 million grew
7% compared to £238 million in 2021,
with £127 million spent on major strategic
initiatives, including £90 million on the
development of our OCGT projects. The
proposed full year dividend of 21.0 pence
per share reflects a 12% increase on the
previous year (2021: 18.8 pence per share)
as the Group continues to pay a sustainable
and growing dividend in line with its
long-standing capital allocation policy.

Financial performance
Adjusted EBITDA
Adjusted EBITDA of £731 million is an 84%
increase (2021: £398 million). All business
units delivered an increase in Adjusted
EBITDA compared to the previous year.

Our Pellet Production business generated
Adjusted EBITDA of £134 million (2021:
£86 million). This reflects increased
production volumes attributable to
commissioning new sites and a full year
of ownership of Pinnacle, an uplift in the
Group’s intercompany sales price between
our Pellet Production and Generation
businesses, and increased value achieved
from sales of biomass in the spot market,
partially offset by increased costs
of production.

Our pellet business produced
3.9Mt of pellets and shipped 4.7Mt
(2021: 3.1Mt produced and 3.2Mt shipped).
Of this volume 2.2Mt was sold to third
parties (2021: 1.2Mt). Increased volume
produced primarily reflects the full year
impact of the acquired Pinnacle sites,
which were added in April 2021 and
additional volumes achieved from the
commissioning of new sites.

Against the background of volatile
commodity prices, the Pellet Production
business contributed significant value
to the Group by providing flexibility
in biomass supply to Drax Power Station.
During 2022 we saw cost increases and
inflationary pressures, particularly in
relation to utilities and transportation,
and incurred additional costs reprofiling
biomass cargoes, both own use and
third-party, to support the provision
of flexible generation to the UK power
system. The value achieved in the
Generation business exceeded the
extra costs incurred.

Drax Group plc Annual report and accounts 2022

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Financial highlights

Adjusted EBITDA
from continuing and
discontinued operations

Adjusted operating profit
from continuing operations

Total operating profit
from continuing operations

Cash generated
from operations

£731m

(2021: £398m)

£469m

(2021: £170m)

Adjusted basic earnings per
share from continuing and
discontinued operations

Total basic earnings per
share from continuing and
discontinued operations

£146m

(2021: £197m)

Net debt to Adjusted
EBITDA ratio

£320m

(2021: £354m)

Total dividend
per share

85.1 pence

(2021: 26.5 pence)

21.3 pence

(2021: 20.0 pence)

1.6 times

(2021: 2.8 times)

21.0 pence

(2021: 18.8 pence)

Financial performance (£m)

Total gross profit
Operating and administrative expenses
Impairment losses on financial assets
Depreciation and amortisation
Impairment of non-current assets
Other
Total operating profit
Exceptional costs and certain remeasurements
Adjusted operating profit
Adjusted depreciation, amortisation, asset obsolescence charges
and losses on disposal of fixed assets
Adjusted EBITDA from continuing operations
Adjusted EBITDA from discontinued CCGT operations
Adjusted EBITDA from continuing and discontinued operations

Capital expenditure (£m)
Cash and Net debt (£m unless
otherwise stated)

Earnings (pence per share)

Distributions (pence per share)

Capital expenditure for the year
Cash generated from operations
Net debt*
Net debt to Adjusted EBITDA (times)*
Cash and committed facilities
Adjusted basic
Total basic
Interim dividend
Proposed final dividend
Total dividend

Year end 31 December

2022

1,023
(543)
(48)
(239)
(42)
(6)
146
323
469
261

731
–
731

255
320
1,206
1.6
698
85.1
21.3
8.4
12.6
21.0

2021

891
(470)
(16)
(199)
–
(10)
197
(26)
170
208

378
20
398

238
354
1,108
2.8
549
26.5
20.0
7.5
11.3
18.8

We calculate Adjusted financial performance measures, which exclude income statement volatility from derivative financial instruments and the impact of exceptional items.
This allows management and stakeholders to better compare the performance of the Group between the current and previous year without the effects of this volatility and
one off or non-operational items. Adjusted financial performance measures are described more fully on page 179, with a reconciliation to their statutory equivalents in note
2.7 to the Consolidated financial statements on page 203.

Throughout this document we distinguish between Adjusted measures and Total measures, which are calculated in accordance with International Financial Reporting
Standards (IFRS). On 31 January 2021, the Group completed the sale of its portfolio of CCGT assets to VPI Generation Limited. Because of this transaction, the results of the
CCGT portfolio for 2021 have been classified as discontinued operations in the Consolidated financial statements. References to financial performance measures throughout
this annual report refer to continuing operations, unless otherwise stated. Further details of discontinued financial performance is included in note 5.4 to the Consolidated
financial statements. Tables in this financial review may not add down/across due to rounding.

*In previous years Net debt was presented on a ‘before the impact of hedging’ basis. However, we consider including the impact of foreign currency hedges associated
with borrowings to better reflect the economic reality of the Group’s indebtedness, i.e. to reflect the fixed GBP cash flows of foreign currency denominated debt.
Thus, all references to ‘Net debt’ now refer to the position including the impact of hedging, unless otherwise stated. A reconciliation of and between these measures
can be seen in note 2.7 to the Consolidated financial statements.

Drax Group plc Annual report and accounts 2022 21

Strategic report

Financial Review continued

We also incurred commissioning costs
at new sites as we continue to invest
to expand capacity to support future
growth opportunities in North America.

from the resale of forward hedged power
back into the merchant market above the
contracted rate. Most of this benefit arose
in the first half of 2022.

Despite these cost increases, we continue
to see opportunities for cost reduction
through additional production at existing
plants, driving efficiencies in production
and logistics, and implementing new
technologies and innovation.

Our Generation business contributed
£696 million of Adjusted EBITDA, all from
continuing operations (2021: £372 million,
inclusive of £20 million from discontinued
CCGT operations). Reprofiling of
generation during the year allowed Drax
Power Station to support security of
supply and maximise generation during
the winter months, based on the needs
of the UK power system.

This optimisation was underpinned by
strong operational performance, which
effectively mitigated the increased risk of
an unplanned outage during periods of
high power prices. In line with our hedging
policy, we managed this increased risk by
retaining a proportion of generating
capacity unhedged.

The Group’s hydro and pumped storage
assets continued to supply renewable
electricity and essential services to the
UK power system and, inclusive of the
results of the Daldowie energy from waste
plant, contributed £171 million of Adjusted
EBITDA in 2022 (2021: £68 million).
This increase was achieved through higher
hedged power prices, increased rainfall
in 2022 against a particularly low year
in 2021, and increased provision of critical
services to the system operator in support
of system stability. This result is net of
a £6 million payment to the Voluntary
Energy Redress Fund.

The extension to the availability of the coal
units at Drax Power Station at the request
of the UK Government, as discussed in the
CEO’s Review, delivered income during
the final quarter of 2022.

The Customers business contributed
£26 million of Adjusted EBITDA during
2022, a significant increase on the
£6 million delivered in 2021. This reflects
continued improvement from 2020, when
the impact of Covid-19 resulted in a loss
of £39 million. Volumes sold increased
to 19.4TWh in 2022 (2021: 18.7TWh).

Our policy is to fully hedge power
purchases for the duration of a sales
contract at the point that the contract is
signed, based on the customer’s forecast
consumption. During 2022, because of
increased market prices and lower
customer demand profiles, we benefited

The total bad debt charge for 2022, net of
credits, was £48 million (2021: £16 million),
an increase of £32 million. This increase
reflects the impact of higher commodity
prices, which feeds through to increased
revenues and gross profit but also to
increased gross trade receivables. Before
the application of credits, the bad debt
charge represents 1.4% of total revenue
for the Customers business (2021: 1.4%).

The overall bad debt provision at
31 December 2022 of £61 million
(representing 18% of the Group’s gross
trade receivables balance) compares
to £47 million at 31 December 2021 (20%
of the Group’s gross trade receivables
balance). The net trade receivables balance
relating to the Customers segment at
31 December 2022 was £244 million
(31 December 2021: £161 million).

The bad debt provision reflects forward-
looking consideration of the potential
impacts of UK Government support to
customers and other macroeconomic
conditions. The Energy Bill Relief Scheme,
introduced by the UK Government,
became effective from 1 October 2022.
It provides financial support for non-
domestic UK energy customers by
implementing a cap on their energy tariff.
This scheme ends in March 2023 and will
be replaced by the Energy Bill Discount
Scheme, which will continue to provide
support for businesses via a discount
on their tariff, as opposed to a cap.

Subsequent to 31 December 2022,
following a strategic review the Group
decided to exit the market for supplying
gas to SME business customers, leading
to the end of all gas sales by the Group.
Having already ceased acquiring new gas
customers, no renewal contracts will be
offered after May 2023. We anticipate the
portfolio will reduce by over 50% by the
end of 2023 and be almost entirely gone
by the end of 2024.

Innovation, capital projects, and other
costs of £124 million (2021: £65 million)
primarily reflects increased spending
to support our growth ambitions and
progress opportunities on major projects
which have not reached the stage where
costs can be capitalised (such as global
BECCS). Innovation and capital projects
accounts for £12 million of this increase.
The main components of the £47 million
increase in other costs were insurance
costs (£8 million), elimination of intra-
group profits (£10 million) and additional
variable pay charges (£7 million).

Drax Group plc Annual report and accounts 2022

Total operating profit
Total operating profit from continuing
operations decreased from £197 million
in 2021 to £146 million in 2022. Within this
is an increase in Total gross profit of
£132 million to £1,023 million (2021:
£891 million) and an increase in Total
operating expenses of £73 million to
£543 million (2021: £470 million) reflecting
the factors discussed above in relation
to Adjusted EBITDA.

As shown in the table on page 21,
the difference between Adjusted EBITDA
and Total operating profit results from
adjustments for a net loss on exceptional
costs and certain remeasurements
of £323 million (2021: a net gain of
£26 million) and charges associated
with fixed assets of £261 million
(2021: £208 million). These factors are
discussed further below.

The net loss from remeasurements on
derivative contracts of £298 million
(2021: a £48 million gain), reflects adverse
movements in the valuation of gas and
inflation contracts, offset by favourable
movements in the valuation of our foreign
exchange portfolio, as sterling weakened
during 2022. For more detail on the nature
and valuation of our portfolio of derivative
contracts, please see note 7.1 to the
Consolidated financial statements.
The Group excludes these certain
remeasurements from Adjusted results
to present a clear and consistent review
of trading performance, as described
in the basis of preparation and note 2.7
of the financial statements.

Exceptional costs for 2022 totalled
£25 million (2021: £22 million). Of this
charge, £19 million reflects the write
down of previously capitalised costs
in respect of a billing system where the
Group has stopped development and
where proceedings have been issued
against the supplier to recover damages
for misrepresentation and breach of
contract. The Group no longer expects
that any future economic benefit will be
recovered as an ongoing intangible asset.
In accordance with accounting standards,
the previously capitalised balance has
therefore been impaired. Following
consideration with external professional
advisers, the Group continues to believe
this previously incurred expenditure will be
recovered from the supplier, and there has
been no change in this position during
2022. Accordingly, an associated
contingent asset has been disclosed,
see note 7.6 to the Consolidated
financial statements.

The remaining £6 million of the 2022
charge relates to previously capitalised
Software as a Service costs, which

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were written off following a change in
accounting policy effective 1 January
2022. For more information on this change
in accounting policy see the basis of
preparation of the Consolidated
financial statements.

Depreciation and amortisation charges
increased from £199 million in 2021
to £239 million in 2022. Of this increase,
£13 million is attributable to the inclusion
of Pinnacle for a full year in 2022, and
£7 million to depreciation on new sites.
The remainder is attributable to
accelerated depreciation of certain pellet
plant equipment in line with planned
capital upgrades.

Adjusted impairments of non-current
assets was £17 million (2021: £nil).
Of this total charge £9 million relates
to the impairment of the Group’s fourth
OCGT development opportunity, which
is considered unlikely to be developed at
the current time. The three projects that
have already secured Capacity Market
contracts remain in development, ready
to meet their obligations when those
contracts commence in 2024. The
expected economic benefit to the Group
continues to be attractive. A further
£8 million relates to a partial impairment
of the assets of the Daldowie energy from
waste plant, due to a reduction in the
forecast earnings over the remaining
period of ownership to 2026, when the
assets will be transferred back to Scottish
Water after they triggered an option in the
Private Finance Initiative agreement.

Profit after tax and earnings per share
Total net interest charges for 2022 of
£68 million reduced in the year (2021:
£75 million). The movement included a
foreign exchange gain of £11 million (2021:
£4 million loss) which resulted from the
weakening of sterling during 2022, and the
subsequent revaluation of intercompany
loans denominated in foreign currencies
(further details on this are included
in note 2.5 to the Consolidated financial
statements). This reduction has been
offset by an increase in monetisation
fees related to the facility available to
accelerate cash flows associated with
trade receivables in the Customers
business, as that facility has increased
in size from £200 million to £400 million
during 2022, as discussed on page 228.

The Total tax credit of £4 million includes
a charge of £67 million on Adjusted
results offset by a credit of £72 million
on exceptional items and certain
remeasurements, the latter predominantly
driven by the tax impact of the
£302 million of certain remeasurements
discussed on page 22.

The effective tax rate applicable to the
Group’s Adjusted pre-tax profits of 17%
(2021: 12%) is below the standard rate of
corporation tax in the UK and includes the
effect of tax rates in overseas jurisdictions.
This rate is lower than the standard rate
in the UK because of credits attributable
to Patent Box and the super-deduction
for qualifying plant and machinery,
announced in March 2021 and running
until March 2023. The increase in effective
tax rate from 2021 has been driven
by growth in UK-based profits, diluting
the impact of the Patent Box and
super-deduction credits.

The exceptional deferred tax credit
of £10 million in 2022 (2021: £49 million
charge) relates to the corporation tax
rate changes announced by the UK
Government in 2021, being a planned
increase from 19% to 25% in April 2023.

In November 2022 the UK Government
announced the Electricity Generator Levy,
as explained on page 13. The levy is not
deductible for corporation tax purposes
and therefore will result in an increase in
the Group’s effective tax rate for 2023.
Payment of the levy will be in line with the
Group’s arrangements for corporation tax
payments, once substantively enacted.

Adjusted and Total profit after tax
attributable to the discontinued CCGT
operations was £nil during 2022 (2021:
£17 million and £24 million respectively).
The above factors all contributed
to Adjusted basic earnings per share
of 85.1 pence (2021: 26.5 pence) and
a Total basic earnings per share figure
of 21.3 pence (2021: 20.0 pence).

Capital expenditure
Capital expenditure in the year was
£255 million (2021: £238 million).
£127 million was on strategic initiatives,
including £90 million in respect of
development of our OCGT projects and
£19 million on UK BECCS, £79 million
on maintenance capital, £27 million on
enhancing existing assets and £22 million
on Health, safety, environment and IT.

The OCGT projects are progressing in line
with the requirement to be operational at
the beginning of their Capacity Market
contracts in 2024. Delivery of our UK
BECCS project is subject to a final
investment decision, which is expected
in 2024 and dependent on the right
regulatory and investment framework.
Commissioning of certain pellet assets in
North America progressed more slowly
than anticipated during 2022. Our capital
projects and operations teams are focused
on achieving full production capacity
as soon as possible during 2023.

Capital expenditure in
the year was £255 million
(2021: £238 million).
£127 million was on
strategic initiatives,
including £90 million in
respect of development
of our OCGT projects and
£19 million on UK BECCS

In September 2022 the Pellet Production
business completed the acquisition of
a 90kt pellet plant in Princeton, British
Columbia, for consideration of
C$11.5 million. The plant will contribute
to the Group’s strategy to increase pellet
production to 8Mt per year by 2030.

Cash and Net debt
Cash generated from operations
Operating cash flows before movements
in working capital and defined benefit
pension obligations for the period was
£734 million (2021: £337 million), primarily
reflecting the increase in Adjusted EBITDA.

Cash generated from operations in 2022,
inclusive of movements in working capital,
of £320 million compares to £354 million
in 2021. The total outflow of £403 million
on working capital includes an outflow
during the year of £407 million relating
to cash collateral. This has been driven
by increased use of exchange traded
contracts during the year, with increased
commodity prices meaning that
counterparty credit limits had to be
managed carefully. Exchange traded
contracts typically require an up-front
margin payment and cash collateralisation
of mark-to-market positions. Excluding
the cash flows in relation to collateral
during the year there was a small working
capital inflow.

At 31 December 2022, the Group had
posted £234 million of cash collateral
(2021: held £173 million of cash collateral).
When the associated trades mature in
2023 and 2024 there will be a
corresponding working capital inflow,
however market movements and new
trades will continue to determine overall
cash collateral requirements in the future.

Drax Group plc Annual report and accounts 2022 23

Strategic report

Financial Review continued

There was a net outflow in relation to
trade and other receivables during the
year. Excluding movements in working
capital facilities and cash collateral
postings, trade receivables increased
by £551 million. This was driven primarily
by higher billing in the Customers business,
reflecting increased commodity prices.
The facility available to accelerate cash
flows associated with trade receivables
in the Customers business, on a non-
recourse basis, was extended during 2022
from £200 million to £400 million. The
extended facility was fully utilised during
the year, resulting in a cash inflow
of £200 million and a corresponding
reduction in receivables. This reduction
was offset by an outflow of £234 million
on collateral posted, as described above,
which is recorded within receivables.

The overall working capital inflow
of £317 million from payables in 2022 was
predominantly driven by increases in the
Customers business, reflecting higher
commodity prices on power and gas
purchases. This was partially offset by the
change from holding net cash collateral of
£173 million at the beginning of 2022 to
having posted £234 million at the end of
the year, with the gross movement on
collateral at the beginning of 2022
showing as a reduction in payables.

A £114 million inflow from renewable
certificate assets was driven by the
monetisation of ROCs using available
facilities, partially offset by the increase
in ROC assets attributable to generation
in the year.

Cash outflows on inventories totalled
£133 million during 2022, resulting in part
from the reprofiling of generation from
summer to winter, meaning more cash was
held in inventory at 31 December 2022.

Net cash movements
Capital expenditure cash flows for 2022
totalled £171 million (2021: £209 million).
Cash flows associated with capital
expenditure on the three OCGT projects
are significantly lower than the accounting
additions recorded because of the use of
letters of credit to extend payment terms.
The amount outstanding under these
arrangements at 31 December 2022 was
£65 million (31 December 2021: £nil).

Corporation tax payments totalled
£39 million in 2022 (2021: £12 million
receipts), reflecting higher UK payments
on account in respect of the increased
profits chargeable to corporation tax.

Net debt and Net debt to Adjusted
EBITDA
The Net debt to Adjusted EBITDA ratio is
significantly below our target of 2.0 times
at 31 December 2022, and reduces to
1.3 times when adjusted for cash
collateral posted.

In previous years, Net debt was presented
on the ‘before impact of hedging’ basis.
However, we consider including the impact
of foreign currency hedges associated with
borrowings to better reflect the economic
reality of the Group’s indebtedness
position. Thus, all references to ‘Net debt’
now refer to the position including the
impact of hedging, unless otherwise
stated. The impact of this change on
Net debt at 31 December 2022 is to
increase it by £2 million.

Liquidity
Cash and committed facilities at
31 December 2022 of £698 million
(2021: £549 million) provide substantial
headroom over our short-term liquidity
requirements. In addition to cash-on-hand,
the Group has access to a £300 million
ESG Revolving Credit Facility (RCF)
and a C$10 million RCF, to manage low
points in the cash cycle. The £300 million
ESG RCF expires in January 2025, with a
one-year extension clause. No cash has
been drawn under this RCF since its
inception over three years ago, but
£46 million was drawn for letters of credit
at 31 December 2022 (31 December 2021:
£74 million drawn for letters of credit).

In December 2022 the Group agreed
a new 12-month £200 million liquidity
facility with its existing lending group.
This facility provides an additional source
of liquidity to the Group’s £300 million
RCF. The new facility was temporarily
drawn during December, to support
optimisation of generation and associated
cash collateral postings, but was undrawn
at 31 December 2022. Separately,
£44 million was drawn under an
uncommitted facility during the second
half of 2022 and remained outstanding
at 31 December 2022 also to support
optimisation of generation during winter
(31 December 2021: £nil).

During the first half of 2022, the Group
utilised existing cash reserves to repay its
index-linked term loan facility, with a total
cash outflow of £41 million. Our liquidity
position remains robust, having put
additional measures in place during the
year in response to the volatility in
commodity markets. All three of our
ratings agencies evaluated our outlook
as stable during the year.

Net debt and Net debt to Adjusted EBITDA

Cash and cash equivalents
Current borrowings
Non-current borrowings
Net debt before impact of hedging instruments
Impact of hedging instruments
Net debt
Impact of collateral
Net debt excluding collateral
Adjusted EBITDA
Net debt : Adjusted EBITDA (times)
Net debt excluding collateral : Adjusted EBITDA (times)

Drax Group plc Annual report and accounts 2022

Year ended 31 December

2022
£m

238
(44)
(1,397)
(1,203)
(2)
(1,206)
234
(972)
731
1.6
1.3

2021
£m

317
(41)
(1,320)
(1,044)
(64)
(1,108)
(173)
(1,281)
398
2.8
3.2

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Earnings per share
(pence)

2022

85.1

developing Covid-19 pandemic. At the end
of 2022, outstanding cash received from
rebased cross-currency swap trades was
£43 million (2021: £48 million).

in its cash and committed facilities,
combined with available mitigating
actions, to be able to meet its liabilities as
they fall due across a range of scenarios.

2022

21.3

2021

26.5

2021

20.0

Adjusted EPS

Total EPS

Total dividends
(£m)

2022

2021

2020

2019

2018

Derivatives
We use derivatives to hedge commodity
price and foreign exchange risk. In 2022
there was significant volatility in these
markets, leading to a net £302 million
charge related to certain remeasurements,
which we continue to adjust for when
presenting Adjusted results. Increases
in the value of foreign exchange related
derivative contracts were more than
offset by increases in liabilities in relation
to gas and inflation trades.

The accounting for, and valuation of, these
products is complex, and is identified in
the key sources of estimation uncertainty
of the Consolidated financial statements
in the current year.

Rebasing is a process whereby the rates
agreed in a contract are modified to
current market rates. This leads to an
initial cash inflow, as the mark-to-market
on the contract is settled at the time of
rebasing, with a subsequent outflow in
future years, compared to if no action had
been taken. The Group rebased contracts
during the first half of 2020 to realise
working capital benefits in light of the

Distributions
In line with our long-standing capital
allocation policy, the Group is committed to
paying a growing and sustainable dividend.
On 25 July 2022, the Board approved an
interim dividend for the six months ended
30 June 2022 of 8.4 pence per share.
This was paid on 7 October 2022 with a
record date of 26 August 2022.

At the Annual General Meeting on 26 April
2023, the Board will recommend to
shareholders a resolution to pay a final
dividend for the year ended 31 December
2022 of 12.6 pence per share. If approved,
the final dividend will be paid on 19 May
2023, with a record date of 21 April 2023.

Taken together with the interim dividend
this would give a total dividend for 2022
of 21.0 pence per share (2021: 18.8 pence
per share), representing a 12% increase,
in line with our policy of paying a
sustainable and growing dividend.

Our capital allocation policy is unchanged
and incorporates maintaining our credit
rating; investing in the core business;
paying a sustainable and growing dividend
and then returning surplus capital beyond
investment requirements.

Going concern and viability
As described on page 20, the Group’s
financial performance in 2022 was strong,
delivering improved profitability and a
decrease in the Net debt to Adjusted
EBITDA ratio. Our financing platform is
stable, with most of our principal debt
repayments due from 2025 onwards and
significant liquidity headroom available
from both committed and uncommitted
facilities.

The Group refreshes its business plan and
forecasts throughout the year, including
scenario modelling designed to test the
resilience of the Group’s financial position
and performance to several possible
downside scenarios. Based on its review
of the latest forecast, the Board is satisfied
that the Group has sufficient headroom

The Directors therefore have a reasonable
expectation that the Group will be able
to continue in operation over the five-year
period of the viability assessment,
as discussed further on page 75.
Consequently, the Directors also have
a reasonable expectation that the Group
will continue in existence for a period of
at least 12 months from the date of the
approval of the financial statements and
have therefore adopted the going concern
basis when preparing the Consolidated
financial statements.

Other information
Non-Controlling Interest purchase
On 30 September 2022, the Group
completed the acquisition of the remaining
10% minority interest in Alabama Pellets
LLC for cash consideration of $22 million.
Alabama Pellets LLC contained the two
pellet plants at Aliceville and Demopolis,
prior to their reorganisation into separate
entities. This acquisition provided the
Group with economic rights over a further
66 kt of biomass production capacity.

Pension plan merger
Historically, the Group has operated two
defined benefit pension schemes, the Drax
ESPS scheme and the Drax 2019 scheme,
as described further in note 6.3 to the
Consolidated financial statements.
On 31 January 2023 these two schemes
were merged. The impact of this will be
to reduce levels of administrative
expenses and time taken to manage the
two schemes, as well as providing the
ability to pool the assets of the schemes
when making investment decisions. There
will be no change to members’ benefits
as a result of the merger.

Liquidity

Cash and cash equivalents
RCF available but not utilised
Short-term liquidity facility
Total cash and committed facilities

Year ended 31 December

2022
£m

238
260
200
698

2021
£m

317
231
–
549

Drax Group plc Annual report and accounts 2022 25

Strategic report

Stakeholder engagement

Understanding the needs of our stakeholders
is essential to our long‑term success

Achieving our purpose –
to enable a zero carbon,
lower cost energy future –
and supporting global efforts
to reduce carbon emissions
are long-term projects.
Building sustainable
relationships with a diverse
range of interested parties
is critical in helping us
achieve them.

Many of our strategic and investment
decisions have multi-year time horizons.
We recognise that these decisions can
have an impact far beyond our business
and well into the future. This is why
we seek to understand the needs and
perspectives of our stakeholders;
and we believe that considering these
views improves the quality of our
decision making.

Section 172 Statement

Under Section 172(1) of the Companies
Act, the Directors have a duty to
promote the success of the Company,
having regard to a range of matters and
stakeholders. The Board is responsible
for ensuring effective engagement with
stakeholders: it recognises that decisions
taken today will have an impact upon
stakeholders, as well as shape the
longer-term performance of the
business. Appropriate consideration
is important in enabling Drax to deliver

positive outcomes for the climate,
nature and people, and to deliver
sustainable value creation.

During 2022 the Board’s discussions
and decision-making considered the
matters contained within Section 172,
and acted in good faith to promote the
sustainable long-term success of the
Company. The following pages explain
how the Board considered those matters
during 2022.

Section 172 matter

a. The likely consequences of
any decision in the long term

b. The interests of the

Company’s employees

c. The need to foster the
Company’s business
relationships with suppliers,
customers and others

d. The impact of the Company’s
operations on the community
and the environment

e. The desirability of the

Company maintaining a
reputation for high standards
of business conduct

The need to act fairly
as between members
of the Company

How the Board considered
those matters
• Business model (page 8)
• Coal winter contingency (page 107)
• Carbon removals (page 12)
• Principal Risks (page 77)
• Workforce engagement (pages 69 and 109)
• Diversity and inclusion (pages 69 and 112)
• Safety, health and wellbeing (page 67)
• Engagement with customers (page 29)
• Engagement with suppliers (page 29)
• Supplier Code (page 72)

• Biomass Sourcing (page 40)
• Climate Positive (page 47)
• Nature Positive (page 63)
• People Positive (page 66)
• Taskforce on Climate-related Financial Disclosures

(TCFD) (page 52)

• Climate change risk (page 89)
• Engagement with communities, schools and

colleges (page 28)

• Drax Foundation (page 32)
• Ethics and integrity (page 71)
• Culture and values (pages 72 and 105)
• Speak Up (Whistleblowing) (page 73)
• Corporate Governance Code (page 102)
• Shareholder engagement (page 27)
• Rights and obligations attaching to shares (page 159)

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Workforce

Key issues

Engagement activities

• Health, safety and

wellbeing

• Cost‑of‑living crisis
• Diversity and

inclusion

• Culture and values
• Engagement,
recognition

Principal Risks

• Safety, health and
wellbeing, and
environment

• People

We maintain regular dialogue through several workforce engagement activities. These include
MyVoice Forums (involving direct dialogue between colleague representatives, and the Chair of
the Board and CEO), colleague briefings run by our executive and leaders, dialogue with unions,
and our annual engagement and ‘pulse’ surveys. The CEO also emails a weekly update with
a Q&A section responding to colleague questions.

Our MyVoice Forums continue to be a key part of our listening strategy, providing us with a view
of colleague sentiment and key topics of interest. We review the results of the MyVoice surveys
with our Forums, inviting input on key topics such as recognition and reward, and diversity and
inclusion. To learn more about the Forums, see page 69.

The Non-Executive Directors have recorded periodic video messages on a range of topics for
distribution across the Group. During 2022, Erika Peterman, Non-Executive Director, spoke about
diversity and inclusion; and Nicola Hodson, Chair of the Remuneration Committee, outlined the
Committee’s role, and explained the annual bonus plan and scorecard measures. The MyVoice
Forums provided feedback on these messages to the Chair and CEO.

In 2022, we also held a Group-wide discussion on biomass sustainability and posted the video
recording of the event to our intranet. The discussion involved the Plant Director at Drax Power
Station posing to the Group Director of Sustainability questions received from colleagues across
the business.

Shareholders and investors

Key issues

Engagement activities

• Strategy
• Financial and
operational
performance

• Biomass

sustainability
• BECCS delivery
• Environmental,

Social and
Governance (ESG)

Principal Risks

• Strategic
• Biomass

acceptability
• Political and
regulatory

We engage through a wide range of channels including statutory reporting – full-year and half-year
results, trading updates, our AGM, Capital Markets Days, and our website. We also have an ongoing
programme of investor relations meetings with shareholders and prospective investors. In 2022,
the CEO, CFO and Head of Investor Relations (IR) met shareholders and investors as part of full and
half-year results roadshows. These events were a combination of in-person and virtual meetings.

The CEO, CFO and Head of IR also held meetings with investors in North America. In June 2022,
the CFO and Head of IR participated in a US road show, meeting investors in New York, Chicago
and Boston. The Head of IR also hosted a visit to the US Southeast to show investors and analysts
our sustainable biomass sourcing and the associated supply chain. This included a field visit
to working forests and meeting with commercial foresters with whom we partner.

The Head of IR and Group Director of Sustainability met with institutional investors and their
governance teams to discuss key issues around biomass sustainability and carbon accounting.
This was part of an ongoing series of engagements through the year. In November, the Chair met
with some investor groups to discuss the Board’s approach to biomass sustainability.

At industry conferences, we hosted one-to-one and group investor meetings with the CEO,
CFO and Chief Innovation Officer, who explained our ambitions for BECCS. Reflecting growing
interest in the opportunity around our planned extension of pumped storage, we hosted two
investor site visits to Cruachan Power Station, and an Edinburgh roadshow.

Drax Group plc Annual report and accounts 2022 27

Strategic report

Stakeholder engagement continued

Communities

Key issues

Engagement activities

• That Drax is a

responsible business
and good neighbour

• Tackling climate

change

We engage with local communities in each of the territories in which the Group is active. In Canada,
in June 2022 members of the Board were pleased to meet with representatives of First Nations
who, as owners of parts of the forests in British Columbia from where we source some of our
biomass, partner with us in the sourcing of some of our biomass. You can read more about this
on page 33.

Principal Risks

• Climate change
• Biomass

acceptability

• Strategic

Quarterly town and parish council liaison meetings at Drax Power Station, North Yorkshire, allow
communication with local communities. There are fixed agenda items where we provide updates
on our operations, and the opportunity for local councillors to ask questions and raise any issues.

We believe it is important to undertake engagement with schools and pupils from a young age.
We engage directly with schools and colleges to promote interest in science, technology,
engineering, and maths (STEM) subjects, and the energy sector. We seek to inspire the next
generation and help develop the workforce of the future. Our five-year partnership with
Selby College in North Yorkshire aims to implement projects concerned with developing skills
in young people that are relevant to modern engineering and green skills. This includes our
first BECCS course.

We also work with the seven Selby Cluster Schools – ranging from primary to further education –
local to Drax Power Station. We deliver curriculum support and develop hands-on activities such
as electric car building, STEM events, careers fairs, and work experience. Our aim is to increase the
number of employer interactions over every young pupil’s academic life, encouraging engagement
throughout school and into early careers.

In the US, we work with several local schools and colleges. These include the University
of Louisiana at Monroe (working on a recycling programme) and Delta Community College
(employee training). We are also funding classroom grants in Demopolis, Alabama, as well as
in Monroe and West Baton Rouge, Louisiana.

In 2023, we plan to launch a new Drax Foundation, which will be an important way for Drax to give
back to the communities in which we operate. You can read more about this initiative on page 32.

We also believe our large-scale carbon removal and sustainable generation projects can create
thousands of jobs, both directly in the supply chain and in the wider economy. These projects
include BECCS at Drax Power Station and the expansion of Cruachan Power Station in Scotland.

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Government, political bodies and regulators

Key issues

Engagement activities

• Energy security
• Energy costs
• Tackling climate

change

• System stability and
flexible generation

• BECCS delivery

Principal Risks

• Climate change
• Biomass

acceptability
• Political and
regulatory

• Strategic

We engage with government bodies in the UK, EU, US and Canada on multiple topics including
energy security, decarbonisation, BECCS, and the need for system stability and flexible generation.
While Drax makes no political donations, it is important that we engage with politicians and their
parties, policymakers, and other stakeholders.

In the UK, we engage with political stakeholders at party conferences and through All-Party
Groups. We also engage proactively and reactively with political bodies, such as Parliamentary
Select Committees, over issues including biomass acceptability. In addition, we engage with
relevant Ministers and their teams ahead of significant political proceedings including fiscal events.

We also engage with policymakers around the world (including the EU, Canada and the US),
to better understand their plans for tackling climate change, and how sustainable biomass and our
plans for carbon removal can be an enabler to them in realising their own goals.

Developed in direct response to shareholder feedback, our political engagement policy is on our
website: www.drax.com/about-us/drax-political-engagement-policy/. You can read more about this
on page 160.

We engage with relevant teams at the UK regulator Ofgem, the Department for Business, Energy
and Industrial Strategy (BEIS), and National Grid. An example in 2022 was in considering making
available our coal units to operate under a winter contingency (see page 107). We emphasise the
growing need for stable markets and appropriate investment mechanisms to provide enough
secure, flexible and dispatchable generation and system support services to the grid. We also
engage with Energy UK and the Sustainable Biomass Programme to promote best practice and
progressive reform in policy, licences, and standards.

Customers and Suppliers

Key issues

Engagement activities

• Energy costs
• Ethical business

conduct
• Reducing

environmental
impact
• Long‑term

partnerships

Principal Risks

• Climate change
• Safety, health and
wellbeing, and
environment

• Biomass

acceptability

The cost of energy was a critical issue for our customers in 2022 and we implemented the UK
Government’s support package for businesses, the Energy Bill Relief Scheme (EBRS). We hosted a
dedicated phone line for customers requiring additional support with arranging payments tailored
to their needs. Where a Trustpilot review has a rating for us of two stars or lower, we assign one of
our Energy Relationship Specialists who engage with the customer to identify the reasons behind
the rating and try to rectify any issues. We also seek to ensure that such engagement involves the
creation of enduring solutions that can improve the service experience overall.

Our internal Operational Excellence team interacts directly with customers to gain feedback about
certain processes, to seek to ensure our solutions meet customer needs. Our large Industrial and
Commercial (I&C) customers, as well as the Third Party Intermediaries (TPIs) we work with
as partners, have dedicated account managers and service delivery managers.

Our relationships with suppliers are governed by contracts that include our minimum standards
including compliance with relevant regulatory and legal requirements, anti-bribery and corruption,
modern slavery and supplier code of conduct. These minimum standards are regularly reviewed by
our Procurement, Legal, and Business Ethics functions. Drax has also signed up to the Prompt
Payment Code, and monitors performance to both continue to improve payment performance
and maintain positive supplier relationships.

Engagement through our biomass supply chain is a key focus for the Group. We require our
suppliers to know from where they source and aim to identify, exclude, or mitigate sustainability
risks. Our annual satisfaction survey asks our biomass suppliers for their views on the sustainability
and compliance system we require them to use. You can read more about our biomass sourcing
in the Sustainable Development section on pages 36 to 74.

Drax Group plc Annual report and accounts 2022 29

Strategic report

Stakeholder engagement in action

Effective engagement helps us to
fulfil our purpose, deliver our strategy,
and create lasting value and positive
outcomes for stakeholders.

Through consultation
and engagement with
stakeholders, our
BECCS project at
Drax Power Station
achieved several
critical milestones
in 2022

Engaging stakeholders
in the development
of BECCS
As a key part of our long-term strategy,
we are developing options for BECCS.
We believe BECCS could offer significant
long-term value creation opportunities,
in addition to being a key part of enabling
not just Drax, but the UK and other
countries, to reduce carbon emissions.

In order for BECCS to progress, it is vital
that there is the right regulatory and
investment framework. Through
consultation and engagement with
stakeholders in 2022, our BECCS project
at Drax Power Station has achieved
several important milestones: the
submission of our Development Consent
Order (DCO) planning application; the
submission of a project bid to the UK
Government as part of the Carbon
Capture, Usage and Storage (CCUS)
Cluster Sequencing Process; and
continued progress on front-end
engineering design (FEED).

Ahead of submitting the DCO application,
we engaged with statutory and non-
statutory consultees on the proposals
for BECCS at Drax Power Station, such
as local Parish councillors, local planning
authorities, the Environment Agency and
the Health and Safety Executive. We also
agreed a plan for information-sharing and
engagement with affected communities.

We continue to engage with the
business community in the region
through trade unions, local businesses,
and business groups such as the
Confederation of British Industry (CBI),
the Chambers of Commerce, and Local
Enterprise Partnerships.

We also discussed policy development and
industry views through trade and member
associations such as the Carbon Capture
and Storage Association and Coalition for
Negative Emissions.

A key focus of BECCS engagement is the
relationship between Drax and its partners
in the East Coast Cluster. We met regularly
to share progress updates.

We also engaged with new and future
partners and suppliers that can support
the delivery of BECCS, for example:

• The National Farmers’ Union of England
and Wales – to explore opportunities to
scale up domestic perennial energy crop
production as a potential new feedstock
for BECCS

• British Steel – to identify opportunities
to locally source steel for the BECCS
project

• The BECCS supply chain – using online

webinars and in-person ‘meet the
engineer’ events in the Humber and
Teesside with our FEED partners,
Worley (each in-person event attracted
interest from around 300 businesses)

The UK Government is a critical
stakeholder for the BECCS project.
Throughout 2022, we met with teams in
BEIS, HM Treasury, the Department for
Environment, Food and Rural Affairs and
the Department for International Trade.

In 2023, we will continue building our
community and supply chain partnerships.
This will include engagement with
policy-makers as they refine the power
BECCS business model and market
frameworks for carbon removals.
We will also work with local and regional
stakeholders on the planning and
consenting aspects of the project.

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Engaging with experts
A key part of our engagement, and
governance around responsible sourcing
of biomass, is the Independent Advisory
Board (IAB).

This is a body of scientists, academics
and forestry experts who advise Drax
on sustainable biomass and its role in the
transition to more intermittent renewable
energy and to net zero.

The IAB provides independent scrutiny,
challenge, and advice. It makes
recommendations on how we can improve
various initiatives within our sustainability
strategy, including our responsible
sourcing of sustainable biomass.

You can read more about the IAB
on page 39.

Supporting colleagues
with the rising cost
of living
For many of our colleagues, the rising
cost of living is deeply worrying and
we continue to work hard to offer support
during this difficult time. Through
feedback from our MyVoice Forums,
colleague survey and the CEO’s weekly
Q&A, colleagues raised concerns about
their ability to pay their energy and food
bills. The Board and Executive Committee
monitored the situation in each of the
countries where we operate and discussed
what our approach might be to best
support colleagues.

Following these deliberations, the
Remuneration Committee and
management decided to bring forward
the 2023 pay review from 1 April 2023
to 1 January 2023. The aim was to support
colleagues by allowing them to benefit
from changes to pay earlier in the year –
specifically, during the winter period
when energy bills are higher – and provide
longer-term certainty. In addition, the
2023 pay review budget was significantly
higher than prior years, (with average
pay rises of 8% in the UK, US and Canada
and 3% in Japan, reflecting inflation
in each country).

With our external partners, we ran a
series of Wellbeing Fairs at sites across our
UK business, with the focus on mental,
financial and physical wellbeing. We also
offered virtual sessions with our new
financial wellbeing partner, Nudge.
These were available to all UK colleagues
and included guidance on how to navigate
the cost of living crisis.

Drax helped to provide
a “winter contingency”
to bolster the UK’s
energy security

Decision to extend coal
operations at request
of UK Government
In July 2022, Drax announced it had
agreed to delay the planned closure of its
two coal-fired units at the request of the
UK Government – a significant matter that
was considered at length by the Board of
Directors. This helped to bolster the UK’s
energy security by providing a “winter
contingency” service (October 2022 –
March 2023) to the UK power system.

The Board recognised that the decision
taken in 2019 to end coal generation
was informed by the Group’s purpose of
enabling a zero carbon, lower cost energy
future and the transition to a flexible,
renewable generation model. However,
in assessing the UK Government’s request,
the Board gave due regard to the impact
of any decision on a range of stakeholders
including the UK Government, National
Grid, shareholders, colleagues,
UK consumers more widely, and the
environment, at what was a challenging
time as a result of significant uncertainty
and volatility across global energy markets.

You can read more about the Board’s

consideration of stakeholders in
this decision within the Corporate
Governance Report on page 107.

Drax Group plc Annual report and accounts 2022 31

Strategic report

Stakeholder engagement continued

Drax Foundation
Drax is committed to being a global force
for good. In 2022, the Board approved
a proposal to set up a global corporate
giving model to support this vision.
In 2023, we aim to launch the Drax
Foundation, which will manage and
distribute a fund for community
investment and giving across the Group’s
core territories. Covering the UK, US and
Canada, the Foundation will be under the
governance of a new sub-committee
of the Board. The Foundation will enable
Drax to invest in larger-scale and longer-
term projects in each of our territories,
and to provide financial support and
sponsorship to local community projects
and charities. The Foundation will provide
a tangible link to the Group’s sustainability
strategy. All projects will require
an assessment to ensure they have the
potential to deliver at least one of the
following outcomes:

• Climate positive: Contributing
to tackling the climate crisis

• Nature positive: Contributing to creating
and maintaining thriving, sustainable
natural environments

• People positive: Helping those most
at risk in the transition to net zero to
find sustainable, meaningful work and
to support education

Engaging stakeholders
in the expansion of
Cruachan Power Station
During 2022, Drax engaged with the UK
Government, the Scottish Government,
environmental NGOs, and a range of other
stakeholders. The aim has been to help
unlock investment in new long-duration,
large-scale electricity storage (LLES)
projects such as the extension of
Cruachan Power Station.

These interactions have led to several
positive steps forward, including a grid
connection agreement with National Grid
from October 2030, and the submission
of the project’s Section 36 application
to gain development consent from the
Scottish Government.

As part of the Section 36 process, Drax
held several exhibitions about the project
to engage with, inform and hear the views
of the local community. These sessions
resulted in potential opportunities with
local businesses. One example is a quarry
that was interested in using the excavated
rock and spoil from the Cruachan
extension in the construction of new roads
and tracks for wind farms.

Following a Call for Evidence in which
Drax participated, the UK Government
committed to introduce a new financial
stabilisation mechanism by 2024. This
new policy framework will aim to de-risk
investment in new-build LLES to meet the
energy system’s needs while also providing
value for money for consumers.

During 2023, Drax will continue to work
with other LLES developers and operators
to engage with BEIS as it undertakes
detailed design work. This work will assess
the benefits and interactions of a
new framework within the wider
energy system.

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Engaging with Tѕˆ ideldel
Biomass in Canada
Six Tsilhqot’in Nations live in British
Columbia, managing nearly 6,000
square miles of land. Having lived there
for thousands of years, they strive
toward a balance between traditional
and modern uses for the land, to sustain
their communities and safeguard the
natural environment. Their forests
provide the resources for a modern
economy, especially products like
timber, pulp wood, and biomass.
Their understanding of the best ways
to support and protect the forests
represents important learning for
other users, including Drax.

“We’ve lived here for thousands
of years, and First Nations have to be
involved in forest management and
decision-making. It has an impact
on our communities, and we rely heavily
on forest industries for employment
and community wellness. We manage
resources in ways that protect them
and are meaningful to us culturally and
spiritually. Supplying Drax with forest
residues for biomass production is
an important part of what we do.”
Percy Guichon, Councillor, Tsˆideldel

Tsˆideldel Biomass was formed in 2018
to focus on biomass and hog fuel
recovery from logging operations
around Williams Lake. The company has
two main clients: Drax for the biomass
and Atlantic Power for the hog fuel.
Tsˆideldel Biomass has recovered close
to one million cubic metres of fibre
to date from forests destroyed by
pine beetle and fire.

Drax management has worked closely
with Tsˆideldel Biomass to build the
business-to-business relationship.
In June 2022, our Board of Directors
had the opportunity to tour the biomass
operations in the field and to attend a
reception afterwards. In October 2022,
Drax Power Station hosted a visit
by Tsˆideldel Biomass representatives.

We hope to continue building our
relationships with First Nations and
to learn from local communities. This is
a vital part of enabling a lasting legacy
of nature positive and climate positive
ways of working.

Find out more about this

on page 44

Drax Group plc Annual report and accounts 2022

Strategic report

Sustainable Development

Sustainability is integral
to our purpose and success

Yasuhisa Okamoto,
Managing Director,
Drax Asia Japan

Drax shares my
aspiration to expand
the industry in the right
sustainable and ethical
way, which offers
significant growth
potential, and that
excites me.

We want to help Japan
and other countries
across Asia in their
decarbonisation journey,
sharing our company’s
expertise of converting
a coal power plant
to biomass and
integrating BECCS.”

Climate positive

Nature positive

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Diane Nicholls,
Vice President of Sustainability
for North America

One of the most
important factors that
attracted me to the role
was Drax’s vision to be
a world leader in clean
energy, using forest
residues, while creating
BECCS to sequester
carbon emissions.

Drax’s commitment to
making a positive impact
on the climate, nature,
and people resonates
with my own values.
My aim is to advance
sustainability in the
natural environment
through continuous
improvement in
forest management.

It’s exciting to be part
of a company that’s
growing rapidly while
focusing on helping to
support the global needs
of people in a sustainable
way. It was a real
opportunity to further
my passion for
sustainability and be
a part of a company
that is working for the
greater good.”

Climate positive

Nature positive

Drax Group plc Annual report and accounts 2022 35

Strategic report

Sustainable Development continued

Sustainability
is at our core

At Drax, we believe
that achieving positive
outcomes for climate,
nature, and people
is key to delivering our
business strategy. We are
committed to creating
a business model where
financial performance,
value creation, and
sustainability outcomes
are aligned.

I joined Drax seven years
ago because I believe
we can make a difference.
Our purpose – to enable
a zero carbon, lower cost
energy future – has
informed our achievements,
sits at the heart of
everything we do and
underpins our commitment
to sustainability. These are
core values at Drax, and we
will continue to implement
them as we target our
stated ambition to be carbon
negative by 2030.

The world must act now to limit global warming
to 1.5°C. Bioenergy has a vital role to play not only
in generating the energy which powers our homes,
schools, and businesses, while also delivering secure,
dispatchable and renewable power, but also is
a key contributor to achieving our climate targets.

Will Gardiner, Chief Executive Officer

I have seen continued recognition and
support from global leaders and policy-
makers of the role that Drax can play
in helping to limit global warming to 1.5°
Celsius (C). That is underpinned by our
objective to be a global leader in carbon
removals, using our bioenergy with carbon
capture and storage (BECCS) technology
to help permanently remove carbon
dioxide (CO2) from the atmosphere.
We continue to develop options for
BECCS, which we believe could become
a world leading, UK-led, exportable
solution for large-scale carbon removals.
The project is well developed, the
technology is proven within the industry,
and an investment decision could be taken
in 2024, subject to the right investment
framework, with a first BECCS unit
operational in 2027 and a second in 2030.

Our ambitious plans are fundamentally
shaped around the global sustainability
agenda, whilst recognising our
responsibilities to the local areas,
communities, and stakeholders where
we operate. Our sustainability framework:
delivering positive outcomes for climate,
nature and people reflects this and
informs our decision-making across the
business. This starts with ensuring that
we use sustainable biomass that is
underpinned by robust Environmental,
Social and Governance (ESG) standards.

The world must act now to limit global
warming to 1.5°C. Bioenergy has a vital
role to play not only in generating the
energy which powers our homes, schools,
and businesses, while also delivering
secure, dispatchable and renewable
power, but also is a key contributor
to achieving our climate targets.

In this section of the report, we explain
how sustainability determines what
we do at Drax, how it applies to our
biomass sourcing and how we’re
progressing towards our ambition
of being carbon negative by 2030.

36 Drax Group plc Annual report and accounts 2022
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What’s inside

Introduction

Sustainability is integral to our purpose
and success.

Find out more
on page 38

Biomass Sourcing

Sustainably sourced biomass underpins
our purpose: to enable a zero carbon,
lower cost energy future.

Find out more
on page 40

Climate Positive

Our purpose means Drax is investing to play
a leading role in the UK’s journey to a net
zero economy.

Find out more
on page 47

Nature Positive

We have put an emphasis on working
in ways that respect, protect, and
where possible add benefits to the
natural environment.

Find out more
on page 63

People Positive

Enabling our people to achieve our strategy
is key to Drax achieving its ambitions.

Find out more
on page 66

ESG Data Supplement
Please see the Drax website for our ESG supplement
where you can find our ESG related disclosures

Drax Group plc Annual report and accounts 2022 37

BECCS done well
In 2022, Drax commissioned an
independent study by Forum for the
Future to convene a panel of experts
(the High Level Panel) to assess the
conditions for implementing BECCS
in a manner which will make a positive
contribution to climate change. The High
Level Panel and its chair, Jonathon Porritt,
published a report outlining their
30 conditions for BECCS done well.
The report has been published and can be
viewed on Forum for the Future’s website.

“With such high concentrations
of greenhouse gases already in the
atmosphere, the only sustainable way
of avoiding a cataclysmic outcome for
humankind will be to draw down billions of
tonnes of CO2 back out of the atmosphere.
Dealing with overshoot means Carbon
Dioxide Removals – with billions of tonnes
of removals and storage needed every
year by 2050.” – The High Level Panel
on BECCS done well, November 2022.

As a company with ambitions to be
a global leader in carbon removal
technology, we are excited about the
possibilities for BECCS. But Drax is about
more than power generation. Our business
model includes opportunities for the
forests and communities where
we operate, and for the role they will play
in addressing the climate crisis. Drax
welcomes constructive input and
challenge on BECCS, and we want
to continue working with stakeholders
to ensure it is done well. That means
delivering it to high standards, using strict
governance and forest monitoring to
ensure positive outcomes.

“BECCS will need to play a significant role
in the world of Negative Emissions
Technologies if we are to remain under
or close to that 1.5°C temperature increase
threshold.” – The High Level Panel
on BECCS done well, November 2022.

We have committed to formally respond
to the recommendations in the study
and we will work with our Independent
Advisory Board (IAB) to implement the
findings in our sourcing strategy.

Strategic report

Sustainable Development continued

Introduction

Drax Sustainable
Development Framework
By using sustainable biomass at its
generation facility in Yorkshire, Drax
continues to play a vital role in the UK’s
energy transition. Since announcing
our Sustainable Development Framework
in December 2021, we have made good
progress against our sustainability
outcomes – Climate Positive, Nature
Positive and People Positive. Our progress
has been underpinned by Group-wide
ESG systems which sets targets,
captures the required data, monitors
and reports on progress and supports
transparent disclosure.

Sustainability is integral to our purpose
and success
Our purpose is to enable a zero carbon,
lower cost energy future. We are
committed to a sustainability strategy
that identifies measurable and transparent
objectives that have been developed by
subject matter experts, scrutinised and
adopted by our Board, and embedded
within our wider business model. This
means we adopt an integrated and
sustainable business model which reflects
the views and needs of stakeholders.

Sustainable Development highlights
in 2022
• Continued embedding our Climate,

Nature and People Positive strategy
through our business

• Created our new Carbon Reduction Task
Force, designed to give oversight, track
our progress, and bring together all our
emissions reductions plans.

• Implemented our ESG dashboard –
allowing visibility of ESG metrics
through the business (see below)

• Since 2006, we have hired

186 apprentices in total and have held
a 91% retention rate of apprentices
completing the programme
(compared to a national average
of 57.5% in 2020/2021).

Sustainability governance
The Board approves the Group’s
sustainability strategy which forms
an integral part of Drax’s overall
strategic imperatives, and which together
enable the realisation of our purpose.
The CEO has overall responsibility
for the implementation of that strategy.
He regularly reports to the Board on
progress in the delivery of key initiatives
which form part of the Group’s
sustainability programme. The Group
Director of Sustainability leads the
implementation of the sustainability
programme at Drax, reporting to the
Group Director of Corporate Affairs, who
is a member of the Executive Committee.

In 2022, a key area of focus was on
establishing the ESG dashboard which
ensures clarity on critical objectives,
tracks the delivery and enables
appropriate challenge on actual
performance of the sustainability
programme against those objectives.
We have also worked on setting up
specific groups which will have a
contribution to make on aspects of our
sustainability agenda. For example, we set
up a new Carbon Reduction Taskforce
which commenced in late 2022. The
intention over 2023 is to further formalise
these groups by the creation of a new
Sustainability Council, chaired by our
Group Director of Sustainability, which
will undertake the review and challenge
on progress, issues and developments
in advance of reporting to the Executive
Committee and Board.

Sustainability priorities
We identify the sustainability priorities
that are material to our business and
important to our stakeholders,
as summarised in the Sustainable
Development Framework below. In 2022,
we commissioned a third-party to review
our sustainability priorities to build and
refine them. This work will be carried out
and completed in 2023.

Sustainable Development Framework and our sustainability priorities

Climate Positive

Nature Positive

People Positive

Biomass Sourcing

ESG

• Carbon emissions

• Environmental

• Employee turnover

• Forests and biomass

pollution and impact

• Biodiversity

• Climate risk and

opportunity

• Biomass supply
chain emissions

• Energy

consumption

acceptability

• Responsible
sourcing

• Communities local

to our sites

• Safety, health and

wellbeing

• Skills and green jobs

• Diversity and

inclusion

• Supply chain human
and labour rights

• Business ethics
and integrity

• Executive

remuneration

• Fair and responsible

products

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Highlight on:
IAB Chair, Sir John Beddington
“The Intergovernmental Panel on Climate Change (IPCC)
and the UK’s Climate Change Committee (CCC) recognise
that sustainably sourced biomass can play an important role
in meeting climate change targets. I decided to chair the
IAB because it’s vital that biomass is sourced sustainably
and takes the latest scientific thinking into account.

As the science evolves, our recommendations will aim
to ensure that the biomass used at Drax makes a positive
contribution to our climate and the environment.

Although the majority of our advisory board meetings have
occurred virtually, we intend to meet face to face more
frequently in future. In particular, to visit the sourcing areas
that Drax uses. I look forward to progressing our work
programme with Drax and delving deeper into the
company’s sustainability strategy.”

Independent Advisory Board (IAB)
The IAB was established in 2019. Their
primary role is to provide independent
challenge, insight and advice on key
aspects of the development and
implementation of our sustainability
strategy; provide scrutiny of our impacts
on nature and climate; review and assess
our sustainability-linked policies; and make
recommendations on how we can improve
our practices. Comprising scientists,
academics, and forestry experts, the IAB is
chaired by Professor Sir John Beddington,
former Chief Scientific Adviser to the
UK Government. Lord John Krebs,
former member of the Committee
of Climate Change, is the Vice Chair.
The IAB’s Terms of Reference and work
programme were updated in 2022
to reflect their explicit focus on science.

The IAB provides the Drax Sustainability
team, Executive Committee and
Board with:

• Feedback on our sustainability strategy
of Climate, Nature and People Positive
outcomes and biomass sustainability.
For example, in 2022 the IAB fed back
on the structure of our new scientific
evidence tracker and best practices
for inclusion of scientific literature;
• Advice on feedstock options, sourcing
decisions, and forest science including
forest carbon accounting;

• Advice on standards, verification,

and post-harvest surveys, ensuring
that the science behind these projects
is robust;

• Scientific advice on the role of biomass

in our climate change mitigation
activities and in supporting the
transition to a net zero energy system.

During 2022, the IAB met five times and
visited industrial and forestry sites in
British Columbia, Canada, to learn more
about Drax’s business in the province.

The recommendations from each meeting
are followed up by the Group Director
of Sustainability on an agreed timeline.
The IAB Chair and Vice Chair meet the
Drax Board, with the most recent meeting
being in September 2022. A summary of
the IAB’s activities and recommendations
is published on the Drax website every
six months.

Drax Group plc Annual report and accounts 2022 39

Strategic report

Sustainable Development continued

Biomass sourcing

Over the last two decades, Drax has
developed the critical knowledge
and capabilities in renewable
generation and the development
of a resilient global supply chain
for wood pellets of the right quality
that meet strict sustainability
standards. And now, in 2022, 99.8%
of our generation was derived from
biomass, hydro and pumped storage,
the balance being derived from
legacy coal generation in
January 2022.

Sustainable biomass is renewable
when biomass is sourced sustainably
because of the closed carbon cycle
which is shown in the diagram
opposite. This section provides
details on biomass sustainability.

The CO2 released from sustainable
biomass operates within what
is termed a biogenic carbon cycle.
This is part of the continuous
exchange of carbon between the
land and the atmosphere.

Conversely, fossil-derived carbon
is a one-way emission and all
burning of fossil fuels adds to the
accumulation of greenhouse gases
in the atmosphere.

Forest
sequestration
of carbon

CO2

Electricity supplied
to national grid

Replantation
of forest

Sustainably
managed forest

Biomass
used as fuel

Logs

Forestry
residues*

Sawmill

Sawmill
residues

Construction/
manufacturing

*includes low-grade roundwood

Pellet plant

Carbon captured,
transported and stored
by BECCS

Sustainably sourced biomass
underpins our purpose: to enable
a zero carbon, lower cost
energy future.
Drax has been working with biomass for
over 20 years. We began co-firing biomass
with coal in 2002 and completed our first
full conversion of a coal unit to biomass
in 2013.

As the world’s largest user of biomass for
energy, our Responsible Sourcing Policy
(Policy), published on the Drax website,
sets out the criteria by which we acquire
our biomass for use at Drax Power Station.
For us, this is biomass that will deliver
positive outcomes for climate, nature
and people. A report “Forest Research –
Carbon impacts of biomass consumed
in the EU” (available on our website)
by Forest Research – the UK’s principal
organisation for forestry and tree-related
science − identified sourcing practices that
maximise the positive carbon contribution
sustainable biomass can deliver.

Our sourcing choices are led by these
recommendations. The biomass used
at Drax Power Station complies with the
standards set out in law, regulations, and
our contract with the UK Government.

We are required to demonstrate,
and assure to a limited level ISAE3000
standard, that the biomass we use at Drax
Power Station is sourced against the UK’s
sustainability standards. The evolution and
implementation of our Policy is informed
by science and sets principles which go
beyond existing UK regulations.

Our Policy, published in 2019, applies
to the production of biomass by Drax
managed facilities in the US South and
biomass consumed at Drax Power Station,
reflecting our business at the time.
We recognise our duty to keep forests
thriving, to respect the many benefits
they bring as carbon sinks and areas
of recreation, as well as their critical role
in fostering biodiversity. We work with
our suppliers to ensure the biomass
we use contributes to the protection,
and where possible, the enhancement
of the natural environment.

Subsequent to our acquisition of the
Pinnacle pellet business in 2021, we own
and operate pellet production facilities in
the US and Canada. We also have a pellet
supply business where our customers
operate under different sustainability
standards to those for Drax Power Station.
In the time since acquisition, we have

challenged ourselves to implement
our Policy across our global operations,
reflecting the growth, development,
and evolving ambition of our business.

In 2022, as we have continued work to
increase the sustainability standards of
our new Canadian assets, the Group has:

• Supported the development of an

Alberta Sustainable Biomass Program
(SBP) regional risk assessment, through
collaboration with the Wood Pellet
Association of Canada. The regional
risk assessment process evaluates risk
against the SBP indicators which will
help us achieve higher quantities of
SBP-compliant fibre for our Alberta
and British Columbia (BC) operations.
• Announced our intention to build a new
pellet plant and port facility in Longview,
Washington, in the Pacific Northwest
region of the US. Our movement into
this new fibre basket will lead to detailed
SBP risk assessments of the fibre
sourcing area. Through this work
we are enabling a greater proportion
of SBP-compliant material.

• Developed more sophisticated systems
and analytics to understand the fibre
we source, which is helping to generate
higher amounts of SBP-compliant fibre.

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“ Biomass is unique amongst renewable technologies in
the wide array of applications in which it can be used as
a substitute for fossil-fuel based products and activities,
from power generation to hydrogen production and
even new forms of plastics. Along with its ability to
deliver negative emissions, this makes biomass one of
our most valuable tools for reaching net zero emissions.”

DISCLOSURE INSIGHT ACTION B

Drax has been awarded a rating of B
in CDP Forests 2022

UK Energy White Paper
(December 2020)

Drax Group sources of fibre

Low-grade
roundwood (t)

Arboricultural
residues (t)

Sawmill and other
wood industry
residues (t)

1,620,136
1,663,922
176,007
57,846
214
10,519
24,807
–
19
18,008

Branches
and tops (t)

245,146
273,828
664
–
–
22,429
–
–
–
–

Thinnings (t)

1,131,778
–
131
12,796
–
27,356
–
–
–
–

1,809,150
63,709
556,978
53,921
144,069
102,331
647
–
–
178

3,571,479

542,067

1,171,062

2,730,982

US
Canada
Latvia
Estonia
Brazil
Portugal
Belarus
UK
Russia
Other
European
Total

Agricultural
residues (t)

112,690
–
–
–
532
–
–
63,510
17,053
6,734

Waste
(t)

–
–
–
–
–
–
–
–
5,264
–

Country
total (t)

4,918,900
2,001,460
733,780
124,563
144,816
162,687
25,454
63,510
22,336
24,920

200,519

5,264

8,222,425

Pellet Production sources of Fibre

Sawmill and other
wood industry
residues (t)

878,417
1,405,962
2,284,379

Branches
and tops (t)

–
257,839
257,839

Thinnings (t)

586,317
–
586,317

US
Canada
Total

Low-grade
roundwood (t)

Arboricultural
residues (t)

Agricultural
residues (t)

Waste
(t)

443,731
38,938
482,669

–
–
–

Drax Power Station sources of fibre (material recieved at Drax Power Station)

Low-grade
roundwood (t)

Arboricultural
residues (t)

Agricultural
residues (t)

Sawmill and other
wood industry
residues (t)

1,465,295
581,782
176,007
57,846
214
10,519
24,807
–
19
18,008

Branches
and tops (t)

245,146
136,156
664
–
–
22,429
–
–
–
–

Thinnings (t)

1,018,727
–
131
12,796
–
27,356
–
–
–
–

1,730,220
41,641
556,978
53,921
144,069
102,331
647
–
–
178

US
Canada
Latvia
Estonia
Brazil
Portugal
Belarus
UK
Russia
Other
European
Total

Country
total (t)

1,908,465
1,702,740
3,611,205

Country
total (t)

4,572,079
759,579
733,780
124,563
144,816
162,687
25,454
63,510
22,336
24,920

–
–
–

Waste
(t)

–
–
–
–
–
–
–
–
5,264
–

112,690
–
–
–
532
–
–
63,510
17,053
6,734

–
–
–
–
–
52
–
–
–
–

2,334,498

404,395

1,059,011

2,629,984

200,519

5,264

6,633,722

Note: our 2022 data table shows a small volume of material from Russia and Belarus. This material was all delivered in January and February 2022. Following the start of the
conflict, we ceased all trading of Russian and Belarusian biomass.

Drax Group plc Annual report and accounts 2022 41

Strategic report

Sustainable Development continued

From forest to furnace: the controls and checks
from source to Drax Power Station

The UK Government outlines sustainability
criteria for organisations to qualify as a
generator of renewable energy. Biomass
must comply with the Land Criteria (which
for wood pellets, sets out a range of
measures for sustainable forest
management) and the Greenhouse Gas
(GHG) Criteria. The GHG Criteria is a limit
set out by the UK Government, which
ensures that the totality of emissions
involved in Drax’s biomass supply chain,
represents significant GHG reductions
compared to fossil fuels. The current GHG
criteria for UK biomass is to ensure supply
chain emissions do not exceed
200kgCO2e/MWh electricity generated.

We must report monthly to the UK
regulators, Low Carbon Contracts
Company Limited (LCCC) and Ofgem on
the amount of biomass used, the type of
material used, where it came from and the
GHG emissions from the supply chain.
We must also confirm if the biomass
complied with the Land Criteria. At the
end of every compliance year, we must
have an independent third-party
assurance to assess the accuracy of the
monthly reporting submitted through the
year. This third-party assurance is against
limited level ISAE3000 standards and is
completed for the regulators of the UK
subsidy schemes for biomass: Ofgem
and LCCC. In 2022, a limited assurance
covering the previous compliance period
highlighted no material misstatements
in our reporting.

For a company to demonstrate that it
meets all the sustainability requirements
of the Land Criteria, it can either use
a voluntary scheme (like FSC®, PEFC or
SBP – see box opposite for further details)
or carry out its own checks and audits.
Material delivered with a full FSC® or
PEFC claim comes from forests assessed
by an independent auditor, deemed to be
responsibly managed, and compliant with
UK sustainability requirements.

At Drax Power Station, to ensure we can
identify and track material through our
supply chain, we are certified against the
FSC®, SBP and PEFC chain of custody
requirements.

SBP-compliant material provides evidence
that it came from a sustainable source.
The SBP system accepts the assurance

of responsible materials provided by FSC®
or PEFC certification. Despite overlapping
requirements, FSC® or PEFC certification
does not cover all the criteria of SBP
certification – and vice versa.

At Drax Power Station, 97% of the woody
biomass used in 2022 was SBP-compliant,
which evidences compliance with the
Land Criteria. The remaining 3% woody
biomass and the non-woody biomass
we use is assessed to be compliant with
the UK Land Criteria through our own
programme of checks and audits.

To qualify for SBP-compliant status, all the
pellet mills we source from need to trace
the material they purchase back to the
point of harvest. Also, they must be able
to test if the material meets sustainability
requirements. This can be done through
the provision of FSC® or PEFC
certification on the material, or through
an additional programme of checks and
controls. Drax purchases sawmill residues
(chips and sawdust) and low-grade
material from managed forests. For
sawmill residues, checks must be in place
to ensure that the sawmill’s sourcing is
in line with SBP requirements. All checks
and controls are then assessed as part
of the SBP audit at the pellet plant.
The SBP standard stipulates for audits
to be conducted on site. As a consequence
of COVID-19 this stipulation was relaxed,
as a result of which in the period of
2021/2022 some audits were conducted
remotely. The ability to conduct remote
audits ceased with effect from
31 December 2022. The auditors also
select a sample of forest sites for audit,
to ensure the controls are effective and
processes are being followed. SBP audit
reports are published annually on their
website for all certified pellet plants.

The contracts for material received at
Drax Power Station require that all
material must comply with Drax’s
sustainability requirements. We maintain
ongoing dialogue with all our biomass
suppliers and operate a programme of
supplier engagement to ensure
compliance.

We also commission additional research
on the areas from which we source in
order to further understand the impact
in these locations. See more on page 45.

Drax Group plc Annual report and accounts 2022

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Forest Stewardship Council
(FSC®)
Founded in 1993, this international
non-governmental organisation
promotes responsible management
of the world’s forests. Its certification
system covers more than 200 million
hectares of forest. (FSC® C119787).

Programme for the
Endorsement of Forest
Certifications (PEFC)
Founded in 1999, this global alliance
of national forest certification
schemes is an independent, non-profit,
non-governmental organisation that
promotes sustainable forest
management through independent
third-party certification.
(PEFC/16-37-1769).

Sustainable Biomass Program
(SBP)
SBP is a certification system designed
for woody biomass used in industrial
energy production. Originally created
by biomass generators, SBP has
evolved and has had a multi-
stakeholder governance structure
since 2019.

Biomass feedstock sources
at Drax

Fibre sources (%)

43
Sawmill residues
7
Branches, tops & bark
14
Thinnings
Low-grade roundwood 33
2
Agricultural residues

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We remain committed to adapting and
improving our sourcing practices in line
with evolving science and our learnings
from engagement with stakeholders.

As a minimum, we assess all fibre suppliers
to our pellet mills under PEFC’s due
diligence review process. This ensures
that all fibre sources are claimed as PEFC
controlled sources. All our pellet mills are
subject to an annual SBP audit, which
assesses their sourcing and management
systems against the sustainability
requirements of the SBP Standards.
In 2022, 97% of the biomass received
at Drax Power Station was certified as
SBP-compliant, with the remaining 3%
assessed to be compliant by our own
controls and verification. Not all the wood
pellets produced at Drax pellet mills in
North America are entitled to carry an
SBP-compliant claim, however all pellets
comply with the requirements of the
customer to whom they are sold.

Biomass production and trading
Following the acquisition of Pinnacle in
April 2021, which expanded our US pellet
operations and introduced new pellet
production facilities in Canada, we
acquired a trading portfolio with
customers to whom we supply biomass.
These customers operate under different
sustainability requirements to the UK
regulators and Drax Power Station.

In the last two years, we have worked
to further enhance our understanding
of sourcing biomass from British Columbia
and Alberta. Recognising the significant
differences to the commercially managed
forests in the US, we have facilitated a visit
to our Canadian operations by the IAB,
which made a number of recommendations
(these can be viewed on our website),
including improving the availability of
evidence around our impact on climate,
nature and people, and developing
region-specific requirements that
complement our global principles.

Highlight on:
Active forest management:
thinning
Thinning removes some trees from a
forest stand to improve the health and
vigour of those remaining. Thinning
operations target small, malformed
or diseased trees for removal, allowing
larger healthier trees to reach maturity
sooner. Thinning also reduces the risk
of pest infestation and wildfire while
speeding the development of a more
mature forest with increased plant
diversity in the understory (the layer
of trees and shrubs between the forest
floor and its canopy).

In the US South, the periodic thinning
of a forest helps improve the size and
quality of sawlogs when the trees
reach maturity, the economic value of
the timber produced and the carbon
absorbed and stored, as well as forest
health and biodiversity. In many cases,
if forests were not thinned, the revenue
from sawlogs would be reduced
and landowners may consider other
uses for their land, such as agricultural
crops and livestock farming. The
management of forestland to produce
sawlogs ensures forests are growing
vigorously, absorbing carbon, and
forests remain a carbon sink.

Fibre sources: thinning (%)
Thinning
Other fibre

14%
86%

Thinning is the process of
periodically removing smaller,
unhealthy, or malformed trees to
reduce the density of working forests.

Less competition for sunlight and
nutrients means healthy trees
grow bigger more quickly.

Younger trees in forests that have been
thinned are larger than older trees
in forests that haven’t.

From a forest that has
been thinned twice

21 years old

12.5” diameter

From a forest that has
never been thinned

21 years old

7.5” diameter

Drax Group plc Annual report and accounts 2022 43

Strategic report

Sustainable Development
continued

Helping to ensure British
Columbia’s forests offer
a sustainable source of
fibre takes collaboration
and careful management
As a business operating in the Canadian
forest industry, predominantly in British
Columbia (BC) and Alberta, we strive
to work with local, provincial and national
governments, communities, and First
Nations. This will help to ensure the
forests of BC and Alberta are sustainably
managed, more resilient against the
risks of pests and fire and preserved
for future generations.

Canada’s forests are some of the most
resilient and sustainably managed in the
world. They are subject to environmental
regulation, careful management and
third-party certification. BC and Alberta
have vast forest resources and these
forests are highly regulated by the
provincial government to meet a series
of conservation, environmental, and
social objectives. Forest policies in
Canada centre on the concept of
sustainable forest management with the
underlying goal of achieving a balance
between the demands on forests for
products and benefits, and the
maintenance of forest health and diversity.
The governments in BC and Alberta set
the harvesting rules and annual harvesting
rates for these forests.

Drax sources its biomass from well-
established forestry markets mainly
in the US and Canada as well as Europe.
The main output from these markets
is sawlogs, which are processed for use
in construction and manufacturing, such
as house building. When used in this way,
these materials represent a source
of long-term carbon storage and when
the forest regenerates or is replanted
these growing trees absorb carbon
from the atmosphere.

In Canada, harvesting is carried out under
regulated schemes often referred to as
licences or tenures. Companies taking
the higher value sawlogs are the principal
industries for Canadian lumber
and primarily hold harvesting rights.
The remaining harvested material which
is a by-product of the principal industries
referred to above, and which previously
had limited other markets, can be used
to manufacture sustainably produced
wood pellets. The licence or tenure holder
manages the forest, ensuring that soil

Protecting forests from pests and fire
In three seasons between 2017
and 2020, BC saw catastrophic
wildfires. Factors like climate change
and storms are seen as contributing to
the increased number of fires in the
province. The intensity of the fires has
been exacerbated by naturally
generated debris left on forest floors,
from relatively recent infestations from
mountain pine beetles and other
insects, or diseases affecting
forest health.

To protect the forests from fires,
pests and diseases, it is important
to open them up through managed
removals that create more space and
less dense stands of trees and natural
debris. It is also crucial to reduce what
is left lying on the forest floor after
forestry operations. This helps to create
an eco-system which encourages
biodiversity and soil health, and which
enables flourishing habitat for flora and
fauna. These sustainable management
practices support the resilience of the
forest, and the biomass collected from
such activities can be used by
businesses such as Drax for its
sustainable power generation.

and water are protected, and harvested
trees are replaced by ecologically
appropriate seedlings. This work is done
by forest professionals and is regulated
by provincial regulations.

The wood pellet industry also supports
the timber industry by utilising the
sawdust and shavings which are a
by-product from sawmills (and which
represents almost 80% of our total
volume into Drax Canada pellet mills)
and the residues in the forest, such
as undergrowth, branches and logs that
are too diseased, twisted, or otherwise
unsuitable for timber production.

Partnerships
Drax operates eight pellet mills across BC
and two in neighbouring Alberta, which
receive by-products from the lumber
industry. We partner with companies that
operate sawmills and have forest tenures
that allow them to harvest certain forest
areas. We obtain sawmill residues from
these partners. The BC and Alberta
governments identify the forest areas able
to produce solid wood products, which
lock in carbon for years. We work with a
range of third-parties, including large
commercial corporations and smaller
community-based groups in protecting
the land from which the wood and
associated by-products are produced.
Some of these partners include
First Nations which have a deep
association and understanding of the land
and forests. For example, we work with
Tsˆideldel Biomass around the Williams
Lake area (you can read more about this
on page 33) and in 2023, we will be looking
to increase our partnerships with First
Nations within our operating areas.

Drax Group plc Annual report and accounts 2022

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Catchment Area Analysis
Drax commissions independent Catchment
Area Analyses (CAAs) in the regions from
which we source. They test the forest
carbon impact of our biomass sourcing, and
we are committed to continuously improve
the methodology of these studies as the
science develops. Our CAAs are published
on our website, with details of the
independent body completing the work,
the methodology used and their findings.

Completion of our CAAs is part of a rolling
programme, and to date we have covered
58% of our sourcing (based on
consumption at Drax Power Station in
2022). Through our rolling programme, we
aim to complete the balance during 2023;
activity which has been encouraged
through both recommendations from the
IAB and the Forum for the Future report,
referenced on page 37.

As part of this work, we ask local experts to
test if demand for wood pellets is causing
the following issues, and to provide the
evidence behind their conclusions:

however fuelwood price increases were
less dramatic, suggesting that the price
increase was not linked to the introduction
of the biomass industry.

• Deforestation and degradation
• Changes in forest management practice
• Unexpected/abnormal increase

in wood prices

• Reduction in growing stock
• Reduction in sequestration rate of carbon
• Increase in harvesting levels above the

sustainable yield capacity

All our CAA reports are published on our
website where you can find full details.
Where findings are inconclusive or
indicate an impact, we investigate further.

For example, in Estonia, the researchers
found a slight increase in wood prices and
a slight increase in harvesting levels above
the sustainable yield capacity. In 2017-
2018, prices of all roundwood assortments
(sawlog, pulpwood, fuelwood) increased
notably, especially for exported pulpwood,

The data for Estonia showed that there
were uncharacteristically low levels
of harvesting between 2004 and 2011.
The level of harvesting was then increased
for the period 2011 to 2020. In 2018,
harvesting was at the maximum
sustainable level (the level which is set
by the Estonian Government) due to
increased sawmill capacity, high demand
for pulpwood from Finland and Sweden,
and improved demand for energy wood.
The researchers described this as a
temporary peak which had already slowed.
We will continue to monitor trends in this
area. SBP certification also provides helpful
data on these trends, ensuring that our
suppliers can demonstrate that feedstock
harvesting does not exceed the long-term
production capacity of the forest.

% of Drax
supply in
2022

Deforestation
and degradation

Changes
in management
practice

Unexpected/
abnormal increase
in wood prices

Reduction in
growing stock

Reduction
in sequestration
rate of carbon

Increase in harvesting
levels above the
sustainable yield capacity

Alabama Cluster
Amite BioEnergy
Burns Lake and
Houston
Chesapeake
Enviva Cottondale
Estonia

Georgia Mill
Cluster
LaSalle
Latvia
Morehouse

4
6
3

12
2
2

7
10
6

No
No
No

Inconclusive
No/Inconclusive
No

No
No
No No/Inconclusive
No
No

No
No
No

No/Inconclusive No/Inconclusive
Inconclusive
Slight Increase

Inconclusive
Yes/Inconclusive

No No/Inconclusive

No
No
No

No
No
Ambivalent
impact
No No/Inconclusive

No
No
No

No
No
No/inconclusive

No
No
Slight increasing
impact
No

No
Inconclusive
No

Highlight on:
Clear-cutting
Clear-cutting is an important forest regeneration technique that supports
sustainable forest management. It happens when most (or all) trees in an area are
harvested simultaneously. It is a well-established forestry practice in many regions,
including the UK, Europe and North America. Clear-cuts typically provide a range
of forest products, with timber suitable for sawlogs used in the construction
industries. Among this, there is usually some low-grade roundwood and forest
residues suitable to make pellets.

The practice of clear-cutting is informed by science-based principles. It can be
used to mimic wildfire and other forest disturbance in a planned and controlled
manner. Clear-cutting is helpful for tree species that require full sunlight to
regenerate and grow; it helps prevent forest degradation through competition
which results in the more vigorous and shade-tolerant trees dominating.
Clear-cutting creates open conditions that allow understory plants to get
more sunlight, paving the way for an increase in pollinators and stronger forest
regrowth. Over time, clear-cut areas regrow by replanting or natural regeneration,
taking their place in a landscape mosaic of multiple forest stands at different
stages of development. This continues the natural forest cycle.

Drax Group plc Annual report and accounts 2022 45

Strategic report

Sustainable Development continued

For biomass to be considered low carbon,
we must ensure that we account for the
emissions created through the full supply
chain (from forest, through all modes
of transport including shipping,
to Drax Power Station). We conduct
this calculation for all the biomass
delivered to Drax Power Station and
ensure that when the emissions are
totalled (including that associated with
all transit including shipping), they still
constitute a significant saving compared
to fossil fuels. This process is defined by,
and required by, UK regulations.
See more on this in our climate section,
on page 48.

6. Does burning biomass produce more
emissions than burning coal?

A. Combustion of biomass produces
similar levels of CO2 to coal. However,
unlike coal, sustainable biomass does
not add additional CO2 to the atmosphere.
When sourced sustainably, biomass is in
a constant cycle of renewal and carbon
absorption across a landscape, ensuring
that at least as much carbon is removed
from the atmosphere to the amount
emitted at the stack. Conversely, burning
coal releases carbon that has been locked
up for millions of years, increasing the
amount of new carbon accumulated
in the atmosphere.

Highlight on:
Frequently Asked Questions
1. What is biomass?

A. Biomass is organic matter (typically
agricultural by-products and residues,
woody waste products, and crops
and microbes).

2. How is burning wood sustainable?

A. Biomass comes from organic, living
matter that is in a cycle of growth and
renewal, absorbing CO2 from the
atmosphere in the growth process.
In the case of woody biomass, trees are
replanted by the work of foresters and
land managers who care for the land,
to replace those which are removed
within a regulated process that enables
the forests to be sustained. When
biomass is used to generate heat and/or
electricity, CO2 is released – and when
new trees are planted as part of
sustainable forest management,
the new-growth trees absorb CO2
from the atmosphere.

3. What is a sustainably managed forest
and how is it sustainable if you are
chopping down trees?

A. Sustainable forest management is
defined in a number of different ways.
At Drax, we follow the definition laid out
in the UK Renewables Obligation 2015,
which covers requirements including
maintaining biodiversity, maintaining the
health and vitality of ecosystems and
maintaining the productivity of the area.
These requirements set the standard that
forest health is maintained for the long
term, and even though forests may be
harvested, trees are replanted in the right
way, maintaining the long-term carbon
stock of the forest.

Forest owners get the best value from
growing, harvesting and selling a range
of products. The harvesting takes place for
multiple purposes, and the sawlogs provide
the bulk of the income for forest owners.
To track how the forests are growing and
what they are being used for, we commission
Catchment Area Analyses on targeted areas
from which we source (see page 45). This
evidence demonstrates that we are adhering
to our responsible sourcing policy for the
woody biomass used at Drax Power Station,
by not causing deforestation, forest decline
or negative impacts on carbon. Information
about the health of these forests is available
on our website.

4. What is sustainable biomass?

A. For biomass to be sustainable, it must
first be sourced from forests which comply
with sustainable forest management
standards. Sustainable biomass uses
residues from the wider forest industry
where forest management and felling is used
primarily for producing timber used for
construction and furniture manufacture.
The material we use to make pellets takes
the by-products which are created from
these industries, including sawmill and forest
residues, and low-grade roundwood, left over
when timber is processed, and which has
little other use or market value.

5. How can it be sustainable if you are
shipping the biomass from across the world?

A. In order to source low quality woody
material, which has limited other uses,
we source from regions across the world that
have large areas of forestry and active forest
industries, leading to a higher availability
of residue material – either sawmill residues
(created as a by-product of sawmilling), or
forest residues (low-grade material created
as a by-product of harvesting or forest
management operations).

Highlight on:
Bioenergy creates an opportunity

“If left to nature, much of British Columbia’s forests
would experience frequent, low-grade fires to maintain
the natural ecosystem. These natural “maintenance”
fires are being suppressed, resulting in unnaturally dense
forests, with high surface fuel loads – inviting this surge
in catastrophic wildfires with significant emissions”

Source: ‘Adding value to waste’, The ForestLink (Note: Shauna Matkovich from
The ForestLink sits on our IAB)

Drax Group plc Annual report and accounts 2022

Climate Positive

Our purpose – to enable a zero carbon, lower
cost energy future – means Drax is investing
to play a leading role in the UK’s journey to a
net zero economy. In December 2019, at COP25
in Madrid, we set an ambition to be carbon
negative by 2030.

Drax is continuing to develop options
for BECCS projects both in and outside
of the UK. See more on our plans for
BECCS on page 12. Delivering these
emission reductions and tackling climate
change is at the heart of our purpose,
and our strategic objectives are aligned
to global renewable energy and
decarbonisation agendas.

What is our approach?
A purpose, strategy, and ambition that
places climate change at the heart
of what we do
Our purpose informs the three pillars
of our strategy:

1. To be a global leader in carbon removals:
By pioneering BECCS at Drax Power
Station and developing BECCS
opportunities globally.

2. To be a global leader in sustainable
biomass pellets: A lower cost biomass
supply chain with the potential for carbon
negative generation.

3. To be a UK leader in dispatchable,
renewable power: A portfolio of
dispatchable flexible assets to support
the energy system’s growing use
of intermittent renewable energy.

Our Climate Policy, updated in 2022,
outlines our approach and follows
the TCFD framework of disclosing
Governance, Strategy, Risk Management,
and Metrics & Targets. Read our Climate
Policy in full on our website, under
Compliance and Policies.

Global context
Introduction by Dr Alan Knight –
Group Director of Sustainability

In October 2022, following a review
of emissions reduction targets and
progress to date, the UN warned there
was no credible pathway to keep global
temperature rise under 1.5°C. Society,
governments, businesses and all of us
must act now to address the climate crisis
and limit global warming to this target:
1.5°C above pre-industrial levels.

Playing our part in mitigating climate
change by staying below an increase
of 1.5°C is at the heart of our business
at Drax. We have transformed from
being a company using coal to one
predominantly using sustainable biomass
and hydropower. We not only generate
renewable energy, we also have ambitions
to become carbon negative using BECCS.
As the Group Director of Sustainability,
I’m excited and proud of this ambition.

Research by the Intergovernmental Panel
on Climate Change (IPCC), the world’s
leading authority on climate science,
states that carbon dioxide removals (CDR)
methods, including BECCS, are needed
to mitigate residual emissions and keep
the world on a pathway to limit warming
to 1.5°C.

The illustrative mitigation pathways
assessed in the IPCC’s 2022 report use
significant volumes of CDRs, including
BECCS, as a key element for mitigating
climate change. IPCC modelling shows
that between 0.5 and 9.5 billion tonnes
of CDRs, via BECCS, could be required
annually by 2050 to reach global net zero
targets. The UN-backed Principles for
Responsible Investment estimate that
the CDR market could be worth over
a trillion dollars by 2050.

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We are committed to the
management and disclosure
of climate change risks and
opportunities in line with the
recommendations of the Task
Force on Climate-Related
Financial Disclosures (TCFD).

See our TCFD disclosure

on page 52

Our targets

Our emission reduction targets for
2030 (using a baseline of 2020 data):
awaiting validation by the Science
Based Targets Initiative

75%

in Scope 1 and 2 emissions from
electricity generation by 2030

42%

in non-generation Scope 1 and 2
emissions by 2030

42%

in Scope 3 emissions by 2030

Find out more
on page 62

Power generation mix in 2022
(% total output)

Biomass
Hydro
Coal
Thermal

97.8
2.0
0.2
0

Drax Group plc Annual report and accounts 2022 47

Strategic report

Sustainable Development continued
Climate Positive

Climate positive by being carbon negative
At Drax, we have set an ambition to be
carbon negative by 2030 by removing
more carbon from the atmosphere than
we produce (Scope 1 and 2), helping the
UK achieve its net zero target. By then,
BECCS at Drax could deliver up to 8Mt of
CO2 removals a year. This would deliver
over 15% of the carbon removals the UK
requires to achieve net zero by 2050,
according to figures provided by the CCC
in their 2019 Net Zero Report.

We are also developing opportunities
for global BECCS, principally in North
America, where we are targeting 4 Mt of
carbon removals by 2030. See more about
our Global BECCS plans on page 12.

Since 2012, the Group’s actions
have reduced our generation
scope 1 and 2 carbon emissions
by c.99%.

We aim to achieve our ambition of being
carbon negative by 2030, by reducing our
emissions as far as possible Group-wide,
while using removals delivered through
BECCS to neutralise our remaining
emissions. In doing so, we will also support
the UK Government and other businesses
to achieve net zero carbon emissions.
We are committed to the Science Based
Targets initiative (SBTi) and have submitted
our targets for validation. To align with
our SBTi targets, Drax set a new baseline
for our carbon emissions data, to ensure
comparability to our 2020 base year.

To make sure our activities continue in line
with science, our decarbonisation strategy
aligns with IPCC scenarios. These limit
global warming to a maximum of 1.5°C
above pre-industrial levels, with low
or no overshoot. They also consider
the necessary role of bioenergy and
BECCS in delivering credible
decarbonisation pathways.

Please see more details on our climate
related work in our TCFD section, starting
on page 52, including metrics and targets
on page 60.

Forest carbon
While biomass is zero rated under
IPCC rules (see diagram on page 49 for
an explanation), Drax has closely followed
the science which underpins this position.
We recognise that biomass is only low
carbon (or better) if it meets certain
sustainability criteria and we have
developed our Responsible Sourcing
Policy on this premise. We have followed
the science of forest carbon for many
years and reviewed multiple approaches of
modelling forest carbon. We have also
commissioned our own studies and
assessed the potential for the use of
remote sensing (using satellites to scan
forest areas) to provide data on forest
carbon.

In 2022, we contributed to the
development of the Greenhouse Gas
(GHG) Protocol “Land Sector and
Removals Guidance” led by the World
Resources Institute (WRI). This included
involvement in the discussions and the
drafting work surrounding the CO2
removals accounting framework, land

Group emissions intensity (tCO2e/GWh)

900

750

600

450

300

150

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

Group emissions intensity

Drax Group plc Annual report and accounts 2022

management removals criteria, and
product storage accounting. We began
piloting the guidance at the end of 2022,
with a view to completing a full forest
carbon inventory of our biomass once
the final guidance is published in 2023.
Being involved with the GHG Protocol’s
project and piloting is key to our forest
carbon work. We believe we should not
only rely on biomass certification schemes
and our own due diligence when sourcing
biomass – we should also consider
quantified impacts on forest carbon.

We have also continued our investment in
research addressing causality with a team
of academic researchers in the US South.
This research includes assessing what
forest catchment areas may look like
if we did not source from them, to better
understand the impact that biomass
sourcing can have. The research uses
economic modelling to establish
relationships between the biomass
demand we create, and landowner
responses to meet that demand, in the
US South. We commit to continuing
to stay close to the science and how it
can inform best practice in safeguarding
forests in this area.

Energy and carbon reduction
initiatives
At Drax, we are continuously monitoring
energy efficiency and saving measures
to reduce our carbon footprint. One of the
initiatives we started in 2022 was at our
Cruachan Pumped Hydro station
in Scotland.

At Cruachan Power Station, Unit 3 is
contracted to the National Grid ESO to
provide system inertia (stability) services,
such that it runs 24 hours a day,
synchronised to the grid. In doing so,
the unit enables more intermittent
forms of zero carbon non-synchronous
generation, such as wind, onto the
electricity transmission system. To remain
synchronised, the unit consumes around
2MWh of power. It is currently contracted
to provide this service until 2026.

In 2022, an energy saving project was
initiated to explore ways to reduce the
power consumption in this operating
mode. Studies are focused on the
generator windage losses to reduce heat
losses and therefore power consumption
to cool the generator and stator.
This project is due to present its findings
in 2023 and any changes to reduce power
consumption will be monitored
during 2023.

Other examples of energy and carbon
reduction initiatives we have kickstarted
in 2022 include:

• within our air conditioning units at

Drax Power Station, we are using more
environmentally friendly gas, allowing
better efficiency

• upgrading to more energy efficient

pumps for the Heating, Ventilation, and
Air Conditioning at Drax Power Station

• signing a Memorandum of

Understanding with Japanese shipping
company MOL Drybulk to reduce
emissions associated with shipping
biomass by deploying technologies such
as wind assistance from sails on vessels.

In 2021, we completed the third in a
series of three high-pressure turbine
upgrades on biomass units 1-3 at
Drax Power Station.

Biomass supply chain emissions
Biomass can only be considered a low
carbon, renewable energy solution when
certain evidence exists. The evidence
must show that the savings of GHG
emissions are delivered on a lifecycle basis,
compared to alternatives such as fossil
fuel generation. Therefore, we collect fuel
and energy data for each step within the
supply chain. This enables us to calculate
lifecycle GHG emissions for our biomass
and demonstrate compliance with
regulatory requirements.

The UK Government has set a limit on
biomass supply chain GHG emissions,
which is currently 200 kgCO2e/MWh of
electricity. Generators must meet this limit
to be eligible for support under the
Renewables Obligation and Contract for
Difference schemes. In 2022, our average
biomass supply chain GHG emissions
amounted to 96 kgCO2e/MWh
of electricity.

In 2020, we launched our Biomass Carbon
Calculator, a GHG lifecycle emission tool
designed to improve the accuracy and
transparency of reporting emissions for
wood pellet supply chains. It accounts
for material sources of GHG emissions,
including categories absent from other
UK reporting tools. These categories
include methane and nitrous oxide
emissions arising from fuel combustion.
The calculator has been externally verified
against UK and EU regulations, and the
calculator and the verification statement
are available on our website, under
Sustainability, Sustainable Bioenergy.

We are further investigating
decarbonisation pathways for our biomass
supply chains to ensure emissions are
reduced at a rate consistent with limiting
global warming to 1.5°C above
pre-industrial levels.

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Biomass carbon accounting:

Biomass emissions are counted in the Forestry and Other Land Use
(AFOLU) category.

IPCC guidance calculates all biogenic carbon emissions and removals from
changes in land-based carbon stocks (like crops, soil and forests) in this way.

It helps to ensure that lands are managed sustainably to mitigate against climate
change and meet Paris agreement goals.

Because biomass is accounted for in the land use sector, the IPCC rates
CO2 emissions from biomass as zero in the energy sector.

CH4 ,N20 and other emissions from biomass are included in the energy sector.

Drax Power Station biomass supply chain GHG emissions in 2022 (%)

Average biomass supply
chain GHG emissions

Unit

kgCO2e/MWh

2022

96*

2021

100

2020

109

2019

124

2018

131

2017

130

37%

33%

Processing
at origin

Feedstock
transport

Drying

Pelleting

Transport
to port

Shipping

Rail to Drax Combustion
CH4 & N2O
emissions

Note:
Includes the biomass supply chain associated with both Drax’s direct operations (Pellet Production business)
and third parties. This is an estimate based on the average carbon footprint of pellets received at Drax Power
Station for each stage in the biomass supply chain.
*Limited external assurance by Bureau Veritas using the assurance standard ISAE 3000.
For assurance statement see the Drax website, under Sustainability, Our Approach.

Drax Group plc Annual report and accounts 2022 49

Strategic report

Sustainable Development continued
Climate Positive

• Air emissions tests conducted by Drax
subsidiaries Morehouse BioEnergy LLC
(MBE) and LaSalle BioEnergy LLC (LBE)
in 2018 and 2019, respectively,
demonstrated that volatile organic
compounds (VOCs) from certain
sources at the facilities were higher
than indicated by previous tests and
exceeded the VOC emission limits in
the applicable air permits. MBE and LBE
reported the test results to the Louisiana
Department for Environmental Quality
(LDEQ). Both MBE and LBE introduced
technology at the plants to improve
emissions in accordance with schedules
of compliance approved by LDEQ.
In August 2020, the construction and
start-up of a regenerative catalytic
oxidizer (RCO) was completed at the
MBE facility. In February 2021, the
construction and start-up of an RCO
was completed at the LBE facility.
These air permit exceedances and other
alleged violations were the subject
of various enforcement actions brought
by LDEQ against MBE and LBE. In 2022,
MBE and LBE finalized settlement
agreements with LDEQ relating to these
air permit exceedances and other
alleged violations, and each entity paid
$1.6 million in settlement to LDEQ.
There are no pending enforcement
actions against MBE or LBE related
to the past air permit exceedances.
As stated, MBE and LBE have
completed the installation of the new
RCOs at each facility to reduce
emissions and continue to monitor
for any potential non-compliances.

Environmental management
Approach and governance
for environment
Our Group-wide Environment Policy,
which can be found on our website,
outlines our ongoing commitment to
manage, monitor and reduce the
environmental impacts caused by our
business through continual improvement
of our operations. It also sets our
commitments to minimising the adverse
impacts of our operations on biodiversity.
Each month, we report internally on
environmental incidents and near misses,
and the Board receives regular updates as
part of the CEO report. We respond to, and
track actions taken from, substantiated
environmental complaints made in relation
to our operations. We also investigate
environmental incidents in relation to our
operations (e.g., waste spillage or near-
miss contamination event) to establish
root causes and learn the appropriate
lessons, which we then share across
the business.

Environmental Management Systems
During 2022, the environmental
management of our Generation assets
was certified to ISO 14001:2015 and these
assets continue to be subject to regular
external verification.

Environmental compliance
Drax recognises the importance of
establishing open and direct partnership
with the local environment agencies in the
areas in which we operate. We provide
further information on environmental
compliance matters below.

• At Daldowie, we continue to identify

and mitigate potential sources of odour.
We have completed work to enclose the
skips which store the waste product
processed at site and signed a contract
to construct a new 50-metre chimney
stack (due for completion in 2023). We
continue our dialogue with the Scottish
Environment Protection Agency (SEPA),
keeping them informed about our
actions. In 2022 no substantiated
complaints about odour were received.

Drax Group plc Annual report and accounts 2022

During 2022,
the environmental
management of our
Generation assets
was certified to
ISO 14001:2015

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Environmental management

Emissions to air
Nitrogen oxides – power generation
Sulphur dioxide – power generation
Particulates – power generation
Nitrogen oxides – pellet production
VOCs – pellet production
Particulates – pellet production
Water use
Total water abstracted – power generation(1)
Total water returned – power generation
Total water abstracted and returned – hydro generation(2)
Total water abstracted from reservoir – pumped storage(3)
Total water abstracted from Loch Awe – pumped storage(4)

Unit

t
t
t
t
t
t

m3
m3
m3
m3
m3

2022

5,979
403
376
836
854
1,354

2021

7,556
1,087
448
386
1,202
193

51,899,818*
47,187,916*
3,389,452,345*
361,145,582*
325,844,996*

64,140,878
57,616,803
3,005,380,954
261,791,757
249,155,337

Notes:
For Pellet Production other emissions to air for 2021 data are reported for Drax Biomass plants only: La Salle, Morehouse and Amite. Our 2022 data reflects 17 pellet mills
under operation, as opposed to 3 pellet mills in 2021.

“Total water abstracted” covers water data reported to the Environment Agency (EA) and Scottish Environment Protection Agency (SEPA) as abstraction.
(1) 2022 Power Generation covers Drax Power Station
(2) Hydro generation covers Galloway and Lanark Hydro Scheme
(3) Pumped storage covers Cruachan Power Station
(4) Excluding volume of water collected via the aqueduct system

*Limited external assurance by LRQA (qualified opinion) using the assurance standard ISAE 3000 for 2022 data as indicated. For assurance statement and basis of reporting
see www.drax.com/sustainability

Emissions to air
Drax Power Station is required to comply
with UK laws and regulations which limit
emissions to atmosphere. New standards
came into effect in August 2021 under
the Industrial Emissions Directive and
Large Combustion Plant Best Available
Techniques Reference Document (BREF)
which sets limits for emissions. 2022
was the first year of operation under
the annual emission limits for biomass.

Our operations in the US and Canada
which manufacture biomass pellets are
also subject to laws and regulations which
limit emissions to atmosphere and set
requirements on the level of self-
monitoring and reporting which is required
to be undertaken.

In 2022, we diverted 3,389,452,345 m3
of water from river systems to run through
our plants before being redirected back
into the river for hydro generation at the
Galloway and Lanark Hydro Scheme.

At Cruachan Power Station (our pumped
storage facility), we generate electricity
by allowing water to fall from Cruachan
dam down through four turbines which
generate electricity at times of demand
for power from business and consumers.
The water flows through the turbines
before being directed into Loch Awe.
At times when demand from business and
consumers falls, there is excess power on
the grid. We use the excess power to
pump water from Loch Awe into the upper
reservoir at Cruachan dam. We closely
monitor the arrangements for the cycling
of this water and report to SEPA
as required.

Water use
The use of water is subject to strict
criteria, compliance with written
procedures and also UK, US and Canadian
laws. That compliance is overseen
internally by the HSE teams and externally
by the local regulatory agencies.

Drax Power Station uses water for
operational and cooling processes, the
volumes of which are shown in the table
above. A primary use for the water at
Drax Power Station is when it is heated
to produce steam at very high pressure
which is used to power the turbines that
generate the electricity. Of the water used
a proportion is emitted as water vapour,
through our cooling towers. The remainder
is recycled and discharged under permit
to the local river. In line with our permit
requirements, procedures are in place
to manage water system efficiency and
usage – ensuring we meet all discharge
consent limits. Compared to 2021, our
total water abstracted for generation
decreased from 64,140,878m3
to 51,899,818m3 – once again, this
was related to the operational position
(i.e. MW produced) for 2022.

Drax Group plc Annual report and accounts 2022 51

Strategic report

Sustainable Development continued
Climate Positive

Task Force on Climate Related Financial Disclosures (TCFD)

CDP Climate

Introduction

Compliance Statement
Drax recognises the importance of climate
considerations, and specifically the
matters of physical and transition risks
arising from climate change. To manage
these risks, we are committed to taking
affirmative actions to meeting the
Financial Conduct Authority’s Listing Rule
9.8.6(8)). This will be our third year of
providing dedicated disclosures against the
TCFD framework. The financial year to
31 December 2022 represents the first
year in which Drax has been required to
respond to the recent additional disclosure
requirements under the TCFD Annex and
Guidance, published in October 2021. The
additional requirements provide for greater
transparency and incorporate new areas
for assessment which by their nature are
complex. Drax has sought to integrate
these new requirements into its business
methods and reporting, whilst recognising
that, given the complexity, in this first
period of reporting we are, like many
stakeholders, evolving our understanding
of the best approaches, methodology and
standards. Accordingly, whilst we consider
the information provided to be responsive
to the new requirements, we are of the
view this will require further refinement

and improvement. Therefore, we believe
that full consistency with the TCFD
requirements has been attained for nine
out of the 11 recommendations in the
reporting period. We consider the
disclosures to be partially consistent with
the recommendations for cross-industry
metrics and targets (recommended
disclosures “Metrics and targets a) and c)”).
We believe our cross-industry metrics
currently lack the level of specificity
required to meet the threshold for full
consistency. Over the coming year,
we intend to evaluate appropriate targets
and evolve our business methods, and
our approach to metric reporting. This
should enable us to increase the level of
specificity we are able to provide on these
disclosure requirements. Our objective is to
confirm that the 2023 Annual Report and
Accounts is consistent with the current
TCFD recommendations.

Our Approach to Disclosure
At Drax, being at the forefront of
combatting the physical and transition
risks of climate change is consistent with
our purpose and business model. Drax has
therefore presented its approach towards

The CDP Climate questionnaire
is aligned to the TCFD
recommendations. In 2022,
Drax was awarded a

disclosing the physical and transition risks
of climate change and their potential
impacts upon the business throughout
this section, but additional relevant
information can be found throughout
the Annual Report and Accounts.

An overview of our progress against
the framework is disclosed by sections
as categorised under the TCFD
recommendations (Governance,
Risk Management, Strategy, Metrics
and Targets). The TCFD Summary
cross-reference table is presented below.

4 TCFD pillars

11 TCFD recommended disclosures

Reference

Governance 1. Describe the Board’s oversight of climate-related risks and

Page 53. Corporate Governance, page 94

Strategy

Risk
Management

Metrics &
Targets

opportunities
2. Describe management’s role in assessing and managing climate-
related risks and opportunities
3. Describe the climate-related risks and opportunities the organisation
has identified over the short, medium, and long-term

4. Describe the impact of climate-related risks and opportunities on the
organisation’s business, strategy, and financial planning

5. Describe the resilience of the organisation’s strategy, taking into
consideration different climate-related scenarios, including a 2°C
or lower scenario
6. Describe the organisation’s processes for identifying and assessing
climate-related risks
7. Describe the organisation’s processes for managing
climate-related risks
8. Describe how processes for identifying, assessing, and managing
climate-related risks are integrated into the organisation’s overall
risk management
9. Disclose the metrics used by the organisation to assess climate-
related risks and opportunities in line with its strategy and risk
management process
10. Disclose Scope 1, Scope 2, and, if appropriate, Scope 3 greenhouse
gas (GHG) emissions and the related risks
11. Describe the targets used by the organisation to manage climate-
related risks and opportunities and performance against targets

Drax Group plc Annual report and accounts 2022

Page 53. Principal Risks page 89

Pages 56-57 Strategic report pages 2-9
and Principal Risks page 89
Pages 56-57. Strategic report pages 2-9
and Viability Statement page 75-76
Page 54-55

Page 53-54, Principal Risks page 77-81

Page 54, Principal Risks page 77-81

Metrics, page 60

Metrics, page 61

Targets, page 62

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Climate-related financial disclosure

Governance
Board and executive-level oversight of
climate-related risks and opportunities

The Drax Board has ultimate
accountability for all climate change risks
and opportunities. The Board meets
regularly and is supported through the
existing governance structure which
manages climate change risk on a
day-to-day basis. Please see the
Corporate Governance report on page 94
for greater detail.

The Group has developed a Climate Policy,
published on our website, that is annually

reviewed and approved by our Executive
Committee. The Policy outlines our
approach to integrate the management
of climate-related risks and opportunities
into everyday decision-making and
delivery of our business strategy.
Responding to climate change is a
core component of the Group’s purpose,
and this is reflected in our governance.
Climate Change is one of our Principal
Risks, and so is subject to a six-monthly
“deep dive” review by our
Executive Committee.

In 2022, the CEO commissioned a new
Group Carbon Reduction Task Force,
which includes Senior Leaders from
across the organisation that will track
and report on current and future projects
required to decarbonise our current and
future value chain. In addition, the Board
have allocated a significant weighting
for decarbonisation targets to the 2023
Group Scorecard, in order to align the
objectives and incentives of the
operational business areas with our
decarbonisation targets.

The Board

• Reviewed the Climate Change Principal Risk
• Agreed the Climate Positive strategy
• Reviewed the Climate Policy
• As part of the approval process for climate change opportunities, the Board reviewed proposals for

investing in construction of additional pellet production capacity, including the carbon and environmental
related design requirements

Audit Committee

• The Audit Committee has responsibility for overseeing risk and risk management, which includes climate

Remuneration
Committee

change risk. Climate risk disclosures are reviewed twice each year

• Reviewed and approved targets for developing ESG dashboards (as part of the 2022 scorecard),

which includes climate metrics

• Reviewed and approved the adoption of a KPI for the development of a blueprint for an ultra-low

carbon pellet mill in the 2022 scorecard.

Executive Committee

• Agreed an emissions reduction target for the 2023 scorecard
• Reviewed and contributed to progress in establishing ESG dashboards, including an assessment

Carbon Oversight
Group (COG)

of the data capture, interpretation, and reporting

• Reviewed and agreed our approach on the shadow price of carbon
• The CEO reviewed and signed off our annual submission of the CDP Climate Change questionnaire.
• Performed a deep dive of the Climate Change Principal Risk and assessed the potential impacts

on the Group’s business outcomes.

• In early 2022, COG provided a forum for the review of climate-related risks.
• COG comprised a group of experts in climate matters across the Group and people in roles with direct
impact on our carbon performance. Both in the formal COG and outside of the group, these members
help manage our day-to-day progress on climate related matters.

• COG members managed the Climate Change Principal Risk.

• Identification, measurement, monitoring

Assigning senior management accountability for climate change risk
These accountabilities include the
We have assigned key accountabilities
implementation of:
on environment and climate change
to ensure a clear understanding
of ownership throughout the business
and at the executive level. Accountability
for the Group’s climate and broader
sustainability positioning (including the
Climate Change Principal Risk) is assigned
to the Group Director of Corporate Affairs,
as delegated by the Executive Committee.
The Group Director of Sustainability
reports directly to the Group Director
of Corporate Affairs and monitors the
day-to-day risk management of our
climate change Principal Risk.

• ESG reporting and performance
(the Drax sustainability strategy
and key performance metrics)

and reporting of the financial risks
of climate change in line with TCFD
recommendations

transition risks) to determine long-term
financial risks that could impact the
balance sheet

• Scenario analysis (for physical and

• Disclosing the financial risks

of climate change

See more details on Governance
in these sections:

Diagram showing how risk reports
up to the Drax Board 77

Corporate Governance Report
page 94

Directors’ Remuneration Report
page 127

Principal Risks and Uncertainties
page 77

• A governance framework to ensure

leaders and wider colleagues
understand the climate-related risks
and opportunities

Drax Group plc Annual report and accounts 2022 53

Strategic report

Sustainable Development continued
Climate Positive

Our progress against TCFD recommendations

TCFD pillar:

Governance

Actions for 2022
Consult the Board and Executive Committee
on internal carbon targets and carbon reduction
plans and agree KPIs against which the Board
and external stakeholders can assess
our progress.

Work with the Board and Executive Committee
on the creation of a new Sustainability
Council that will oversee climate-related risks
and opportunities.

Progress in 2022
The Board and Executive Committee were
consulted on several climate-related
matters (details in the previous table).

Actions for 2023
In 2023 we will roll out our new
Sustainability Governance
approach.

At the end of 2022, we planned our
new Sustainability Governance approach
and identified roles and responsibilities
for managing our Climate Change
principal risk.

Risk Management
Our approach to Climate Risk
The Group recognises climate change risks
and the financial impacts as a Principal
Risk, reflecting management’s assessment
of the risk exposures for the Group across
its operations based on an established
approach to the identification, rating and
mitigation, which is fully integrated into
the Group’s Risk Management Policy.
Our climate-related risks are prioritised
based on our risk scoring matrix, which
looks at likelihood and impact. Our
assessment of impact considers a broad
range of impacts, including financial,
regulatory, environmental, reputational
and strategy considerations – our
sustainability priorities are embedded
throughout that assessment. Our Principal
Risk categories (including Climate Change)
are described in full in the Principal Risk
section on page 77.

At Drax, we identify, monitor and manage
our climate-related risks through scenario
analysis, climate vulnerability
assessments, internal programmes for
carbon reduction and striving towards our
BECCS ambitions to be a leader in carbon
removals. In addition to minimising our
own emissions, climate-related
considerations are embedded in our
decision-making, and we use a set of
financial criteria, including our internal
carbon price, for investment decisions.
We consider existing and emerging
regulatory requirements related to climate
change as well as other relevant factors.
You can find more details on how we
manage risk in our “group approach to risk
management” on page 78.

Drax has identified climate risks in two
main categories – physical and transition.
Physical impacts of climate change include
event-driven, acute impacts, such as

flooding, and chronic impacts, such as
sea-level and temperature rises. Transition
impacts of climate change include policy,
regulatory, technology, and market-related
changes associated with the transition to
a low carbon economy. Whilst the physical
impact of climate change may pose
challenges to our operations (which
even where we seek to mitigate could
still have material impact on our business),
the transition impacts include several
aspects which directly align with the
Group’s strategy.

Scenario Analysis
To understand the physical and transition
risks of climate change, their financial
impacts and their ultimate materiality to
the balance sheet and income statement,
the Group works with third-parties to
perform scenario analysis. Scenario
analysis enables an organisation to assess
climate-related risks and opportunities
under a range of potential future states
and pathways. Scenario analysis can be
carried out qualitatively or quantitatively
and provides a useful tool to:

• enable organisations to consider issues
for which possible outcomes are highly
uncertain, outcomes which will develop
over the medium to longer-term,
or potentially have significant
disruptive effects

• provide structure to strategic future

planning and broaden decision makers’
thinking to a range of possible scenarios

• help organisations to assess the
potential business, strategic, and
financial impacts from climate change
and the management actions that may
need to be considered in strategic and
financial plans

• help organisations identify indicators
to monitor the external environment
and provides the opportunity for
organisations to adjust their strategies
and financial plans where necessary

• aid investors to understand the

resilience of an organisation’s strategies
and financial plans and to compare risks
and opportunities

The Group recognises that TCFD is a
journey and as data improves, we commit
to continue to build on our approach
to understanding the impacts of climate
change. In 2020, we completed a high-
level qualitative analysis considering the
impact to our business under different
physical and transition climate risk
scenarios. In 2021, we worked with a third
party to advance this work by considering
both transition and physical risks under
different climate scenarios, looking at
impacts to 2030, aligning with Drax’s
strategic planning. In 2022 Drax focused
on understanding the physical risks
of climate change that could impact
our self-supply value chain operations
in the US South, British Columbia and
Alberta, for the 2030s and 2040s,
expanding the time frame considered.

We have taken a risk-based approach
to our analysis work, focusing on the most
material areas first. Our 2022 work covered
our own pellet production and supply,
as this represents a significant element
of our value chain and supply of biomass
for Drax Power Station (DPS). Future work
will have a broader focus, including
impacts on forests, third-party supply
of pellets and our hydropower assets.

Drax Group plc Annual report and accounts 2022

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The table below provides an overview of scenarios considered by Drax to understand the risks of climate change.

Physical
Risk

Transition
Risk

• 2°C world – current level of physical impacts (approximated to RCP 2.6): Very ambitious and effective global
action to mitigate climate change results in a scenario < 2°C warming by 2100. In this scenario, the physical
impacts of climate change are limited by 2030, despite some impacts continuing to increase beyond this time
due to the lag in climate systems and greenhouse gas emissions. Changes across the economy, society, and
environment are limited in response to physical climate change.

• 4°C world – High level of physical impacts (approximated to RCP 8.5): Low ambition/effectiveness on global
action to mitigate climate change results in > 4°C warming by 2100 (despite the high ambition set by the UK).
The physical impacts of climate change are more pronounced by 2030 and continue to increase significantly
beyond this time. Changes across the economy, society, and environment are more pronounced in response
to physical climate change.

• A 1.5°C world scenario: Rapid and comprehensive changes are made to progress decarbonisation goals, beyond
the UK’s current net zero commitments and beyond current global pledges, to limit warming to 1.5°C by 2100.
Coordinated global action occurs, including changes to policy, regulation, technology, and markets to support
decarbonisation and carbon removal by 2030.

• An ‘existing policies’ scenario: The existing policies set by the UK (which are not yet sufficient to achieve net zero
by 2050), US, and Canada, and the current global pledges are maintained without further ambition and action
to progress decarbonisation goals, resulting in potential warming above 3°C by 2100. Changes across the global
economy and society are less rapid and less comprehensive by 2030. Policy is fragmented and ad-hoc across
the UK, US, Canada, and globally.

A summary of the 2022 physical risk supply chain assessment
In 2022, we researched the physical
climate risks on our supply chain.
The focus was on the medium and
long-term threats to our pelleting facilities,
logistics operations and generation assets
across the US, Canada and the UK.
Short-term threats were not a focus

for this study, as the Drax supply chain has
some built-in resilience for the short term,
and recent investments have enabled
short-term risk to be managed to an
acceptable level. This study therefore
focused on potential future actions which
will be required as the pace of change

increases. This was a quantitative
assessment, based on the modelled annual
average expected disruption. The key risks
for the 2040s were identified and are
summarised in the table below:

Climate change risks in the 2040s

Risk category

River flooding in the UK impacting train routes into Drax Power Station High
High
Coastal flood and potential for disruption at ports
Hurricane or windstorms causing disruption at US ports
Medium
Drought and low river levels causing disruption to waterway navigation Medium
Medium
Heatwaves and wildfires causing disruption to transport routes

Having evaluated these risks, the analysis
concluded that the Group has a resilient
supply chain, with only minor disruption
to supply expected during an average year
due to climate related risks. The minor
disruption would be equivalent to less than
half a shipment to Drax Power Station per
year from all the annual transatlantic ship
loads we receive. This risk only rises
slightly through to the 2040s, remaining
below a single shipment disrupted per
year on average.

These risks have been incorporated into
our Climate Change risk register, which
is summarised below and in the Principal
Risks section on page 77. In our 2021
Annual Report and Accounts, we reported
on the transition scenario analysis, which
looked at two transition scenarios
(Rapid transition ‘1.5-degree scenario’
and Slow transition ‘existing global
policies’). We reported on the main
impacts under both scenarios and our
strategic response under both scenarios.

Drax has a resilient supply chain,
a strategy of increasing our self-supply
and our climate-related opportunities
outweigh our risks. As our business
strategy is built around our climate-related
opportunities, this demonstrates that our
strategy is resilient against climate-
related risks.

The Group’s business strategy is closely
aligned to our strategic response to the
main impacts highlighted under our
transition risk scenario analysis,
highlighting that our strategy is resilient
against transition risks. We therefore
focused in 2022 on our physical risks.
In 2024, we hope to take a final investment
decision on our opportunities for Cruachan
expansion and BECCS, and further
scenario analysis on transition risks are
planned for 2024, as more information
becomes clear.

Low risk: <2,000 tonne-days
Medium risk: 2,000 – 10,000 tonne-days
High risk: >10,000 tonne-days

To increase the understanding of the
physical risks posed by climate change,
the Group is considering:

• Further risk assessment work across the

Drax supply chain in North America to help
inform decision-making on possible steps
to mitigate supply chain risks

• Exploring physical climate risks outside

of our supply chain, looking at operations
at DPS and at the individual pellet mills
• Further work on heatwave risk, as such

events may have an impact on operations,
including the generation of electricity
at Drax Power Station, or disruption
to supply chains

Drax Group plc Annual report and accounts 2022 55

Strategic report

Sustainable Development continued
Climate Positive

Our Key Climate Related Risks
1. Time frame: Short-term (1 year) – aligns to our time periods for assessing going concern
• Medium (2-5 years) – matches the period assessed for viability reporting
• Long-term (5+ years) – aligns to our 2030 BECCS ambitions and beyond

2. Significant Impact:
• Significant impact is assessed as an impact greater than 20% of 2022 Adjusted EBITDA of £731 million

Note, the assessments in the Risks and Opportunities tables considers gross impact only, and not likelihood

• Impacts of climate change are considered in the Viability Statement on page 75 and note 3.8 to the consolidated financial statements

Grouping

Description

Physical risks
to our Pellet
Production
operations and
supply chain
in the US
and Canada

Acute and chronic climate
hazards impacting:
• Fibre availability to

Canadian pellet production

• Site operations in

US pellet production sites

• Site operations at
Canadian pellet
production sites

Time
frame1

ST, MT
and LT

Significant Impact2 Strategic mitigation

No (direct impact
on revenue and
cost of sales)

• Proactive weather monitoring with appropriate mitigations taken to minimise

the potential impact of extreme weather events

• Pellet Production business has developed stockpiles to alleviate incidences

of extreme weather-related production interruption.

• Modelling of reservoir spillway capacities at Cruachan Dam, to understand

capacity for extreme weather events

• Diversification into new jurisdictions that reduce seasonal impact on the business
• New build pellet mills positioned to minimise risk associated with potential future

weather patterns

• Continue monitoring systemic risks when moving to new geographies
• Colleague training to respond to adverse climate effects

Note: risks which, following mitigation, are assessed as low risk are not presented here. These include issues raised in our third-party
risk assessment work, including risks to shipping in North America.

Physical risks
to our Drax
Power Station
operations and
supply chain

Physical risks to ports and
shipping UK, including
• extreme weather events
and flooding at multiple
UK port locations

ST, MT
and LT

Yes (direct
impact on
revenue and
cost of sales)

• Business continuity plans in place for ports in our supply chain,

including response to weather events

• Continue getting more detailed climate scenario analysis to look

at supply chain risks

• Engaged with the local authority climate risk plan to cover storm surges

• Sea level rise impacting
available port facilities,
preventing the receipt of
material into Drax’s UK ports

• River water temperature

at DPS rises to a level which
could cause permit breach

ST, MT
and LT

No (direct impact
on revenue and
cost of sales)

• Permit variation already in place for the summer months

Note: risks which, following mitigation, are assessed as low risk are not presented here. These include issues raised in our third-party risk
assessment work, including road and rail into the UK and risks to third-party supply

Policy risks
related to the
transition to
a low-carbon
economy

Future regulatory
framework(s) no longer
consider biomass to be
renewable and/or require
biomass generators to pay
a carbon price on stack
emissions or on supply
chain emissions

ST, MT
and LT

Yes (direct
impact on
revenue, cost
of sales and
operating
expenses)

Updates to sustainability
criteria on biomass cannot
be met

Changes in UK Carbon
Budget, Government strategy
significantly limits or does
not allow for unabated gas
generation – risk to OCGTs
projects

ST and
MT

No (direct impact
on revenue,
cost of sales
and operating
expenses)

No (direct impact
on revenue, cost
of sales and
operating
expenses)

Due to the potential high impact of these unmitigated risks, we have
a strong mitigation plan in place which is functioning well, lowering the risk
to an acceptable level
• BECCS ambitions are a key part of our strategy
• Group decarbonisation plans in place to reduce biomass supply chain emissions
• Engaging with regulators and industry bodies and wider stakeholders to

understand their priorities, influence the strategic direction, and undertake
scenario planning in preparedness for ensuring compliance

• Targeted scenario planning and direct engagement with the REDIII negotiation
process and via Trade Associations suggesting alternative policy and regulatory
solutions, to ensure workable outcomes

• Seeking engagement with eNGOs to discuss issues of contention and potential
areas of common ground, as well as challenging views where we believe they
are inaccurate or misleading

• Continued engagement with key stakeholders around our biomass sourcing and

the benefits of using biomass from working forests

• Alternative Fuels programme looking at options for alternative feedstocks

• Close liaison with UK Government on future polices. Group Market Analysis team

modelling future generation scenarios and predicting future generation mix

• Broad range of future options being developed

Technology risks
related to the
transition to a low
carbon economy

Reputation and
market risks
related to the
transition to
a low-carbon
economy

Note: risks which following mitigation are assessed as low risk are not presented here

Note: Five risks are considered within this category but are considered to be low risk after consideration of mitigations in place, so are not
included here. These risks include issues such as: Lack of government strategy/commitment to new low carbon technologies and ability
to raise funds for implementing new technologies

Market factors or reputation
leads to a reduction
in profitability of the
Customers business

MT
and LT

No (direct impact
on revenue)

• All energy supply propositions now from renewable sources
• Introduction of value-adding energy services (Offer non-generation system

support and energy management services, such as the provision
of decarbonization services, including vehicle fleet electrification

• Strategic Communications work ongoing to provide better data and transparency

on BECCS and biomass

Note: risks which following mitigation are assessed as low risk are not presented here.

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We also cover the climate-related risks on our strategy – see page 82 on Principal Risks and Uncertainties for a detailed breakdown.

Our Key Climate Related Opportunities
Each of our climate-related opportunities would impact on revenue, cost of sales and operating expenses.

Opportunity

Description

Development
of new
sustainable
biomass
pellet
capacity and
self-supply

Development
of BECCS
at Drax
Power
Station

Drax is targeting 8Mt p.a. of production capacity
by 2030. This production will be used for
third-party sales plus our own generation.
This target also covers the balance of supply
from other lower cost biomass sources and
third-parties. Increasing our self-supply capacity
will provide greater security in respect of
an important aspect of supporting our
business model.

One of our strategic objectives is to be a global
leader in carbon removals. At Drax Power Station,
we are developing options to retrofit BECCS, and
aiming for 8Mt p.a. of carbon removals by 2030.
Achieving this could make Drax Power Station
the world’s first carbon negative plant at scale
and offers a model for further BECCS retrofit for
adoption by other power generation plants.

Development
of Global
BECCS
in North
America

We have announced that our ambition is to
remove 4Mt of carbon through BECCS outside
the UK p.a. while generating renewable, baseload
electricity and supporting healthy, sustainable
forests. We continue engaging with policymakers
and are screening regions and locations for
BECCS in North America.

The planned
expansion
of Cruachan
Pumped
Storage
Power
Station in
Scotland.

The UK’s plans to achieve net zero by 2050
will require further electrification for example
of heating and transport systems, resulting in
a significant increase in demand for electricity
from businesses and consumers.

However, meeting the full extent of expected
demand will only be possible if additional power
sources are developed which can provide the
dispatchable power and system support services
required to ensure security and stability of supply
and to limit the cost to the consumer.

Time
frame1

ST, MT
and LT

Significant
Impact2

Implementation

Yes

• Expansion of existing plants and of new satellite facilities, in 2022

we increased our pellet production by 27%

• In 2022 we commissioned three new plants and acquired a new 90kt

pellet plant in British Columbia. You can read more about this on page 13
• Additionally in 2022, we took Final Invesment Decision (FID) to develop
two new pellet production projects and, in July, opened our new Tokyo
sales office

Yes

• At Drax Power Station, between 2018 and 2020, we completed two
BECCS pilot projects. In 2021, we selected our technology partner,
agreeing a long-term contract with Mitsubishi Heavy Industries
Engineering for Drax to use its carbon capture technology

• We completed a pre-Front End Engineering Design (pre-FEED) study and
commenced the planning application, including formal public consultation
on the project. Also, in 2021, the East Coast Cluster was selected as
a priority cluster for deployment of Carbon Capture and Storage
infrastructure. As part of our capital investment programme on BECCS,
in 2022 Drax selected Worley Europe Limited to begin the FEED work
• In 2022 we signed a Memorandum of Understanding (MoU) with British

Steel, and submitted our Development Consent Order (DCO)

• We announced that we are aiming for 8Mt p.a. of carbon removals in the
UK by 2030. And during 2022, we submitted our planning application
for the UK Government consultation on greenhouse gas removals (GGR)
business models. Subject to an effective carbon removals policy and
regulatory framework from the UK Government, we are aiming for the
deployment of BECCS on two of our biomass generating units by 2030

See more details on our ambition for two BECCS units at Drax Power
Station on page 12

Yes

• Progressing with site selection, government engagement and

technology development

• In September 2022, we announced an MoU with Respira, an impact-

driven carbon finance business, which could see the largest volume of
carbon dioxide removals (CDRs) traded so far globally. Under the MoU,
Respira could purchase up to 2Mt of CDRs over a five-year period from
our North American BECCS projects. This would enable other
corporations and financial institutions to achieve their own CO2 emissions
reduction targets, by purchasing CDRs from Respira

See more details on our Global BECCS ambitions on page 12

• Planning application was submitted in May 2022. The location, flexibility,

and range of services it can provide makes Cruachan strategically
important to the UK power system

• A final investment decision could be taken in 2024 and the development
operational by 2030. Any investment decision will depend on the right
regulatory framework

• Amount and extent of assets or business activities vulnerable to transition risks: Based on the residual risk after mitigations over
a five-year time horizon, capitalised spend on UK BECCS is vulnerable to transition risks if the UK Government does not pursue
BECCS as a route for carbon removals. As identified in the critical judgements, the total capitalised to date is £25 million.
This is linked to the risk around regulatory frameworks identified in the table above. An investment decision could be taken
by the Group in 2024, subject to the right investment framework, and spend will continue on this project in 2023.

• Amount and extent of assets or business activities vulnerable to physical risks: Based on the residual risk after mitigations over
a five-year time horizon, an interruption to biomass generation is considered to be the most likely way that physical risk could
manifest. As identified in the table above, the impact of this could be greater than 20% of Adjusted EBITDA in a given year.
• Amount of capital expenditure, financing, or investment deployed toward climate-related risks and opportunities: The Group’s

purpose – to enable a zero carbon lower cost energy future – and our ambition to become a carbon negative company by 2030,
inform our future capital expenditure and investment plans. We believe that our three strategic objectives are closely aligned
with the goal of addressing climate change. As previously announced, we are developing plans to invest a significant amount
in the coming years to progress these objectives, and expenditure is underway in planning and development of new technologies
such as UK BECCS. £19 million of capital expenditure related to UK BECCS was recognised during 2022 with a total capitalised
spend on the project to date of £25 million.

Drax Group plc Annual report and accounts 2022 57

Strategic report

Sustainable Development continued
Climate Positive

We also cover the climate-related risks on our strategy – see page 82 on Principal Risks and Uncertainties for a detailed breakdown.

Our progress against TCFD recommendations

TCFD pillar:

Risk Management
Actions for 2022

Build on the first phase of the asset-level
physical risk assessment, considering
additional climate scenarios over longer
time horizons.

Strategy
Impact of climate-related risks and
opportunities on our strategy

The identified climate-related risks and
opportunities that could have a material
financial impact on the business are set
out on pages 56-57.

Our climate-related opportunities are
intrinsically linked to our strategy of being
1) a global leader in sustainable biomass
pellets, 2) a global leader in carbon
removals, and 3) a UK leader in
dispatchable, renewable power.

We continue to explore and develop
the transition plan that will enable us
to operate beyond the current subsidy
regime for biomass generation past 2027.
Subject to the right regulatory and
investment framework, we aim to
transform Drax Power Station into one
of the world’s leading carbon capture

Progress in 2022

Actions planned for 2023

In 2022, we completed the second stage
of our physical risk assessment of our US
and Canada pellet operations.

Drax will update and monitor the risk
register for the Climate Principal Risk
and build on our risk assessment work.

projects. This involves using BECCS
to permanently remove 8Mt p.a. of CO2
emissions from the atmosphere each year
by 2030. The project is well-developed,
the technology proven within the
industry, and an investment decision
could be taken in 2024, with a first BECCS
unit operational in 2027 and a second
in 2030. Should BECCS not be achieved
due to any of the risks identified in the
Principal Risk and Uncertainties disclosure
on pages 82-83, this would potentially
limit our ability to achieve our net carbon
negative targets.

In 2022, we made significant progress to
deliver our BECCS project. This included
submitting our DCO, continuing with the
FEED process, and signing a MoU with
British Steel. It also included ongoing
stakeholder engagement with the local
community, local planning authorities,

the Environment Agency and the Health
and Safety Executive. The East Coast
Cluster initiative was selected as one of
the UK’s first carbon capture and storage
clusters in the UK, see more on page 14.
This is the first step towards ensuring
the CO2 transportation and storage
infrastructure which will be required to
safely take and store the CO2 emissions
captured by the BECCS project.

We do not expect the six-month winter
contingency for coal, which ends in March
2023, to have an impact upon the timing
of the project’s final investment decision
or intended commissioning date. Site
preparation works for BECCS are ongoing
and will continue following formal closure
of the coal units in March 2023. You can
read more about our ambitions for BECCS
in the CEO’s review on page 12.

We also cover the climate-related risks on our strategy – see page 82 on Principal Risks and Uncertainties for a detailed breakdown.
We consider climate change through our financial planning, please see note 3.8 to the financial statements.

Amount of capital expenditure, financing,
or investment deployed toward climate-
related risks and opportunities:
At 31 December 2022 the Group had
capitalised £25 million relating to the
UK BECCS development project, including
£19 million in 2022. Please see more detail
in our financial statements.

Our Beyond Net Zero Plan and Progress
One of the pillars of our business strategy
is to be a global leader in carbon removals.
To demonstrate our commitment to that,
in 2019 we set an ambition to be carbon
negative by 2030. Our actions towards our
strategy are summarised in the graphic
page 59.

Progress: We have been on a journey
removing fossil fuels from our generation
portfolio. In 2012, we were a single site,
burning 9.6 million tonnes of coal,
producing emissions of 784t CO2 per
GWh of electricity generated. In 2020
we announced the planned closure of
our commercial coal operations and in
2021 we sold our CCGT assets. In 2022,
we agreed to delay the planned closure
of our two coal-fired units at the request
of the UK Government to bolster the

Drax Group plc Annual report and accounts 2022

UK’s energy security by providing a
winter contingency service (October 2022
– March 2023) to the UK power system.
Our coal units will close in March 2023 on
conclusion of the contract with National
Grid. We are currently developing three
OCGT plants, to deliver on our capacity
market contracts starting in 2024 and
continue to evaluate these projects,
including their potential sale.

In addition to removing fossil fuel
generation, we have been identifying
emissions reductions opportunities and
efficiency projects. We remain committed
to our BECCS ambitions, which we believe
is fundamental to delivering the net zero
ambitions of the UK, not just our own
carbon removal ambitions.

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2030: Drax achieves carbon negative
• 75% reduction in Scope 1 and 2

emissions from electricity generation

• 42% in non-generation Scope 1

and 2 emissions

• 42% in Scope 3 emissions

Our 2030
targets use
data from
2020 as their
baseline

2022 Scope 1
& 2 emissions:
669 ktCO2e =
78% reduction
since 2020

Building BECCS
at Drax Power
Station (DPS)
begins (subject
to the right
investment
framework)

Second BECCS
unit at DPS.
Total 8Mt CO2
captured
p.a.

Aiming for
12Mt p.a. of
negative
emissions
globally
by 2030

Aligning with our strategic objectives:

To be a global leader
in carbon removals

Emissions in 2020 (as per baseline)

Group emissions, scope 1 and 2:
3,080 ktCO2e

Second
biomass unit
converted

Third biomass
unit converted

Fourth
biomass unit
converted

2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022 2023 2024 2025 2026 2027 2028 2029 2030

First biomass
unit converted

Drax acquires
Hydro assets
in Scotland

Sale of gas
assets and end
of commercial
coal generation

Emissions reductions
measures

First BECCS
unit operational
at DPS,
capturing 8Mt
of CO2 p.a.

A purpose, strategy, and ambition that places climate change at the heart of what we do

Our progress against TCFD recommendations

TCFD pillar:

Strategy
Actions for 2022

Progress in 2022

Actions for 2023

Undertake in-depth analysis on the
physical climate risks across our biomass
pellet supply chain and build on the
climate scenario analysis completed
in 2021.

We completed our follow up climate
scenario analysis in August 2022 and
shared this with the relevant teams
across the business.

Drax will perform an additional materiality
assessment of ESG related risks that
will seek to inform the Group’s approach
to climate and other sustainability
related risks.

Drax Group plc Annual report and accounts 2022 59

Strategic report

Sustainable Development continued
Climate Positive

Metrics and targets
At Drax, our key metrics related to our
transition to a net zero future are focused
on monitoring our progress towards our
carbon negative ambition.

We consider our climate related issues in
the context of our materiality assessment.
In 2023, we are completing a materiality
assessment with support from a third

party and commit to updating our metrics
in line with any changes.

Climate-related risks and opportunities

Climate Related Metrics

• Physical risks to our Pellet Production
operations and supply chain in the
US and Canada

• Amount and extent of assets or business activities vulnerable
to physical risks. Please see climate-related risks, page 57
• Pellets produced (see Key Performance Indicators, Page 18)

• Physical risks to our Drax Power
Station (DPS) operations and
supply chain

• Policy risks related to the transition

• Amount and extent of assets or business activities vulnerable

to a low-carbon economy

• Technology risks related to the

transition to a low-carbon economy
• Reputation and market risks related
to the transition to a low-carbon
economy

• Opportunity: Development of new
sustainable biomass pellet capacity
and self-supply

• Opportunity: Development of BECCS

at DPS

• Opportunity: Development of Global

BECCS in North America

• Opportunity: The planned expansion
of Cruachan Pumped Storage Power
Station in Scotland

to transition risks £ or % Please see climate-related risks,
page 57

• Land use. 97% of wood pellets used in Drax Power Station

were SBP-Compliant (full reporting on biomass sustainability
in the Biomass Sourcing section, starting on page 40)

• Proportion of business activities aligned with climate-related
opportunities – Proportion of 2022 Group generation from
biomass, hydro and pumped storage: <99% (2021 was 94%)

• Pellets produced (see Key Performance Indicators, Page 18)
• Amount of capital expenditure, financing, or investment
deployed toward climate-related risks and opportunities.
Please see climate-related opportunities, page 57

• Amount of capital expenditure, financing, or investment
deployed toward climate-related risks and opportunities.
Please see climate-related opportunities, page 57

• Proportion of business activities aligned with climate-related
opportunities. Proportion of 2022 Group generation from
biomass, hydro and pumped storage: >99% (2021 was 94%)

• Pumped storage and hydro capacity: 0.6GW (see page 9)

(2021 was 0.6GW)

Metrics relevant
to all risks and
opportunities

GHG emissions:
• Scope 1
• Scope 2
• Scope 3
• Carbon intensity

page 61

• Total energy
consumption
page 61

• Remuneration

linked to climate
change,
see below

• Internal carbon
price, see below
• Water use, see

page 51

Remuneration:

Internal carbon price:

Our Group Scorecard comprises key
metrics by which the cash bonus awards
for Executive Directors and all eligible
colleagues are assessed. For 2023 the
Scorecard includes a carbon reduction
metric, linking performance-related
remuneration to actions that support
the delivery of our long-term ambition
to be carbon negative by 2030.
See targets section on page 62.

For Drax’s future investments to
adequately consider their carbon impact,
we have developed a shadow carbon
price in 2022. Our internal carbon price
has been benchmarked to the UK ETA,
and will be subject to change over time,
and across 2022 was within the range
of £75-100/t.

We intend that as part of the evaluation
of strategic growth project decisions
through 2023, our internal shadow carbon
price will be considered and will be applied
to emissions across all Scopes (1, 2 and 3)
over the lifetime of the investments.
The level of the price will be kept under
review so that it calibrates to a sufficiently
material level to influence decisions,
driving forward our purpose.

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Understanding our carbon emissions

Scope 3

Scope 1

Scope 2

Scope 3

Upstream

Direct emissions

Indirect emissions from
electricity

Downstream

• Coal supply chain
• Natural gas supply chain
• Biomass supply chain
• Supply chain for other fuels
• Supply of sludge to Daldowie
• Biomass transport from
Drax Biomass to Drax
• Utilities as part of lease

contracts

• Coal and natural gas power

generation

• Hydro electricity
consumption

• Methane and nitrogen oxides

emissions from biomass
generation

• Pellet plant operations
• Pellet port operations
• Large plant vehicles
• Flue gas desulphurisation

• Cruachan electricity imports
• Generation electricity

consumption

• Pellet Production business
electricity consumption

• Recycling, processing
and disposal of waste
• Reuse and reprocessing
of ash and by-products

• Transmission and distribution
• Emissions from use of sold

electricity

• Office sites electricity

• Emissions from use of sold

consumption

natural gas

• Emissions from transport
and use of sold pellets

• Emissions from operational

systems

and capital purchases

• Business travel
• Hotel stays
• Employee commuting

• Company vehicles
• Fluorinated gases from

heating, ventilation and air
conditioning systems

In line with TCFD Guidance on Metrics, Targets and Transition Plans (October 2021), we disclose the following climate-related metrics:

Carbon and energy performance

Carbon emissions
Generation CO2 emissions (1)
Group total Scope 1 (2)
Group total Scope 2 (location-based) (3)
Group total Scope 2 (market-based)(3)
Group total Scope 1 and 2 (location-based)(6)
Proportion of Group emissions within the UK
Group total Scope 3 (4)
Biologically sequestered carbon (5)
Carbon intensity
Generation emissions per GWh of electricity generation
Group emissions per GWh of electricity generation (6)
Total energy consumption
Group total energy consumption
Group total energy consumption within the UK

Unit

2022

2021

2020

ktCO2e
ktCO2e
ktCO2e
ktCO2e
ktCO2e
%
ktCO2e
ktCO2e

tCO2e/GWh
tCO2e/GWh

310
336*
333*
332*
669*
51*
3,123*
12,130

23*
49*

525 (7)
932
323
323
1,255
78
3,121
13,415

33(7)
78

2,682 (7)
2,762
318
318
3,080
95
3,135
13,273

143(7)
164

kWh
kWh

5,232,723,625*
680,178,336

44,112,891,484
40,112,110,227

48,253,807,865
47,090,524,296

Note: Carbon emissions are reported against a criterion of operational control. Carbon emissions are reported in units of carbon dioxide equivalent (CO2e) and include all
greenhouse gases as required by the GHG Protocol. For the basis of reporting see www.drax.com/sustainability
(1) Generation emissions covers the total direct emissions from Scope 1 and indirect emissions from Scope 2 activities across our Generation sites
(2) Group total Scope 1 covers all direct emissions from our own business operations, across all sites
(3) Group total Scope 2 covers all indirect emissions associated with our electricity and heat consumption, across all sites
(4) Group total Scope 3 excludes ‘downstream leased assets’; and categories ‘end of life treatment of sold products’, ‘franchises’ and ‘investments’ are not applicable
(5) The biogenic carbon emissions resulting from generation are counted as zero in official reporting to both UK authorities and under the UK Emissions Trading Scheme as
the use of sustainable biomass is considered to be CO2 neutral at the point of combustion. This methodology originates from the United Nations Framework Convention
on Climate Change

(6) Group emissions are total Scope 1 and 2 emissions as reported
(7) 2021 and 2020 figure was based on the Scope 1 kgCO2 EUETS value of Drax Power Station and Daldowie only
*

Limited external assurance by LRQA (qualified opinion) using the assurance standard ISAE 3000 and based on Drax using the Corporate Greenhouse Gas Protocol,
for 2022 data as indicated. For assurance statement and basis of reporting see www.drax.com/sustainability

Drax Group plc Annual report and accounts 2022 61

Strategic report

Sustainable Development continued
Climate Positive

Targets:
In response to our climate risks, our
actions centre around our ambition to
deliver negative emissions and the targets
listed here are in response to our climate-
related risks and support our climate-
related opportunities.

Our ambition is to become carbon
negative by 2030. To achieve this, we
have set the following targets which are
going through the validation process with
SBTi and are based on further reductions
from a 2020 base year:

• 75% in Scope 1 and 2 emissions from

electricity generation by 2030

• 42% in non-generation Scope 1 and 2

emissions by 2030

• 42% in Scope 3 emissions by 2030

Interim targets towards our long-term
ambition to be carbon negative by
2030 that are in the Group Scorecard
for 2023 are:

• Reduce the emissions footprint

arising from our portfolio of hydro
generation assets by 25%, by the
end of 2023, versus our 2020 baseline
emissions figure

• Beginning the process of exiting the
sale of natural gas contracts to our
retail customer base

• Installing electric vehicle charging
infrastructure across the majority
of our UK sites

Alongside the 2023 Group scorecard
projects, we will utilise the new shadow
carbon price to prioritise and seek funding
for dedicated decarbonisation projects,
currently at various stages of
development, to target specific sources
of emissions across our Group footprint.
This will allow us to secure capital spending
for projects which do not provide positive
commercial returns when judged against
traditional valuation measures.

Aligned with our climate-related
opportunity to develop new sustainable
biomass capacity and self supply, we have
set a target to have 8Mt p.a. of production
capacity by 2030. See Strategic Report,
page 19.

We have not set targets on spend related
to our BECCS ambitions, but we continue
to progress our strategy and hope to take
a final investment decision in 2024.

See more details on our plan to reach our
negative emissions ambitions in the CEO
Review on page 12.

TCFD pillar:

Metrics and Targets
Actions planned for 2022

Progress in 2022

Actions for 2023

Develop internal carbon targets,
underpinned by carbon reduction plans,
outlining the financial and human capital
we will deploy for implementation, for
approval by the Board.

We set up a new Carbon Reduction Task
Force, to support our carbon reduction
plans and began the process of
developing internal carbon targets.
We submitted for SBTi validation and
will update on this in 2023.

In 2023, we will be developing individual
carbon reduction plans across our three
main business units (Pellet Production,
Generation and Customers). These will
form part of our climate transition plan.

LRQA Independent Assurance Statement

LRQA Independent Assurance Statement
The following statement is a direct extract from the LRQA assurance statement dated 20 February 2023.

Relating to the Drax Group Plc Environmental and Social Governance data for the period January 1 2022 to December 31 2022.

LRQA Limited (“LRQA”) has provided independent limited assurance to Drax Corporate Limited (“Drax”) over specific data within the
Drax Group plc Annual Report 2022 (“the Report”) including the following:

• Group GHG emissions (Scope 1 and 2)
• Group GHG emissions (Scope 3)
• Water abstraction and discharge
• Employment data on headcount
• Group energy consumption
• Percentage of emissions in the UK
• Group generation emissions intensity
• Group emissions intensity

The assurance was conducted in accordance with the International Standard on Assurance Engagements (ISAE) 3000.
LRQA’s full independent limited assurance statement can be found at www.drax.com/sustainability.

Drax Group plc Annual report and accounts 2022

Nature Positive

We have put an emphasis on working in ways that respect,
protect and where possible add benefits to the natural
environment.

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Global Context
Introduction by Alicia Newton –
Senior Scientific Officer

We have put an emphasis on working
in ways that respect, protect and where
possible add benefits to the natural
environment, through partnerships and
initiatives around regions in which we
operate. This ranges from our power
station in North Yorkshire and hydro sites
in Scotland, to the forests from which
we source in both the US and Canada.

In 2021, the World Economic Forum (WEF)
Global Risk Report identified biodiversity
loss, ecosystem collapse and human-
made environmental damage as top risks.
The general expectation of business and
society is shifting from solely minimising
harm (or protecting natural environments)
to actively restoring and creating an
environment to allow nature wellbeing
to improve. At Drax, we support this and
will include it within our Nature Positive
outcome as it progresses in 2023.

We fully support Target 15 (part of the
post-2020 Global Biodiversity Framework,
ratified at COP15 in late 2022 which looks
at the responsibilities of businesses and
financial institutions) and are working
towards it by developing processes to align
with TNFD (see more on page 65 about
our TNFD pilot).

In 2022, we began work on consolidating
our Nature Positive approach across the
business and its operations – e.g., by
developing KPIs and metrics. I’m proud
to say that we remain passionate about
contributing to nature-positive globally
while remaining committed to delivering
Nature Positive outcomes for the business.
In this report we will refer to both
‘nature-positive’ (which refers to the global
concept – see box) and ‘Nature Positive’
(which refers specifically to one of the
Drax sustainability outcomes).

Approach and governance
for Nature Positive
We continue to shift our approach from
a focus on ensuring we do not have a
harmful nature impact to also include
restorative nature actions. The ESG
dashboard allows tracking of our nature-
related actions, and we are continuing
this work in 2023 as we publish our
Nature Policy. One of our aims for 2022
was to begin to integrate existing
workstreams into a Nature Positive
framework and narrative. This piece
of work will continue in 2023 as we work
through the TNFD pilot.

In 2022, we began work on a separate
Nature Policy, which will map onto our
Group aims and extend our commitment
from ‘no harm’ to actions which encourage
the regeneration of nature. Our Nature
Policy will set out what we aim to achieve
as a business to support nature and
biodiversity in the areas where we operate.
Until implementing our new Nature Policy,
we have our Group Environment Policy,
which can be viewed on our website.
This outlines our commitment to minimise
adverse impacts of our operations
on biodiversity, through the protection
of fauna and flora.

Nature initiatives
Below is a summary of some of our current
efforts and initiatives that we hope to build
on in 2023.

US:
• Collaboration with the Louisiana

Department of Wildlife and Fisheries
(LDWF) to improve forest conditions
of hardwood plantations established
under the Wetland Reserve Program
(WRP) by providing a market for
thinning material.

• We support the Forest Stewards Guild’s
(FSG) bottomland hardwoods initiative
in the Lower Mississippi Alluvial Valley.

What is nature-positive?
In a paper published in 2021,
conservationist Harvey Locke,
scientist Johan Rockström and the
CEOs of 12 conservation and business
organisations, argued for the adoption
of a ‘Nature-Positive Global Goal
for Nature’ corresponding to and
supporting the net zero goal. The paper
set out three gradual objectives
for nature-positive: ‘Zero Net Loss
of Nature from 2020, Net Positive
by 2030, and Full Recovery by 2050’.
Put simply: We need more nature
by 2030 than we have today.

In 2022, we set the following
commitment for Nature Positive:

By 2027 Drax will have
implemented the systems
and metrics across our
operations and value
chains to demonstrate
a contribution to nature
positive outcomes
in those regions.

Drax Group plc Annual report and accounts 2022 63

Strategic report

Sustainable Development continued
Nature Positive

Work with the FSG includes participation
in, and support of, learning exchanges
and landowner workshops, plus funding
for the development of individual
management plans. We also share
bottomland hardwood mitigation
material with our suppliers (a project
developed in cooperation with the FSG).

Canada:
• In British Columbia, we collaborate

with various forest industry participants
to advance environmental stewardship,
including First Nations. Our purchase
of low-grade wood and residues
enhances the quality of forests by
avoiding the burning of the material left
on the forest floor, which often occurs.
Removal of the residues also helps
prevent and mitigate the impact of
wildfires.

Drax Power Station:
• The nearby areas of Barlow Mound and
Arthur’s Wood are monitored annually,
through ecological surveys with
independent reporting (such as
of soil health). Barlow Mound and
Arthur’s Wood are also managed
for wildlife habitat conservation.

Cruachan Power Station:
• Since 2009, this plant has completed
biodiversity surveys to monitor the
species living in the surrounding
habitats. This survey data has allowed
the team to build a picture of the variety
of mammals, birds and insects present
in the area, including a significant
number of protected status species.

• We seek to partner with local

organisations and land-owners such
as to reforest pockets of land near the
plant. This project further enhances the
extent of natural forest within the area,
complementing some of the protected
‘Atlantic rainforest’ in Scotland, and
providing habitat for many local native
protected species.

Galloway and Lanark Hydro
Electric Schemes:
• We started a project with partners
to monitor Atlantic salmon smolts
in the Polharrow Burn to increase
understanding and identify if there
are hotspots of fish mortality.

• In 2022, the team started a new project

(Dee Restoration) at Black Water,
funding the improvement of instream
and riparian habitats.

Contributing to nature-positive
thinking
We are working with the World Business
Council for Sustainable Development
(WBCSD) to track nature-positive science
and the international response to
understand how we can learn from
the latest developments and work towards
a shared understanding of nature-positive
with other stakeholders.

Within WBCSD, we are active members
of multiple working groups including
the Forest Solutions Group and the Nature
and Nature-based Solutions project.
Through this engagement, we are helping
with the development of nature-positive
roadmaps for both the forest and energy
sector. The ‘Forest Sector Nature-Positive
Roadmap Phase I: A shared definition of
nature-positive’, published in November
2022, provides guidance and tools to
support forest companies in implementing
nature-positive strategies.

WBCSD is a Science Based Targets
Network (SBTN) corporate engagement
programme member. In 2022, Drax was
involved in the joint WBCSD and SBTN
consultation workshops of the SBTN
design phase, developing science-based
targets for nature through methods, tools,
and guidance.

We are a founding supporter of
the Get Nature Positive campaign.

Highlight on:
Post-COP15: our thoughts on the World Biodiversity Summit

Business and finance representatives formed a large
portion of the attendees at the COP15 summit in Montreal
and were united in their recognition of the need to halt and
reverse nature loss.

There was widespread support for adopting a target of ‘30 by 30’, meaning that 30%
of land and marine areas are designated as protected by 2030. Business leaders also
led the call for the adoption of the Kunming-Montreal agreement, particularly the
specific targets around reforming environmentally harmful subsidies and the reporting
of nature-related risk and opportunity in financial disclosures. Drax is excited to
embrace and contribute to these targets in the coming years, and to continue to be
part of the conversation around the Global Biodiversity Framework and the Global Goal
for Nature. Drax attended COP15, supports these nature-oriented priorities and is
reflecting them in our policy framework, in our actions and in our pledge of financial
resources to realise the necessary change. We expect this to be an important area
of focus in 2023.

Drax Group plc Annual report and accounts 2022

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The Taskforce on Nature-related
Financial Disclosures (TNFD)
Launched in June 2021, the TNFD is
an international initiative to provide
a framework on how organisations
can address environmental risks and
opportunities to channel capital into
positive action. The framework builds
on the existing Taskforce on Climate-
related Financial Disclosures (TCFD).

At the time of writing, the TNFD
is currently on its third beta iteration,
with the final TNFD framework set
for publication in September 2023.

We are committed to the management
and disclosure of our nature positive
risks and opportunities. In 2022,
we were selected alongside 22 other
companies to pilot the TNFD
framework with TNFD pilot partner
WBCSD. Drax was chosen among
others in the energy industry
to represent the renewables and
bioenergy sector.

Since October 2022, we have
participated in multiple workshops to
contribute to the development of the
TNFD framework, exploring priority
focus areas for the energy sector
through testing the guidance and
knowledge sharing. Findings and
feedback from the group will be fed
back to TNFD in 2023.

Drax Group plc Annual report and accounts 2022

Strategic report

People Positive

Enabling our people to achieve our strategy
is key to Drax achieving its ambitions.

Spotlight

Our Values

We care about
what matters

We’re a can-do kind
of place

We see things differently

We listen carefully

We do what we say
we’ll do

Find out more
on page 94

Introduction by Karen McKeever –
Chief People Officer

Enabling our people to achieve their
potential and feel they are enabled to do
their best is critical to Drax achieving its
ambitions. To be People Positive, we are
looking after the people who work for
and with us, as well as supporting the
communities in which we operate.
We do this by supporting the green skills
agenda, developing a talent pipeline,
and focusing on diversity and inclusion.
Our ambition is to make Drax a great place
for all colleagues to work, be themselves,
and grow, while being a good and
responsible neighbour.

With the impact of Covid-19 still being felt,
our people strategy aims to ensure that
colleagues have the resilience to adapt
and work effectively at a fast pace, whilst
having the confidence in and awareness
of the resources available to them to
manage current and future uncertainties.
An effective approach to helping our
people also means that as an organisation
we need to adapt. We are therefore
evolving our ways of working to create
an environment with the colleague
experience at its heart.

Our People Positive strategy objectives
are to:

• Ensure the organisation has the

diversity, skills and experience to deliver
our business strategy

• Bring to life a culture that is

representative of our strategic ambition

• Ensure our people are working as

effectively as possible, feel valued for
the work they do and their contribution
as a person to our workplace community

People Positive strategy
Our People Positive strategy encompasses
all aspects of a colleague’s experience
at Drax, including the systems we use,
our policies, our values, and our culture.

In 2022, we continued to review our
People policies to assess whether they
met the up-to-date needs of our business
and colleagues. We introduced a new
Bereavement policy which considers
a range of bereavement experiences,
including miscarriage.

Our Resourcing strategy underpins our
plans for growth, reflecting work with
the business to understand both current
and future resourcing needs. This has
included new advertising and engagement
strategies to attract, retain and develop
diverse talent pools that reflect the
demographics of the areas in which we
operate. It also includes our Strategic
Workforce Plan, which focuses on future
workforce planning, enabling us to grow
our business internationally and adapt
to business changes swiftly.

We continued to undertake reviews
of our reward strategies in each market,
with the intention that our people are
incentivised, rewarded and recognised
for their contribution. This helps us create
a high performance, inclusive culture.

During 2022, we started work on our
employee value proposition, which aims
to reorientate and integrate the
organisations culture and values and
support our global growth strategy.
This will create an environment where
colleague wellbeing is prioritised.

66 Drax Group plc Annual report and accounts 2022

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Our People

Total number of Group employees (1)
Employee engagement score
Total employee turnover rate

Unit

n
%
%

2022

3,229*
79
13.8

2021

3,053
79
29.5

2020

3,022
82
11

(1) Total number of Group employees as at 31 December
*

Limited external assurance by LRQA (limited assurance using the assurance standard ISAE 3000) for 2022 data as indicated.
For assurance statement and basis of reporting see www.drax.com/sustainability

Safety, health and wellbeing
Approach and governance for safety,
health and wellbeing
The safety, health and wellbeing of our
employees and contractors is a primary
focus for Drax. Our Group-wide Safety,
Health and Wellbeing policy (available on
our website) is supported by our
OneSafeDrax vision that all colleagues
have a role to play in safety for themselves
and those they work alongside.

Local Health, Safety and Environment
(HSE) performance is regularly reviewed by
each management team, with Group HSE
performance reviewed quarterly by the
Group HSE committee. Findings from an
assessment of captured data is reviewed
by the Executive Committee and the CEO
also reports on that analysis, progress
made on initiatives and areas for further
action to the Board at each meeting.
Additionally, Drax Leadership Team
sessions (held monthly) commence with a
‘safety standout’ section where key safety
messages are shared.

During 2022, we completed the roll-out
across all sites of a new HSE reporting
platform. This single system allows more
data analysis of incidents, corrective
actions, hazard management, risk
management and behavioural observations.
We expect to see improved analysis in 2023
as we develop dashboards to look at trends
in reporting that help us understand areas
for action and develop local objectives.

An important part of the processes,
systems and training which we adopt
is a recognition of the importance of
continued attentiveness, of learning
about existing and emerging workplace
hazards and risks and ensuring the
appropriate tone and commitment from
leaders and all colleagues in working
safely. In this way safety is acknowledged
to be a shared responsibility which is
enabled by ongoing vigilance and striving
to improve, recognising that as individuals
and as a collective we can do better.

Additional people data can be found
in our ESG Supplement, published on the
Drax website.

Employment contracts

Employees per country

Full time
Part time

93%
7%

UK
US
Canada
Japan

72%
12%
15%
<1%

Employees per business unit

Employment gender (total workforce)

Pellet production 23%
21%
Generation
27%
Customers
29%
Corporate

Female
Male

32%
68%

Note: headcount as at 31 December 2022
*

Limited external assurance by LRQA (qualified opinion) using the assurance standard ISAE 3000 for 2022
data as indicated. For assurance statement and basis of reporting see www.drax.com/sustainability

My Voice survey 2022:

“90% of colleagues
believe their
supervisor/manager
sets the right example
when it comes to
being safe on the job”

Safety Management Systems
We have safety management systems
(SMS) in place to promote safe workplaces
for our people. During 2022, we aligned all
our Pellet Production sites to one HSE
management system across the US and
Canada. Our Customers and Corporate
sites in the UK continue to implement
a SMS, with a focus on promoting
wellbeing and a continuous improvement
in our health and safety culture.

Using a risk-based methodology designed
to assess, improve, and demonstrate the
adequacy of our HSE business processes,
a third-party undertakes our HSE internal
assessment. Each business receives a
report for local management’s ownership
of the improvement areas, and the overall
assessment is reported to the quarterly
Group HSE Committee and to the
Audit Committee. In 2022, this happened
in July and November respectively. The
Group HSE Committee provides oversight
on HSE related risks, and the Committee’s
Terms of Reference were reviewed
in June 2022.

Drax Group plc Annual report and accounts 2022 67

Strategic report

Sustainable Development continued
People Positive

Health and safety compliance
Wherever we operate, we seek to establish
an open and direct partnership with
the local health and safety agencies.
We provide further information on safety
aspects below:

• As reported in 2021, following

notification of charges relating to a
violation of occupational health and
safety laws arising from an explosion
at the Entwistle pellet plant in
February 2019, Drax pleaded not guilty
to all charges. In September 2022, all
charges against Drax were dismissed.
• We have received notification from the
Health and Safety Executive in relation
to non-compliance with the Pressure
Systems Safety Regulations (2000) at
Drax Power Station. Drax consider this
to be an administrative breach and have
challenged the notification, and we are
awaiting a formal response from the
Health and Safety Executive.

Safety Performance
Each business unit submits monthly
reports on HSE performance, including
our total recordable injury rate (TRIR).
The Board receives an update at each
meeting as part of the CEO report, which
includes information on any incidents and
trends. We have a process to investigate
injury events, with particular focus on
those with a potential to become more
severe, to ensure we establish root causes
and learn the lessons we need before
sharing those findings and learnings
across the organisation, where relevant.

In 2022, our total TRIR was 0.44 per
100,000 hours worked, against a target
of 0.20 (2021: 0.22 per 100,000 hours
worked, against a target of 0.20).
This is not where we want our safety
performance to be and remains a primary
focus for us. However, it does reflect our
improved visibility on incidents and
reporting in the year as changes have
been introduced across the Pellet
Production teams that better capture
incidents and provide tools for assessing
and reporting on actions being taken.

In September 2022, we conducted a
‘safety standdown’. This was an
opportunity for all our operations and
support functions to engage in a
conversation about safety, as an avenue
for collating ideas on how we can improve
our safety performance. The safety
standdown was launched with a video
from the CEO to all colleagues,
emphasising the importance of safety.
Our teams are now tracking their
commitments to improving safety
behaviours and specific actions.

As we implement our HSE improvements,
we are investing in maturing our safety
culture. Through a training and mentoring
programme, including hazard awareness
and risk assessments, we expect to see
reductions in TRIR during 2023. We plan
to conduct relevant benchmarking in 2023
on our injury rates, and TRIR will form part
of the safety scorecard metric in the
bonus calculation.

Process safety
Process safety is the application of
engineering and management principles,
guidelines, and tools to the identification,
assessment, and control of the risks
associated with the release of hazardous
materials during the design, operation,
and maintenance of our industrial
processes. The goal of our process safety
is to prevent or mitigate the consequences
of accidental releases of hazardous
materials, which can include chemical
spills, explosions, and fires.

Our Group-wide Process Safety Policy
focuses on how we identify and manage
process risk to protect our people, assets,
the environment, and the communities
in which we operate. It reflects our
commitment to reducing the potential for
a major accident, through the application
of improved plant and process controls,
and the training and awareness of
our people.

During 2022, we embedded process
safety across the Generation business
and continued the journey of integration
across our Pellet Production business.
Our process safety principles are in line
with industry good practice and focus
on controls of plant, process and people.
A new process safety dashboard was
delivered in 2022, giving management
and operations teams visibility of
process safety compliance against targets.
As part of continuous improvement,
we will update and adapt this during 2023
to reflect best practice. We aim to improve
and consolidate our process safety
measures by adopting a multifaceted
approach to the scoring that highlights
and prioritises improvement areas.

Process safety performance is reported
monthly to the Executive Committee.
We expect that all process safety incidents
with high potential are routinely
investigated to establish root causes and
enable corrective actions. The actions
focus on preventing reoccurrence and
we share the lessons learned across
the Group.

Health and safety performance

TRIR – total(1) (2)
TRIR – employees
TRIR – contractors

2022

0.44*
0.46
0.39

2021

0.22
0.27
0.11

2020

0.29
–
–

2019

0.22
–
–

(1) TRIR is the total fatalities, lost time injuries and medical treatment injuries per 100,000 hours worked.

Total includes both employees and contractors. There were no fatalities in any of the years stated above.
(2) Limited external assurance by LRQA (limited assurance using the assurance standard ISAE 3000) for 2022

data as indicated. For assurance statement and basis of reporting see www.drax.com/sustainability

Drax Group plc Annual report and accounts 2022

For additional health and safety
performance data, see our
ESG data supplement

Wellbeing
We have given increased attention
and resources to colleague wellbeing
and our strategy includes support through
our benefits, employee assistance
programmes, manager and leader
education, and mental health first aiders.
We have a wide-ranging communication
programme to help raise awareness and
educate colleagues about the support
available to them, including our Living Well
newsletter and on-site events. In the UK,
we held wellbeing fairs for the first time
in November, giving colleagues the
opportunity to interact with benefit
providers first-hand.

With many colleagues feeling the impact
of the rising cost of living, we introduced
a new financial wellbeing partner, nudge.
As well as providing personalised online
financial wellbeing hints and tips, nudge
worked with us to provide seminars
covering topics including how to navigate
the cost of living crisis. In 2023, we will
continue to work closely with this provider
to offer ongoing support to colleagues.

We know that wellbeing is closely
interlinked with inclusion. To create an
inclusive environment, our wellbeing and
inclusion strategies are closely aligned.
Both are delivered through colleague
events (both in-person and online) and
internal communications (such as
newsletters) to encourage colleagues
to take part in awareness sessions
and discussions.

Building psychological safety, where
colleagues feel comfortable to talk about
difficult topics, has also been a key priority
during 2022. Through communications
and events, we tackled sensitive subjects,
including menopause, male mental health,
and testicular and prostate cancer.

With the support of an external specialist,
we increased the number of colleagues
in the UK trained as mental health
first aiders, enabling appropriate
representation for each UK business area.
This has ensured these colleagues are
able to provide support to the rest of the
workforce. We have also continued our
work to understand the appropriate
offering for our North American colleagues.
We are aiming to build on the energy and
enthusiasm of our existing mental health
first aiders to act as wellbeing advocates
across our organisation, to support our
wellbeing strategy.

Colleague representation
and engagement
Engaging with our colleagues is a priority
and starts with listening to, and better
understanding, their views. Established
in 2019, our My Voice Forums (MVFs) are
a valuable way for the Board and senior
management to undertake such
engagement. The MVFs are made up
of colleague members from each part of
our business, to ensure representation
for every function. A member of the
Exectuive Committee and an HR
representative support these forums and
attend each meeting. The MVF chairs
meet quarterly with the Chair of the Board
of Directors and the CEO to discuss
colleague sentiment and to provide
feedback on key topics. You can read more
about such Board-level engagement with
the MVFs on page 109.

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We regularly survey our colleagues to
understand levels of engagement and
inclusion, which helps us understand
progress or areas of challenge in making
Drax an inclusive and positive place
to work. Our inclusion index is also one
of the key metrics on our Scorecard –
see page 147 for more information.

Based on the findings from our annual
survey undertaken in October 2021, our
engagement and inclusion scores have
improved compared to 2021. The 2021
engagement survey highlighted
that leading change, our social and
environmental commitment, and providing
opportunities for careers and development
are what matter most to our colleagues.
In 2022, our survey results showed that
good progress has been made on leading
change on and careers and development.
However, there is more work to do to help
build colleague understanding around our
social and environmental commitments.
This will be addressed through our
community strategy and our work to
improve transparency and reporting on
our biomass sourcing.

Diversity, equity and inclusion (DE&I)
We are committed to a supportive, diverse
and inclusive working environment, where
employees can be themselves. Genuine
inclusion that is reflected in the attitudes
of those people within the organisation to
being open to accepting, respecting and
collaborating with people whose ideas and
backgrounds differ from their own, drives
diversity, which drives innovation. As the
Group grows and increases our global
footprint, we draw on the culture and
heritage of the communities and countries
where we operate. This supports our
business for future growth and delivers
on our purpose: to enable a zero carbon,
lower cost energy future.

Diversity Data, gender
balance

Board:

44% female

56% male

Senior career levels:

31% female
69% male

Drax Group plc Annual report and accounts 2022 69

Strategic report

Sustainable Development continued
People Positive

Our My Voice Survey gives an insight into
DE&I at Drax, and our Inclusion Index in
2022 was 80% – a 3% increase from 2021.

Our key activities in 2022 included
the following:

• We focused on building an experienced

DE&I team to drive our progress.
The team undertook a review of our
DE&I interventions globally and used
this to enhance our DE&I strategy.

• We built the foundations for the launch
of our four Colleague Resource Groups
(CRGs) planned for 2023. Our CRGs will
be a space for colleagues who are
passionate about inclusion to support
our inclusion goals, and for colleagues
from marginalised communities to
come together.

• We continued to roll-out our Inclusive

Management Programme for managers.
The programme uses immersive learning
to build manager capability around
inclusion, from understanding bias
to having challenging conversations.
By the end of 2022, over 180 managers
had attended the programme, which is
being rolled out to North America in
2023. Alongside this, we also launched
our global ‘We Belong’ e-learning
programme for all colleagues.

• In November 2022, we sponsored the

POWERful Women Conference, focused
on how the energy sector can build
inclusive cultures and deliver on
diversity goals. Twelve female
colleagues from across Drax attended
the conference and brought those
learnings back to their own roles.
Our partnership with POWERful
Women has also seen us involved in
their campaign to widen participation of
women in the energy sector, and several
colleagues from Drax will be featured
in this campaign in early 2023. This is
an important issue for Drax, and we
support the aim to encourage more
women to consider a career in energy.

• In 2022 we refreshed our self-

identification project ‘Count Me In’.
The purpose of ‘Count Me In’ is to gain
greater insight to the demographics of
our colleagues, so we can make more
informed and strategic decisions. By the
end of 2022, 71% of our colleagues had
completed the ‘Count Me In’ survey,
and we will continue to take action
to improve this.

Further information on diversity is
available in the Corporate Governance
Report, page 100

Levelling up and social mobility
Drax is at the forefront of bringing
opportunities and growth to Yorkshire and
the Humber – helping to work to a goal
of creating thousands of jobs. Our most
recent report, ‘Capturing Carbon at Drax:
Delivering jobs, clean growth and levelling
up the Humber’, shows how the Humber
region could be the cornerstone of a green
economic recovery by creating and
supporting thousands of jobs.

• We are partnering with Selby College
to develop the UK’s first educational
programme in carbon capture.
• We are part of the Zero Carbon

Skills Taskforce.

• We are a signatory to the Social Mobility
Pledge, committing to social mobility
through outreach, access and
recruitment.

Development and training
We are committed to developing new
talent, providing our colleagues with the
skills and capabilities to support them in
fulfilling their career aspirations. In 2022,
we delivered 2,352 total colleague training
hours, and 12,415 digital learning hours
using a blended learning approach.
We have a proud history of investing
in new talent by providing internships,
graduate programmes, work experience
and apprenticeships – our longest-running
apprenticeship schemes at Drax Power
Station were established almost twenty
years ago. Since 2006 we have hired 186
apprentices in total and have held a 91%
retention rate of apprentices completing
the programme (compared to a national
acerage of 57.5% in 2020/2021). Currently,
in the UK we have 54 apprentices with
another 63 colleagues working on
apprenticeship qualifications in the
business. We also have placements
for interns and graduates.

In 2022, we launched our Senior
Leadership Development offering,
with 88 Senior Leaders who participated
in 2022. Our senior leaders continue
to participate in our Inclusive Leadership
Programme, which supports managers
in helping to improve diversity outcomes,
and the course received 91% satisfaction
feedback. We plan to expand our Inclusive
Leadership Development programme
in 2023 with participation by colleagues

Drax and Selby College regularly
host Science, Technology,
Engineering and Maths (STEM)
events to inspire young people to
enter careers in STEM. In 2022, over
170 Year 9 pupils from four different
local schools took part in a range of
fun and engaging STEM activities,
introducing them to future skills,
training, and employment
opportunities. The event engaged
analysts and engineers from Drax’s
graduate and apprenticeship
schemes to lead some of the
sessions, as a way to inspire the next
generation and show them the
career opportunities available
to them.

in North America. Our high-potential
Future Creators programme, launched
in 2019 and designed to support the
accelerated development, retention, and
growth of our future leadership pipeline,
continues to be successful. To date,
49 colleagues have completed it and 86%
of all of the participants have either moved
up a career level or moved into broader
roles since joining the programme.

Community and charity
At Drax, we care about being a socially
responsible business. By making a positive
contribution to the communities in which
we operate, and by supporting good
causes, our intention is to play a part in
helping to shape a better future for people
living in areas which have a connection
with one of our businesses.

As part of that work, we deliver charitable
donations and employee volunteering
initiatives. In 2022, Drax UK employees
gave £14,422 and Drax UK gave £592,372
in donations, including through employee
match funding, payroll giving, our
community fund, community partnerships
and fundraising days.

We offer employee volunteering days,
providing one day of paid time per year
to take part in volunteering activities.
In 2022, 59 volunteering days were
completed across Drax Group. Examples
of employee volunteering included
supporting primary schools, vaccine
clinics, and refugee centres.

Drax Group plc Annual report and accounts 2022

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comply with the Drax Group Supplier
Code of Conduct (covering issues such as
human rights, modern slavery, anti-bribery
and corruption and financial crime) and
our sustainability requirements.
A breach of these obligations can,
if not corrected in a satisfactory manner,
lead to the termination or suspension
of a relationship.

We also commission independent risk
reports to help us identify risks and
establish mitigations that we can
incorporate into our supply contracts.
Beyond this, we are further developing
our engagement with our pellet suppliers
to Drax Power Station. These activities
will include:

• Development of a supplier risk

assessment

• Design and implementation of supplier

scorecards

• Regular visits to each supplier’s
operational sites, and catch-up
video calls

• Hosting webinars, open days, site tours,

training and networking events
• Active participation in industry

conferences and events

Ethics and integrity
At Drax, we are committed to conducting
business ethically, with honesty and
integrity, and in compliance with relevant
laws and regulations. We do not tolerate
any form of bribery, corruption, human
rights abuse, or other unethical business
conduct.

Governance of Ethics and
Business Conduct
Everybody at Drax is personally
responsible for ethical business conduct.
Managers are responsible for
demonstrating leadership on ethical
matters and supporting their teams
to apply our ethical principles.

Being a good neighbour
Drax strives to be a good neighbour
and is committed to playing a positive role
in the communities in which it operates.
Drax does this through a combination
of community outreach initiatives
and grant funding for local projects
and programmes.

In 2022, Drax Group donated £843,561
to support 225 community initiatives (this
includes the Drax UK figure of £592,372
on the previous page). For example, in the
US we donated $10,000 to environmental
group Ouachita Green in Louisiana to
support community improvement efforts
in Ouachita Parish, close to our Monroe
office. This donation supported projects
such as planting oak trees to replace those
damaged in storms.

In the UK, Drax Power Station donated
£15,125 to Selby High School as part of
a five-year programme to supply laptops
to each annual intake of Year 7 pupils from
low-income families. The pupils are able
to use the laptops throughout their time
at the school, increasing their access to
technology to support their learning.

In Scotland, we have been supporting the
Galloway Glens Landscape Partnership
in and around the Water of Ken and River
Dee. This project aims to connect people
to their heritage and support modern,
rural communities close to our Galloway
Hydro Scheme to secure a prosperous
future. For example, we conduct and
participate in nature-related research trials
and restoration projects, and support
community events.

We have included a community section
within the newly developed ESG
dashboard. It measures our engagement
with the community and will be used to
evaluate our progress. In 2023, we intend
to launch the new Drax Foundation
to invest in our communities through
multi-year funding for non-profit
organisations. These organisations
will deliver improved access to STEM
education, skills development for
underserved communities, or benefit the
natural environment. We expect to work
collaboratively with representatives from
our local communities to create Action
and Engagement Plans, to ensure we are
listening and responding to local needs.
You can read more about the Foundation
on page 32.

Our Skylark Nature Reserve is a
500-acre site near to both the power
station and the village of Barlow,
Selby. It includes a woodland area,
wildflower meadow and over 100
species of wildlife, including
endangered species. Our Skylark
team work with ecologists on
conservation work and host visits
from local schools.

Engagement with our suppliers
Our Buying teams and the Responsible
Sourcing team manage our engagement
with pellet suppliers to Drax Power
Station. They work closely with the
Industry Frameworks and Supply Chain
Compliance and Business Ethics internal
teams at Drax.

The Responsible Sourcing team’s first
line of engagement for biomass suppliers
is through our Sustainability Data System.
This questionnaire-based system assesses
the risks associated with suppliers based
on their answers. For most of our pellet
suppliers at Drax Power Station,
we also use Sustainable Biomass Program
(SBP) certification (97% of volume in 2022
was SBP-compliant). This helps ensure the
biomass we receive at Drax Power Station
meets our requirements. For non-SBP
wood pellet suppliers to Drax, we appoint
third-party auditors. All biomass contracts
supplying to Drax Power Station must

Drax Group plc Annual report and accounts 2022 71

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Sustainable Development continued
People Positive

Business Ethics Documentation
Framework
Our business ethics documentation
framework consists of principles, policies,
and guidance.

Audit Committee
receives an annual
report about
EBCC activity

Executive
Committee

Drax Code of Conduct
The principles are set out in our Drax Code
of Conduct (Drax Code), which outlines
our approach of ‘doing the right thing’, and
identifies the behaviours expected from
employees and contractors on a broad
range of topics, such as ethical behaviour,
health and safety, and whistleblowing.
The importance of complying with policies
and guidance is integral to the Drax Code,
which includes a series of embedded
training videos. The consequence of failing
to comply with the Drax Code is clearly
articulated in the Code itself.

Ethics and
Business Conduct
Committee (EBCC)

Business Ethics policies and guidance

Our business ethics policies and guidance
relate to:

• Anti-Bribery and Corruption
• Anti-fraud
• Corporate Criminal Offences

(Anti-facilitation of Tax Evasion)

• Fair Competition
• Financial and Trade Sanctions
• Human Rights
• Privacy
• Speak Up (Whistleblowing)

We reviewed each of these policies
and the Drax Code in 2022.

A series of guides support the above
policies. Some of these guides are
subject-specific (for example, Fair
Competition), others span multiple policies
(for example, Ethical Due Diligence).

In 2022, the Drax Code, Anti-Bribery
and Corruption Policy, Privacy Policy
(and training), and a guide summarising
all Business Ethics policies were deployed
as mandatory reading to colleagues in
Canada. This formed part of wider
integration activities into the Drax Group
Policy Framework. Other Group colleagues
received annual eLearning refreshers
on the Drax Code and Privacy. Additional
training to certain ‘at higher risk teams’
was also provided throughout the year
on other Business Ethics related topics.

As a result of our expansion and opening
an office in Japan, integration planning
activities for Drax Asia also commenced
in 2022, with an employee handbook
to be developed in 2023.

Business Ethics
team

The Ethics and Business Conduct
Committee (EBCC), a sub-committee
of the Executive Committee, oversees
our business ethics programmes.

The EBCC comprises senior leaders,
meets quarterly, and was chaired
by the Chief Financial Officer during
2022 until November, when the
Group General Counsel formally
assumed this role following
ExCom approval.

The EBCC serves as an escalation
route for higher risk ethical
decisions, which is supported by
an agreed Escalation Protocol.

The Audit Committee provides
an additional layer of oversight,
receiving an annual summary
on EBCC activity. It also receives
quarterly updates on Speak Up
reports.

Our Business Ethics team takes steps
to understand our risk profile. The team
also works on developing, deploying,
and maintaining the associated policies,
procedures, awareness raising
communications and training materials.
In addition, the team monitors and
evaluates compliance and investigates
potential breaches of policy. Our Internal
Audit function provides assurance
on the robustness of our programmes.
Our Anti Bribery and Corruption
programme was the most recent to be
audited (in September 2022).

Drax Group plc Annual report and accounts 2022

Employees completed Code
of Conduct e-learning

99%

Employees completed
an Annual Business
Ethics Declaration

86%

Note: Excludes employees on long-term absence

from Drax during the declaration period, and does

not include colleagues based at our Princeton and

Japanese sites who joined the business

during 2022.

Drax Supplier Code
Our Supplier Code sets out the
commitments and standards we expect
from our third parties, and any
subcontractors they use, in relation to
working for Drax. The Supplier Code,
which was reviewed and updated in 2022,
includes details of how any third party
can ‘speak up’ about a concern over
non-compliance with the Supplier Code.

During 2022, we continued to roll out our
Supplier Code to relevant third-party
suppliers, incorporating it into the
associated contracts by means of specific
business ethics clauses (including a
termination clause for serious breach).

We take a risk-based approach to ethical
due diligence, with appropriate suppliers
being subject to the relevant checks prior
to on-boarding. Our due diligence system
enables the continual monitoring
(i.e., in relation to international sanctions,
regulatory enforcement action and
as relevant, negative media) of suppliers
during contract lifecycle. When
concerning alerts are raised, they are
investigated and, where appropriate,
escalated to the Ethics Business Conduct
Committee (EBCC) for consideration.

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Business Ethics programmes
Supply Chain Human Rights (SCHR)
Drax has been a signatory of the UN
Global Compact (UNGC) for five years and
has embedded the ten principles of the
Compact through our policies, culture, and
ways of working. We also participate in the
UNGC’s Modern Slavery Working Group.

We set out our human rights
commitments in our Human Rights policy,
the Drax Code, and our Supplier Code.
Our Human Rights policy and codes are
publicly available.

We have a long established cross-
departmental SCHR Working Group,
which reports quarterly to the EBCC.
You can find more detail about the
activities of the Working Group in our
Modern Slavery Statements.

Anti-Bribery and corruption (ABC)
We have a zero-tolerance approach
to bribery and corruption. Our ABC
programme is based on ‘Adequate
Procedures’ guidance published by the
UK Ministry of Justice and the EBCC
oversees it (along with all other business
ethics programmes). In 2022, our ABC
programme was subject to internal audit,
with controls deemed to be appropriate
and working effectively to manage risks.
This aligned to the internal risk assessment
that was conducted in 2022. In 2023,
we will be focused on addressing the due
diligence related recommendations
from the audit.

Fair competition
We are committed to conducting our
business in accordance with all applicable
fair competition laws and have adopted
a zero-tolerance approach to any anti-
competitive behaviour or activity. Our Fair
Competition programme now covers UK
competition law, US anti-trust law and
Canadian laws, and includes mandatory
e-learning for ‘at higher risk’ teams. During
2022 we engaged lawyers to provide an
external risk assessment of the
programme which they deemed as
satisfactory (‘green’ traffic light rating).

Data privacy and security
The Data Protection team manages our
Privacy programme. We take seriously the
privacy and security of the personal data
we control, working closely with our
people, customers and third parties.

In 2022, the Data Protection team
completed the annual review of policies
and notices to confirm they remain in line
with prevailing legal and regulatory
requirements. The updates encompassed
new jurisdictions where the group
operates (i.e., Canada and Japan).

During 2022, 14 reports
raised across internal and
external Drax channels
were managed under the
Speak Up programme.

We listen
carefully

New system improvements were
implemented to third-party onboarding
for Data Protection and Information
Security Due Diligence in the UK,
with plans to roll out across other
jurisdictions in 2023. These changes
provide that contract assessments take
place on the inclusion of the correct
clauses supplied to the Procurement team.
Other improvements include refresher
training on data protection topics,
improved working practices with the
security function, and continued education
within the Data Protection team.

Data Protection investigations into
potential data breaches were investigated
in a timely manner, with good support
from operation teams. In some cases,
timely resolution included sending a
notification to relevant authorities
if necessary (such as the Information
Commissioners Office).

Individual rights requests from customers
and employees were processed within
required timescales, along with requests
made by appropriate authorities
(such as the Police).

Speak Up (whistleblowing)
We are committed to transparency,
openness, and continuous improvement.
We encourage those working for and
on behalf of Drax, and our third parties,
to raise genuine concerns (via our
reporting channels) about practices that
could breach laws, regulations, or our
own ethical standards.

Drax has a zero tolerance of retaliation or
victimisation. We have processes in place
to apply appropriate consequences should
an individual retaliate against, or victimise,
a reporter in any way.

Of the reports raised (or carried over
and closed out) in 2022 and considered
by the Board, several related to safety
standards and practices. Concerns were
also raised about inclusivity and standards
of behaviour.

The Board sought action by management
to address the matters raised, where
substantiated, in addition to an
assessment of the underlying causes.
This involved Non-Executive Directors
participating in additional discussions
with management on potential initiatives
and programmes.

Four matters raised in 2022 remain under
investigation at the time of this report.

For more information, please see the
Corporate Governance section
on page 100.

Corporate Criminal Offences (CCO)
(Anti-facilitation of Tax Evasion)
Our ethical due diligence and payment
procedures have been set up to facilitate
the conduct of business which is compliant
with applicable tax laws. These procedures
are subject to regular internal audit.

In 2022, we aligned our documentation
for Canadian colleagues.

Financial and trade sanctions
Our ethical due diligence and contracting
processes include the consideration
of financial and trade sanctions risk.
Risk-based monitoring of counterparties
is also in place. An assessment of the
Financial and Trade Sanctions policy
programme in the second quarter of 2022
found the controls to be appropriate and
working effectively.

There was heightened sanctions-related
activity in 2022 due to the Russian
invasion of Ukraine. The Financial and
Trade Sanctions policy, coupled with the
work of our Business Ethics and Legal
teams, supported an effective response.

Non-financial information
statement
We have summarised our policies and
disclosures in relation to non-financial
matters, in line with the Non-Financial
Reporting (NFR) requirements of the
Companies Act 2006.

Drax is a participant of the United Nations
Global Compact (UNGC) and this report
forms our UNGC Communication on
Progress. We have mapped the NFR
requirements to the four issue areas of the
Ten Principles of the UNGC. Except where
indicated as an internal policy, all policies
and codes are available on our website.

Drax Group plc Annual report and accounts 2022 73

Strategic report

Sustainable Development continued
People Positive

Non-financial information statement

UN Global Compact
Environment

Non-Financial Reporting requirement
Environmental matters

Labour

Employees

Social matters

Human rights

Respect for human rights

Policies, due diligence processes and outcomes
Group Environment policy
Group Climate policy
Sustainability policy
Responsible Sourcing policy
Carbon emissions
Nature Positive
Environmental management
Code of Conduct
Supplier Code of Conduct
Group Safety, Health and Wellbeing policy
Human Rights policy
Gender Pay Reporting
Safety, health and wellbeing
People, culture and values
Community and Charity policy (internal policy)
Positive social impact
Supplier Code of Conduct
Human Rights policy
Modern Slavery Act statement
Ethics and integrity

Anti-corruption

Anti-corruption and anti bribery matters Code of Conduct

A description of the Company’s
business model
A description of the principal risks

A description of the non financial key
performance indicators

Anti-Bribery and Corruption policy (internal policy)
Ethics and integrity
Business model

Climate-related financial disclosure
Principal Risks and Uncertainties
Remuneration committee report

ESG data supplement 2022 – Drax website

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ESG Summary – ratings
B
CDP Climate Change
In 2022, Drax Group plc received a score
of B (on a scale of F – A) in the Climate
Change. CDP is a not-for-profit charity
that runs the global disclosure system
for investors, companies, cities, states
and regions to manage their
environmental impacts. Please see the
CDP website for further details.

A complete summary can be found in our ESG Supplement on the Drax website

B
CDP Forests:
In 2022, Drax Group plc received a
score of B (on a scale of F – A) in the
CDP Forests. CDP is a not-for-profit
charity that runs the global
disclosure system for investors,
companies, cities, states and regions
to manage their environmental
impacts. Please see the CDP website
for further details.

AA
MSCI:
In 2022, Drax Group plc received a rating of AA (on a scale of
AAA-CCC) in the MSCI ESG Ratings assessment. The use by drax
group plc of any MSCI ESG research LLC or its affiliates (“MSCI”) data,
and the use of MSCI logos, trademarks, service marks or index names
herein, do not constitute a sponsorship, endorsement,
recommendation, or promotion of Drax Group plc by MSCI.
MSCI services and data are the property of MSCI or its information
providers and are provided ‘as-is’ and without warranty. MSCI names
and logos are trademarks or service marks of MSCI.

B
ISS:
As at 21/02/2023, Drax Group plc has
a ISS Corporate Rating of B- Prime (one
a scale of D- to A+). Corporate Rating
prime status is awarded to companies
with an ESG performance above the
sector-specific Prime threshold.

62
Moody’s:
In 2022, Drax Group plc received
a score of 62 from Moodys ESG
Solutions (on a scale of 0 to 100,
with 100 being the highest score).

Drax Group plc Annual report and accounts 2022

25.9
Sustainalytics:
In 2022, Drax Group plc has a Sustainalytics ESG Risk Rating of 25.9
(on a scale of Low Risk 0 to High Risk 100).

Viability statement

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In accordance with the UK Corporate Governance Code, the Directors have assessed
the prospects of the Group over a period significantly longer than the 12 months
required by the going concern provision.

The assessment of viability was led
by the CEO and CFO, in conjunction
with management teams, and presented
to the Board as part of the annual planning
process. In reviewing this assessment,
the Board considered the principal risks
faced by the Group, financial forecasts
and sensitivities, availability of funding
and the strength of the Group’s control
environment. Detail was also provided
on longer-term risks.

Assessment period
The Board determined to conduct this
assessment over a period of five years
(2021: five years) considering:

• The Group’s Business Plan (the Plan)
which is prepared annually, updated
three times during the year and used
for strategic decision-making, includes
a range of financial forecasts and
associated sensitivity analysis.
This Plan covers a one-year period in
detail, before extending into the medium
term. Five years is considered to be
an appropriate mid-point in this range,
when considering length of forecast
and expected accuracy over the
forecast period and this time period
receives specific focus from the Board.

• Within the forecast period, liquid
commodity market curves and
established contract positions are used.
Liquid curves typically cover a one to
two-year window and contracted fuel
commitments with third parties extend
out to five years. The Group’s foreign
exchange exposure is actively hedged
over a rolling five-year period. Selecting
a five-year period balances short-term
market liquidity whilst including
medium-term contractual positions.
• The Group benefits from the stable and
material earnings stream available from
current subsidies until 31 March 2027.
In the period beyond current subsidies
the viability modelling assumes that Drax
Power Station runs on a merchant basis.

• A significant proportion of the Group’s

debt facilities mature in this period, with
91% maturing in the five-year window.

• There is limited certainty around the

Group’s markets and regulatory regimes.
However, the Board has assumed no
material changes to the medium-term
regulatory environment and associated
support regimes beyond those already
announced at the date of this report.

The business considers longer-term
forecasts for other purposes, including
value in use analyses and estimates of
useful economic lives, in line with the
requirements of accounting standards and
as set out in note 2.4 to the Consolidated
financial statements.

Review of principal risks
The Group’s principal risks and
uncertainties, set out in detail on pages 77
to 91 have been considered over the
viability assessment period. The risks
were evaluated, where possible, to assess
the potential impact of each on the
viability of the Group, should that risk arise
unmitigated. The impacts were included,
where appropriate, as sensitivities to the
Plan and considered by the Board as part
of the approval process.

The Group has a proven record of rapidly
adapting to changes in its environment
and deploying innovative solutions
to protect its financial performance.
Previous adverse events have arisen
and provided challenges which tested
the ability of the Group to deliver on its
targets but, on each occasion, it has been
able to respond positively.

Relevant principal risks
The principal risks with the potential to
exert significant influence on viability are
considered to be: trading and commodity,
political and regulatory, biomass
acceptability and plant operations
A significant adverse change to the status
of each risk has the potential to place
material financial stress on the Group.
As described on pages 77 to 91, some
of these risks have increased during 2022,
as market conditions and commodity
prices have continued to be highly volatile.

A summary of the scenarios modelled
can be seen below. In addition to modelling
the impacts on a standalone basis,
severe but plausible scenarios that
included a combination of unforeseen
plant outages, adverse movements
in commodity prices and reductions
in subsidy income were considered.

As part of its review of principal risks and
uncertainties, the Group considered risks
related to climate change. This review
concluded that such matters remained
low risk to the Group over the period that
viability has been assessed. In particular,
the work performed over climate related
risks, as part of the TCFD process (see
page 52), and in our impairment analysis,
suggests that climate change does not
currently present a significant threat to
viability on a net basis, notwithstanding
the changes noticed by the business in
weather patterns, as noted in the review
of principal risks on page 77.

The most likely way in which climate
change risks could manifest is through
a failure in plant operations, either
in the Pellet Production or Generation
businesses. The impact of these scenarios
is included in the analysis as noted in the
table below and further information
is contained within note 3.8 of the
financial statements.

The outcomes of this analysis indicated
that the Group would be able to withstand
these scenarios without compromising
upon its ability to meet liabilities as they
fall due. This is further considered in the
‘Review of financial forecasts’
section below.

Principal risk

Description of scenario modelled

Trading and commodity
Political and regulatory/
biomass acceptability

Plant operations/
Climate change

50% power price downturn
Zero ROC recycle value after CP22

20% increase in biomass costs to produce

+10% increase in biomass forced outage rate
90-day outage on ROC unit (in 2023)
Failure of a large supplier to deliver
Pellet production volume decrease of 7%

Severe but plausible case Combination of the scenarios above

2023 impact
>20% of
opening cash
and committed
facilities?

No
No

Yes

Yes
Yes
Yes
No
Yes

Drax Group plc Annual report and accounts 2022 75

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Viability statement continued

Consideration of other risks
The remaining principal risks, including
transitional impacts of climate change,
were considered and were not deemed to
present a significant threat to viability over
the assessment period. The impact of
increased expenditure or a loss of margin
as a result of one of these risks (e.g. a
cyber attack resulting in disruption to
planned generation) can be inferred from
the scenarios already modelled.

If the Group is not successful in achieving
its strategic aims, then this could pose
a threat in the longer-term. However,
analysis of this risk suggests that this
would materialise beyond the assessment
period, and therefore consideration
has been presented in the longer-term
risks section below.

Longer-term risks
Considering a time horizon extending
beyond the viability assessment period,
the two principal risks which are believed
to be most significant are climate change
and strategy.

Climate change could have a physical
impact via an increase in the frequency
of extreme weather events, leading
to sustained reduced profitability for the
Group because of supply chain disruptions.
In addition, as the speed of transition
to lower-carbon/net-zero increases there
is a risk that new policies and regulation
impact the Group’s operations or plans.
However, climate change also provides
companies with an opportunity. For more
information on climate-related risks and
opportunities, please read the TCFD
section on page 52.

Failure to deliver on our strategic
objectives could also pose a threat
to the Group over the longer term.
The achievement of these objectives
is forecast in the period beyond the
assessment period. The models used to
assess viability are based on the analysis
required by IAS 36, and therefore exclude
enhancement capital expenditure and
the associated cash inflows. An example
of such inflows and expenditure is for
future BECCS projects.

If returns achieved from strategic
initiatives were significantly below
forecasts then, given the level of capital
expenditure required to complete the
plans, this could present a risk to the
Group. However, a detailed analysis of the
returns achievable, including reasonably
possible downside scenarios and potential
impacts on viability, would be performed
ahead of any final commitment by the
Board to progress each initiative, in line
with our long-standing disciplined
approach to capital allocation.

Review of financial forecasts
The Plan considers the Group’s financial
position, performance, cash flows, credit
metrics and other key financial ratios and
was most recently updated to reflect
current market and external environment
conditions in January 2023. It is built by
business unit and includes growth
assumptions appropriate to the markets
each business serves. Climate change
is also factored into these forecasts, as,
for example, forecast future energy prices
are based on decarbonisation targets
committed to by the UK Government.

The Plan includes assumptions, the most
material of which relate to commodity
market prices and levels of subsidy
support available through the generation
of biomass-fuelled renewable power.
It is underpinned by the earnings of the
biomass generation units, albeit these
reduce in the model at the end of current
subsidies in early 2027. The impact of
the Energy Generator Levy announced
in November 2022 has been considered
when preparing financial forecasts
and sensitivities.

The Plan is subject to stress testing,
which involves the construction of
reasonably foreseeable scenarios,
including those aligned to the principal
risks (described above) which test the
robustness of the Plan when key variables
are flexed both individually and in unison.
Where such a scenario suggests a risk to
viability, the availability and quantum of
mitigating actions is considered.

As part of stress-testing the Plan,
a ‘severe but plausible’ scenario was
constructed and assessed. Rather than
a single event, the Board considers the
most significant downside scenario that
could reasonably arise in the assessment
period to be an aggregation of incidents
either in a short timeframe or repeatedly
during the period. Further detail is
contained within the ‘Relevant principal
risks’ section above.

The severe but plausible case considered
the impact on earnings, cash flow and net
leverage resulting from incidents including
unexpected generation (+10% increase
in biomass forced outage rate) and pellet
production outages, adverse movements
in commodity prices and a loss of ROC
income during the period. Whilst the
outcomes from this scenario were
significant, they indicated that the Group
should continue to operate within the
covenant restrictions of its financing
arrangements and would have sufficient
cash to meet its liabilities as they fall due.
The final column of the scenarios table
indicates the scale of the impacts.

Drax Group plc Annual report and accounts 2022

Potential mitigating actions were also
considered. Such mitigating actions
included potentially reducing levels
of capital expenditure and dividend
payments if required. The impact would
also be partially mitigated through the
Group’s ability to trade effectively in
volatile markets, use of existing committed
facilities, the Group’s insurance
arrangements and reductions in
other expenditure.

Availability of adequate funding
The Group’s current borrowings are set
out in note 4.2 (page 224). The Board
expects these facilities, along with cash
flows generated, to provide adequate
levels of funding to support the execution
of the Group’s Plan.

Facilities totalling c. £1.2 billion, excluding
RCFs, mature during the assessment
period. The base viability assessment
assumes that these are repaid as they
fall due or prior to that, predicated on no
strategic enhancement expenditure being
included in the model, as discussed above.
In the severe but plausible case the
facilities are forecast to be extended based
on expected rates achievable in the
current environment.

At 31 December 2022 the Group had
total cash and committed facilities of
£698 million, see note 2.7 on page 208.
The Plan demonstrates that the Group
expects to operate within its current
committed facilities for the duration
of the assessment period under a range
of scenarios.

The Board is confident that the Group
has access to a range of options to
maintain a diverse and well-balanced
capital structure.

Expectations
Based on its review, the Board is satisfied
that viability would be preserved in a range
of scenarios, with various mitigating
actions available to manage the risk,
should they be required.

Taking all of the above into account,
the Board has a reasonable expectation
that the Group will be able to continue
in operation and meet its liabilities as they
fall due over the five-year period
of their assessment.

Strategic report

Principal risks and uncertainties

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The effective management
of risk supports the delivery
of our strategy

Identifying, assessing, and managing risks
across the Group is an integral part of
enabling an informed assessment of the
potential challenges in the delivery of
our strategy. The Board is responsible
for determining risk appetite and ensuring
the effectiveness of risk management
and internal controls across the Group.
The Group has a comprehensive system
of governance controls to identify and
manage all key risks in accordance with
policies and processes approved by
the Board.

Risk appetite
The risk appetite is the level of risk that the
Group is prepared to tolerate in seeking to
realise its business objectives. The Board
determines the risk appetite of the Group
to ensure the potential impact of both
current and emerging risks is considered
and appropriately managed, to increase
the likelihood that the Group’s business
objectives can be achieved, whilst seeking
to minimise the threat of adverse impact to
the financial and operational performance
and the prospects of the Group.

Risk appetite therefore informs the
expected behaviours from our Board,
senior executives, colleagues, contractors,
and partners. This helps in determining the
investment likely to be required to support
risk management activities and an
appropriate risk-balanced approach to
carrying out our plans. Risk appetite can
vary depending on the nature of the risk,
the expected impact of that risk, the
extent to which the risk is foreseeable
and the potential benefits to the Group
and its stakeholders.

Some parts of the Group’s operations
reflect high inherent risk while also
providing the opportunity for potential
commercial gain. For example, trading
in commodities, where the Group
has developed a commercial strategy
that is designed to manage the Group’s
exposure to volatility in commodity prices
whilst also reflecting the Group’s risk
appetite in this area. We deploy forward
hedging strategies which seek to
manage the volatility of commodity prices

to help limit the Group’s exposure to the
uncertainty of future adverse swings
in commodity prices, whilst also
acknowledging that this same market
volatility provides an opportunity for
financial returns. This is an area of risk
which experienced material change
in 2022 and we explore the issues
and challenges associated with this risk
on page 87.

The risk management approach reduces,
rather than eliminates, the risk of failure to
achieve business objectives, and provides
reasonable, but not absolute, assurance
against material misstatement or loss.
For example, in recent years the business
has become increasingly aware of changes
in weather patterns which, alongside other
climate-related risks, have become more
impactful on our business. As a result,
we continue to recognise a Climate
Change Principal Risk. Through our
analysis of the underlying climate risks,
we seek to identify material challenges
to the business which might arise and
consider how we should respond to both
physical and transitional climate risks.
In so doing we seek to better understand
the emerging and potential future threats
against the resilience of our business
and operations to reduce the adverse
impact which might arise for our people,
our assets, our ability to operate day to day
and our financial performance.

Risks are assessed on a gross basis,
a net basis after mitigating controls have
been considered, and a target risk level
reflective of the Group’s risk appetite.

Drax Group plc Board

Audit Committee

Group Executive Committee

First line of defence

Second line of defence

Third line of defence

Management of Risk Controls

Develop a Risk Management Framework

Internal Audit

Internal Controls

Provide Independent Oversight of Risk

Independent Assurance of Risk
Management Framework

Management Controls

Compliance

E
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Drax Group plc Annual report and accounts 2022 77

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Principal risks and uncertainties
continued

Risk management governance
The risk management governance
structure includes the Executive
Committee (from which owners are
identified to be accountable for each
Principal Risk) and the Group’s risk
management committees who have
responsibility for:

• Regularly assessing and understanding
the risks that may impact our business
to ensure any new, current or emerging
risks are managed within the defined
risk appetite and limits of the business.

• Reviewing changes in the internal

business and external macro environment
and responding appropriately.
• Driving completion of the actions
required to improve the mitigation
of risks and where possible reduce risk
exposures to target levels.

• Driving an appropriate risk management

culture that promotes and creates
balanced risk-taking behaviour and
clear accountability.

• Demonstrating robust governance
of risk management by reviewing
and challenging risk management
across the Group.

In line with good governance, the risk
management committees at the business
unit and Group function level undertake
regular reviews of operational and financial
risks, receiving reports from subject matter
specialists and risk owners reflecting
their technical knowledge. The Executive
Committee undertakes deep-dive reviews
of all the Principal Risks through an annual
cycle and receives reports from the risk
management committees and Principal
Risk owners. Under the guidance and
challenge of the Audit Committee,
management undertake a process that
targets continuous improvement with
regards to risk management including
a quarterly update being provided at each
Audit Committee meeting on proposed
enhancements. During 2022, as part
of their annual internal audit plan,
KPMG completed a maturity assessment
of the Group’s risk management
framework as a result of which no
high priority actions were identified.

Drax Group plc Annual report and accounts 2022

Group approach to risk management

The Group has a Risk Management Policy, approved
by the Board, which defines its approach to risk
management. The key elements of the policy are
detailed in the diagram below:

Identification

Monitoring
and
Reporting

Drax Group’s
Risk Management
Process

Assessment

Governance

Identification
Senior leadership and risk owners
are collectively responsible for the
identification of risks with the potential
to threaten the achievement of
strategic objectives.

Monitoring and Reporting
The Executive Committee undertake
deep-dive reviews of each Principal Risk
on an annual cycle and receive reports
from the risk management committees
and Principal Risk owners.

The Audit Committee and the Board
review the suitability and effectiveness
of risk management processes and
controls. They also review and challenge
the proposed disclosures prepared
by management on risks to consider
whether they are fair, balanced and
understandable, provide adequate links
to the Group’s strategy (and the ability
to realise objectives over the near and
longer term) and reflect adequately
wider macro and emerging threats.

Assessment
Senior leadership and risk owners
assess likelihood and possible impact
of risks occurring using the Group’s risk
scoring methodology.

They also seek to ensure appropriate
mitigating controls are in place to
manage identified risks to an acceptable
level aligned to risk appetite and
target risk.

Governance
Risk management committees
undertake regular risk reviews and
receive reports from business units and
risk owners reflecting their specialist
areas and technical knowledge.

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Emerging Risks
In addition to these reviews, risk owners,
risk management committees, the
Executive Committee, and the Board
undertake holistic reviews to identify
emerging risks and consider the
appropriate response. This involves
judgement and is undertaken through
gathering the views of key internal
stakeholders including the Executive
Committee and Board members who
bring to bear significant levels of technical
knowledge, industry experience and
economic awareness. Where appropriate,
this may also involve the views of external
experts or stakeholders. For example a
review of the Group’s physical climate risks
was undertaken by Atkins, a third party
consultant, during the year.

As a result of this, a new emerging risk
was identified – the significant levels
of construction which will be required
in future periods to deliver strategic
objectives. In addition to ongoing capital
expenditure on the OCGT projects, and
investment in the expansion of existing
and new North American pellet plants,
the business is approaching a pivotal
point in relation to options for BECCS
development, and the risks relating to
physical execution are becoming more
important. Whilst work continues to
ensure an economic business model can
be established for UK BECCS, as outlined
further on pages 16 and 82, initial
preliminary works to enable the project
at Drax Power Station are commencing.

This exposes the Group to new risks
associated with the execution of a
significant programme of work, dependent
on supply chains, availability of skills in the
labour market, and the other operational
and safety risks associated with large
scale construction. As a result, the key
controls in operation to mitigate these
risks are undergoing review to ensure they
are sufficient and effective. In conjunction
with this, the level of assurance obtained
over the design and operation of these
controls is also being considered. As these
projects progress through 2023, 2024
and 2025, and final investment decisions
are expected to be taken, the Board
will consider whether this represents
a new Principal Risk to the Group.

Vanessa Simms,
Audit Committee
Chair

On behalf of the Board, the
Audit Committee reviews
the effectiveness of the system
of risk management and internal
control. The Committee takes
a keen interest in understanding
the evaluation of the Group’s
Principal Risks, to ensure
that internal controls remain
appropriate and that the Group’s
overall exposure to risk aligns
with the Board’s risk appetite.

You can read more about

how the Committee oversee
Principal Risks on pages 116
to 126.

Internal control
The Group has a well-defined system
of internal control, supported by policies
and procedures, documented levels
of delegated authority which support
decision-making, and accountability by
management across the Group. These
internal controls operate as important
mitigations of the risks identified via the
Group’s risk management processes.
Therefore, the effective design and
operation of these key internal controls
is critical to the achievement of the
Group’s strategic aims.

Management maintain an assurance map
assessing the level of assurance obtained
for each of the Group’s Principal Risks
across the various lines of defence,
as shown on page 77. This enables the
Audit Committee to debate and challenge
whether sufficient assurance is in place
over the Group’s system of internal control.
Where a risk is identified as having
emerged or increased, the level of
assurance obtained over the respective
mitigating controls may need to be
enhanced in response. For example,
the identification of capital construction
as an emerging risk has led to the inclusion
of an internal audit addressing BECCS
readiness in the 2023 internal audit plan.

The Audit Committee approves and
implements a programme of internal
audits covering various aspects of the
Group’s activities. Refer to page 126
for further information. This programme
evolves, based on an assessment of the
key risks of the Group.

The majority of internal audits are
performed by KPMG, who provide a fully
outsourced internal audit function to the
Group, reporting to the Audit Committee.
For specialist areas, an expert auditor
is employed such as the use of DNV
to undertake internal audits in respect
of Health and Safety. The findings and
recommendations from each internal
audit are distributed to members of the
Executive Committee and the Audit
Committee as a whole. Each report
includes management’s responses to
the findings and recommendations, and
details of the actions that management
propose to take. At each monthly meeting,
the Executive Committee considers the
status in responding to and closing
recommended actions.

In addition, the Audit Committee receives
a quarterly update report on the status
of the internal audit plan and any recent
findings. Internal audits are augmented
by additional internal control checks
which are performed by operational
management, and which are considered
by senior management and the
Audit Committee.

Where weaknesses are identified, these
are investigated and the impact on the
business is identified, with remediation
actions established. This is also reported to
the Audit Committee. None of the findings
reported during 2022 were individually
or collectively material to the financial
performance, results, operations,
or controls of the business.

Based on the assessments undertaken
by each of the Executive Committee
and the Audit Committee during 2022,
and considered at the meeting of the
Board held in finalising the Annual Report
and Accounts in February 2023, the Board
determined that it was not aware of
any significant deficiency or material
weakness in the system of internal control.
For further information on the work of the
Audit Committee see pages 116 to 126.

Drax Group plc Annual report and accounts 2022 79

Strategic report

Principal risks and uncertainties continued

Overall risk assessment
The Group has identified nine Principal
Risk categories which have the potential
to have a material adverse impact on the
operational or financial performance
of the Group. These and other key risks
are assessed within an established
programme by which management,
the Executive Committee and the Board
consider how risk and the Group’s ability
to respond should evolve.

The Board continued to perform a robust
assessment of Principal and emerging
risks. As part of its year end processes,
the Board considered reports from
management reviewing the Principal Risks
and uncertainties, and how these had
evolved during the second half of 2022.
This review took account of the ongoing
Russia-Ukraine conflict, the volatility
in the energy market and the potential
impact on future energy strategy. Thought
was also given to the cost of living crisis
and associated government responses
such as the Energy Bill Relief Scheme
and Electricity Generator Levy, as well as
the agreement reached with National Grid
to make our two coal-fired units at
Drax Power Station available to operate
as a winter contingency until the end
of March 2023. All of these areas are
discussed in further detail below.

The threat of cyber-attack is evolving,
and managing this risk requires careful
understanding and assessment of the
threat. Geopolitical tensions have in the
past been known to result in increased
cyber related incidents, and the Russia-
Ukraine conflict is considered to have
increased the Group’s risk exposure to
attacks, state-sanctioned or otherwise,
on our systems. Despite the significant
work and investment undertaken to further
enhance security over our systems, this
heightened external risk environment
poses an increased cyber risk which may
result in operational and financial impacts
and regulatory non-compliance.

Consistent with the view communicated
in Drax’s 2022 Half Year Report, increased
energy prices expose the business to
a heightened financial cost should
an unplanned outage occur on a plant,
as the business would incur the cost
of a significantly heightened market price
to buy back the volumes contracted but
undelivered. Whilst we do not believe the
integrity of the Group’s plant and
machinery, and therefore the likelihood
of an outage, has increased, the financial
impact of such an occurrence has
increased and could have a material
impact on the Group’s results.

The two material increases in risk noted
above are discussed further below under
‘Cyber-security’ and ‘Cost of living and
energy market conditions’. Additionally,
the Information systems and security and
Trading and commodity risk disclosures
on pages 91 and 87 respectively, provide
detailed descriptions of the risk, impact
and key mitigations associated with
both threats.

Despite there being some further,
less significant, increases in the Group’s
other Principal Risks, as discussed further
below, the Board is satisfied that the
Group’s remaining Principal Risks are
materially unchanged.

Russia-Ukraine conflict
Russian forces invaded Ukraine in
February 2022, which not only created
a humanitarian crisis but led to extensive
economic impacts felt across the globe,
leading to potential risks to the business
summarised below:

Biomass pricing and availability
The conflict is testing global supply chains
and reinforces the importance of resilience
in the Group’s biomass sourcing processes.
As the volume of Russian and Belarusian
biomass purchased by the Group has
historically been very low, this line of
sourcing was ceased with no significant
impact on the Group’s ability to achieve
required future biomass volumes.

However, a secondary impact on the
Group’s indirect supply chains has been
upward global biomass pricing pressures,
as suppliers faced increased costs to
procure fibre due to market shortages and
inflationary pressures. The impacts of
higher biomass prices are largely mitigated
by our long-term hedging strategy which
ensures a high proportion of the contracts
in place have agreed pricing out to 2027.
In addition to remaining vigilant to biomass
pricing pressure, the ability of our suppliers
to fulfil contracted volumes continues to
be closely monitored to respond to market
developments, including the impact
of fibre market shortages resulting from
the Russia-Ukraine conflict.

Cyber-security
The Board believes the Russia-Ukraine
conflict has increased the Group’s risk
exposure to attacks on our systems,
and those of suppliers on whom the Group
relies for integrity of service. This view
is supported by our engagement with a
range of third parties in addition to publicly
available information. The Group’s Security
and IT teams have conducted a thorough
risk assessment of our externally facing
infrastructure and have implemented
a robust critical patch regime as a result
of this heightened cyber-security threat.
The Group also has regular updates with
its regulators which allow it to assess and
calibrate the level of security risk. Whilst
the Group’s response to the heightened
risk has been robust, it is acknowledged
that cyber-attacks are continuously
increasing in sophistication and
complexity, requiring constant assessment
and response to address any vulnerabilities
on an ongoing basis. Therefore, whilst
actions in respect of this increasing threat
have been undertaken, we recognise the
scale, pace and nature of exposure also
continues to evolve and responding
immediately with commensurate
mitigations may not always be possible.

Market volatility
The Russia-Ukraine conflict has also
contributed to widespread energy market
volatility and concerns over the security
of supply due to the restriction of Russian
gas. The resulting commodity price
increases and extension of the availability
of the Group’s coal assets are discussed
further on pages 81, 87 and 90.

Drax Group plc Annual report and accounts 2022

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Energy market reform
Changes to government policy
at a regional and national level in the
countries in which we operate may
increase the cost to operate our
businesses. Global economic challenges
and volatility in commodity markets have
created the potential for an accelerated
timeline of political and regulatory reform,
as governments and regulatory bodies
seek to ensure fiscal policy and regulation,
including regulation surrounding biomass,
remains fit for purpose.

The UK Government has opened a
consultation on Review of Energy Market
Reform (REMA), however it currently
remains unclear the scale of the impact of
any such reform. As part of their response
to current heightened energy prices, the
UK Government announced an Electricity
Generators Levy, which will apply to the
Group’s hydro run-of-river and biomass
generating assets under the Renewable
Obligation scheme from 1 January 2023
to 31 March 2028. Refer to page 13
for further information.

Credit availability and liquidity
We are exposed to spot and forward
commodity prices. High volatility may
impact Drax’s ability to access the market
as it presents challenges in respect of
liquidity and credit. This requires careful
management of both ongoing exposures
and potential collateral requirements
under a range of scenarios. This could
result in a reduction in Drax’s forecast
hedge levels in future years, and less
certainty over forecast earnings.

Set out below are the Group’s nine
Principal Risks:

• Strategic
• Health, safety and environment
• Political and regulatory
• Biomass acceptability
• Trading and commodity
• People
• Climate change
• Plant operations
• Information systems and security

Cost of living and energy
market conditions
During the second half of the year,
in common with other economies,
the UK continued to experience increased
pressure on the cost of living due to high
inflation. It is expected that inflation
will continue to outstrip the increase in
average incomes over the coming months.
Energy market pressures also continued
into the second half of 2022, becoming
a more sustained energy price increase.
In response to this, in order to provide
support to our colleagues through this
challenging period, we accelerated the
Group’s annual pay review process by
three months to take effect in January
2023. You can read more about this on
page 130. These economic conditions,
as well as the UK Government’s response
to them, create the following risks
to the business:

Cash collection
We recognise that the inflationary
pressures from rising commodity prices,
including power, are providing challenges
to consumers and in some cases causing
hardship. In September 2022 the
UK Government announced the Energy
Bill Relief Scheme (EBRS) to support
UK businesses and other non-domestic
energy users by protecting them from
increasing energy costs and providing
them with certainty over winter energy
costs. Price caps have been applied to
UK customer bills from 1 October 2022
and from 1 April 2023 the EBRS will be
replaced by the Energy Bills Discount
Scheme (EBDS), which has been
confirmed to be in place until March 2024.

We continue to monitor how wholesale
power price increases are feeding through
to end consumers in our Customers
business. By building on the actions taken
during the Covid-19 pandemic, we aim
to support our customers during this
challenging time by working to provide
payment plans where necessary.
We remain alert to the possibility that this
may have an impact on our customers’
ability to pay their bills, resulting in a
potential financial impact of bad debt
or delayed payments.

Market price volatility
What initially appeared to be temporary
energy price volatility resulting from
short-term pressures on supply at the start
of 2022, became a more sustained energy
price increase. As noted on page 87,
energy price volatility exposes the Group
to an increased financial cost should an
unplanned outage at Drax Power Station
occur. We believe that this risk is most
appropriately managed through holding
back a proportion of capacity as a
mitigation. This would enable energy
contracts to be fulfilled by an alternative
unit should an unplanned outage occur.
Price increases in the forward market can
also present challenges in respect of
liquidity and credit, requiring careful
management of both ongoing exposures
and collateral requirements.

Continued availability of coal-fired units
until March 2023
In July 2022 the Group confirmed that,
at the request of the UK Government,
it had entered into an agreement with the
National Grid to make our two coal-fired
units at Drax Power Station available
to operate as a winter contingency
to the UK power system until the end
of March 2023. The units will only operate
if and when we are instructed to do so
by the National Grid. Whilst this means
prolonging the UK’s dependence on fossil
fuels, which is not aligned with the Group’s
strategy, we recognise that as part of the
UK’s critical national infrastructure, we play
a key role in providing security of energy
supply and take this responsibility seriously.
Some of the Group’s facilities and
equipment relating to coal-fired generation
are classed as ageing assets, given Drax
Power Station was built approximately
50 years ago. Continued operation of these
assets therefore brings operational risks
in maintaining the availability of assets to
fulfil a request to operate. The Group is also
cognisant that the extended use of the
coal-fired units could increase the threat
of disruption to the Group’s operations
and supply chain from protester action.
Before committing to extending the
availability of the coal-fired units, a
thorough assessment was undertaken
to ensure these potential risks could be
sufficiently managed to an acceptably
low level. In assessing whether to make
the units available, and after careful
consideration, it was determined that a
six-month extension was not expected to
impact on the timing of a final investment
decision or intended commissioning date
for the UK BECCS project. Site preparation
works for UK BECCS are ongoing and will
accelerate following formal closure of the
coal units in March 2023.

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Strategic report

Principal risks and uncertainties continued

Risk level change from previous year

Up/increasing

Down/reducing

No change

Strategic risk

The Group’s purpose is to enable a zero carbon lower cost energy future, with an ambition to become a carbon negative company by
2030. The Group has three strategic aims that underpin its purpose and ambition as detailed in the Group’s business model on page 8.
Strategic risks are defined as those that could materially undermine any of the Group’s strategic aims, and thereby prevent the Group
from delivering its stated outcomes and fulfilling its purpose.

In 2022 the business established a strategy execution team that monitors the delivery of strategic initiatives and mitigates risks.
A quarterly review is undertaken by the Executive Committee to gauge its confidence in delivery and determine the actions to be taken
should course correction or additional risk mitigation be required.

Strategic pillar: To be a global leader in sustainable biomass pellets

Achieving a leading position requires delivering and growing our own production, at a sustainable economic cost whilst ensuring our
sustainability requirements are met.

The primary objectives are to increase biomass production capacity to 8Mt p.a. and to continually improve the biomass pellet supply chain
to maintain pellet costs at a sustainable economic level.

Risk and impact
• There is a risk to the availability of feasible expansion

opportunities, the successful identification and delivery
of initiatives to reduce the current cost of biomass,
and the availability of sustainable biomass fibre.

• There is the risk that biomass does not have stakeholder
support in our target markets (for example, government,
investors, economic and social) leading to a lower rate
of adoption than our strategic plan assumes.

Strategic pillar: To be a global leader in carbon removals

Key mitigations
• Continued execution of the integrated plan to expand biomass

production capacity and maintain the cost of sustainable biomass pellets
at an economically sustainable level.

• The adoption of the development and execution of a medium

to long-term fibre strategy as a strategic initiative.

• The identification and management of biomass acceptability

as a Principal Risk as detailed on page 86.

As a key part of our long-term strategy, Drax is developing options for Bioenergy Carbon Capture and Storage (BECCS), as a form
of carbon removal. We believe BECCS could offer significant long-term value creation opportunities, in addition to being a key part of
enabling not just Drax but the UK and other countries to reduce carbon emissions. To be a leader in the emerging carbon removals market,
Drax is working to deliver the BECCS project at Drax Power Station and also deliver BECCS globally. This requires the development
of an economically attractive business model within its target jurisdictions.

Risk and impact
• There is a risk that current or future governments do

not provide the fiscal and legislative framework required
to support the scale of the BECCS programme and
Drax’s future investment decision. This could result in
the potential impairment of £24.5m of capitalised UK
BECCS development costs as detailed further under
critical accounting judgements on page 178.
• There is a risk that an economic business model

for BECCS cannot be established, including the risk
that regulatory and voluntary frameworks do not
develop in such a way as to enable Drax to fully
participate in these markets.

• There is a risk that Drax cannot build the right asset

portfolio at sufficient scale to achieve a leading position.

Key mitigations
• Drax has established and is delivering against three strategic

programmes:
– Development of options for its UK BECCS project at Drax Power

Station, and engagement with UK Government and other stakeholders
to secure the right commercial model to support it. Refer also
to Political and Regulatory risk on page 85.

– Development of options for BECCS projects in other jurisdictions.
– The proactive development and sale of carbon removal products

and standards.

• These programmes build on Drax’s competitive advantage, support the
development of a scalable carbon removals business, and reduce the
reliance on a single market and commercial model. Emerging risks
associated with the development of these programmes include
construction risks, referred to on page 79.

Drax Group plc Annual report and accounts 2022

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Down/reducing

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Strategic risk continued

Strategic pillar: To be a UK leader in dispatchable, renewable power

To maintain the position as the leading provider of UK dispatchable, renewable power requires the right portfolio of assets and associated
business models. These must operate within a system that values the dispatchable characteristics of those assets at the right
economic levels.

Risk and impact
• There is a risk that our asset portfolio is not

appropriately valued by the market, is excluded from
effective participation in power markets, or might be
out-performed by a future technology.

• There is a risk that Drax Power Station does not receive

the right economic support post 31 March 2027
with respect to the dispatchable renewable power
that it provides.

• There is a risk that unexpected changes to electricity
supply and demand could reduce both demand and
volatility, and therefore limit the market for dispatchable
renewable assets.

Strategic enabler: Capital

Key mitigations
• We maintain and invest in our market modelling capability and embed

it into planning, option assessment and test and/or cross check against
third-party scenarios.

• We continue to actively engage with relevant UK Government

departments and regulators in relation to a range of matters associated
with power market design, and the role of dispatchable renewable
generation.

• We continually evaluate the current and projected performance of our

own portfolio of assets, and the value gained from changing the
composition of the asset portfolio in line with the Group’s view of the
outlook for the market and emerging technologies.

Delivering any one of the strategic aims requires the ability to access and effectively allocate the capital required, whilst maintaining
a corporate credit rating in the BB range, to support power trading and B2B energy sales to Customers.

Risk and impact
• There is a risk that the Group is unable to raise sufficient

Key mitigations
• The Group’s financial position including working capital and cash

finance to fund the ongoing business or remain
compliant with existing financing agreements due to
poor performance, illiquid capital markets or poor credit
rating leading to lack of investor appetite for the Group’s
credit and/or equity.

resources is strictly controlled.

• We continue to run a full investor relations programme, covering equity

and debt markets.

• The Group’s capital allocation process provides rigour and consistency

in assessing the technical, financial, and strategic justification
and performance of new projects across the Group, in particular
for investments in new and emerging technologies.

• We have reviewed the impact of the Electricity Generator Levy on our
capital strategy and have not identified a materially increased risk.

Drax Group plc Annual report and accounts 2022 83

Strategic report

Principal risks and uncertainties continued

Risk level change from previous year

Up/increasing

Down/reducing

No change

Health, safety and environment

Context
The health and safety of our employees and contractors, and effective management of our environmental impact remain priorities
for the Group. Maintaining high operational and procedural safety standards is also an important contributor to the continued success
of the business across all aspects of our activities. Safe, compliant, and sustainable operations are integral to the delivery of our strategy
and crucial for sustained long-term performance. Safety and environmental management are foundational to our operational philosophy,
and we continue to work across the Group to identify, implement and maintain high standards supported by a positive culture of safe
working. We seek to respond proactively to emerging legislation and regulatory changes in both safety and environmental aspects.

Risk and impact
• Our operations involve a range of potential hazards
which could affect colleagues, contractors, others
attending our sites, and the wider environment,
that arise from the materials and equipment we use and
the processes we perform. This includes heavy plant
and machinery across our sites in the US, Canada and
the UK in the manufacture, storage and transportation
of biomass pellets, and the generation of electricity
from different sources, including biomass and hydro.
Refer to page 90 for more information.

• As we enhance and expand our safety reporting

to include populations such as contractors, our TRIR
has the potential to increase while appropriate
mitigations are fully embedded with new workers
on operational sites.

• The biomass we use to generate electricity, and the
particulates that can occur if the biomass pellets
degrade, are highly combustible.

• In the generation of electricity, supplied to the National
Grid at up to 400kV, we operate various plants at high
temperatures and pressures, as well as managing
significant volumes of water used by our nine hydro
plants in Scotland (for example, 79.4 billion gallons
at Cruachan). These are inherent attributes of our
operations which contribute to Health, Safety and
Environment (HSE) risk.

Key mitigations
• Continued investment in safety equipment, environmental mitigation,

and plant equipment and its regular maintenance.

• Maintaining robust management systems which are subject to periodic

review, and are refreshed as appropriate.

• Careful management of the production, preparation, storage and

transportation (whether within our sites, ports, or in transit
between sites) to minimise the risk of fire or explosion.
• Integration of all assets into a new HSE system across all

our pellet operations.

• Effective governance framework including an executive-level Group

HSE Committee, chaired by the CEO, to review and challenge
the management of HSE across the Group.

• Regular reporting to the Board on HSE matters as part of the CEO report.

Outlining trends, incidents, and initiatives to enable the Board to
understand culture, behaviours, and the status of key HSE matters.
• Development of plans to align all business units on key focus areas
to drive improvement in our HSE performance, whilst building upon
the existing ‘One Safe Drax’ vision.

• Implementation of a new Health, Safety, Environment and Quality (HSEQ)

IT system for tracking and reporting events and near misses, prompt
investigations, and timely implementation of corrective actions
by directing attention and encouraging continuous improvement.

• A programme of training, which aims to provide colleagues with
an appropriate level of competence, enabling them to contribute
to the effective management of HSE risks.

• Raising awareness through shared experiences of events or near

misses with colleagues across different sites.

Drax Group plc Annual report and accounts 2022

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Political and Regulatory

Context
During 2022, the focus of the UK Government turned to the situation in Ukraine, the cost of living crisis, and energy security. Generation
from biomass has continued to play a crucial role in UK energy security, and the case for the future role of BECCS in supporting UK energy
independence and its net zero ambitions has strengthened. However, the Group remains conscious of the ongoing discussion associated
with biomass (refer to Biomass Acceptability Principal Risk on page 86) and the need for further commitment and financial support from
the UK Government, and other critical partners, in order to deliver the decarbonisation of UK power generation and enable the Group
to realise its negative emissions strategy. Global economic challenges and volatility in commodity markets have created the potential
for an accelerated timeline for the UK Government’s continuing review and reform of the detailed legislation and regulation that
underpins the electricity market. In 2022, this included launching REMA, announcing the Energy Prices Guarantee and the introduction
of the Electricity Generator Levy (EGL). January 2023 also saw the launch of the UK Government’s Capacity Market consultation, seeking
views on proposed reforms to strengthen the security of supply and provide greater clarity around the transition to net zero.

Internationally, the Group is entering new markets which increases its regulatory obligations and compliance challenges. This includes
reviews of sustainability standards in the Group’s key markets including Canada and Japan; sales of pellets into Asian markets; and the
opening of an office in Japan to support these activities. Furthermore, we remain alert to the changing geopolitical landscape which
could continue to impact the global energy sector.

Risk and impact
• The invasion of Ukraine by Russian forces means the Group is no

longer willing or allowed to access Russian and Belarusian biomass.
Whilst the historically low volumes of Russian and Belarusian material
purchased by the Group means this had no significant impact on the
Group’s ability to source biomass, it has led to upward pricing
pressures due to market shortages and associated inflationary
pressures. The global biomass markets have been and are expected
to remain volatile both in terms of pricing and availability.

• At the request of the UK Government, the Group entered into an

agreement with National Grid to make the two coal-fired units at Drax
Power Station available to operate as a winter contingency until the
end of March 2023, in response to concerns over security of supply.
There is a risk that the UK Government asks the Group to extend the
availability of its coal operations beyond this date, which, were it to be
enforced, could materially and adversely impact the Group’s
renewable energy reputation and also potentially delay the timetable
for UK BECCS.

• The cost of living crisis, compounded by the effects of Covid-19,
is having an impact on social and economic policy as well as UK
Government funding. Whilst public and political pressure to respond
to the threat of climate change remains strong, it has been impacted
by a reassessment of investment priorities and resulting changes
to UK Government fiscal policy. This has resulted in delays to the
introduction of new legislation to deliver investment frameworks that
support reducing carbon emissions. This could adversely impact the
investment needed to support BECCS, which may result in material
delays in the ability to realise Drax’s strategy around carbon removals.

• Changes to government policy at a regional and national level in the
countries in which we operate may increase the cost to operate our
businesses, reduce operational efficiency, and affect our ability to
realise our strategy. Examples include reform to the UK legal framework
following Brexit; changes to electricity market structure and the launch
of the REMA consultation; network access and electric charging
arrangements; environmental regulation (refer to Biomass Acceptability
risk on page 86); wholesale market arrangements including impacts on
liquidity (refer to Trading and Commodity risk on page 87); consumer
service and affordability requirements; and the EGL.

• The global regulatory environment is evolving, which may result in

additional costs and complexity. Post-Brexit reviews of regulation are
back on the agenda and could lead to a divergence between UK and
EU regulation and reporting requirements, further increasing our cost
to operate. Our involvement in new international supply chains and
pellet markets in Asia introduces additional challenges in terms of
compliance, regulatory change and misalignment of standards between
markets. Such complexity could increase the risk of non-compliance,

regulatory investigation and enforcement action against Drax,
potentially resulting in penalties/sanctions that impact anticipated
returns and/or the Group’s licence to operate.

• Inflationary pressures from rising commodity prices, including power,
are providing challenges to consumers and in some cases causing
hardship which may lead to delayed payments or bad debt.
We continue to monitor how wholesale power price volatility
is feeding through to end consumers in our Customers business and
aim to support our customers during this challenging time, for
example by providing payment plans. There is also a risk of continuing
energy supplier failures from these rising commodity prices, which
results in greater cost mutualisation, whereby the cost of supply
failure is spread across the remaining industry participants.

Key mitigations
• We believe the impacts of higher short-term biomass prices are

mitigated by our biomass hedging strategy, which ensures a large
proportion of the biomass contracts in place are long-term with
agreed pricing and volumes. In addition to remaining vigilant
to biomass pricing pressure, the ability of our suppliers to fulfil
contracted volumes is also closely monitored, due to the impact of
fibre market shortages associated with the Russia-Ukraine conflict.
• Engaging with politicians and government officials, to listen to and

inform understanding and perception of Drax’s business. This includes
our commitments on sustainability and the creation of socio-
economic value (including jobs, training, and investment in
communities), plus the critical role that Drax’s strategy will play
in supporting the UK’s committed target to achieve net zero by 2050
and ensuring security of supply.

• Engaging with regulators and industry bodies to understand their

priorities, influence the strategic direction, and undertake scenario
planning in preparedness for ensuring compliance. Working with wider
stakeholders and industry associations to maintain Drax as a thought-
leader on priority UK and global policy and regulatory issues.

• Exploring opportunities for the delivery of investment in BECCS

globally, such as the US and the wider Asia-Pacific region. Working
with leaders and key stakeholders in those regions, to identify areas
of common purpose and share ideas for creating jobs, investment,
and new growth opportunities. The Group’s International Affairs
team continues to develop our stakeholder interaction and broaden
engagement in regions where we source and supply biomass.

• Confirming our compliance frameworks and internal guidance remain
robust and continue to focus on best practice as regulation evolves
and the business further expands its global operations.

• Investment in knowledge and experience through recruitment

into the Group to best support our global operations.

Drax Group plc Annual report and accounts 2022 85

Strategic report

Principal risks and uncertainties continued

Risk level change from previous year

Up/increasing

Down/reducing

No change

Biomass acceptability

Context
Biomass is a significant element of Drax’s current business and is important in the delivery of longer-term strategic objectives,
enabling the Group to meet its carbon removal target and the UK to realise its net zero target. During 2022, Drax sourced and shipped
to the UK 2.5Mt of biomass for use in the operational activity of generating electricity at Drax Power Station. Furthermore,
Drax enters into commercial contracts to supply biomass to third parties. The supply of 2.2Mt of biomass to third parties represented
4.7% of revenue during 2022.

High-profile campaigning by anti-biomass groups increased during 2022, with sentiment amongst stakeholders potentially being impacted.
However, there continues to be clear and reiterated UK Government acceptance and recognition of biomass’ important role in enabling
security of supply. This is also underpinned by independent research of the contribution to be made by sustainably sourced biomass. 2023
is likely to be an important year in the development of biomass regulation and policy globally. Regulatory frameworks associated with the
sourcing of biomass materials are also under development, including in some regions where we currently conduct business and others where
we may seek to develop our business in the future. It is possible that future regulatory frameworks, may not align with our strategy and
investment case. This could result in reduced support for certain types of biomass as a renewable energy source, increased costs of doing
business, or the introduction of barriers to entry which may adversely impact our growth plans and financial returns versus expectations.

The UK Government is due to develop its positioning and publish several relevant documents over the coming months which may impact
the Group’s licence to operate. In Europe, the EU Commission (the primary decision-making body) will also publish an updated policy file
as part of the “Fit455” package, including regulation on biomass in the Renewable Energy Directive III (REDIII). The RED file is widely
considered to be market leading in terms of sustainability criteria for biomass, on which UK regulation is based. REDIII revisions may
impact biomass policy decision making in the UK in the future, or in countries we supply, such as Japan, potentially restricting certain
types of fibre for bioenergy. We continue to engage with UK and EU governments and other stakeholders to explain the benefits
of responsibly sourced biomass and the positive impact this technology can have on the climate, nature and people.

Risk and impact
• Some parties, including certain environmental non-governmental

organisations (eNGOs) continue to argue against the use of biomass.
These groups seek to influence and challenge policy and law-
makers, which may result in reduced political, business, public, and
financial support for the benefits of biomass. 2022 saw high-profile
and heightened campaigning by anti-biomass groups, including
using the framework of the OECD Guidelines for Multinational
Companies to challenge certain statements made by Drax.

• Biomass remains immature as a commodity market. This includes
some of the regions from which biomass is sourced, processed,
and shipped. The Group currently has robust supply chains in
place and in order for this to continue, we will require ready
access to an increasingly diverse supply of biomass.

• Drax’s target is that all fibre currently used at Drax Power Station is

Sustainable Biomass Program (SBP) compliant. However, SBP
standards are now under revision. There is a risk that the revised
standards do not keep pace with stakeholder perceptions of
biomass, the needs for the Group in supporting its strategy,
including under BECCS, or become unworkable or overly restrictive.

• In the UK, policy decisions and publications relevant to biomass

are expected in 2023. These include the Biomass Strategy which
will set out the UK Government’s latest position on biomass and
UK BECCS. Additionally, the UK Government is looking at policy
decision making required closer to 2030, in particular how
biomass sustainability can be assured when the CfD regime closes
to biomass from 2027 onwards. The UK Government is also in the
process of developing a UK Sustainable Finance Taxonomy, within
which different technologies will be deemed as being a ‘green
investment’ or not. If the current UK Government position
supporting biomass as a renewable technology changes, this may
negatively impact the Group’s operations and revenues in the UK.
• In Europe, the Fit455 process continues with REDIII under revision

which may adversely impact the Group’s growth plans. Being
outside the EU reduces the UK’s influencing ability on EU biomass
policy. The present draft of REDIII proposes unworkable
restrictions on the use of “primary woody biomass” in Europe,
which, if included in the final legislative text, would have negative
impacts on the Group’s ability to supply Europe with its biomass
needs, risking EU energy security and the delivery of long-term
climate targets.

• Reputation and market risks related to the transition to a

low-carbon economy include increased activity by eNGOs,
the potential for reduced investor and customer confidence,

Drax Group plc Annual report and accounts 2022

delays to our strategy (for example more stringent qualifying regimes
or approval processes linked to developing existing or new facilities, or
risk from legal challenge by eNGOs to our development or operational
activities) and challenges with employee recruitment and retention.
Refer to People risk on page 88.

Each of the above risks could have a material and adverse impact on the
Group’s financial and business prospects, strategy and future results.

Key mitigations
• Engagement with stakeholders in all regions in which we operate,

via a new global biomass campaign, to understand their requirements
and expectations around sustainability as well as improving readiness
to produce evidence of compliance.

• Proactive education of stakeholders on the science of our

sustainability practices.

• Increased resource within teams to develop and maintain strong
relationships with policymakers in the UK, EU, North America
and Asia via targeted engagement across institutions.

• Targeted planning and engagement with the REDIII negotiation
process and via Trade Associations suggesting alternative policy
and regulatory solutions, to ensure workable outcomes.

• Where possible, seeking engagement with eNGOs to discuss issues
of contention and potential areas of common ground, in support
of more constructive engagement on delivering change that is
responsible and sustainable. Equally, where we believe the views
of eNGOs are inaccurate or misleading, providing robust challenge.
• The Independent Advisory Board (IAB) of scientists and leaders in the
field of sustainability provided impartial advice and guidance relating
to the robustness of our work to deliver Nature Positive, Climate
Positive and People Positive outcomes throughout 2022 which
will continue in 2023. Refer to page 39 for further information.
• Closer relationships forged with suppliers through the supplier

relationship programme to identify opportunities to enhance actions
which support sustainable and responsible sourcing strategies and
biodiversity, which is integral to our philosophy.

• Scenario and contingency planning and direct engagement with

voluntary certification schemes, notably SBP, at Board and technical
levels to ensure revised standards are fit for purpose and to identify
alternative options where necessary.

• Provided support to SBP to achieve RED II approval, affording

divergent policies in UK and EU to be met through the same scheme.

• Continued assessment of new markets from which to source

sustainable woody and alternative types of biomass.

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Trading and commodity

Context
The Group is exposed to fluctuations in a range of different commodity prices, impacting both revenue and costs. Managing these exposures,
the interactions between them, and the resulting balance of opportunity and risk, is critical to delivering value. Volatility within global
commodity markets was significant during 2022, bringing with it heightened risk and a need to consider potential additional mitigations.

Drax produces biomass and power with renewable certificates, and captures the market value of these commodities through both the
wholesale markets and direct sales to end-users. The Group’s cost base is exposed to spot and forward commodity prices and foreign
exchange rates, and the liquidity of these markets, particularly, the cost and availability of third-party biomass pellets and the fibre and
logistics costs of our own Pellet Production business.

Managing the volatility and liquidity risks of these markets requires careful planning. Through our portfolio strategy, we optimise our
assets to maximise value within the clearly defined parameters of our risk management framework, covering each individual commodity.
We use forward hedging of varying lengths to manage the volatility of commodity prices and limit the impact of these on both revenue
and costs, and we have multiple routes to market to manage liquidity constraints.

Risk and impact
• Power prices can be subject to significant volatility. Short-term elevated
power prices in excess of hedged rates may result in losses should
an unplanned outage occur on one or more of the Group’s generating
units, as the Group could be required to buy back at spot (or the then
prevailing market) rates which could be materially higher than the price
which Drax had originally been paid for supplying that power.

• Power prices remain highly volatile after reaching unprecedented
levels during 2022, creating increased market uncertainty as well
as constraints on supply. This uncertainty impacted market liquidity,
which is expected to continue in the longer term. Such a continuation
could make it harder to achieve target hedge levels for future periods,
resulting in less certainty over forecast earnings and increased
exposure to volatility.

• High energy prices may cause some supply customers to change their

forecast consumption. This presents challenges in managing the
portfolio hedge position, and in a volatile market could result in
additional costs if volume has to be bought or sold at adverse prices.

• Delivery of commercial value from the flexibility of our portfolio,

and the optimisation of a complex supply chain against an uncertain
running regime, requires effective execution of our trading strategy
and opportunities to trade being available through sufficient liquidity.
Volatility, as experienced in 2022, brings added complexity to the
delivery of our strategy and increases the pressure on executing
specific trades to take account of market conditions. Errors
in execution, delays in carrying out planned trading or interruptions
to our trading platform could all materially adversely affect the
Group’s performance.

• Reduced liquidity in the forward market, along with price volatility,

can lead to increased market exposures. These exposures potentially
reduce the market’s appetite to trade further as this volatility in prices
may lead to uncertainty on counterparty exposure across the market.

• Increased production costs in Drax’s supply chain may impact

suppliers’ ability to deliver contracted biomass. This could result
in additional third-party purchases in the spot market, at uncertain
prices, or an interruption to forecast generation. Refer to Political
and Regulatory risk on page 85.

• Disruption to Drax’s biomass supply chain itself may also impact

Drax’s ability to fulfil its sales contracts or deliver the forecast fuel
requirements to the Generation business. During 2022, we
experienced instances of suppliers warning of shortages and risk
in their ability to meet their contracted obligations.

• The Generation business may fail to secure future system support
services contracts or the value in providing those services may
reduce due to increased competition.

• Inability to fulfil pellet sales contracts may result in an exposure to the
difference between the contracted and market price of the pellets.
This could result in loss of margin and profits for the Group,
particularly when wider supply of pellets is restricted.

• The fibre market is very dynamic and is impacted by both our suppliers

and competitors. This makes it difficult to forecast the probability
and impact of associated risks. The industries that use residuals

(and other fibre classes) continue to develop. Whilst biofuel technology
is still an early concept it is likely that this market will develop in the
longer-term, further emphasising increasing demand for fibre.
• Across the international markets we trade in, we are exposed to

foreign currency exchange risk, primarily in relation to the sterling
cost of pellets to the Generation business, which is typically
contracted in USD or EUR.

Key mitigations
• We continue to build on our high levels of forward power hedges

(sales) for 2023 to 2025, and the CfD on one of our biomass
generation units reduces our exposure to volatility.

• Our UK portfolio of Industrial and Commercial electricity customers
provides liquidity for forward power and renewable certificate sales
through the Customers business. We maintain high hedge levels
of customer sales through our power trading capability.

• We are able to regularly reforecast our supply customers’ usage and
realign our portfolio hedge to reflect changes in demand. A large
proportion of our customers are on flexible contracts, where they
absorb the cost or benefits of any reforecasts.

• Under our hedging strategy, our exposure to buying back power
at higher prices in the short term is mitigated by holding back
a percentage of generation. This provides insurance should there
be an unplanned outage.

• The flexibility and optimisation capabilities of the Group’s hydro
assets allow the Group to manage its exposures more effectively
and provide additional opportunities to create value.

• Enhanced monitoring of the Group’s credit exposure, both cash and

non-cash, and identification of a number of levers that could be utilised
should the Group’s market exposure move outside of our defined levels.

• Increased self-supply of biomass allows the Group to better manage
the supply chain to meet both forecast generation requirements at
Drax Power Station and also third-party supply contracts and respond
quickly to changes in these demand profiles.

• A consolidated Group-wide biomass position enables oversight of

our complete portfolio, allowing better informed decisions about how
pellet production operations are able to support our forecast sales/
generation requirements, noting the requirement to satisfy third-
party biomass supply obligations.

• Operating three biomass units under a single ROC cap for Drax Power
Station provides increased opportunities for flexibility of generation
and can create additional value.

• The Group has long-term fibre contracts to supply the Pellet

Production business with biomass. We also actively engage with
third-party pellet suppliers to ensure delivery schedules are met and
any changes to agreed schedules are understood, to limit the impact
on power generation. We continue to build fibre inventory and there
is a dedicated team focused on managing this dynamic issue.
The Biomass Strategy Team is focused on the 5 – 15 year fibre plan
that underpins the pellet production business and BECCS strategy.
• Foreign exchange risk is mitigated by significant hedging of forecast

exposures over a five-year horizon.

Drax Group plc Annual report and accounts 2022 87

Strategic report

Principal risks and uncertainties continued

Risk level change from previous year

Up/increasing

Down/reducing

No change

People

Context
During 2022, we, like many other organisations, faced tough challenges. As Covid-19 measures relaxed, the cost of living crisis began
to take hold creating new pressures. Additionally, the labour market has been competitive with resources scarce and salaries increasing
for in-demand skills. To fulfil our international growth plans we need to increase headcount significantly in markets with which we are
less familiar. Plans to understand the long-term skills and capabilities required are underway, such as supporting work on new
technologies like BECCS, alternative fuels, and the expansion of our biomass facilities in the US. Whilst addressing these market
pressures and growth plans, keeping our colleagues safe is paramount in our planning and decision-making.

It is imperative that our workforce has the skills required as the Group expands its presence. The UK political turmoil, and high-profile and
heightened campaigning by anti-biomass groups during 2022 have the potential to impact our reputation, engagement with prospective
candidates, and workforce attrition.

Risk and impact
• In addition to ensuring we retain the core skills that will be

required to run our business, the growth plans of the
organisation will require new skills and capabilities. The Group
is world leading in a number of the key aspects associated with
the delivery of our strategy. As such, we require people with
skills and capabilities which are adaptable to addressing new
and emerging aspects of sustainable power generation and
associated markets. Our performance and the delivery of our
strategy is dependent upon having a robust talent pipeline at
all levels of the organisation which importantly also reflects
the diversity in the wider societies in which we operate.
• Union organisation could lead to complex pay negotiations

with an associated cost of establishing appropriate
contingencies to mitigate against any threat of potential
strike action.

• Changing ways of working allows colleagues more choice

about where and how they work. This means we have to be
competitive on all fronts with our employee value proposition.
The failure to adequately respond to changing colleague
expectations could result in the loss of existing colleagues
or not attracting new colleagues with the skills the Group
needs for future growth.

• The Group is undertaking significant change associated with

implementing our strategy and improving operational
effectiveness. Such change can have an impact on employee
engagement, wellbeing, stress, and retention, with subsequent
impacts on colleague turnover and productivity.

Key mitigations
• We are progressing our employee value proposition and strategic
workforce planning approach to fulfil our growth plans. Current
growth needs are being met by increasing the overall capacity
of the resourcing team and outsourcing recruitment processes
where required to manage the increased demand.

• Working with colleagues across all aspects of our business to

understand and determine our skills and capability needs, for the
near, medium and longer term. Supporting the more immediate
needs through reskilling programmes whilst also looking at the
medium/longer term through our early careers offering.

• Contingencies are in place to mitigate against the risk of outage

caused by strike action.

• Enhancing our diversity and inclusion strategy to ensure it is

responsive to stakeholder views, provides equality of opportunity
and aligns to our organisational vision and goals. You can read
more about our work in this area on pages 69 and 112.

• Using automated advertising for our recruitment, supporting our
levelling up and diversity agendas, and identifying talent from
broader communities.

• Introduction of an Inclusive Leadership Programme, and an
Inclusive Management Programme, aligning to the business’
strategy to educate and inspire colleagues to make Drax a more
inclusive place to work.

• Continued investment in employees’ personal and career

development to enhance business performance and provide
the Group with a relevant pipeline of talent in critical roles.

• Regular reviews of our succession and key talent cover,

• International growth brings with it increased complexity,

mapped to our development programmes and talent offering.

which requires an understanding and appreciation of cultural,
legal, and diversity matters in those territories.

• Reputation and market risks related to the transition to a

low-carbon economy may result in challenges with employee
recruitment and retention. Refer to Climate Change risk
on page 89.

• Evolving our engagement and listening strategies mapped

to a colleague experience framework, including the introduction
of Colleague Resource Groups.

• Onboarding a new occupational health provider and broadening
our benefits and wellbeing offering to help colleagues take more
preventative measures in areas, such as financial wellbeing.
• Aligning our wellbeing and inclusion plans, recognising that

colleagues will contribute their best when they feel
psychologically safe and supported in being themselves at work.
This includes additional education and support focused on
financial wellbeing and addressing increased anxieties relating
to the rising cost of living, encouraging healthy behaviours,
and enabling colleagues to understand their own health.

• Introducing a new Bereavement Policy which considers a range

of bereavement experiences, including miscarriage.

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Risk level change from previous year

Up/increasing

Down/reducing

No change

Climate change

Context
The resilience of the Group’s strategy and operations to climate risks is important to the functioning and long-term value creation of
the Group. We have identified climate risks in two main categories – physical and transitional. Physical impacts of climate change include
event-driven, acute impacts, such as flooding, and chronic impacts, such as sea-level and temperature rises which may pose challenges
to our operations. Transitional impacts of climate change include policy, regulatory, technology and market-related changes associated
with the transition to a low-carbon economy that could affect the Group’s business model, but also serve as opportunities for growth.

In the analysis of the risks we therefore assess differing factors: those where the Group needs to mitigate against adverse events which
could impact our ability to conduct our business, and those where, through effective and constructive engagement with third parties,
the Group will be able to deliver a combination of economic, financial, and sustainability benefits through its activities. We provide
further detail on climate-related risks and opportunities in our TCFD disclosure on page 52.

Risk and impact
• Physical risks to our pellet production operations and
supply chain in the US and Canada include increased
frequency, variability, and severity of extreme weather
events such as hurricanes, flooding and wildfires
with potential to cause damage to assets and impact
on the supply of raw material and finished goods.

Key mitigations
• The Pellet Production business has developed stockpiles to alleviate
incidences of extreme weather-related production interruption.
• The increase of geographic diversity of pellet plant asset locations

across the US and Canada.

• Modelling of reservoir spillway capacities at Cruachan Dam,

to understand capacity for extreme weather events.

• Physical risks to our Generation operations and supply

• A robust business strategy informed by net zero 2050 scenario.

chain include increased frequency and severity
of extreme weather events, such as heavy rainfall,
flooding and high winds, with potential to cause
damage to assets and impact on transport
infrastructure that could restrict or reduce access
to sites. For example, during December 2022,
Winter Storm Elliot halted production at several plants
in Canada due to sub-zero temperatures and also
prevented the transport of pellets as railway lines
became inoperable.

• Policy and regulatory risks related to the transition to

a low-carbon economy include changes in government
and cross-border climate or emissions policies that may
negatively impact our Generation and Pellet Production
businesses. Refer to Political and Regulatory and
Biomass Acceptability risks on pages 85 and 86
respectively.

• Technology risks related to the transition to

a low-carbon economy include technology and
innovation, such as BECCS, not developing as expected,
impacting delivery of the Group’s carbon negative
ambition and business strategy as well as faster than
expected development of competing technologies,
such as direct air capture.

The Group’s three strategic objectives are aligned to global renewable
energy and decarbonisation agendas. Refer to pages 2 and 3.

• Carbon negative ambition and Climate Policy, underpinning a business
strategy consistent with UK and international climate change policies.
Discussions with governments and policy makers continue
with increasing recognition of the role the Group’s strategy
can contribute to in combatting the threats of climate change.
• Sourcing from a wide geographical range of third-party biomass

suppliers; and continued evaluation of alternative fuels, using different
feedstock types and considering wider sourcing geographies.
• Robustly challenging the views of eNGOs where we believe those

views are inaccurate or misleading. Equally, where possible, seeking
engagement with eNGOs on carbon accounting and reporting,
and liaising with the UK Government on future policies.

• Innovation team track technology advances and progressing

development of new technologies.

Drax Group plc Annual report and accounts 2022 89

Strategic report

Principal risks and uncertainties continued

Risk level change from previous year

Up/increasing

Down/reducing

No change

Plant Operations

Context
The reliability and safe operation of our facilities is critical to our ability to create value for the Group as well as fulfill our contracted
obligations in the generation of power for the UK power system.

The Plant Operations risk profile is influenced by a number of key activities including the safe management of ageing assets, building
inherent reliability and safety by design for new installations, management of change, and operating equipment within intended design
limits and parameters.

The Group’s facilities are highly complex and require careful management, identification, control, and mitigation of risk to operate safely
throughout the full life-cycle (from design through to decommissioning). The operational risk profile is varied and continually changing
due to the growth in the business, with the construction of new assets and decommissioning of older assets.

At the request of UK Government, the Group entered into an agreement with National Grid to make our two coal-fired units at Drax
Power Station available to operate as a winter contingency until the end of March 2023 to support security of supply to the UK.

Risk and impacts
• Severe weather events (such as hurricanes, fires, and floods)

across North America and in the UK could result in interruption
to operations and hinder the supply of required materials to
operate our assets. Refer to Climate Change risk on page 89.
• As plants age, the operational reliability and integrity is expected

to reduce. For example, Drax Power Station located in
Selby in Yorkshire was built approximately 50 years ago and
some of our hydro assets, located in Scotland, nearly 100 years
ago. Whilst the likelihood of an unplanned outage occurring
remains unchanged from the evaluation in 2021, the impact
of an unplanned outage at Drax Power Station has increased
due to volatile energy prices. Refer to Trading and Commodity
risk on page 87.

• Failure to procure critical spares, goods, and services could

result in additional production losses. The war in Ukraine has
resulted in supply chain challenges such as longer lead times
and significantly increased costs, exacerbated by global
competition for raw and manufactured materials.

• Loss of experience due to planned restructuring or leavers could
lead to loss of knowledge and increasing reliance on processes
and procedures to operate plant and maintain quality.
In particular, the Pellet Production business saw a high
colleague turnover in 2022.

• An inherent risk of handling biomass is the potential for fire and
explosion during its storage, production, transportation and its
on-site delivery, which has the potential to cause significant
disruption to operations. Refer also to Health, safety and
environment risk on page 84.

Key mitigations
• Business continuity plans are in place for all plants, ports and

other logistics which cover weather impacts and other factors.
This enables Drax to respond to normal and one-off
weather events.

• A comprehensive plant investment and reliability programme has
been implemented, that is risk-based and reflects the challenges
of operating complex equipment and takes account of potential
long lead times for spares, supported by an experienced
engineering team. Increased controls such as advanced
condition monitoring to alert any plant failures before they occur,
where practicable, are being installed.

• The potential cost of an outage is considered when determining
the running regime of our generation plant. For example, when
prices are higher, lower risk running options will be utilised
whereas when prices are lower we may look to take the
opportunity to perform short maintenance outages.

• Maintaining stringent safety procedures in place for sourcing,
acceptance, and handling biomass, and the control of dust
management from both a respiratory, health, and fire and
explosion perspective are assessed for their compliance
with our policies.

• Maintaining plant standards and investment in plant to

As Low As Reasonably Practicable (ALARP) standards, such as
chemical suppression systems at Drax Power Station have been
established. In areas of the plant where engineering controls
cannot yet meet required standards, Personal Protective
Equipment (PPE) is used to ensure individuals are not exposed
to harmful levels of dust.

• As a result of the extension to the availability of the coal units

• Increased physical security presence is in place. Security policies

until March 2023, we believe the likelihood of protestor activity
has increased. This could result in disruption to or prevention
of biomass operations due to site damage, health and safety
issues, or supply chain interruption leading to curtailment
of delivery of goods and materials (including biomass)
or otherwise to safely operate our generation assets,
with significant financial impacts.

• There are also threats across our supply chain due to the
reliance on the complex co-ordination of transportation
at various stages of the process. Therefore, Drax could
be exposed to unplanned disruption.

• Injuries and environmental issues could occur as a result

of decommissioning, demolition, and restoration activities.

and procedures are in place for each site/region in addition
to a plan of adherence.

• Insurance is in place to cover potential losses from plant failure,

where possible.

• Maintaining robust management systems, designed to identify

and mitigate risk and manage process safety across
operating assets.

• Providing the required training and development to equip our
colleagues in conjunction with recruiting people with the right
skills and experience.

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Risk level change from previous year

Up/increasing

Down/reducing

No change

Information systems and security

Context
Our Information and operational technology systems and the integrity of the data we use, are essential to supporting the day-to-day
business operations of the Group in addition to contributing to the delivery of our growth strategy.

As part of the UK’s critical national infrastructure, we are required to maintain availability of our systems and the capability to adapt and
respond to evolving external threats. We have a clearly defined technology and security roadmap, continually improving and investing
in technology which is capable of meeting current and projected future requirements and ensuring our financial, legal, regulatory
and compliance obligations are met.

Managing these risks in an environment where threats and challenges are continually evolving requires careful understanding and
assessment. We use internal and external expertise, including engagement with regulators, auditors, and industry groups, to continuously
update our understanding of the IT and Security risk environment. We involve IT and Security in all projects to ensure systems networks
and architecture are reviewed and threat levels are assessed and addressed. Nevertheless, despite the significant work and investment
undertaken to further enhance security over our systems, this heightened external risk environment poses an increased cyber risk
to our business continuity and supply chains.

Risk and impact
• Geopolitical tensions have in the past been known to
result in increased cyber-related threats. The ongoing
conflict between Russia and Ukraine has increased the
Group’s risk exposure to attacks, state-sanctioned and
otherwise, on our systems and those of suppliers
on whom we rely for integrity of service.

Key mitigations
• Maintenance of effective and up-to-date cyber security measures,
including a prevent, protect, detect, respond and recover strategy,
which evolves to address known and emerging threats.

• We are well-placed to respond to changing regulations and standards

and we continue to develop technology, security controls, and resilience
measures to maintain compliance.

• Successful cyber-attacks have the potential to

• Regular awareness campaigns and training events are undertaken aimed

compromise our systems, affecting the confidentiality,
integrity and availability of our data (including personal
data). The threat is evolving, and the risk from this
threat has increased as a result of the Russia-Ukraine
conflict. Their current attack methodology seeks to
deny access which may cause operational and financial
impacts and regulatory non-compliance.

at improved cyber-security awareness.

• Maintenance of a robust supplier onboarding policy and associated

processes, to ensure major service providers and vendors are
appropriately risk-assessed and reviewed periodically.

• Periodic internal and independent external assessment of the integrity,
adequacy, and compliance status of our IT and cyber security controls.

• Regular updates with regulators to allow the business to continually

• Evolving regulatory requirements present ongoing

assess the level of security risk.

• Increased exercising and refreshing of business continuity, disaster

recovery, and crisis management plans.

• Continual technical refresh programmes to address legacy

infrastructure and systems, and adoption of secure-by-design principles
and design patterns.

• Refer to the People risk disclosure on page 88 for additional mitigations.
• All Information systems and security risks, and associated risk treatment
plans, are reviewed regularly by the IT Board comprised of Executive
Committee level members and senior management subject
matter experts.

challenges to the Group. Operators such as Drax are
required to broaden the scope of systems that are
deemed ‘at risk’ and focus is being placed on
establishing adequate resilience, the capability
to respond and recover quickly from disruptions,
and ensuring the continuation of safe and secure
operations. Not meeting such regulatory obligations
could result in the Group facing enforcement notice and
financial penalties.

• We partner with third-parties to support our information

and operational systems. If these businesses were
themselves to suffer systems failure, cyber-attack,
or financial difficulties, this could in turn impact our
business, operations, and performance.

• Legacy systems are more difficult to maintain and are

more susceptible to cyber-attacks. Subsequent
operational issues, such as reduced performance, may
impact the availability of systems, data, and facilities,
affecting our operations adversely.

• The availability of experienced IT and Security

personnel in the labour market has tightened. This may
result in not being able to retain and/or hire people with
the necessary skills to manage these risks. See People
risk on page 88.

The strategic report is set out on pages 2 to 91 and was approved by the Board of Directors on 22 February 2023.

Will Gardiner
CEO

Drax Group plc Annual report and accounts 2022 91

Governance

Effective governance is
integral to the success
of our business and the
realisation of our goals

Amy Gwynn
Assistant Environmental Officer and a member of the
Women’s Network at Drax Power Station

The numbers of female colleagues
at Drax Power Station has increased
significantly over the years, both in
operational and support roles,
which is very positive.

While this is great to see and shows real
progress in our efforts to create a more
diverse workplace, it’s also highlighted
areas we need to improve to reflect this
demographic, such as the need for
improved, better fitting personal
protective equipment and creating
breastfeeding facilities.

We’re there to listen to colleagues’
concerns and ideas and make changes
to support women at various stages
in their lives, including the menopause.

We want future generations of women
to know they can work in our industry,
that there are equal opportunities to
grow and develop within the business
and that they can realise their potential.”

People positive

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Barbara Maxwell,
Purchasing and Supply Lead at our Galloway
and Lanark hydro schemes. Barbara is a
Mental Health First Aider (MHFA)

I wanted to become a MHFA
because I’ve seen first-hand
how mental health can affect
people. It can be really hard to
find the strength to initially tell
someone about your worries
or problems and to know
where to ask for help.

My training has given me the
confidence to know the signs
to look out for and to step in.
I also know where to signpost
for professional help.

Colleagues know there’s
someone at Drax they can talk
to. By directing colleagues to
professional support, they’ll
get the support they need
earlier, creating a happier and
healthier workforce.”

People positive

Drax Group plc Annual report and accounts 2022 93

Governance

Corporate
Governance Report:
Letter from the Chair

Effective governance
is fundamental to the way
in which everyone on the
Board and across every
part of our business is
expected to act.

Philip Cox CBE, Chair

Our purpose, strategic
objectives and values

Our purpose and ambition
Our purpose is to enable a zero carbon,
lower cost energy future.

Our ambition is to become carbon
negative by 2030. Being carbon negative
means that we will be removing more
carbon dioxide from the atmosphere than
we produce throughout our direct
business operations globally – creating a
carbon negative company.

Our Strategic Objectives
Safety, sustainability and cost reduction
underpin our three strategic objectives:

To be a global leader in sustainable
biomass pellets
Pellet sales, self-supply, cost reduction,
fibre sourcing and technology

To be a global leader in carbon removals
Development of projects in UK and
internationally

Carbon negative by 2030

To be a UK leader in dispatchable,
renewable power
Dispatchable, renewable power – biomass,
hydro, pumped storage

Renewable power and energy services
to strategic customers

Our Values
• We care about what matters
• We’re a can-do kind of place
• We see things differently
• We listen carefully
• We do what we say we’ll do

I am pleased to present our
Corporate Governance Report.

Governance is integral to the success
of our business and the realisation of our
goals. It also informs our purpose and
values. Effective governance is
fundamental to the way in which everyone
on the Board and across every part of our
business is expected to act. In addition,
it enables us to work in ways that help us
realise our potential.

During 2022, the Board challenged
management and contributed to the
Group’s progress in delivering its strategy.
This included the continued expansion of
the supply of sustainably sourced pellets,
both for the Group’s own use and third-
party contracts. Furthermore, the Board
fully supported an accelerated
development of options for BECCS in the
UK and globally. We have also devoted time
during meetings and in our Board visits to
understanding performance in activities
such as health, safety and sustainability.

You can find more information about the
Board’s trip to Canada on page 95 and
on sustainability from page 36. For more
about safety and how we embed key
actions into assessing management’s
performance, please see page 156.

During 2022, Drax – in common with many
other organisations and individuals – had
to react to challenging macro-economic
factors. These included the impact of the
invasion of Ukraine by Russia and the
resulting sanctions, high energy prices,
and rising inflation. Colleagues have
worked hard to understand these issues
and develop appropriate actions, which
the Board scrutinised and challenged
before reaching what we believe are
appropriate conclusions. One example was
the formation of a working group to
undertake a detailed review of the Group’s
supply chain and supplier resilience after
the introduction of sanctions. The Board
received updates on operational issues
and risks, and the steps taken to ensure

the supply continuity that would allow the
Group to meet its generation commitments.

Amidst energy market changes
unprecedented in modern times, Drax
received a UK Government request to be
available to operate our coal units during
winter 2022/23, if required. The Board
carefully assessed this request. More
details about the decision-making process,
stakeholder considerations (including the
need for customers to have energy
security during winter) are on page 107.
The effect of the cost-of-living crisis has
had an impact upon many people,
including our colleagues across the Group.
The Board discussed these impacts and
how to respond in the early autumn, and
supported management in considering the
amount and timing of the annual salary
review. We also considered our colleagues’
wellbeing, including the development
of a Bereavement Policy. There is more
information about this on page 69.

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In line with the Board’s expectations for a
full and thorough stakeholder engagement
process, the Cruachan expansion work
during 2022 involved a broad consultation
with all relevant stakeholders. Through
2022 the Board received updates on
progress and discussed the structure
of engagement. The project remains
in the preliminary stage of consultation
and approval. The expansion represents
a key part of enabling the supply of secure,
renewable energy in Scotland and
England. And it will become a focus
for education and job creation in the
local communities.

During the year, Will Gardiner and
I continued to meet quarterly with
the chairs of the MyVoice Forums,
our workforce engagement initiative.
These meetings allow us to hear directly
from colleagues, via their representatives.
It is a safe forum where everyone can
speak openly, holding discussions on
key issues that are important for our
colleagues. Will and I then reported the
feedback to the whole Board. This ensures
all Directors gain an appreciation of
employee interests and concerns while
also providing an opportunity for Directors
to offer informed guidance and reflections
upon our possible responses. You can read
more about this on page 26.

Recognising the value of increasing
Director engagement with employees,
Nicola Hodson recorded a video in June
2022. In it, she explained the annual bonus
plan, how we choose financial, strategic
and ESG measures, and how they support
our strategy. We shared the video with
colleagues in July 2022 and, as the fourth
most viewed internal video in 2022,
it was very well-received. At the
Annual General Meeting (AGM) in 2023,
we will use online technology once more.
This enables shareholders to attend
remotely and in person, with the aim
of optimising shareholder engagement
and participation. However, the take
up rate for remote attendance remains
very low so we will continue to consider
its effectiveness in enabling the Board
to hear from shareholders.

The integration of the Canadian business
continued in 2022, with the Board
reviewing ways to invest in and facilitate
operations as part of transitioning into
an enlarged group. Since the acquisition
of Pinnacle in April 2021, colleagues
in Canada have made a significant
contribution to the business and our
strategic progress is testament to
everyone’s dedication. As part of
integration, the Group continues to roll out
training modules such as ethics, values
and safety to colleagues. The
management team has also overseen
ongoing work to implement the Group’s
sustainability principles across our
Canadian sites.

In June 2022, the Board took part in a
highly successful trip to pellet production
sites in Canada. We attended a series of
meetings with local management and
subject matter experts, including health
and safety, process safety and ESG.
Directors were fortunate to attend a forest
tour hosted by a First Nations group,
where we discussed the vital forest
management work taking place. We were
also delighted to meet many Canadian
colleagues in person and develop those
important relationships. Non-Executive
Director Kim Keating who was appointed
to the Board in October 2021, lives and
works in Canada and is passionate about
outreach within local communities. During
the visit, all of the Board members gained
insights into the operational challenges
of conducting business in Canada with
extreme seasonal weather changes
including periods of severe cold, snow and
high winds. More discussion around this
risk and the response of the business is
on page 89.

Engaging with our stakeholders
The Board recognises the need to ensure
effective engagement with stakeholders,
both internally and externally. Regular
updates form part of reports discussed at
Board meetings, supported by discussions
with management and advisers. Some
Directors have also directly engaged
with suppliers while visiting Canada,
and with shareholders. These included
meetings where variously our CEO,
Will Gardiner, CFO, Andy Skelton,
and I have participated. In addition,
Will Gardiner has led our engagement
with the UK Government. As our business
continues to grow internationally,
we appreciate the open discussions and
enriched experiences that come from

visiting and meeting stakeholders
face to face. We feel it is vital to listen
to stakeholders, take account of their
perspectives, and respond to and act
upon their feedback. This was clearly
demonstrated during our considerations
concerning the potential operation of
the coal units, during winter 2022/23.
There are details about the process
included on page 107.

We believe the BECCS programme is
fundamental to delivering the net zero
ambitions of the UK, while also supporting
the nation’s energy demands. During
2022, we have worked with stakeholders
such as BEIS, and DEFRA, regional
partners including the Northern
Endurance Partnership (NEP) as part of
the East Coast Cluster, and commercial
partners to develop our work on BECCS.
This included holding two large events
focused on suppliers. Last October,
the Board held a two-day review of the
Group’s strategy, including the potential
scale of the BECCS opportunity.
The review assessed key next steps for
the programme in the UK, and considered
the prospects for global BECCS, primarily
in the US. To do so, we scrutinised the
feedback from meetings with regulators,
policy makers and potential partners in
several US states. These options for
broadening the adoption of BECCS,
both at home and globally, are
encouraging and we believe represent
genuine prospects for accelerated growth.

With BECCS being just one aspect
of our portfolio and engagement with
stakeholders, the Board also received
reports about wider stakeholder
engagement. In July, we received
a presentation from the External Affairs
team and discussed, assessed and
challenged the quality of the team’s
engagement in satisfying Section 172 of
the Companies Act. Naturally, this meant
considering the issues pertinent to the
Group, such as the expansion at Cruachan,
plus UK and global BECCS. However,
we also sought to gain a better
understanding of what matters most to
our stakeholders, and of how management
seeks to address these issues. The Board
fully understands the vital nature of this
work and the next phase of BECCS
delivery in 2023 relies upon stakeholder
support and the necessary regulatory
framework in supporting Drax’s
investment decision (find more
information on page 26).

Drax Group plc Annual report and accounts 2022 95

Governance

Corporate Governance Report: Letter from the Chair continued

Diversity and inclusion
In last year’s Annual Report, we outlined
our progress regarding diversity and
inclusion at Board level and throughout
the Group. Even so, we recognise there is
always more work to do. We welcome the
expectation from the FCA for improved
transparency, as announced in its April
2022 Policy Statement on ‘Diversity
and inclusion on company boards and
executive management’. It includes
recommendations that appear in our own
Board Diversity Policy, which was
reviewed and approved during 2022.
While already meeting two of the FCA’s
new targets, we are mindful of the
expectations placed upon the Boards of
listed companies to meet all the targets.
Set out below is our current progress
against the FCA targets, and we provide
further diversity figures in the tables
on page 106:

1. At least 40% of the board are women.
Met: 44.44% of the Board are women.
In addition, 40% of the Executive
Committee are women.

2. At least one of the following senior

board positions is staffed by a woman
– Chair, Chief Executive Officer (CEO),
Senior Independent Director (SID)
or Chief Financial Officer (CFO).
Not yet met: This is something of which
we are mindful, and it will be considered
as a factor in any future recruitment
processes. Both the Audit Committee
and Remuneration Committee are
chaired by women.

3. At least one board member is from a
minority ethnic background, defined
by reference to the categories
recommended by the Office for
National Statistics, excluding those
listed as coming from a White ethnic
background. Met: The Board currently
has one director from an ethnic
minority background.

In other sections of this Annual Report,
we explain the additional measures we
have taken in 2022 to support positive
change for diversity, equity and inclusion.
These include leadership development,
more transparency in career progression,
and awareness-raising through events.
We have developed our Bereavement
Policy, which considers a range of
bereavement experiences, including
miscarriage and are building Colleague
Resource Groups (CRGs) to give under-
represented voices an opportunity
to communicate in a safe place.
We are also evolving our recruitment
strategies to attract candidates from
under-represented groups.

The Board considered and fully supported
all these steps. For example, to celebrate
Black History month in February 2022,
Non-Executive Director Erika Peterman
recorded a personal video message
to colleagues (the fifth most-viewed
internal video of 2022), and we held
an internal live panel event to share
colleagues’ experiences.

Culture and governance
As the Group focuses on its People
Positive agenda, we continued during
2022 to work on culture, values and our
colleagues’ experience. The Board
received regular updates on workforce
engagement, including feedback on
meetings between the Chair of the Board,
the CEO and the chairs (chosen by
colleagues) of the MyVoice Forums.
The Board also reviewed and challenged
management on the results of the
workforce engagement survey and the
corresponding action plans, such as
workshops to support colleagues. Actions
following the 2021 survey, and ahead of
the 2022 edition, were taken with the aim
to improve the lower response rates from
our colleagues in Canada and the US.
These included making additional PC
workstations available to colleagues
in operating facilities, and allowing
employees to access the survey with
their phones via a QR code. In addition,
line managers had to both ensure
colleagues could access emails and make
the appropriate plans for colleagues to
have enough time to complete the survey.

The Board and management continue
to place particular emphasis on the safety
and wellbeing of our people. However,
as we emerged from the pandemic,
the cost-of-living crisis started to take hold.
Our response included careful
consideration of the best financial support
measures, bringing the annual pay rise
forward by three months and giving
colleagues a significant increase.
We appointed a new financial wellbeing
partner, called Nudge. Through a web
application, Nudge offers colleagues
personalised financial guidance that aims
to help them navigate the current financial
challenges, as well as plan for retirement
and deal with other financial matters.

During the year there were a number of
Director visits to sites. For example, in
November, John Baxter and Kim Keating
travelled to Drax Power Station to meet
management and colleagues. They
discussed safety, how to improve the
operational efficiency of assets, and
planning for onsite development works.
Kim also had a separate meeting with
female employees who were part of a
women’s networking initiative, and John
met apprentices to discuss their experience
of working at Drax. He also visited the
Glasgow office in June, for an update
on risk management (including safety
and governance) and our Scottish assets,
including the development at Cruachan.

Looking forward, pressures on the global
economy and cost-of-living are likely
to continue. Alongside these challenges,
we will ensure that our strategy for
biomass acceptability, carbon removal,
and secure renewable power all develop
too. Drax experienced many changes
during 2022 and the Board recognises
the significant work by all colleagues,
in response to those challenges. We very
much appreciate everyone’s positive
contribution in delivering our day-to-day
operations while progressing our strategy.
It is only by working together, informed
by our values and our continuing
commitment to realising our ambitions
responsibly, that we can deliver
our purpose.

Philip Cox CBE
Chair

Drax Group plc Annual report and accounts 2022

Corporate Governance Report: Board of Directors

The Board shapes our purpose, strategy, culture and
values to generate long-term sustainable value and
provide strong stewardship of the Group.

Key to Committees
A Audit Committee

N Nomination Committee

R Remuneration Committee

Chair of Committee

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Philip Cox CBE
Chair
N R

Will Gardiner
CEO

Andy Skelton
CFO

Contribution and Experience
Using his strong financial and commercial
skills built over 25 years, Andy provides
the financial oversight and controls that
has supported the growth of Drax from
a renewable energy company
to an international company with
a differentiated portfolio.

Highly values driven, with a personal
commitment to Drax’s climate, nature
and people positive ambitions, Andy
represents Drax as a member of the
Northern Powerhouse Partnership,
helping create more opportunities and
a better economy for the people of the
North of England, where he also lives.

Previously Andy was CFO at Fidessa Group
plc and has held a number of senior
finance positions at CSR plc, Ericsson
and Marconi, including two years as
CFO of Ericsson Nikola Tesla. Andy has a
BA in accounting and finance and qualified
as a chartered accountant in 1994.

Appointment to the Board:
January 2019

Contribution and Experience
Philip’s responsibilities at Drax include
Board composition and succession, Board
governance and stakeholder engagement.

He was previously CEO of International
Power plc, having formerly been CFO.
Prior to this he held a senior operational
position at Invensys plc and was CFO at
Siebe plc. As a non-executive, he was
previously Chair of Kier Group plc, the
Senior Independent Director at Wm
Morrison Supermarkets plc, Chair of
Global Power Generation and a member
of the boards of Talen Energy Corporation,
PPL, Meggitt plc and Wincanton plc.

Philip is a Fellow of the Institute of
Chartered Accountants and has an
MA from Cambridge University.

Philip is an experienced leader of large
businesses, particularly in the energy
sector. As Chair, Philip cultivates a culture
of openness, transparency and honesty
on the Board in which constructive debate
and challenge occurs and all directors
contribute fully. Philip has an in-depth
knowledge of energy markets and the
related regulation. He also has extensive
experience in stakeholder engagement.

Appointment to the Board:
January 2015

Appointment as Chair:
April 2015

Contribution and Experience
Will has driven the vision and operations
of the Company since becoming CEO
in January 2018, inspiring Drax’s
transformation from a leading UK
renewable energy company to global
leadership in sustainable biomass with
the ambition to be a global leader
in carbon dioxide removals.

Sustainability considerations are at the
core of everything at Drax. Will is driving
Drax’s sustainability agenda, taking
a thought leadership role in defining
sustainability criteria for woody biomass.
Working with stakeholders across the
spectrum, Will is creating a purpose
led company at Drax to ensure outcomes
that are positive for people, nature and
the climate.

In addition to being CEO of Drax, Will is
a Commissioner of the Energy Transitions
Commission, is a member of the
World Economic Forum’s (WEF) Alliance
of CEO Climate Leaders, and is also
a non-executive board member of the
Sustainable Biomass Program.

Will joined Drax in 2015 as CFO and
was appointed as CEO in January 2018.
He has a wealth of experience in finance
and technology, having held CFO and
divisional Finance Director roles at
a number of major companies, including
CSR plc (acquired by Qualcomm,
Inc in 2015) and Sky. He has dual US-UK
citizenship and has lived and worked
in the UK since 1998.

Appointment to the Board:
November 2015

Drax Group plc Annual report and accounts 2022 97

Governance

Corporate Governance Report: Board of Directors continued

Key to Committees
A Audit Committee

N Nomination Committee

R Remuneration Committee

Chair of Committee

David Nussbaum
Senior Independent Non-Executive
Director

A N

Contribution and Experience
David holds a portfolio of other Board
appointments, including Chair of
International Alert and of the Joffe Trust.
He also serves as a member of the Board
(‘Council’) of Chatham House, and of the
International Budget Partnership;
is President of the Advisory Council
of Transparency International UK;
and is a member of the Ethical Investment
Advisory Group of the Church of England.
David’s executive career has included
being the Chief Executive of The Elders,
of WWF-UK, and of Transparency
International. He was previously Finance
Director and Deputy CEO of Oxfam,
and CFO of Field Group plc. In a
non-executive capacity, David has been
Deputy Chair of the International
Integrated Reporting Council, Deputy
Chair of Shared Interest Society,
a non-executive director of Low Carbon
Accelerator Limited, and Chair of
Traidcraft plc. David is a chartered
accountant, and has a Masters in
Theology from both Cambridge and
Edinburgh universities, and a Masters
in Finance from London Business School.

David’s extensive experience in
international development and
environmental matters, in addition to his
prior experience as CFO of a UK listed
industrial company, is of significant value
to Drax and contributes to the Board’s
discussions and understanding of the
perspectives of and engagement
undertaken with stakeholders.

Appointment to the Board:
August 2017

Vanessa Simms
Independent Non-Executive Director
A N R

Nicola Hodson
Independent Non-Executive Director
A N R

Contribution and Experience
Vanessa has extensive experience
in senior finance roles across several
different, and capital intensive, industries,
including real estate, medical devices
and telecommunications.

Contribution and Experience
As Chair of the Remuneration Committee
Nicola brings to the role a wide range
of experience of international business,
government organisations, and dealing
with a variety of stakeholders.

Vanessa is CFO of Land Securities Group
plc and has worked in finance for over
20 years. Prior to her role at Land
Securities Group plc, Vanessa was
CFO of Grainger plc, held a number
of senior positions within Unite Group plc,
including Deputy Chief Financial Officer,
and was UK finance director at SEGRO plc.
Vanessa is a Fellow of the Association
of Chartered Certified Accountants and
has an Executive MBA from Ashridge.

Vanessa has broad and expert level
experience in strategic capital allocation,
finance, risk and internal controls at highly
successful companies in the UK which
is invaluable in her role as Chair of the
Audit Committee. She has a
comprehensive understanding of large,
listed companies’ requirements and brings
a rich insight into a broad range of
stakeholder perspectives.

Appointment to the Board:
June 2018

Nicola is currently Chief Executive of IBM
UK and Ireland and Deputy President of
TechUK. Previously she was Vice-President,
Global Sales and Marketing, Field
Transformation at Microsoft, Chief
Operating Officer of Microsoft UK and
previously held P&L and sales roles at
Siemens, CSC (now DXC) and EY. Nicola is
a Non-Executive Director of Beazley plc.

Nicola brings expert level technology
knowledge, with her current working
experience at the forefront of global
organisations. She is also skilled in
business and digital transformation, and
sales. Nicola is committed to inclusivity
and enabling people to realise their full
potential, irrespective of their background.

Appointment to the Board:
January 2018

Drax Group plc Annual report and accounts 2022

Board statistics (As at 31 December 2022)

Gender diversity (%)

Composition (%)

Tenure in years (%)

Female
Male

44.4
55.6

Non-executive 66.7
22.2
Executive
11.1
Chair

0-2
3-4
5+

22.2
44.4
33.3

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John Baxter CBE
Independent Non-Executive Director
N R

Kim Keating
Independent Non-Executive Director
N R

Erika Peterman
Independent Non-Executive Director
A N

Contribution and Experience
John has over 45 years working across
the nuclear, electricity, oil and gas sectors.
John was previously at BP plc, most
recently as Group Head of Engineering
& Process Safety, prior to which he
worked at the UK utility Powergen plc
as Group Engineering Director, as well as
roles as a UKAEA Board member and also
as a nuclear submarine engineer officer.
He is a non-executive Director of Sellafield
Ltd and chairs the Sellafield Board
Committees on Environment, Health,
Safety & Security and also People
& Remuneration

He is a Chartered Engineer, Fellow of
both the Royal Academy of Engineering
and the Royal Society of Edinburgh.
John was President of both the Institution
of Mechanical Engineers and The
Welding Institute.

John has broad and expert level
experience in engineering, health and
safety, and energy generation experience.
John is passionate about people
development, particularly advancing the
opportunities for young people in STEM
careers, including via apprenticeships.
His dedication to charity work and
fundraising to support young people,
provides a depth of understanding
during Board discussions on stakeholder
engagement and culture matters. Also,
having been born and brought up in
Scotland he brings important insights to
Drax on the local environment and culture.

Appointment to the Board:
April 2019

Contribution and Experience
Kim is a Professional Engineer with
25 years of broad international experience
in the oil and gas, nuclear, hydropower,
and mining sectors. Most recently, Kim
was the Chief Operating Officer of the
Cahill Group, one of Canada’s largest
multi-disciplinary construction companies.
Prior to joining the Cahill Group in 2013,
Kim held a variety of progressive
leadership roles from engineering design
through to construction, commissioning,
production operations and offshore field
development with Petro-Canada
(now Suncor Energy Inc.). She is currently
a non-executive director of Yamana Gold
Inc. & Board chair of Major Drilling
International Inc. Kim is also a founding
member of Makwa-Cahill Limited
Partnership, a nuclear qualified indigenous
fabrication company. Kim is a Fellow of the
Canadian Academy of Engineering, holds
a Bachelor of Civil Engineering degree and
an MBA. She also holds the Canadian
Registered Safety Professional (CRSP)
designation & Diligent Climate Leadership
certification. She is a graduate of the
Rotman-Institute of Corporate Directors
Education Program and was awarded her
ICD.D designation. Throughout her career,
Kim has made significant engineering and
project management contributions to
complex major projects in the Canadian,
Norwegian and UK energy sectors,
bringing a wealth of strategy, operational
leadership, and technical expertise to
her roles. She has a deep appreciation
and insight into the value of community
partnerships particularly with
indigenous groups.

Appointment to the Board:
October 2021

Contribution and Experience
Erika’s extensive experience, gained
from over 25 years working in global
organisations, enables the delivery
of change and growth in complex,
world-leading businesses. Her broad
knowledge has been built serving various
parts of the chemicals industry, across
a range of sectors from plastics,
petrochemicals, agriculture and pharma.

Erika is currently Senior Vice President
at BASF Corporation, where she leads the
North American Chemical Intermediates
business. Erika has held senior executive
roles with BASF, covering manufacturing
and production, engineering, strategy,
and commercial business management.
Passionate about STEM and DEI,
she actively supports BASF’s talent
and workforce development programs,
as well as a range of diversity and
inclusion initiatives.

Erika sits on a variety of College of
Engineering Advisory Boards, including
those for the University of Houston
and the Georgia Institute of Technology.
She serves as a Board Trustee at Chatfield
College in Cincinnati, Ohio. She is also
a member of the Executive Leadership
Council, a non-profit organization
whose mission is to globally accelerate
the development of successful black
executives across the lifecycle of their
careers. Erika holds a BSc in chemical
engineering from the Georgia Institute
of Technology and an MBA from the
University of Houston.

Appointment to the Board:
October 2021

Drax Group plc Annual report and accounts 2022 99

Governance

Corporate Governance Report: Compliance with
the UK Corporate Governance Code 2018 (Code)

At two meetings during 2022, the Board formally considered reports on how Drax, the Board and its Committees applied the Principles
and complied with the Provisions of the Code. The meetings included discussions about the steps being taken and how they might
evolve, as well as the effectiveness of stakeholder and colleague engagement. We also discussed how the Board assesses, monitors

Board Leadership and
Company Purpose
Principles
A. Promoting the long-term sustainable
success of the Company, generating
value for shareholders and
contributing to wider society.
B. Purpose, values and culture
C. Resources and effective controls
D. Engagement with stakeholders
E. Workforce engagement and

whistleblowing

Division of Responsibilities
Principles
F. The role of the Chair
G. Board composition
H. Non-Executive Directors
I. The company secretary and

Board resources

The Board has clearly articulated the Group’s
purpose (to enable a zero carbon, lower cost
energy future), ambition (to become carbon
negative by 2030) and business model.
The Board promotes a culture of openness
and collaboration, setting a clear and positive
tone to promote our values.

This underpins the Group’s strategy: to be
a global leader in both sustainable biomass
pellets and in negative emissions, and to be
a UK leader in dispatchable, renewable power.
It also supports the UK’s ambition to achieve
net zero by 2050.

Items such as health, safety and wellbeing,
ethics and employee engagement are
standing agenda items at Executive
Committee and Board meetings. This provides
oversight and identifies areas for
improvement and practices that enable
positive engagement, underpinning the
culture of respect.

The workforce engagement forums meet
quarterly. Key issues discussed in 2022
included career development, inclusion, social
and environmental responsibility, Russia’s
invasion of Ukraine, inflation, energy costs
and the rising cost of living. Chair, Philip Cox,
and CEO, Will Gardiner, meet quarterly
with the chairs of the workforce forums,
with support from Hillary Berger, who is
Group General Counsel and an Executive
Committee member. The subsequent CEO
report to the Board includes information
about these meetings.

Typically, the Group undertakes employee
engagement surveys annually. Action from
the 2021 survey included the implementation
of a career pathway pilot. This involved career
video stories and leaders engaging with teams
to discuss how they can improve on
communicating and leading change. (You can
read more about how the Board monitors and
assesses culture on page 105).

The Board comprises the Chair of the Board,
two Executive Directors and six independent
Non-Executive Directors. All six were
considered independent on appointment;
one of them, David Nussbaum, acts as
Senior Independent Director.

The Senior Independent Director, David
Nussbaum, led the Non-Executive Directors
in a review of the Chair’s performance and
then provided feedback to the Chair.

Non-Executive Directors routinely scrutinise
performance against business objectives
(including financial, strategic and other
measures captured in the Group Scorecard).
They hold management to account while
providing challenge and guidance in an open
and constructive environment. Examples
from 2022 include requests for deep dives
into the top safety risks and the
reintroduction of health and safety to the
bonus scorecard. In addition, there were

Composition, Succession
and Evaluation
Principles
J. Appointments to the Board and

succession planning

K. The skills, experience and knowledge

of the Board and Committees

L. Board evaluation

The Nomination Committee comprises
the Chair of the Board (who also chairs
the Committee) and six independent
Non-Executive Directors.

All appointments to the Board are subject
to a formal, rigorous and transparent process,
and all new Directors undergo a thorough
induction programme.

The Audit Committee comprises four
independent Non-Executive Directors.
The Committee chair, Vanessa Simms,
was considered independent on appointment
in that role, and has recent and relevant
financial experience.

Each year the Nomination Committee reviews
the Group’s succession plan, identifying
colleagues who have the potential to progress
to more senior roles in one to five years.
Based on merit and objective criteria,
the review focuses on various aspects such
as technical skills, experience, behaviours,
attitudes and diversity. This ensures the
business has the right leaders in place
to deliver our purpose and strategy.

The Audit Committee provides oversight and
challenge of the Group’s financial statements
to ensure they provide a fair, balanced and
understandable assessment of the Group’s
position and performance.

The Board has procedures in place to manage
risk and oversee the internal control

Audit, Risk and Internal Control
Principles
M. The effectiveness of internal and

external audit functions

N. Fair, balanced and understandable

assessment

O. Risk management and internal control

Remuneration
Principles
P. Remuneration policies and practices
and alignment to long-term strategy

Q. Executive remuneration
R. Independent judgement and discretion

and remuneration outcomes

The Remuneration Committee comprises
five independent Non-Executive Directors
and the Chair. The Committee Chair,
Nicola Hodson, was considered independent
on appointment as Chair and has relevant
committee experience.

Shareholders approved the current Directors’
Remuneration Policy (Policy) at the 2020 AGM.

During 2022, the Remuneration Committee
– with support from Korn Ferry –reviewed the
Policy and considered it to be broadly fit for
purpose. The updated Policy will be presented
to shareholders for approval at the 2023
AGM. You can find out more about the
proposed new policy in the Directors’
Remuneration Report on pages 127 to 157.
Annual bonus metrics are the same for all

You can find the Code on the Financial Reporting Council website at www.frc.org.uk

100

Drax Group plc Annual report and accounts 2022

Board Leadership and

Company Purpose

Principles

A. Promoting the long-term sustainable

success of the Company, generating

value for shareholders and

contributing to wider society.

B. Purpose, values and culture

C. Resources and effective controls

D. Engagement with stakeholders

E. Workforce engagement and

whistleblowing

Division of Responsibilities

Principles

F. The role of the Chair

G. Board composition

H. Non-Executive Directors

I. The company secretary and

Board resources

Composition, Succession

and Evaluation

Principles

J. Appointments to the Board and

succession planning

K. The skills, experience and knowledge

of the Board and Committees

L. Board evaluation

Audit, Risk and Internal Control

Principles

M. The effectiveness of internal and

external audit functions

N. Fair, balanced and understandable

assessment

O. Risk management and internal control

Remuneration

Principles

P. Remuneration policies and practices

and alignment to long-term strategy

Q. Executive remuneration

R. Independent judgement and discretion

and remuneration outcomes

You can find the Code on the Financial Reporting Council website at www.frc.org.uk

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and constructively influences culture. In addition, we considered the actions taken in addressing recommendations from the most
recent, externally-led Board and Committee performance evaluations. The Board’s view is that the Company has satisfied the
Principles and Provisions of the Code throughout 2022.

In June 2022, the Board visited Drax sites in
Canada. This gave Directors the opportunity
to visit key projects, meet operational
colleagues, and gain invaluable insight into
the local culture of the business. The visit
included learning about First Nations’ forest
management, in addition to health and
safety, process safety and ESG at the
Canadian sites. Following the easing of
Covid-19 restrictions, we are planning further
visits to Drax site locations for 2023.

The Board ensures that both it and the
business actively engage with a wide range
of stakeholders to encourage meaningful
two-way participation. This also ensures the
Group makes a positive contribution to wider
society. Board papers submitted for material
decisions, and the assessment undertaken
at Board meetings, consider the impact
on wider stakeholders, and the Board
routinely receives updates on stakeholder
engagement. You can read more about this

discussions about the cost tracking and
status of projects.

Before regular Board meetings, the Chair
and Non-Executive Directors meet without
the Executive Directors being present,
giving them the opportunity to consider
and discuss matters. The Audit Committee,
which the Board Chair, Philip Cox, attends
by invitation, also provides routine agenda
time to discuss matters in the absence

on pages 26 to 33. The Chair, Senior
Independent Director and Chairs of the Audit
and Remuneration Committees are all
available for engagement with shareholders.

Diversity, equity and inclusion are important
to the work of the Board, which is keen to set
the right tone. The Board assesses actions
being taken in the three core areas of
the strategy:

(1) Data – understanding and tracking
changes being made to the socio-
economic and cultural balance of
colleagues working across the Group

(2) Educate – positive steps to inform

behaviours as part of driving change

(3) Inspire and recruit – encourage people

throughout the organisation to participate
and recognise the importance of their
involvement in realising shared objectives

The Diversity and Inclusion Steering
Committee reviews progress in each pillar
regularly with the CEO providing updates to
the Board. You can read more about our work
on diversity and inclusion on pages 69 to 70
and 112 to 113

The Group’s confidential whistleblowing
telephone hotline and web-portal enable
colleagues and third parties to raise matters
of concern. The Board oversees
whistleblowing and receives regular updates;
it also discusses findings from investigations
and challenges management on initiatives
associated with raising awareness and
addressing learnings.

of management. These agenda items
typically include meetings with the external
and internal auditors.

The Board approves additional appointments
in advance, taking into account the additional
demands on directors’ time. No Executive
Director has a non-executive position
in another listed company.

All Directors have full access to the services
of the Group Company Secretary, who works
closely with the Chair of the Board and Chairs
of the Committees. This ensures the Board
has the policies, processes, information, time
and resources it needs to function effectively
and efficiently. The whole Board approves
the appointment or removal of the Group
Company Secretary.

The most recent review, conducted
in November 2022, also assessed the
capabilities required to support progress
in delivering the breadth of projects across
key functions of the Group.

Board Alchemy performed an externally
facilitated evaluation of the Board and
its Committees in 2022. You can read
more about this on page 107 to 108 and
pages 113 to 115.

All Directors seek annual re-election
(or election at their first AGM following
appointment).

More about the composition and activities
of the Nomination Committee is in
the Nomination Committee Report,
on pages 111 to 115. Actions being taken

in the search for a new Chair of the Board
upon the conclusion of Philip Cox’s period
of tenure can be found on page 112.

framework. Its procedures also determine
the nature and extent of the principal risks
the Group is willing to take to achieve
its long-term strategic objectives. Details
of the approach to risk management,
the process controls and principal risks,
together with mitigation strategies, appear
on pages 77 to 91. The Audit Committee

participating colleagues, including Executive
Directors, ensuring alignment. In 2020, the
Committee determined that from 1 January
2023, the contribution rates paid in respect
of pension benefits for existing Executive
Directors would align with the wider
workforce.

supports this work as part of regular
agenda items.

to appoint PwC for the financial year
commencing 1 January 2024.

In 2021, the Committee undertook a formal
tender in preparation for the end of tenure
of the present external auditor Deloitte LLP.
This concluded with a recommendation

Details about the composition and activities
of the Audit Committee are within the Audit
Committee Report, on pages 116 to 126.

The Remuneration Committee scrutinises
performance-related pay at the point of
completing a measurement period. It has
discretion to adjust remuneration outcomes
where appropriate to ensure that reward
outcomes align to Group performance.

No directors are involved in making decisions
regarding their own remuneration.

You can find the updated Policy, the
composition and activities of the
Remuneration Committee, and remuneration
outcomes in the Remuneration Committee
Report on pages 127 to 157.

Drax Group plc Annual report and accounts 2022 101

Governance

Corporate Governance Report: Executive Committee

Role of the Executive Committee
The Executive Committee focuses on the delivery of the Group’s
strategy, assessing the adequacy of the Group’s financial
structure, operational and financial performance, innovation,
organisational development, and change. This is enabled
by engagement with the workforce in addition to external
stakeholders, including the UK Government and NGOs.

The Executive Committee considers business performance
against the annual plan, and reviews progress in realising
longer-term objectives. They receive reports on each of the
business units, covering financial and non-financial metrics.
The latter include matters affecting the safety and wellbeing
of our workforce, which is the opening agenda item for each
meeting. Ethics and values are also a standing agenda item.

The Committee considers stakeholder engagement, including
a focus on the political landscape that could impact the Group’s
ability to execute its strategy. There are more details about such
engagement by the Group on pages 26 to 33. During 2022, there
were no changes to the membership of the Executive Committee.

The Executive Committee develops and considers policies and
procedures that provide an effective framework for operating
in line with required standards, laws and regulations. These
policies and procedures include our Code of Conduct, Group
Health and Safety, Supplier Code of Conduct and Diversity
and Inclusion Policy.

As detailed on page 107, the question of whether to operate
the coal units during winter 2022-2023 represented a significant
business decision for the Group and its stakeholders.
The Executive Committee completed several reviews of the
risks related to coal generation and reported these findings
to the Board.

Following the acquisition of Pinnacle Renewable Energy, Inc in
April 2021, the Committee has continued – throughout 2022 –
to oversee its integration within Drax. We are also deepening our
understanding of the opportunities related to global sustainable
biomass generation.

In 2022, the Executive Committee completed an in-depth review
of all nine principal risks; each one is owned by a member
of the Executive Committee. Following the acquisition of
Pinnacle, the Pinnacle Risk Register was restructured to align
with the Drax Principal Risk categories and risk scoring
methodology (which was completed in 2021). The resulting
document was then circulated to each Principal Risk owner
for review and feedback, to help establish Group-level
governance of Pinnacle-specific risks. You can read more about
our Principal Risk processes on pages 77 to 91.

The Executive Committee meets informally most weeks
throughout the course of the year, in addition to holding 7
meetings at which more formal reports are considered on a range
of business performance and planning measures. Where relevant
to the matters under discussion, Committee members receive
the relevant briefing papers ahead of these meetings. In addition,
members receive presentations on various issues from senior
managers within the business units.

The Committee also meets with management teams each quarter
for a deep dive into performance in delivering the Group’s
strategic imperatives. In these sessions, the Committee reviews
key programmes and progress against key milestones.

Biographies of the Executive Committee members are on the
website: drax.com/about-us/corporate-governance/.

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A sound governance framework underpins our purpose and supports effective
decision making and the delivery of our strategy

Drax Group plc Board
The Board is responsible for leading the Group and ensuring long-term value creation for shareholders and wider stakeholders.
It also establishes and reviews the Group’s purpose and values, assesses and monitors culture, and takes responsibility for setting
and overseeing the Group’s strategy and risk appetite. It monitors performance too, making sure the necessary controls and
resources are in place to deliver the Group’s plans and that the Group meets its responsibilities to its stakeholders.

Audit Committee
This Committee oversees financial
reporting, key accounting
judgements, internal controls and risk
management systems, plus internal
and external audit effectiveness.

Nomination Committee
The tasks of this Committee include
making recommendations on the size,
diversity and composition of the
Board, and succession planning for
the Directors and senior executives.

Remuneration Committee
This Committee oversees the Group’s
approach to remuneration, ensures
remuneration policies support the
purpose and strategy, and sets pay for
the Executive Directors and members
of the Executive Committee. It also
considers the alignment of reward
across the wider business.

Page 116

Page 111

Page 127

Executive Committee
The focus of this Committee is the Group’s strategy, financial structure, planning, operational and financial
performance, and governance framework. It also closely considers culture and diversity, succession planning
and organisational development below Board level.

Page
102

Ethics and
Business
Conduct
Committee
This Committee
monitors ethical
behaviour and
practices across
the business.

Capital
Allocation
Process
Committee
The members of
this Committee
provide
oversight,
co-ordination
and approval for
capital
deployment
proposals.

Financial Risk
Management
Committee
This Committee
provides
oversight and
challenges the
effective
management of
all financial risks,
including trading,
commodity,
treasury and
currency.

IT Board
This Board
provides
oversight and
co-ordination
of IT activities
and strategy,
information
systems and
security risk.

Group HSE
Committee
This Committee
reviews and
challenges
the management
of process and
people safety,
health,
environment and
wellbeing risks.

Operating
Review
Committees
(Pellet
Production,
Generation
and
Customers)
These
Committees
review the
operational
and financial
performance
of the business
units.

Drax Group plc Annual report and accounts 2022 103

Governance

Corporate Governance Report continued

Role of the Board
The Board determines the Group’s purpose, strategy and
business model for long-term value creation, and its appetite for
risk and risk management policies. The Board also determines the
annual plan and budget, considering whether the Group has the
necessary resources to deliver the strategy. In addition, the Board
sets the key performance indicators to measure performance
against strategic objectives (e.g. tracking cost reduction targets
in the self-supply of pellets; see page 18). It also reviews and
advises on stakeholder engagement, including with shareholders,
the workforce, Government and NGOs. The Board considers
management proposals for acquisitions, disposals, and other
transactions outside ordinary delegated limits. Such transactions
included the decision to make available the coal units at Drax
Power Station, in the event called upon to provide power to the
UK grid (see page 107).

The Board also considers material changes to accounting policies
or practices, and significant financial decisions. Such decisions
include investment in large scale projects such as BECCS, capital
structure and the dividend policy. For more information on these
see the Financial Review which starts on page 20. The Board
provides challenge to management on the Group’s priorities and
initiatives related to sustainability and environmental practices.
The Board reviews the effectiveness of the Group’s governance
structure too, commenting on how it should be revised to reflect
the evolution of the business. Reviews may cover: business
conduct, ethics and whistleblowing; the prosecution, defence
or settlement of material litigation; and Directors’ Remuneration
Policy. They may also include the terms of reference of Board
committees, and the Board structure, composition and
succession planning.

Terms of reference
The Board has a schedule of matters reserved for its decisions,
and formal terms of reference for its committees (which it
reviews periodically). The terms of reference of the committees
of the Board are available to view on the Group’s website at
www.drax.com.

Matters not specifically reserved to the Board and its committees
under their terms of reference, or for shareholders in General
Meeting, are delegated. Delegation is to the Executive
Committee, or otherwise delegated in accordance with a
schedule of delegated authorities that is approved by the Board.
The most recent review of the Matters Reserved for the Board
occurred in December 2020. This review informed a detailed
assessment of the Group’s wider delegations of authority,
which was completed in 2021.

How the Board functions
Routinely, before the formal meeting of the Board, the Chair
and the Non-Executive Directors meet in private without
management being present. This allows the Chair and Non-
Executive Directors to exchange views and share any concerns
before the meeting starts. At each Board meeting, the CEO gives
a report on key business, operational and safety matters and
reports on the Group’s financial performance. The Board also
receives regular reports on performance against the business
plan, as well as operational and financial performance. In addition,
it receives regular business reports from senior management
across the Group, and updates on investor relations and wider
stakeholder engagement. Adequate time is allocated to each
agenda item, to support effective discussion and challenge
by Directors.

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During 2022, there was a focus on understanding the principal
risks associated with the request received from the UK
Government to be able to operate the coal units, if required,
to assist with country’s energy security during winter 2022/23.
You can read more about the Board’s decision process and
stakeholder engagement on page 106-107 and in the
Principal Risks and Uncertainties section on page 77.

Linked to energy security, the Board received regular updates
during 2022 on the macro-economic factors influencing energy
providers and supply chains. In February, the Board established
a working group with delegated authority to complete a detailed
review of the Group’s supply chain. This review encompassed
the resilience of suppliers and analysis on third-party sourcing.
During the year, the Board also discussed the increasing costs
of pellet production and inflation-related costs. Board members
reviewed ways the Group’s integrated supply chain is capable
of creating additional value to mitigate macro-economic factors.
You can read more about the Group’s approach to economic
risks on pages 77 to 91.

The Board receives regular industry, regulatory and topical
updates from internal specialists as well as external experts and
advisers. Examples included, half-yearly updates on security
matters including cyber security, information security and the
effectiveness of controls.

The core activities of the Board and its Committees are planned
on a forward agenda that the Chairs of each Committee consider
and review at least annually. Through meeting minutes the
Committee maintains a list of matters arising from each meeting
and follow these up at subsequent meetings. The Group
Company Secretary advises the Board on governance matters,
ensuring good information flows within the Board, its
committees, the Executive Committee and senior management.
The Group Company Secretary also assesses compliance with
the Listing, Prospectus, Disclosure Guidance and Transparency
Rules, the Corporate Governance Code and the Companies Act.
An important part of this is effective collaboration with other
parties across all Group functions. Good training, regular
discussions on key issues, and support in evaluating the
potential for change from those in areas of critical operational risk
are also imperative.

All Board Committees are authorised to obtain legal or other
professional advice as necessary to perform their duties.
This includes securing the attendance of external advisers
at meetings and seeking required information from any member
of the Group’s workforce.

The Company’s Articles of Association (the Articles) give the
Directors power to authorise conflicts of interest when presented
with such matters for their review. The Articles were most
recently reviewed by the Board in 2021 and updated with
shareholder approval at the AGM held in 2021. The Board has
an effective procedure to identify potential conflicts of interest,
consider them for authorisation and record them. In 2022,
no conflicts of interest were identified. The Articles also allow
the Board to exercise voting rights in Group companies without
restriction (for example, to appoint a director to a Group
company). The Articles are available on the Group’s website at
https://www.drax.com/wp-content/uploads/2021/04/2021-
Articles-of-Association.pdf.

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Culture

How does the Board monitor and assess culture?

The Executive
Committee

• The subject of ethics and values is a standing agenda item for the Executive Committee. The Chair of the

EBCC supports the CEO’s regular updates to the Board.

• The Executive Committee develops plans for Board consideration on matters such as responding

to workforce engagement feedback, promoting diversity and inclusion, and dignity at work.

• The CEO sends a weekly Group-wide “Ask Will” email with Q&A (allowing colleagues to ask/comment about

what is on their mind).

The Group
Ethics and
Business
Conduct
Committee
(EBCC)

• A sub-committee of the Executive Committee, the EBCC meets quarterly to monitor, support and challenge
activities, assessing whether there has been proper regard for the Group’s policies as well as external laws,
regulations and standards. It also considers initiatives to maintain, enhance and assess ethical behaviour
and business conduct across Drax.

• Members of the EBCC include the Group General Counsel (Chair), the Director of Corporate Affairs, the DBI
Senior Vice President, the UK Portfolio Generation Director, the Managing Director of Drax Customers,
the Group General Counsel and the Group Company Secretary.

• The EBCC supports the Group’s commitment to doing the right thing in its business practices. It achieves this
by making sure there are appropriate communications to raise awareness and providing appropriate training
that informs behaviours in accordance with our Code of Conduct. For more information, see page 72.
• This sub-committee also assesses and challenges the annual review and risk assessment of compliance

programmes. These cover anti-bribery and corruption (including conflicts of interest), corporate criminal
offences (tax evasion), ethical due diligence, fair competition, privacy, sanctions, Speak Up (whistleblowing),
and supply chain human rights.

The Business Ethics team is responsible for the operation of the
Group’s Speak Up (whistleblowing) programme and reviews its
annual risk assessment (most recently completed in early 2022).
This includes the external, confidential (and anonymous, should
reporters so wish) reporting service that’s available in multiple
languages. In the 2022 MyVoice engagement survey, 86%
of colleagues responded positively when asked whether they
“feel comfortable to speak up or report any concerns”.
For more information on Speak Up, see page 73.

Our various Speak Up reporting channels are promoted to
internal stakeholders across several platforms, and to third
parties via our Supplier Code of Conduct. The Business Ethics
team responds to any reports from within Drax, as well as those
referred via the external service. The Group Company Secretary
is the Whistleblowing Officer with oversight of all related
investigations, which the Business Ethics team manages. Speak
Up matters continue to be reported to the Board and EBCC at the
respective meetings, with an annual report of EBCC activities
(including Speak Up reports and investigations) provided to the
Audit Committee. The Audit Committee also receives a quarterly
report on Speak Up.

As stated in our 2021 Annual Report, our Speak Up programme
received a positive internal audit in May 2021 (reported to the
Audit Committee in July 2021). Most actions raised in the audit
were completed within 2021, although one that the Audit
Committee was tracking – related to creating an investigation
procedure – was carried over into 2022. To close this action,
the EBCC created and approved three principle-based guides
in June 2022.

The Speak Up (whistleblowing) policy was reviewed in early 2022,
with no material changes required. Our two Speak Up guides
(one for reporters and the other for managers) were also
reviewed and updated then communicated to colleagues in
2022. Both documents reflected our newly-created template
for internal Speak Up reports.

The Speak Up programme was rolled out to colleagues in Canada
during 2021. In July 2022, there were further communications
via the deployment of the Anti-bribery and Corruption Policy and
a ‘Keeping Ethics in Mind’ guide that summarises Business Ethics
policies. In September 2022, the full Code of Conduct
(including Speak Up content) was issued to former Canadian
salaried colleagues; whilst non-salaried colleagues received
the ‘Code at a Glance’. Our new Princeton colleagues in Canada
will be included in the programme from 2023.

We intend to deploy the Speak Up programme to our Drax Asia
colleagues in 2023. In preparation, during the second half of
2022, we progressed an external legal review of our Speak Up
policy in relation to Japanese whistleblowing legislation.

In addition, the Business Ethics team held two virtual awareness-
raising sessions in September 2022 for our MyVoice Forum
members and Mental Health First Aiders. A Code of Conduct
eLearning refresher (including Speak Up content) was deployed
in November 2022 to all UK and US colleagues (although not
to our colleagues in Canada).

Drax Group plc Annual report and accounts 2022 105

Governance

Corporate Governance Report continued

Diversity
We explain our work promoting diversity of all kinds on
pages 69 to 70. The tables on this page show the gender and
ethnicity representation on the Board, and the gender
representation in the wider workforce, at 31 December 2022.

Gender diversity of the Board and wider workforce

Male

Female

Total

Gender

Board
members
Senior
managers(1)
All
employees(2)
Total

No.

55.6

44.4

100

2,155
2,205

992
68
68 1,024

3,147
32
32 3,229

100
100

(1) Direct reports of the Board (Executive Committee) and their direct reports.
(2) Excluding Board members and senior managers.

Gender representation on the Board and Executive Management

Number of Board
members

Percentage
of the Board

Number of senior
positions on the Board
(CEO, CFO, SID
and Chair)

Number in
executive
management

Men
Women
Other categories
Not specified/prefer not to say

5
4
0
0

55.56%
44.44%
0.00%
0.00%

4
0
0
0

6
4
0
0

Ethnicity representation on the Board and Executive Management

Number of
Board members

Percentage
of the Board

Number of senior
positions on the Board
(CEO, CFO, SID
and Chair)

Number in
executive
management

White British or other White (including
minority white groups)
Mixed/Multiple Ethnic Groups
Asian/Asian British
Black/African/Caribbean/Black British
Other ethnic group, including Arab
Not specified/prefer not to say

7
0
0
1
0
1

77.78%
0.00%
0.00%
11.11%
0.00%
11.11%

3
0
0
0
0
1

10
0
0
0
0
0

Percentage
of executive
management

60.00%
40.00%
0.00%
0.00%

Percentage
of executive
management

100.00%
0.00%
0.00%
0.00%
0.00%
0.00%

Board leadership of stakeholder engagement
The Board is responsible for engagement with stakeholders.
It ensures that appropriate time is given to discussing the views
and feedback from stakeholders and assesses the sufficiency
of resources available for the Group to effectively engage.
The Corporate Affairs team maintains a detailed map of the
Group’s key stakeholders, the concerns they have raised, and
the date of each meeting with them.

Members of executive management, including Executive
Directors, provide regular updates to the Board on key
stakeholder relations activity, current issues and the relevant
feedback received from stakeholder interaction. These updates
ensure the Board’s awareness and inform discussions, with
members taking these opportunities to assess and challenge
management’s approach relating to engagement.

The methods of engagement vary according to the issue and
stakeholder(s) concerned, and engagement takes place at
many levels of the business. A judgement is made, case-by-case,
on the need for engagement by the Board, Executive Committee
or senior management, or at the operational level. Management
also keeps under review the relevant stakeholders that may be
affected by major decisions.

During 2022, the Board received reports on the engagement
strategy from a range of stakeholders. The topics included
BECCS and the potential expansion of the Cruachan pumped
storage power station (see page 95). The Board also considered
biomass acceptability and strategy, and the possible use of the
coal units over winter 2022-2023 (see page 107). The CEO’s
report to the Board regularly includes a section detailing activity
around key stakeholder relations and the relevant feedback
received from stakeholder interactions.

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The Board has a duty to promote the success of the Company,
as set out in Section 172 of the Companies Act 2006. Supporting
this, Board discussions – and papers – for material decisions
consider the likely impact on stakeholders affected by the
decisions. This helps to ensure that the interests of all relevant
stakeholders are considered in decision-making. You can find
our Section 172 Statement on page 26.

For more detailed information on our stakeholders and how
we engage with them, please refer to our Stakeholder
Engagement section on pages 26 to 33.

Directors’ development and induction
The Board are supported in their development and knowledge
through a combination of regular presentations from
management, and informal meetings, that build an understanding
of the business and sector, or in areas recognised as being
technically complex. Such training is intended to support a
deeper understanding and equip the Non-Executive Directors
with insight into how the Drax approach compares with the
practices of its peers.

All new Directors receive a comprehensive and tailored induction
programme. It includes meetings with key managers,
international site visits, briefings on key operational matters and
training with external and internal providers on Board procedures
and governance matters. Following their appointment in October
2021, Kim Keating and Erika Peterman completed their induction
programme during the first half of 2022.

Throughout 2022, the Directors also had access to the advice
and services of the Group Company Secretary. Directors may
take independent advice at the Company’s expense, when they
judge it necessary to discharge their responsibilities effectively.
No such independent advice was sought in 2022.

Board decision-making and stakeholder considerations
– Extension of coal operations and energy security
In 2020, the Board announced that by 2021 Drax would cease
the commercial operation of coal for the generation of power.
This decision was, and remains, an integral part of the delivery
of our carbon negative strategy. This is also underpinned by the
further development of generation through the use of viable
and sustainable alternative fuels. As a consequence of the energy
crisis and the war in Ukraine, in spring 2022 the UK Government
requested that Drax consider making available its two coal fired
units for operation during winter 2022-2023 under a formal
operational and commercial framework.

With regular discussions on the matter, the Board diligently
examined this request and established a sub-Committee
consisting of the Chair, CEO and CFO. Additionally, a new
management working group fed into the Executive Committee
to consider the impact of extended coal operations. Early in the
process, the Board took advice from key advisers including our
brokers and our lawyers, Slaughter and May. The analysis
included scenario-planning and reports on different stakeholders’
perspectives and their concerns.

It was emphasised that the aim of operating the coal units,
if required, was not to generate significant value for the
Company. Instead, the expectation was to enter into an
agreement with National Grid ESO that would allow for extended
coal operations in consideration for a reasonable fee, to ensure
the Group’s costs were reimbursed, and to ensure additional risks
which might arise were suitably indemnified. In seeking such a
structure, management was cognisant of the views of external
stakeholders, including shareholders. It also took account of the

Group’s willingness to support the country, businesses,
and communities in the security of energy supply at a time
of potential need.

As the Government’s request represented a significant change
from the Company’s stated strategy, the Board placed significant
importance on stakeholder views. We gained updates on the
views of energy customers, employees, NGOs, Ofgem and
shareholders. We also considered concerns regarding the impact
on the delivery of BECCS at Drax Power Station and the possible
reputational impact. After thorough review, the Board concluded
that it did not expect that a decision to make available the coal
units over winter 2022-2023 would adversely affect the timing
of realising BECCS. However, it was noted that the 2023 phase
of the BECCS project continues to rely heavily on the UK
Government’s financial model that supports BECCS.

Operationally, the Board considered site and logistics security to
enable the units to achieve a state of readiness. This included the
recruitment of experienced contractors and provision of training,
and the identification of supply chain partners. It was also
recognised that the amount of coal generation was not
significant when compared to energy generation from
sustainable and renewable biomass. Furthermore, and crucially,
the request related to a short-term challenge to address a
security of supply issue for the UK’s energy needs.

Throughout its consideration, the Board was cognisant of its
stated strategy; the Directors remain committed to the cessation
of the coal operation and to becoming carbon negative by 2030.
The Board was also respectful of the views of stakeholders both
within the Company and those outside who were averse to
enabling the coal assets to be operated. The decision to agree
to operate the coal units during winter 2022-2023, if required,
resulted from several factors, including the highly unusual
circumstances arising from the war in Ukraine. Other factors
included high levels of energy uncertainty, energy market
volatility, and the fact that Drax forms a key part of the UK’s
critical energy infrastructure.

2022 External evaluation of the Board
The Board conducts formal performance evaluations annually.
These reflect on the continuing effectiveness of its activities and
the quality of its decisions, and consider the contributions made
by each Board member. In line with the UK Corporate Governance
Code requirements, every third year the Board engages an
external facilitator to support the review. Board Alchemy
supported the review in 2019 and Committee performance
evaluation in 2020. Board Alchemy has no other connection
with the Group or individual Directors.

Selection of the provider
In preparing for the 2022 review, the Board agreed that Board
Alchemy should be re-appointed. In so doing the Board
recognised that there had been significant changes since the
previous external review,. These included the appointment
of two new Non-Executive Directors as well as a transformational
acquisition and significant change in the activities of the Group
combined with progression in strategy. Board Alchemy brought
knowledge of the business and its objectives, and an
understanding of how the Board had been performing (and its
goals from three years ago). These insights were considered
valuable in supporting the present review and allowing a degree
of continuity that considered how the Board had evolved and
responded to the changes experienced. Following consideration
of the style of assessment, reflection and challenge, provided by
Hanif Barma of Board Alchemy, the Board concluded that he
was the most appropriate choice of reviewer.

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Corporate Governance Report continued

The process
Hanif commenced the review by consulting public information
on the Group. Subsequent conversations with the Goup Company
Secretary added additional context to the written materials
and allowed for an assessment of progress since the last external
review. The Directors completed questionnaires and took part
in interviews to support discussions on key topics and gain
feedback. Hanif also met selected members of the Executive
Committee and observed the September meetings of the Board
and Remuneration Committee, and the November 2022 meeting
of the Audit Committee. After collating all feedback, a report was
presented to the Board at the December 2022 meeting.

good engagement amongst Board members. The Directors had
noted progress in relation to feedback provided the previous year.
Apart from the topics arising from the separate, overall board
performance evaluation, the Directors did not identify further
areas that merited the Chair’s attention. Hanif also met the Chair
to discuss the performance of individual Directors and the
comments were fed back to the relevant Directors.

Although there were no high priority actions for the Board, some
recommendations and suggestions were provided and are set out
on page 114, alongside the outcomes and actions to be taken
over the coming year.

Outcomes
In November 2022, David Nussbaum, Senior Independent
Director, received feedback from Hanif regarding the Chair’s
performance; the Chair was not present for this discussion.
Later in November, David provided feedback to the Chair based
on the conversation with Hanif. The conclusions of the feedback
were that the Chair continued to perform well and was an
effective enabler to the Directors, promoting open dialogue and

Number of meetings held
The Board and its Committees have regular scheduled meetings
and hold additional meetings as required to deal with matters as
they arise. The Board has seven scheduled meetings each year,
with the Board meeting at least annually to specifically consider
strategy. Directors are expected, where possible, to attend all
Board meetings, relevant Committee meetings, the Annual
General Meeting (AGM) and any other General Meetings.

Board roles
The key responsibilities of members of the Board are as follows:

Position

Chair

CEO

CFO

Senior Independent
Non-Executive
Director

Role

Responsible for leading and managing the Board, its effectiveness, and governance. Makes sure Board
members are aware of, and understand, the views and objectives of major shareholders and other
key stakeholders. Helps to set the tone from the top in terms of the purpose, goal, vision and values for the
whole organisation.
Responsible for the day-to-day management of the business, developing the Group’s strategic direction
for consideration and approval by the Board and implementing the agreed strategy.
Supports the CEO in developing and implementing strategy, in relation to the financial and operational
performance of the Group.
Acts as a sounding board for the Chair and a trusted intermediary for other Directors. Available to discuss any
concerns with shareholders that cannot be resolved through the normal channels of communication with the
Chair or the Executive Directors.

Independent
Non-Executive
Directors

Responsible for bringing sound judgement and objectivity to the Board’s deliberations and decision-making
process. Constructively challenge and support the Executive Directors. Monitor the delivery of the strategy
within the risk and control framework set by the Board.

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Time commitment
Directors’ commitments outside of Drax are kept under review
to make sure they have sufficient time to dedicate to the business
and effectively perform their role. Under the terms of the Chair’s
letter of appointment, the Chair is expected to commit between
50 and 70 full days a year to this role. Under the Non-Executive
Directors’ letters of appointment, each is expected to commit
12 to 15 full days a year. That includes attendance at Board
meetings, the AGM, one annual Board strategy off-site event,
and at least one site visit each year.

In addition, Non-Executive Directors are expected to devote
appropriate preparation time ahead of each meeting. The time
commitment expected in respect of their membership of the
Audit, Nomination and Remuneration Committees is an additional
three to four full days a year in each case. However, in practice,
considerably more time is devoted, particularly by the Chairs
of the Committees.

Executive Directors may, with the prior approval of the Chair,
take on one additional role in an external listed company.
Neither of the Executive Directors have taken on such a role.
Non-Executive Directors may, with prior approval from the Board,
take on additional roles provided the individual can continue
to devote sufficient time to meet the expectations of their role.
No requests for new external roles have been received from
the Non-Executive Directors during the year.

Non-Executive Directors are encouraged to undertake visits
to Drax operations and spend time with management and
the workforce. This is designed to build and then maintain
their knowledge of the developing business, and to understand
the operational challenges. Visits undertaken in 2022 enabled
the Board to assess the effectiveness of actions being taken
and to scrutinise both the financial and non-financial impacts
of the pandemic. More information on these visits can be found
on pages 95 and 96 of the report.

Board composition and independence
The Board has reviewed the independence of each Non-
Executive Director. None of the Non-Executive Directors
who served during 2022 had any material business or other
relationship with the Group. In addition, there were no other
matters likely to affect their independence of character
and judgement. The Board recognises that, in view of the
characteristics of independence set out in the Code, length
of service is an important factor when considering the
independence of Non-Executive Directors. It also recognises
that Directors who have served more than nine years may not
be considered independent. The Board considers all the
Non-Executive Directors to be independent.

Workforce engagement

In 2019, the Board selected the MyVoice Forums (MVFs)
as the most appropriate means to facilitate workforce
engagement. This decision was informed by the workforce
forums already existing in parts of the business. These had
demonstrated a sound basis on which to build a Group-wide
framework of effective and direct engagement between the
Board and the workforce.

Each business unit has a MVF, comprising approximately
10 colleague representatives. Across the Group, we have
approximately 50 representatives, drawn from across career
levels and jobs roles, and representing a range of diversity and
experience. Collectively, the MVFs form a structured network
of members across the Group, to ensure all colleagues’ voices
and views are heard.

The MVF chairs meet quarterly with the Chair and CEO to
discuss colleague sentiment and to provide feedback on key
topics. Each of these meetings features a discussion about the
feedback on topics previously agreed to be important to the
Board and workforce. Following each meeting, the Chair and
CEO provide updates to the Board, to make sure all Directors
understand the views of colleagues and feedback received.
Engagement with the MVF chairs has been valuable in helping
the Board gain ongoing feedback as the Group continues
to evolve.

Topics discussed in 2022 included our return to offices
following the Covid-19 pandemic and the move towards hybrid
working. The Chair and CEO also gained feedback on internal

events which had taken place and which were designed to
raise awareness and encourage discussion about inclusion
(Black History Month and Neurodiversity). Other topics
included Russia’s invasion of Ukraine and its impact on energy
prices; the rising cost-of-living; Drax Power Station running
coal; and biomass sustainability. The forums offer a safe space
in which to address direct questions raised by the MVF chairs,
and to discuss important issues.

The MVFs continue to be a key part of our listening strategy
and work in tandem with the MyVoice engagement survey.
The forums provide valuable, deeper insight to the survey
themes and deliver further input to the resulting action plans.

Following the 2021 engagement survey, our MVFs provided
valuable insight concerning career and growth opportunities.
The engagement and feedback from the forums helped to
shape and drive our plans, which has resulted in a 4% rise in
favourable responses in the 2022 MyVoice survey compared
to 2021.

Each week, the CEO sends an email to the entire workforce
with an update on what he and the business have been doing,
and with answers to colleague questions. During 2022,
the CEO received over 1,900 questions on topics including the
rising cost-of-living, and the impact on electricity generators
of the Russian invasion of Ukraine, wider political changes
and UK windfall taxes.

Drax Group plc Annual report and accounts 2022 109

Governance

Corporate Governance Report continued

Board attendance 2022
The table below shows the number of meetings held and the directors’ attendance during 2022.

Director

Date appointed as a director and member of the Board

Scheduled
meetings(1)

No. of meetings
attended

% of meetings
attended

John Baxter
Philip Cox
Will Gardiner
Nicola Hodson
Kim Keating
David Nussbaum
Erika Peterman
Andy Skelton
Vanessa Simms

17 April 2019
1 January 2015
16 November 2015
12 January 2018
21 October 2021
1 August 2017
21 October 2021
2 January 2019
19 June 2018

Vanessa Simms

19 June 2018

Notes:
(1) The scheduled meetings that each individual was entitled to, and had the opportunity to, attend.

7
7
7
7
7
7
7
7
7
8

100%
100%
100%
100%
100%
100%
100%
100%
100%
100%

Summary of the Board’s activities in 2022

In addition to the topics discussed earlier in the
Corporate Governance Report, the Board considered
the following key items in 2022.

Board strategy event
• Over a two-day period in October 2022, the Board

conducted its annual deep dive into strategy. The two days
included presentations from management and discussions
with various internal stakeholders from across the
organisation. The sessions provided insight into market
context, opportunities for the growth of the Group,
including the deployment of BECCS internationally and
explanation of key stakeholders involved in supporting the
Group’s plans. Discussions were also held on sustainability
and the capabilities to enable the realisation of the Group’s
plans for growth using sustainable biomass.

Health, safety and wellbeing
• In April 2022, following a visit by several Directors to a

selection of the North American sites, the Board discussed
working practices and agreed that efforts to harmonise
health and safety standards across all the Group’s
operations should be ongoing. In November 2022,
the Remuneration Committee agreed that a safety KPI
be reintroduced to the 2023 bonus scorecard. You can read
more about this in the Remuneration Committee Report
on page 156.

Operations
• Considered and approved the development of, and

investment in, BECCS.

• Considered and approved the planning process to develop
an additional underground pumped hydro storage power
station at Cruachan – with the potential for more than
doubling the electricity generating capacity at that site.
• Considered the risks related to the Government’s request

to operate the coal units if called upon, over winter
2022/23. See page 107 for more information.

110

Drax Group plc Annual report and accounts 2022

Nomination
Committee report

As the Group grows and
evolves, having leaders with
the right mix of skills and
capabilities to deliver our
strategy and purpose, is key.

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Philip Cox CBE, Chair

Committee members
Philip Cox (Chair)
John Baxter
Nicola Hodson
Kim Keating
David Nussbaum
Erika Peterman
Vanessa Simms

Attending by invitation
CEO

Number of meetings held in 2022: One (1)
The Group Company Secretary is Secretary to the Committee.

Attendance in 2022

Committee member

Date appointed
a member

No. of
scheduled
meetings

No. of
meetings
attended

% of
meetings
attended

17 April 2019
John Baxter
22 April 2015
Philip Cox
12 January 2018
Nicola Hodson
Kim Keating
21 October 2021
David Nussbaum 1 August 2017
21 October 2021
Erika Peterman
19 June 2018
Vanessa Simms

1
1
1
1
1
1
1

1 100%
1 100%
1 100%
1 100%
1 100%
1 100%
1 100%

(1) As explained on page 112, additional time and focus outside of formal

meetings was given by Nomination Committee members to discuss the
Chair’s succession.

Terms of reference
The Committee’s terms of reference are reviewed annually,
most recently in February 2023. The terms of reference
are available on the Group’s website at
www.drax.com/governance

Role of the Committee
The Committee’s principal responsibilities are to:

• Keep under review the Board’s structure, size and composition
(including requisite skills, diversity, knowledge and experience)
in relation to delivering the long-term success of the Group

• Ensure a succession planning process is in place for the

Directors and other senior managers, including the
identification of candidates (from both within and outside Drax)
who align with the objectives of the business and Group

• Conduct the search and selection process for new Directors,

taking advice from independent search consultants
as appropriate

• Monitor and challenge initiatives and progress in addressing

diversity and inclusion

• Report on the Board and Committee evaluation

Nomination Committee activities since the last report
• Discussed the process and search for a new Chair
• Non-Executive Directors considered the renewal of John
Baxter’s letter of appointment as part of a Board meeting
• Considered a report on succession planning at executive

and senior management levels

• Reviewed and approved the updated Board Diversity Policy,

to reflect FRC guidance

Introduction
I am pleased to present the Nomination Committee Report
for the year ended 31 December 2022.

The Nomination Committee has overall responsibility for people
matters, with a particular focus on Board level and senior
management. To support the long-term success of the Company,
the Committee also assesses the adequacy of internal processes.
These processes concern reviewing and evolving the balance of
skills, experience and diversity required which increasingly takes
account of the Group’s extended global footprint. The work
includes challenging executive management on whether the
capabilities within the organisation are sufficient, and the steps
being taken to ensure appropriate assessment and forward
planning takes place to support the delivery of the Group’s
strategy. The work also covers succession, through the
development of existing talent and identification of alternative
talent sources that might be outside the Group. Board members
and senior management must be able to deliver the Group’s
purpose, and in conjunction with supporting and enabling that
realisation consistent with our values, and to do so with due
regard for the requirements of Drax’s stakeholders.

Drax Group plc Annual report and accounts 2022 111

Governance

Nominations Committee Report continued

Given the growing international presence and complexity of Drax,
the Committee recognises the importance of having effective
measures in place, embedded within the regular considerations
and actions of the business that ensure management properly
understand the requirements of our business. Drax requires people
with new skill sets and experience in activities which the Group
may not previously have undertaken. For example, delivering
options for BECCS in North America continues to progress and,
in 2023, we will be growing our teams in North America (including
into new states in the US). In September 2022, we welcomed
new colleagues at Drax Princeton (Princeton Standard Pellet
Corporation), a site that will assist in our efforts to reach 8Mt p.a.
of sustainable biomass pellets by 2030. During 2022, we also
opened a sales office in Japan; the first time the Group has had a
presence in Asia. This is an exciting step towards our strategy to
increase biomass sales in the Asian markets. These developments
demonstrate the significance of building strength amongst
our colleagues, including senior management.

A priority for the Board and Nomination Committee is assessing
how these developments in the business align with the Group’s
imperative of broadening diversity in the enlarged Group. We are
also conscious of taking into account the local communities
in which we operate, trends across wider society, and the ability
of the Group – and its people – to adapt. We recognise that such
work has its challenges, and the Board is committed to playing
a role in shaping that activity. It is also dedicated to ensuring
diversity, equity and inclusion are fundamental to the
recruitment, retention, career progression and personal
development activities across the business. We recognise
that such activity is central to enabling the right culture and
values of the Group, and to long-term success.

Succession planning and diversity
I was appointed to the Company as a Non-Executive Director in
January 2015 and appointed to the position of Chair in April 2015.
Since my appointment to the Board in January 2015 I have seen
Drax change and grow, establishing itself as a business that is not
only a key part of the UK’s national infrastructure, but also leading
new ways of supporting businesses and communities using
innovative, reliable and sustainable sources of power generation.
My third and final three-year term is due to expire in December
2023. As part of the 2020 review into my re-appointment for that
final term, the Committee proposed the search for a successor
should start early enough to allow for a thorough recruitment
process. This is intended to facilitate an overlap period when
the Chair-designate could join the Board with sufficient time
to complete a meaningful onboarding process.

A robust process is in place to support the structured succession
and to ensure objectivity. Our Senior Independent Director leads
this and I will continue to provide input, as requested. Additional
time and focus has been given by Nomination Committee members
to discuss these matters, forming part of Board meetings and
informally outside of meetings. Firstly, following a rigorous review
of an initial six advisers by a subset of the Nomination Committee,
four firms were invited to present. Following those presentations
to the subset of the Committee, Heidrick and Struggles were
appointed in October 2022. A key advantage of this firm has
been its ability to conduct an international search, reflecting the
structure of our growing Group across the US, Canada, Asia and
Europe. Our structure also brings a level of complexity, so the
search will include candidates with experience in large multi-
national groups. It should be noted that Heidrick and Struggles
is signed up to The Voluntary Code of Conduct for Executive
Search Firms, which ensures it factors diversity considerations
into its recruitment advice and has no other engagement with
the Group or conflict which would impact their role.

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Drax Group plc Annual report and accounts 2022

During 2022, the Committee also reviewed and updated the
Board Diversity Policy (the ‘Policy’), with due regard for the
FCA Policy Statement on diversity and inclusion on Boards and
in executive management. The Policy states the Company’s
support for the recommendations from the FTSE Women Leaders
Review and the Parker Review. It also confirms our objective
to maintain at least 40% female director representation and
to have at least one director from an ethnic minority. As shown
on page 106, these targets are currently fulfilled. The Policy also
highlights that the Board believes a commitment to diversity
and inclusion is fundamental to achieving our strategic goals
and delivering a zero carbon, lower cost energy future.

While recognising the steps already taken on diversity, the Board
and Nomination Committee are conscious this remains an
important element of ensuring the appropriate balance of skills,
knowledge and experience. Members of the Board also continue to
be strong advocates for enabling positive and constructive change
in the wider workforce, which recognises the value from diversity.

Each year, the Committee reviews the Group’s measures to enable
succession planning and assesses alignment with the Group’s
strategy and the realisation of its objectives. This relates to the
skills, capabilities and experience needed to deliver our strategy.
The review includes identifying colleagues with the potential
to progress into more senior roles, across a timeframe of one to
five years. It also incorporates factors such as technical skills,
experience, behaviours and attitudes. The most recent meeting
considering these matters in depth was held in November 2022.
The Board is of the view that high performing companies are
enabled by greater diversity and has challenged management
on the need for effective recruitment, onboarding and career
development programmes that ensure diversity is proactively
included. We remain of the view more needs to be done
in these areas.

The review also included an assessment of the time required
for identified candidates to be ready to assume more senior roles.
During the discussions, the Committee offered views on the
importance of providing each of the candidates with appropriate
training. Management outlined the training implemented during
2022, how its evolution would encompass a wider cross-section
of employees, and how targeted training supports them in their
personal development. The Committee asked to be kept updated
in 2023 to understand the progress being made. In addition, the
Committee endorsed the need for ensuring there was a suitable
level of understanding about the technical requirements of roles
identified. Importantly this should take account of emerging
technologies, as well as capabilities in new types of markets –
for example markets for Carbon Offsets, in which the Group
will need to participate and how such areas might inform
recruitment processes.

As part of the succession review, the Committee discussed
the Group’s progress on gender diversity. This included work
to identify talent earlier in career paths, for example by focusing
on diversity data when hiring new employees and converting
diverse job applicants into new hires. In 2022, the Company
also set up partnerships to help attract diverse candidates.
We adopted female-biased language when advertising for
Apprentice Engineers, which resulted in an increase to the
number of female applicants and subsequent engineer hires.
The proportion of female apprentices increased, from 14% at
the end of 2021 to 21% at the end of 2022. A ratio of one female
to every four male apprentices is progress but we believe more
needs to be done. During 2022, we also launched our Senior
Leadership Development offering to support the growth of
our senior leaders. This involves having a consultation with
our internal leadership development experts to co-create

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bespoke development journeys. Options available to employees
include a diagnosis of development needs through psychometrics
and 360-degree feedback and sourcing an executive coach
or mentor. Options also include support in sourcing formal
qualifications within a newly-created programme, which
would be subject to evaluation and feedback. A total of 84 senior
leaders took advantage of this offering in 2022, and we hope
the number will continue to grow throughout 2023.

Currently, out of a total of ten Executive Committee members
at 31 December 2022, four (40%) are female. No changes to the
members of the Executive Committee were made during 2022.
You can see more details about our Executive Committee
members here: www.drax. com/about-us/corporate-governance/
board-and-committees/.

The Board and senior management continue to recognise that
Drax needs to do more, at all levels of the business, to support
people from diverse backgrounds. The 2023 plan goes beyond
gender, with a clear commitment to a supportive, diverse and
inclusive working environment where you can be yourself and
your contribution matters. We continue to invest additional
resources into this important area with the recruitment and
onboarding of a Diversity, Equity and Inclusion (DE&I) team.
To engage colleagues more broadly with DE&I, and encourage
consideration of the issues while taking positive steps to influence
culture and behaviours, a series of key events took place. This
included the Group marking Black History month in February
2022. At the start of the month, Non-Executive Director Erika
Peterman recorded a personal video message for colleagues,
and there was a live panel event where colleagues shared their
experiences. Work was also undertaken to align the wellbeing
strategy with inclusion, recognising the intrinsic link between
an individual’s sense of wellbeing and belonging. The organisation
has also recognised the National Day for Truth & Reconciliation in
Canada and held neurodiversity awareness events. The Colleague
Resource Groups (CRGs) that represent gender, ethnicity, sexual
orientation, and neurodiversity were launched in August 2022 and
began recruiting for Chairs, sponsors and regional representatives.
The goal is to further drive employee engagement, safety and
wellbeing, and the work will continue into 2023. The groups aim to
attract colleagues from across all our regions, to increase visibility,
engagement and understanding about a range of topics.

The Nomination Committee and Board receives updates on
management programmes to encourage a diverse workforce to
pursue careers and qualifications that fit with the opportunities
that Drax offers. These include apprenticeship schemes, training
programmes, and experience days where young people can learn
more about what we do and the roles available. The activities are
an important part of our role in the industry, and they allow for
two-way engagement. Our five-year programme with Selby
College, which we started in 2020, continues and we have regular
partnership meetings where we discuss opportunities for both
parties to work together. The college has also delivered a course on
BECCS and rolled it out to colleagues within the business; further
cohorts are planned for 2023. In addition, the college continues
to deliver our upskilling Engineering Manufacturing Technician
Apprenticeship and we currently have 17 students on the course.
The college also provides other engineering-related training.

Non-Executive Directors: terms of appointment
Under the Board’s policy, Non-Executive Directors are appointed
for an initial term of three years, which can be renewed by mutual
agreement. For this to happen, the Board must be satisfied with
the director’s performance and commitment, and a resolution
to re-elect at the appropriate AGM be successful. The Board
will not normally extend the aggregate period of service of any
independent Non-Executive Director beyond nine years.

What’s more, the Board will rigorously review any proposal to
extend a Non-Executive Director’s aggregate period of office
beyond six years.

In 2022, the Board considered the re-appointment of John
Baxter, for a second term of three years. The Board considered
John’s skills and contribution, together with the feedback
from the externally-supported evaluations of the Board and
our Committees. Following this, and on recommendation from
the Non-Executive Directors, the Board approved the extension
of his appointment for a further three years, taking effect
from 16 April 2022.

Board and Committee evaluation
The Board conducts an annual performance evaluation,
ensures there are ongoing Board development activities, and
provides a comprehensive induction for new Board members.
In 2022, an externally-facilitated evaluation of the Board and
its Committees was conducted by Board Alchemy. There is
a detailed update on the Board evaluation process on page 107
and 108.

The external performance evaluator – Hanif Barma at Board
Alchemy – commented in his report on the Board’s progress
regarding director diversity, since his last performance review
in 2019. Pleasingly, feedback included in Hanif’s 2022 review
as provided by the Directors, is that both our Non-Executive
Directors who were appointed in 2021 – Kim Keating and
Erika Peterman – have made valuable contributions to the
quality of Board discussions.

The evaluation also determined that the Board and Committees
were led well by effective, inclusive chairs. It was also concluded
that the Board and Committee members had the requisite skills
and experience to provide valuable contributions and effective
challenge. Hanif also highlighted the progress made regarding
Director diversity. At its meeting in December, the Board assessed
the performance evaluation report and progress in responding to
the open recommendations from previous evaluations. The table
on page 114 summarises progress from the most recent
evaluations and how we responded to them in 2022.

The Nomination Committee is aware of the importance of ensuring
existing Board members continue to develop their understanding
as the Group evolves. This is highlighted in a recommendation
from the independent performance review reported to the Board
in December. One area identified was to consider ‘refresher’
training sessions on hedging strategy, trading and energy
commodity markets.

Recommendations from previously-raised Board and Committee
evaluations have been addressed, with certain items involving
continued work and focus.

Previously-identified needs included making the best use of the
Board’s time to enable Directors to make the fullest contribution,
and the processes around induction and obtaining external
viewpoints. Improvements in the quality of papers submitted to,
and presentations delivered by management at Board meetings
were highlighted as potential remedies; efforts to refine and
develop Board packs continue. During the October 2022 Board
strategy meetings, the Board were complimentary on the
progress the business had made in developing meeting materials
and enabling informative discussions that resulted from them.
As the business evolves and grows, the focus will be on the Board
papers and what new and additional information is required
to ensure ongoing rigour.

Drax Group plc Annual report and accounts 2022 113

Governance

Nominations Committee Report continued

A summary of the key recommendations from the Board and Committee evaluations, and proposed actions, is provided below:

10.

11.

12.

13.

Recommendation

Comments

Provide ‘refresher’ development to Board non-executives
in areas relating to hedging strategy plus trading and
commodity markets. Adopt a structured approach
to determining training needs for Board members.

During 2023 a number of training sessions will take place and
Directors will be consulted on any individual training needs.

Enable Board members to visit Drax assets more regularly,
particularly since this has been difficult in recent years.
Members should use visits as an opportunity to engage
with staff.

The Board agrees that Non-Executive Directors would benefit
from visiting at least one asset per year, outside of the usual
schedule Board trips.

Consider using the Chair succession exercise to meet new
requirement for a woman to hold one of the four senior
roles on the Board.

Diversity is actively being considered as part of the recruitment
process. Heidrick and Struggles are also signed up to the
Voluntary Code of Conduct for Executive Search Firms.

Obtain specific feedback from Board members about how
to further improve papers submitted to the Board.

Directors will be consulted about meeting materials.

Ensure less-experienced members of the management
team who present papers to the Board are consistently
well-briefed and adequately prepared.

This action is part of an ongoing initiative to provide the
opportunity for the Board to meet with a wider cross section
of employees as part of routine business. From 2023 additional
support will be provided to new presenters.

Establish formal terms of reference for the Independent
Advisory Board (IAB) to Drax, then regularly review and
update them.

Terms of reference are in place and were last reviewed by the
IAB in September 2022. They will be considered by the Board
in 2023.

The Board should discuss the merits of establishing a
Sustainability Committee and, if the decision is to proceed,
consider the timing of its launch and its remit.

The Board have asked the CEO to evaluate the potential
contribution of a separate sustainability committee, including
its objectives, constituent members and the degree of
oversight provided by the Board to its conduct of business.
This will be considered further by the Board in 2023.

Give attention to the development of a digital strategy to
support the broader business strategy and purpose of Drax.

A digital strategy will be developed and presented to the Board
in 2023.

At Board level, undertake a ‘lessons learned’ review of the
Pinnacle acquisition and establish the practice of
conducting similar reviews on a regular basis.

An initial paper on lessons learned should be presented to the
Executive Committee, following which a Board discussion will
be held in 2023.

Consider resuming the practice of holding occasional Board
meetings away from the London head office.

The Board agree that at least one Board meeting each year
should be held at a different site. In addition, a Board visit to
Cruachan Power Station is planned for June 2023.

The Board should seek management views about how the
Non-Executive Directors might better support the
Executive in stakeholder management.

In 2022 the Board discussed how Non-Executive Directors
could participate in stakeholder engagement beyond the
regular work of the Chair. A Board paper detailing peer
methods of engagement will be considered in 2023.

The Board should discuss how to evolve support for local
communities, particularly through the creation of
employment opportunities for minority groups.

A paper detailing support opportunities will be presented to
the Executive Committee, following which a Board discussion
will be held in 2023.

The Remuneration Committee’s terms of reference should
include a responsibility to annually review the performance
of the remuneration consultants.

The terms of reference were updated and approved at the
the February 2023 Remuneration Committee.

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Embedding the Company’s values and culture within the wider
workforce is an area of continued focus. The Board’s imperative
of ensuring culture, values and behaviours is appreciated, and
evidenced in many legacy operations, needs to continue to be
embedded in the American and Canadian assets. As the business
grows, it will also be important to understand and embrace the
breadth of diversity in the communities where we operate,
ensuring that people from diverse backgrounds feel supported
and we learn from colleagues inside and stakeholders outside
about how we as a Group can grow. There is more information
about our work with local communities on pages 28 to 33.

Skills and knowledge of the Board
A key responsibility of the Committee is ensuring the Board
maintains a balance of skills, knowledge and experience
appropriate to the long-term operation of the business and
strategy delivery. The Nomination Committee has reviewed the
Board’s composition, considering whether it has:

• The right mix of skills, experience and diversity
• An appropriate balance of Executive Directors and Non-

Executive Directors

• Non-Executive Directors who can commit sufficient time to
the Company to discharge their responsibilities effectively

Renewal and re-election
Any newly appointed Director may hold office until the first AGM
following their appointment. At that meeting, they must submit
themselves for election by shareholders.

In accordance with the Company’s Articles of Association,
and in line with the recommendations of the Code, each of the
Directors will retire annually and offer themselves for re-election
by shareholders at the AGM. The evaluation and review of the
Board and its Committees, described above, concluded that each
Director continues to demonstrate commitment, management
and business expertise in their particular role. They continue
to perform effectively. Accordingly, John Baxter, Philip Cox,
Will Gardiner, Nicola Hodson, Kim Keating, David Nussbaum,
Erika Peterman, Andy Skelton and Vanessa Simms will all retire
at the forthcoming AGM. Being eligible, they will offer themselves
for re-election.

The Executive Directors’ service contracts and Non-Executive
Directors’ letters of appointment are available for inspection
(by prior arrangement) during normal business hours at the
Company’s registered office. They will also be available for
inspection at the venue of the AGM, before that meeting takes
place. Details are contained in the Notice of Meeting.

Following the review, the Committee was satisfied that the Board
continued to have an appropriate mix of skills and experience to
operate effectively, now and for the future. All the Directors have
many years of experience, gained from a broad variety of
businesses. Collectively they bring a range of expertise and
sector knowledge to Board deliberations, which encourages
constructive, challenging and insightful discussions.

During the year, I met regularly with the Non-Executive Directors
in the absence of the Executive Directors. Separately, the Senior
Independent Director held a meeting with the Non-Executive
Directors without me being present, as required by Provision 12
of the Code.

This report was reviewed and approved by the Nomination
Committee.

Philip Cox CBE
Chair of the Nomination Committee
22 February 2023

The Board at Drax does many things well but most striking
for me was the Board’s mindset. It thinks broadly and deeply
about how it does things, and is willing to challenge itself about
the way it works. It is proactive but, as circumstances change,
this mindset means it also reacts and responds with positive
engagement from board members; the Board looks at things
from different perspectives and reflects on feedback that
it receives. Embracing diversity and inclusion has been an
important enabler of this outcome, and this operates at two
levels. Boardroom diversity is a key strength and, for example,
the Board has responded to Drax’s shift from UK to global
business by internationalising the Board. The Board also actively
promotes organisational diversity, understanding that this will
underpin the business’s long-term success. It engages actively
with staff through the MyVoice Forum and asset visits, seeking
to understand staff viewpoints. It is now striving for greater
participation of local and indigenous communities in Drax’s
workforce.” Hanif Barma, Board Alchemy

Drax Group plc Annual report and accounts 2022 115

Governance

Audit Committee report

The Committee seeks
to ensure transparent
and accurate reporting
of financial and operational
performance, and robust
wider business controls

Vanessa Simms, Chair

Committee members
Vanessa Simms (Chair)
Nicola Hodson
David Nussbaum
Erika Peterman

The Board is satisfied that the Committee’s membership has
the appropriate level of independence, skills, and recent and
relevant financial experience. Vanessa Simms, a chartered
certified accountant, is CFO of Land Securities Group plc.
David Nussbaum is a chartered accountant who has served
in several senior financial roles. Details of the skills and
experience of the Committee members can be found
on pages 97 to 99.

Attending by invitation
Chair of the Board, CEO, CFO, Group Financial Controller,
internal auditor (KPMG), external auditor (Deloitte),
others as required.

Number of meetings held in 2022: Four
In addition to the meetings mentioned in the table below,
Vanessa attended several planning meetings with
management in advance to discuss key agenda items, plan for
papers and ensure that her expectations were satisfactorily
reflected in the matters discussed and explained. Vanessa also
held meetings with the external auditor and internal auditor at
intervals throughout the course of the year to discuss planning
for work and specific items such as engagement with the
Financial Reporting Council (FRC), progress on the evolution
of the UK’s governance environment and responses
to recommended actions from previous reports.

Attendance in 2022

Committee member

Date appointed
a member

No. of
scheduled
meetings

No. of
meetings
attended

% of
meetings
attended

Nicola Hodson
12 January 2018
David Nussbaum 1 August 2017
Erika Peterman 21 October 2021
19 June 2018
Vanessa Simms

4
4
4
4

100%
100%
100%
100%

John Baxter attended the April 2022 meeting by invitation.

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Drax Group plc Annual report and accounts 2022

Introduction
The role of the Audit Committee is to provide oversight of the
financial reporting process, the internal and external audit
process, the Group’s system of risk management and internal
control, and compliance with laws and regulations. This is to
ensure transparent and accurate reporting that covers financial
and operational performance and future prospects, and robust
wider business controls required for the day-to-day conduct of all
aspects of its business. Through this activity the Committee also
assesses whether stakeholders are able to gain a fair and
balanced understanding of how the Group is performing, its
underlying resilience, and the effectiveness of the governance
applied in the conduct of its business.

Such work is particularly important in times of volatility and
uncertainty. 2022 saw continued macro-economic and geo-
political challenges that have affected many aspects of society.
This has included the ongoing conflict in Ukraine, the global
energy crisis and inflationary pressures; each of which have
impacted businesses and consumers. In such times, management
have a responsibility to link the sound business practices
mentioned above with proactively understanding and responding
to the immediate challenges affecting our stakeholders and wider
society. In turn, the Audit Committee considers the robustness of
the process in making those decisions, challenges management
on the tracking and assessment of emerging risks and evaluates
the appropriateness of controls, including potential required
changes required to those controls.

As described by Will Gardiner in his CEO report, on page 12,
2022 saw Drax continue to invest in delivering on its strategy
and purpose. Progress made included, developing options for
BECCS; commissioning of additional operational capacity of pellet
production in North America; and delivering growth across our
commercial operations. In so doing our employees worked
exceptionally hard, responding to challenges such as securing
the required volume of biomass to meet the demand of our plant
in the UK and to fulfil third party supply contracts; working with
customers facing uncertainty in meeting their energy bills; and
developing the commercial frameworks that could support our

Terms of reference
The Committee’s terms of reference are reviewed annually
by the Committee and then by the Board. The terms of
reference are available on the Group’s website at
www.drax.com.

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BECCS programme. In addition, colleagues responded to the
impact on the UK of the energy crisis, in particular helping
to bolster the country’s energy security by providing a
“winter contingency” service, making available for operation
the coal-fired generation units at Drax Power Station to support
the UK power system for the winter of 2022-2023 should they
be called upon to operate.

Considering how to respond to the UK Government’s request for
a winter contingency, requiring Drax to provide the operational
readiness of the Group’s coal-fired generation units, was a key
activity in 2022. We speak more about this process in the
Corporate Governance Report on page 102. The evaluation
involved consideration of multiple issues, which included the
risks of ensuring the assets would be capable of operating if
called upon by National Grid. The Audit Committee supported
the Board in considering these issues. At our meeting held in July,
management were asked to report back to the Board in the
autumn on actual steps taken to ensure operational readiness
and the mitigation of identified risks, on which they reported in
November 2022. This allowed us to further assess the adequacy
of steps taken and follow through on actions implemented which
sought to mitigate identified features.

2022 began against a backdrop of increasing tensions in Ukraine,
and the subsequent invasion by Russia in February 2022.
With the introduction of sanctions regimes, Drax acted quickly
to secure alternative sources of biomass to replace those of
Russian and Belarusian origin. During the year, the Committee
was appraised of the work being undertaken to transition
to alternate sources, including the steps being taken by
management to be assured of sustainable sourcing. This included
reviewing the biomass acceptability principal risk, and the level
of independent assurance obtained. More information on our
sustainable sourcing practices can be found on page 40,
and more information on our biomass acceptability risks
can be found on page 86.

Geo-political tensions have further increased the threat of
disruption to businesses and organisations from cyber-attacks.
Our response to cyber threats is an important part of assessing
the effectiveness of our internal controls. We explain in more
detail our evaluation and response to cyber risks on pages 80
and 91. During 2022 the Committee received reports on cyber
security and cyber risk management. This included both the
threat assessment and the actions being taken, including the
levels of future investment required in people, processes and
systems. We also received information on the level of
sophistication of threat activists. For example, the Committee
considered the breadth of different attack strategies and the
data captured on the form of such attacks.

The Group’s generation assets form part of the UK’s critical
national infrastructure, and Drax is designated as an Operator
of Essential Services. As such, Drax is required to maintain
a defined level of resilience to defend against potential cyber-
attacks. The Committee considered a report in April 2022
on how management is meeting its regulatory obligations and
comparing the internal status to updated benchmark guidance
from the UK Government. In November 2022 the Committee
also considered a detailed report from the cyber security function
on our independently assessed current state of preparedness,
and recommendations on how to continue to enhance our
capabilities, reflecting the evolving requirements of regulators
in addition to management’s own understanding of the emerging
risks. The Committee will monitor actions resulting from these
reviews at future meetings.

The Committee discussed the strength of the team, their
experience and operational capabilities to evaluate the evolving
threats and to implement the required resilience, in addition to the
training and awareness promoted across the wider organisation
to cyber-attacks. The Committee will continue to assess whether
the capabilities of the team are at the appropriate level to maintain
the required level of resilience. The Committee and Board have
been supportive of enhancements including additional investment
and recruitment as part of responding to the emerging threats.

Another consequence of the conflict in Ukraine has been
to significantly increase volatility in global commodity markets.
As discussed on page 80 this volatility increases certain risks
to the Group, including those associated with an unplanned
outage on our generating assets. The Committee was updated
at each of their meetings during 2022 on how these increased
risks are being managed, and the additional mitigations
introduced by management to assess whether balanced
and proportionate actions were being taken.

The Committee receives periodic reports on the work to assess
compliance with material regulations or policy pertaining to the
Group’s activities. During 2022, this covered areas including cyber
security, safety, and sustainability supported by reports from
management and, where appropriate, subject matter experts.

Role of the Committee
The role of the Committee is to assist the Board in fulfilling its
oversight responsibilities. This includes undertaking the following:

• Monitoring the integrity of the financial statements and other

information provided to shareholders

• Reviewing significant financial reporting issues and

judgements contained in the financial statements, and inviting
challenge from the external auditor on the approach taken

• Advising the Board on whether the Committee believes

the Annual Report and Accounts are fair, balanced
and understandable

• Reviewing the systems of internal control and risk management,

including consideration of emerging risks

• Supporting the Board in establishing a culture of honesty

and ethical behaviour, including oversight of whistleblowing
procedures, fraud risk and controls

• Assessing the requirement for, and reviewing the outputs from,

independent external assurance and verification

• Maintaining an appropriate relationship with the Group’s external
auditor and reviewing the effectiveness and objectivity of the
external audit process

• Maintaining and monitoring the non-audit services policy

to ensure the external auditor’s independence and objectivity
• Making recommendations to the Board (to put to shareholders
for approval) regarding the appointment of the external auditor

• Monitoring and reviewing the effectiveness of the internal

audit function

As Chair of the Committee, I report to the Board on the Committee’s
activities and considerations following each meeting. All members
of the Board also receive the minutes of each Committee meeting.

In undertaking its duties, each member of the Committee has
access to the services of the Chief Financial Officer and the
Group Company Secretary and the resources of their teams.
The Committee also has access to external professional advice
as required and deemed necessary. I hold meetings with the
Chief Financial Officer, external auditor and internal auditor out
of cycle from the formal meetings. I also attend planning
meetings with those preparing for forthcoming Committee
meetings to discuss relevant papers and key matters.

Drax Group plc Annual report and accounts 2022 117

Governance

Audit Committee Report continued

The Committee allows time at each meeting to speak in the
absence of management or advisers. In addition, the Committee
meets both the external auditor and the internal auditor without
management present. Where required, this allows the Committee
members to discuss areas for attention and identify potential
areas of challenge. The Committee’s understanding with both
the external and internal auditor is that, if they should at any time
become aware of any matter giving them material concern,
they should promptly draw it to the Committee’s attention via
the Chair of the Committee. No such issues were raised in 2022.
The feedback from the recent Board and Committee evaluation is
that such discussions support transparency and positive discussion.

Review of Committee effectiveness
In line with the FRC’s Guidance on Committees, the effectiveness
of the Audit Committee is periodically considered. During the
autumn of 2022, an external review was undertaken of the Board
and its Committees, including the Audit Committee (see page 107
for further details). The review concluded that the Audit
Committee continued to work well. Meetings are chaired well;
the Committee Chair is inclusive and encourages contributions
from Committee members, who contribute freely, provide good
challenge and ask pertinent questions. There is good engagement
and positive relationships with both the external auditor and
the internal auditor. High quality papers are produced to support
the meetings and Committee members have fed back positively
on the information they receive. The respective Committee
Chairs work together well and coordinate when necessary
(one such example being on target setting and assessment
of reward outcomes for performance related incentives) to avoid
a siloed approach to the work of the Committees. An internal
review will be conducted in 2023.

Committee activities in 2022
The Committee follows a programme of work designed to
ensure that sound risk management processes, a robust system
of internal control and fair and balanced external reporting are
in place. The Committee undertakes its duties reflecting an
annual work plan, which is agreed at the final meeting each year
for the following calendar year. In addition, where appropriate
to activities in the Group or to reflect changes in applicable
regulations or external conditions, agenda items are incorporated
to ensure members of the Committee have the opportunity to
consider and contribute to an analysis of material issues. The
main areas of work undertaken by the Committee during 2022
at its routinely scheduled meetings are set out in the table below.

Reviewing the effectiveness of the system
of risk management and internal controls
The Committee received updates on the Group’s risk
management and internal control environment and reviewed
internal audit reports at each of the four meetings held during
2022. It gave particular focus to the emerging risks arising from
the conflict in Ukraine and ongoing volatility within commodity
markets, and how management were responding.

At its meeting in April, the Committee considered in detail how
management had responded to the emerging risks from the
conflict in Ukraine, including the formation of a working group,
detailed tracking of risks, and the escalation of key items to
the Executive Committee and Board as appropriate. In addition,
a deep-dive was performed into the impact of the conflict
on cyber security risks, incorporating information provided
by external parties, and considering the actions both already
taken and planned in response.

February

April

July

November

Item under review

• The 2021 year-end review

• Management update on key

of key financial and reporting
matters

financial and reporting
matters

• An update on going concern

• The external auditor’s

and viability

• Final report from Deloitte
on its 2021 audit findings
• The 2021 Annual Report and
Accounts and preliminary
results announcement
• The verification process

undertaken to support the
2021 Annual Report and
Accounts

• An update on the effectiveness
of risk management and internal
controls during the period
• An update on the Group

Assurance Map

• Year-end risk review, including
ongoing risks and mitigations
arising from Covid-19 and
emerging risks from the
conflict in Ukraine

• An update on whistleblowing
• Summary of internal audit
reviews for the period and
outstanding actions

• An update on the external
auditor tender process

management letter for the
2021 audit, including
management responses
and actions

• An update on the

effectiveness of risk
management and internal
controls during the period

• An update on internal

controls and risk
management of cyber
security, including the
impact from the conflict
in Ukraine
• An update on
whistleblowing

• Summary of internal audit
reviews for the period and
outstanding actions

• The effectiveness of the

2021 external audit process

• Senior Accounting Officer

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Drax Group plc Annual report and accounts 2022

• The 2022 interim review of key
financial and reporting matters

• Report from Deloitte on its

2022 half year review findings
• The external auditor’s response
to the report from the FRC’s
Audit Quality Review (AQR)
team on its 2020 audit

• Consideration of the 2022 Half

Year Report and results
announcement

• An update on the effectiveness

• Management update on key

financial and reporting matters
affecting 2022

• Plan and timetable for the 2022
Annual Report and Accounts
• Planning report from Deloitte on

the 2022 audit, including response
to AQR team report

• Summary of internal audit reviews
for the period, outstanding actions,
and the proposed plan for 2023
• An update on Audit and Corporate

of risk management and
internal controls during
the period

• Half year risk review, and
reporting included in the
Half Year Report

• An update on internal controls

and risk management of
sustainability, supported by
an external review

• An update from the Ethics and
Business Conduct Committee
• An update on whistleblowing
• The Audit Committee’s terms

Governance reform, and
management actions

• An update on internal controls

and risk management of health,
safety and environment

• An update on the effectiveness
of risk management and internal
controls during the period

• An update on the Group

Assurance Map

• A review of the Group’s

Principal Risks

• An update on whistleblowing
• A review of the ESG metrics

published in the Annual Report and
Accounts, and their verification
• The effectiveness of the internal

audit process

reporting to HMRC

of reference

• An update on the Group

• The Auditor Independence

Tax Strategy

Policy

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The Committee took part in several other deep-dive risk and
internal control reviews during the year including wider cyber
security risks, ethics and business conduct, health and safety,
and climate change and sustainability. As part of the latter review,
the Committee challenged management on the level of external
assurance and verification of the data and statements included
in the Group’s external reporting. Following this, and a review
of management’s risk assessment, the Committee were satisfied
with the level of assurance being provided.

Where the Committee feels it is of value, external parties are
engaged to support with subject matter deep-dive reviews and
those parties may be asked to attend Committee meetings to
provide additional expertise and insight. For example, DNV
Limited attended the meeting of the Committee in November
2022 to provide an update on their internal audit work around
health, safety and environment, and their key findings.

Alongside the expert support provided by these external parties,
management also co-ordinates an ongoing self-assessment and
review of risk management and internal control activities
covering the Group’s principal risks. Control owners are required
to provide a quarterly assessment on the operation of key
controls, and to detail any potential gaps or control failures
identified. These responses are then reviewed by a separate
internal team, and the assessments of control operation and
effectiveness are periodically verified.

This assessment is performed against the broader context of
changes in both the underlying risks and also the environment in
which the Group is operating, and considers whether prevailing
controls remain appropriate. To support this, the Committee
regularly reviews a detailed Assurance Map for the Group,
covering each of the Principal Risks. This documents the different
levels of assurance that are in place, and how they are structured.
It also provides management’s assessment of whether the overall
level of assurance is appropriate, or has areas that require
addressing. The Committee challenges management on this
assessment and identifies any areas that they feel require further
assurance, giving guidance or instruction on how that should be
provided, where necessary.

Having reviewed the latest Assurance Map at their meeting in
November 2022, the Committee was satisfied that there were no
significant gaps in the levels of assurance maintained by Group.
The Committee recognised the need for continued focus on the
assurance around biomass acceptability, climate change and
political and regulatory principal risks, as these areas are rapidly
changing and can have a significant impact on the Group. Several
actions were agreed at the meeting, to be implemented in 2023,
including the further development of second-line assurance in
these areas. Additional detail on the Group’s Principal Risks and
key mitigations can be found on page 78.

As noted above, conditions in energy markets remained volatile
during 2022, and what initially appeared to be short-term
pressure on prices at the start of 2022 became more prolonged.
This has exposed the Group to the risk of an increased financial
cost from an unplanned outage were such an event to occur,
and can also present challenges in respect of liquidity and credit,
requiring careful management.

The Committee received updates on the impact of these changes
during the year, and the mitigating actions being taken by
management to manage these evolving risks. This included the
outputs from scenario and liquidity planning and stress testing
to consider whether established trading, risk management, and
plant operational policies remained appropriate in light of market
conditions. The oversight and management of these risks falls
under the remit of the Financial Risk Management Committee,

(as detailed on page 103). The Committee was satisfied with
the mitigating controls implemented to manage the underlying
risks, and that potential future scenarios were being
appropriately considered.

The Committee also works with the internal auditor, KPMG,
to assess the broader system of risk management and internal
control. The annual internal audit plan is designed with input
from the Committee and wider management, and focuses on
key areas of risk for the Group. This provides the Committee
with an additional independent perspective on whether the key
controls mitigating these risks remain appropriate and effective.
Where appropriate, the internal auditor will provide detailed
recommendations to improve the systems of risk management
and internal control. Further detail on the role of internal audit
is provided on page 125.

Updates provided to the Committee by management on risk
management and internal controls during 2022 included financial
reporting, and the continued development of the Group’s
financial control framework. This framework takes a risk-based
approach to defining required levels of internal financial control,
focused on mitigating the risk of material misstatement arising in
the financial statements, due to either error or fraud. During 2022
the focus of this work was on continuing to drive consistency
and best practice across the Group, and in particular aligning
the approach across the Pinnacle operations, acquired in 2021.
Significant work was also undertaken around the financial
systems roadmap for the Group and on developing plans
to harmonise and streamline approaches, with a focus on
automation of controls where possible.

The continued enhancement of the financial control framework
forms part of the Group’s overall response to the corporate
governance reforms proposed by BEIS (“Restoring trust in audit
and corporate governance”). At meetings during 2022, the
Committee received updates from the internal auditor on the
latest developments in this area and discussed the planned
approach in responding to potential future changes. This was
supported by a deep-dive review at the meeting held in
November 2022, which included an update on management’s
plans and the progress against these, as well as an assessment
of the areas likely to require most focus in 2023. The Committee
was satisfied with the progress being made in this area, and that
the proposals published by BEIS are being appropriately
considered and addressed by management.

As part of its routine business, the Committee review and discuss
findings and action points arising from the internal and external
reviews that are performed, to assess whether improvement
plans are suitably robust and have appropriate delivery targets.
None of the findings discussed during 2022 were considered
individually or collectively material to the financial performance,
results, operations, or controls of the business, but the
assessments did identify opportunities for future improvements.
Areas highlighted include how learnings from past health and
safety events can be more rapidly incorporated into future
working practices, and how access to automated systems
must continue to evolve, including multifactor authentication.

The Committee considered information arising from internal
whistleblowing reports. It discussed with management the scope
of any investigation and challenged on the appropriateness of
the steps being taken in response. The Board was also updated
on these reviews separately. The Committee seeks to understand
how matters identified in incidents inform training for colleagues
and how actions by management can improve culture within our
operations. An explanation of the Group’s Whistleblowing Policy
can be found on page 105.

Drax Group plc Annual report and accounts 2022 119

Governance

Audit Committee Report continued

Reviewing key judgements and financial
reporting matters
Explanations of all the Group’s material accounting policies,
critical accounting judgements, areas of significant estimation
uncertainty and other material financial reporting matters are
set out in the notes to the financial statements. The Committee
reviewed these aspects of the financial statements, with
a particular focus on the areas it deemed the most complex
or subjective, as highlighted in the table below. In addition,
the Committee considered how these matters are disclosed
within the Annual Report and Accounts, to ensure that
appropriate context and explanations are provided.

At each of its meetings the Committee receives a Financial
Reporting and Accounting update from management, covering
any key changes in the period, as well as emerging issues. These
updates also incorporate any updated guidance or clarifications
issued by bodies such as the FRC or FCA and management’s
assessment of the impact on the Group and the timing of any
planned response. These papers are discussed with the external
auditor in advance of the Committee meetings, ensuring that they
have the opportunity to consider and provide their own views
on the matters raised. This includes highlighting alternative
approaches or accounting treatments to the Committee, to assist
their consideration of management’s conclusions and proposals.

Description

Audit Committee review and conclusion

Accounting for derivative financial instruments
As described more fully on page 252, the Group makes use
of derivative financial instruments to manage key financial risks
facing the Group.

The Group’s balance sheet includes significant assets and liabilities
arising from these contractual arrangements that are measured at
fair value by virtue of being within the scope of IFRS 9. Judgement
is required around which contracts meet specific criteria and which
do not (and therefore remain outside the scope of IFRS 9) and may
also be required in the valuation methodology applied, where
different approaches or sources of input information may be adopted.

A judgement is made that biomass contracts continue to fall outside
the scope of IFRS 9, primarily due to the illiquid nature of the market
and the contractual terms in place between counterparties.
The market remains immature and there is not a readily accessible
source of supply and demand at present.

Where a fair value calculation is required, this typically involves
a mark-to-market calculation, comparing the contractual price to
prevailing market rates. As described on page 87, during 2022 there
has been significant volatility in several of the markets most relevant
to the Group, including power and foreign currency.

The result of this volatility is that the valuation of these contracts
has been subject to significant fluctuations during the year. The size
and scope of the Group’s derivative portfolio means that small errors
in the valuation or disclosure process could have a material impact
on the amounts included in the financial statements.

In addition, whilst the inputs to these calculations are largely taken
from observable market prices or data points, in certain cases more
than one potential source of information is available. Whilst
differences in these forward-looking assumptions are typically
relatively small, the impact can become material when applied to a
large portfolio of contracts. In addition, the volatility during 2022
resulted in the differences in source data increasing at certain points,
as observable market prices can take time to fully incorporate rapid
changes in the macro environment.

The accounting and disclosure requirements in this area are
inherently complex. As a result, the accounting, controls,
and disclosures in relation to derivative financial instruments
all remain key areas of focus for the Committee.

At each meeting, the Committee receives an update on any new
classes of derivative financial instrument that the Group has
entered into and the proposed accounting treatment. During 2022,
there were no new classes of instrument that required review.

Ahead of each reporting date, the Committee reviewed
management’s assessment that biomass contracts continue
to fall outside the scope of IFRS 9. This involved comparing the
requirements of the financial standard with the current situation
in terms of observable practice and market conditions, and
developments during the period.

Having completed this review, the Committee was satisfied
with management’s assessment. However, it was noted that this
is a critical judgement given the potential impact on the financial
statements should biomass contracts be deemed to be within the
scope of IFRS 9.

At each of its meetings, the Committee was also updated on the
overall valuation of the Group’s derivative portfolio, and the
movements in the period. The Committee considered the operation
of the financial control framework around the valuation process,
and the output from a rolling self-certification process.

During 2022 the Committee gave particular focus to reviewing
the improvements made to the valuation process, in light of the
significant volatility in market prices and the corresponding
fluctuations in valuations. These improvements include
enhancements to the way in which credit risk adjustments are
calculated and applied, increasing the granularity within the
underlying valuation models, and more frequent detailed reviews
of the most complex derivative valuations, including reconciliation
to external valuations.

The Committee also considered the impact of volatility during 2022
on the source data used in the valuation process. As a result,
it was concluded that this should be disclosed in the Annual Report
and Accounts as a key source of estimation uncertainty, as detailed
opposite. Consideration was also given to the wider disclosures
made around financial instruments, and the Committee were
satisfied that these were appropriate and accurately described
the closing position and potential impacts from future
price movements.

Based on these reviews, the Committee was satisfied that the
controls in place around derivative financial instruments were
robust, and that the enhancements to the control framework and
valuation methodologies made during 2022 were appropriate.
In reaching this conclusion, the Committee considered the opinion
and recommendations of the external auditor, and the independent
analysis performed by their specialist teams.

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Description

Audit Committee review and conclusion

At its meeting in November 2022, the Committee reviewed
management’s process and initial conclusions in respect
of impairment for the 2022 financial year.

Having considered and challenged management’s reports, process
and key assumptions, the Committee concluded that the overall
approach to impairment reviews was appropriate, and was satisfied
that the only potential impairments necessary during the year were
in relation to the Abergelli OCGT project and the Daldowie energy
from waste site, as described in more detail on page 195.

The Committee also considered the accounting impact of the winter
contingency service agreed on the coal units, and in particular
whether any reversal of prior impairment charges was required.
Having reviewed management’s assessment, the Committee was
satisfied that no such reversals were required, and that the assets
in question would already have been fully depreciated.

At its meeting in February 2023, the Committee reviewed a
roll-forward of the analysis from November 2022 and considered
any significant internal or external changes since that detailed
analysis had been performed. This incorporated further analysis
of the expected impact of the Electricity Generator Levy announced
by the UK Government in November 2022.

This review did not indicate any material changes in the conclusions,
and the Committee was satisfied with management’s assessment
and the impairment charges proposed. Further scenarios and analysis
were also considered to support the review of going concern and
viability conducted by the Committee, discussed in more detail below.
This analysis did not suggest any further indicators of impairment,
and supported the conclusions reached.

The Committee reviewed the impairment disclosures in the Annual
Report and Accounts and concluded that the key assumptions and
sensitivities had been appropriately disclosed, and that all statements
made were supportable.

Impairment of goodwill and fixed assets
The Group reviews its goodwill and fixed assets (or, where
appropriate, groups of assets in cash-generating units (CGUs))
for potential impairment. Impairment reviews are triggered by either
the existence of potential indicators of impairment at a given point
in time or, in the case of goodwill and other intangible assets
with indefinite useful lives, are conducted at least annually.

As part of this review the Group reviews its classification of CGUs.
As described on page 194, there have been no changes to this
classification during 2022.

When an impairment review is deemed to be required,
the recoverable amount of the asset or CGU is assessed.
This assessment is made with reference to the present value
of the future cash flows expected to be derived from its value in use,
or its expected fair value on sale.

Assumptions that underpin the assessment of value in use for
each CGU are based on the most recent Board-approved forecasts.
The forecasts include all the necessary costs expected to be incurred
to generate the cash inflows from the relevant assets in their
current state and condition.

Given volatility within commodity markets during 2022, certain
assumptions can vary significantly from one period to the next.
The reviews performed therefore also include sensitivity and
scenario analysis to help the Board understand how changes
in key assumptions impact the assessment. These include
considering the prices of key commodities such as power and gas,
as well as the potential impact of unplanned outages at different
plants. Where these reviews suggest a potential risk of impairment,
further detailed work is undertaken.

The discount rates applied to the underlying forecasts
(to take account of future risk and the time value of money) also
represent an important assumption. These rates are reviewed
annually with input from external experts. Market volatility,
interest rates and inflation rates all impact the underlying calculation
of these discount rates, and as such this area has required additional
focus during 2022.

Impairment arises where management determines, and the
Audit Committee concludes, that the carrying amount of an asset
(or group of assets) exceeds its recoverable amount. Further detail
on this process and the assumptions made is provided in note 2.4
to the Consolidated financial statements.

Drax Group plc Annual report and accounts 2022 121

Governance

Audit Committee Report continued

Description

Audit Committee review and conclusion

Calculation and presentation of alternative
performance measures
As described on page 179, the Group presents Adjusted results
excluding the impact of exceptional items and certain
remeasurements. Adjusted results are consistent with the way
Executive management and the Board review and assess the
performance of the Group. The effects of exceptional items and
certain remeasurements are presented separately in a column
on the face of the Group’s Consolidated income statement.

The Group has a clear policy that sets out the transactions
considered as exceptional for the purpose of this presentation,
and the determination of certain remeasurements. However,
the classification of transactions as exceptional and the separate
presentation of certain remeasurements requires judgement.

A full glossary of alternative performance measures referenced
throughout the Annual Report and Accounts, including the closest
equivalent IFRS measure and an explanation of why the measure
is considered important, is provided on page 287. Further supporting
reconciliations of certain alternative performance measures
from relevant IFRS measures are provided in note 2.7 to the
Consolidated financial statements.

The Committee plays an important governance role in the
classification and presentation of items as exceptional in the
financial statements. At each Committee meeting, management
presents a paper that sets out the transactions proposed to be
classified as exceptional in the period. The Committee reviews
this paper, and challenges each of the individual items. Formal
approval of the classification is provided at reporting dates.

In 2022, the Committee challenged management around the
write-off of historically capitalised SaaS costs, recorded as an
exceptional item in the year. This was to ensure that the treatment
was consistent with the agreed policy and was not business-as-usual
expenditure. As a result of this review the Committee was satisfied
that recording the historic write-off as exceptional was appropriate,
whilst current period and future costs would be reflected
in underlying results, as described on page 177.

In addition, the Committee reviewed the definition of alternative
performance measures in the year to ensure that they remained
appropriate. As a result of this review it was determined that the
primary Net debt metric reported in the Annual Report and Accounts
should be updated to incorporate the impact of derivative financial
instruments specifically used to hedge the impact of fluctuations
in foreign currency denominated debt.

At its meeting in February 2023, the Committee reviewed
the final classification of transactions as exceptional or certain
remeasurements in the 2022 financial statements. It also
considered the calculation and presentation of alternative
performance measures in the 2022 Annual Report and Accounts.
Having considered analysis from management, and the opinion
of the external auditor, the Committee was satisfied that
the approach taken is appropriate. It was also satisfied that
the Annual Report and Accounts for 2022 are fair, balanced
and understandable.

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Description

Audit Committee review and conclusion

Review of other significant judgements and estimates
The other areas of significant judgement and key sources
of estimation uncertainty in the financial statements are set out
on page 178. Management regularly reviews these other areas
to ensure they are kept up to date, and also considers whether
other items should be included.

At each of its meetings, the Committee reviews a paper prepared
by management that summarises key financial reporting updates
for the period. This paper includes a summary of significant
accounting judgements and key sources of estimation uncertainty
and an update on any changes in the period. In particular,
any material emerging issues are discussed in detail.

As part of the preparation for the 2022 Annual Report and Accounts,
management considered the level of provision required for expected
credit losses in the Customers business. This took account of market
conditions, current UK Government support schemes and any
observed changes in customer payment habits. Management also
considered whether the provision represents a key source of
estimation uncertainty under IAS 1.

As noted in the 2021 Annual Report and Accounts, during 2021
it was deemed appropriate to commence capitalisation of certain
costs associated with the BECCS project at Drax Power Station,
based on an increasing level of confidence in the development
of the project in the future. As total capitalised costs on this project
are now material to the financial statements, this is deemed
to represent a significant judgement under IAS 1.

In November 2022, the Committee reviewed and discussed a paper
from management outlining how the potential future impacts of
climate change had been considered in preparation of the financial
statements, covering areas such as impairment reviews and the
useful economic lives of the Group’s fixed assets.

During 2022, the Committee reviewed the approach taken
to calculate expected credit loss provisions in the Customers business.
It noted the impact of the Government’s Energy Bill Relief Scheme,
which came into effect in October 2022, and the performance
of cash collection against billing seen during the year as a whole.
Having completed this review, the Committee was satisfied that
the approach adopted in the calculation was appropriate.
The Committee also concluded that the risk of a material change
in the estimated carrying value of related assets within the next
financial year was unlikely, and that therefore this does not represent
a key source of estimation uncertainty under IAS 1.

The Committee reviewed management’s assessment that
capitalisation of certain costs associated with the UK BECCS project
remained appropriate. As part of this, the Committee noted that
the total amount capitalised under this project was now material,
and so this item warranted inclusion as a significant judgement
in the financial statements. The Committee also noted that
judgements were being made to not yet capitalise costs associated
with other potentially significant future projects, such as
the expansion of the Cruachan pumped storage power station
and BECCS projects in the US. The Committee was satisfied
that the proposed disclosure incorporated sufficient detail
to cover these areas.

Having considered the other matters raised in management’s
papers, the Committee was satisfied that the items disclosed
as critical accounting judgements and key sources of estimation
uncertainty on page 178 are appropriate and complete. In addition,
the Committee was satisfied that the descriptions clearly and
accurately reflect the matters disclosed and the positions taken.

Drax Group plc Annual report and accounts 2022 123

Governance

Audit Committee Report continued

Reviewing the 2022 Annual Report and Accounts
At its meeting in November 2022, the Committee received
reports from management on its planning for the various
elements of the 2022 Annual Report and Accounts. This included
a timetable for preparing drafts and for the contributions,
including peer review and commentary, being made by members
of the wider management and Executive teams. The Committee
also discussed how such review would support the task of
ensuring the Annual Report and Accounts, taken as a whole, was
fair, balanced and understandable.

Between the year-end date and the date of the approval of the
Annual Report and Accounts, the Committee Chair was updated
on progress with the year-end audit process and key financial
reporting matters. Updates were also provided by the external
auditor and the internal auditor. At its meeting in February 2023,
the Committee reviewed both the external auditor’s findings and
the draft 2022 Annual Report and Accounts.

The Committee also reviewed and approved the verification
process undertaken by management around key information
included in the Annual Report and Accounts. This included
reviewing the results of internal and external assurance received
around specific disclosures and sections of the report, and
considering the overall level of review and assurance. Having
completed this review, the Committee was satisfied that the
verification process was robust and that key information and
statements included within the Annual Report and Accounts
were supportable.

As part of this review, the Committee considered the internal
controls, forecasts and relevant assumptions underpinning the
Viability Statement and the ongoing adoption of the going
concern basis in preparing the financial statements. This included
assessing a scenario analysis prepared by management, reviewed
by the external auditor, which considered the potential future
impact of the Group’s principal risks on its financial projections.
Particular focus was given to the scenarios relating to plant
operations and commodity price risks, given current market
conditions, and the medium to long-term impacts they could
have. This is discussed in further detail on page 75.

The Committee challenged the assumptions made around
availability of finance and covenant compliance, and considered
the appropriateness of the period of assessment for viability.
Whilst management and the Board consider longer-term
forecasts for other purposes, including strategic planning and
capital allocation, the Committee concluded that it was
appropriate for the assessment period to remain at five years.

The Committee was satisfied that the proposed viability
statement was robust, fair and balanced, including consideration
of the disclosure around longer-term term risks extending beyond
the viability assessment period. In addition, the Committee was
satisfied that the level of assurance, challenge and verification
was appropriate, whilst taking into account the work undertaken
by the external auditor. Consequently, it was also concluded that
the ongoing use of the going concern basis of preparation for the
financial statements was appropriate.

As noted above, the Committee considered and reviewed
management’s disclosure on certain remeasurements and
exceptional items (see page 178) and the presentation of these
items in the Consolidated income statement. This included a
review of the calculation and presentation of alternative
performance measures. The Committee was satisfied that the use
of alternative performance measures and the way in which they
are presented remains appropriate, and that they provide helpful
information to the users of the Annual Report and Accounts.

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Drax Group plc Annual report and accounts 2022

Fair, balanced and understandable
As a result of the Committee’s review, it advised the Board of
its conclusion that the 2022 Annual Report and Accounts, taken
as whole, were fair, balanced and understandable. This view is
underpinned by the Committee’s discussions with operating and
finance management regarding the Strategic Report, and with
the finance team regarding the financial statements. In addition,
the Committee believes that the Annual Report and Accounts
provides the information necessary for shareholders to assess the
Company’s and the Group’s position and performance, business
model and strategy, and that statements made are supported
by appropriate verification and assurance, including those made
around the systems of risk management and internal control.

External audit
Effectiveness of external audit
The Committee reviewed the effectiveness of the external
auditor during the year and does so annually. Deloitte LLP
(Deloitte), who have performed the role of external auditor
continuously since 2005, were reappointed at the AGM in
April 2022. Makhan Chahal became lead Audit Partner in 2021
and has significant listed company and sector-specific
auditing experience.

The Committee’s review primarily considered the independence
and objectivity of Deloitte, its professional competence and past
performance. The Committee also considered the robustness of
the audit process including, in particular, the level of challenge
given to critical management judgements and the professional
scepticism being applied. This took account of the Committee’s
discussions with the external auditor around areas of higher
audit risk and the basis for the auditor’s conclusions on those
areas. During 2022 this included a particular focus on the annual
impairment review process and the valuation of derivative
financial instruments. The Committee was satisfied with the
level of ongoing challenge applied by the external auditor.

The annual review of effectiveness also incorporated feedback
from members of the finance and wider management teams.
The Committee sought their views on matters including the
quality of audit work and engagement whilst planning and
executing the audit, both at a Group and business unit level.
In addition to completing an annual review, the Committee
considers the effectiveness of the external auditor throughout
the year and discusses this point at each meeting. This ongoing
review incorporated any relevant external information, such as
the FRC’s annual Audit Quality Inspection and Supervision
Report, which was published in July 2022 and included
an assessment of Deloitte and other large audit firms.

As reported in the 2021 Annual Report and Accounts, during
2021 Deloitte’s audit of the Group’s 2020 financial statements
was selected for review by the FRC’s Audit Quality Review (AQR)
team. The Committee considered in detail the findings from
the final report from the AQR, together with Deloitte’s responses
in each area and their proposed future actions. In addition, the
Chair and Audit Partner discussed the final report, and the
Chair met with the FRC directly to understand their key findings
and recommendations.

The Committee noted two key areas recommended for
improvement in relation to the work performed, around expected
credit loss provisions within the Opus Energy business, and the
assessment of discount rates used by management in performing
impairment reviews of non-current assets. The Committee
considered Deloitte’s proposed actions in these areas as part
of the presentation of their 2022 audit plan at both the July 2022
and November 2022 meetings, and also considered the

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improvements that had already been incorporated into its audit
of the Group’s 2021 financial statements. The Committee
reviewed the conclusions from Deloitte’s revised approach
at their February 2023 meeting, and the additional work that
had been performed. Improvements made to the audit approach
included further utilisation of specialist teams within Deloitte
(covering both credit provisions and data analytics) and additional
corroboration of management assumptions against independent
external data sources.

Having considered the actions taken and improvements made
by Deloitte to address the areas identified in the AQR team report,
the Committee concluded that there were no matters which cast
significant doubt on the fundamental quality of the audit process.
It was also noted that no adjustments to the financial statements
were required as a result of this review.

Based on its overall review, and satisfactory consideration and
response to the AQR team report, the Committee is satisfied that
the external auditor and its audit has continued to be effective.
The Committee agreed that the external auditor’s work
demonstrated an ongoing commitment to audit quality, that the
audit process was robust, and that Deloitte had shown strong
levels of technical knowledge and appropriate professional
scepticism in its work.

As reported in the 2021 Annual Report and Accounts, a tender
process for the Group’s external audit was conducted during
2021, in accordance with the UK Statutory Auditors and Third
Country Auditors Regulations 2016 (SATCAR), which require all
Public Interest Entities to rotate their external auditor at least
every 20 years. As a result of the process, in January 2022 the
Board agreed to appoint PwC as the Group’s auditor for the
financial year ending 31 December 2024, subject to shareholder
approval. Deloitte will continue in its role as external auditor
for the financial year ending 31 December 2023, also subject
to shareholder approval, and PwC will shadow Deloitte in respect
of this audit as part of an orderly transition.

Independence of external audit
The Group has an Auditor Independence Policy (AIP) that defines
procedures and guidance under which the Company’s relationship
with its external auditor is governed. The AIP also facilitates the
Committee being able to satisfy itself that there are no factors
that may, or may be seen to, impinge upon the independence,
objectivity and effectiveness of the external audit process. The
Committee reviews the AIP annually and last did so in July 2022.
As part of this annual review, the Committee considers areas
of development in best practice and guidance. The main features
of the current AIP (which is available at www.drax.com) are:

• A requirement to review the quality, cost effectiveness,
independence and objectivity of the external auditor

• A requirement to rotate the lead Audit Partner every five years,
and processes governing the employment of former external
auditor employees

• A policy governing the engagement of the auditor to conduct
non-audit activities, which is expected to occur in very limited
circumstances and is kept under review at each meeting
of the Committee

The external auditor also reports to the Committee on its own
processes and procedures to ensure independence, objectivity
and compliance with the relevant standards.

The amounts paid to the external auditor during each of the
financial years ended 31 December 2021 and 2022 for audit
and non-audit services are set out below and in note 2.3 to the
Consolidated financial statements (page 193).

Schedule of fees paid to Deloitte LLP

Audit fees:
Statutory audit of Drax Group
Statutory audit of the Company’s
subsidiaries
Total audit fees:
Interim review
Other assurance services
Assurance services provided
to non-material affiliates
Corporate refinancing fees
Reporting accountant fees
Total non-audit fees:
Total auditor’s remuneration

Year ended
31 December
2022
£000’s

Year ended
31 December
2021
£000’s

1375.0
40.0

1,250.0
40.0

1,415.0
115.0
46.2
18.0

65.0
–
244.2
1,659.2

1,290.0
110.0
42.3
16.4

–
469.0
637.7
1,927.7

As noted opposite, the external auditor should not provide
non-audit services where it might impair its independence
or objectivity. Therefore, any engagement for the provision
of non-audit services requires prior approval from the Committee
or Committee Chair. Agreement to allow the external audit firm
to perform additional non-audit services is taken only after
considering two key factors. Namely, that the non-audit services
policy has been fully applied and that any engagements are in the
best interests of the Group and its key stakeholders.

During 2022 there was a decrease in the level of non-audit
services provided by Deloitte, with the most significant item
being the Group’s interim review. In 2021, Deloitte provided
support in a limited reporting accountant role in respect of the
shareholder circular for the acquisition of Pinnacle, with fees
totalling £469,000.

In all cases the Committee was satisfied that the work was best
handled by the external auditor because of its knowledge of the
Group, and that the services provided did not give rise to threats
to independence. The Committee was also satisfied that the
overall levels of audit and non-audit fees were not of a material
level relative to the income of Deloitte as a whole, and that the
level of non-audit fees was below the 70% cap, based on the
average audit fee for the preceding three years.

Auditor reappointment
The Group has fully complied with the provisions of The Statutory
Audit Services for Large Companies Market Investigation
(Mandatory Use of Competitive Tender Processes and Committee
Responsibilities) Order 2014. The Committee discussed the
appointment of an external auditor at its meeting on 20 February
2023 and recommended to the Board that a resolution to
re-appoint Deloitte as the Group’s external auditor should be put
to shareholders at the AGM in April 2023.

Internal audit
The Group has adopted a fully outsourced model for internal audit
since 2020. KPMG has acted as the Group’s main internal auditor
since this model was implemented, supported by an internal team
which acts as an interface with the business. The internal auditor
presents an annual plan to the Committee for approval at its final
meeting of the preceding year. This proposed programme of work
is based on the assessment of the internal auditor, taking into
account input from interviews with key internal stakeholders
from finance, risk and wider management.

Drax Group plc Annual report and accounts 2022 125

Governance

Audit Committee Report continued

The Committee reviews this plan to ensure that priority is given
to the areas of highest risk for the Group, while maintaining
appropriate coverage of all other key risks. Fees are agreed on
an audit-by-audit basis depending on the scope and requirement
for specialist input, whilst being managed within an overall annual
budget. Having reviewed the plan for 2022 in detail, the
Committee subsequently approved it.

The Committee receives reports at each meeting regarding the
reviews completed since its last meeting, and progress against
the overall annual plan. The Committee reviews the findings
and agrees the recommended actions and delivery dates for
improvements, taking into consideration supporting analysis
from management on the root causes of any weaknesses.

Key topics reviewed by the internal auditor during 2022 included
Accounts Payable, Risk Management, and Regulation and
Compliance. These reviews each provided recommendations to
the Committee and management on how to further improve the
system of internal controls, including suggested enhancements
around segregation of duties when placing orders with suppliers,
and the oversight of trading activities by the internal Compliance
team. The recommendations, and suggested timelines, were
agreed between management and the internal auditor before
being presented to Committee. Aside from a small number of
cases where the Committee asked for activities to be accelerated,
all actions and target dates were approved.

In addition, the internal auditor provided information to the
Committee at each meeting around the ongoing progress
of the BEIS consultation “Restoring trust in audit and corporate
governance”. This included a deep-dive at the Committee
meeting in November 2022, following the publication of the
results of the consultation in May 2022, at which management’s
action plans and progress in relation to each of the key areas
of the consultation were considered.

In conjunction with reports from the internal auditor on reviews
completed during the period, the Committee also receives reports
from management detailing progress on implementing
recommendations from previous reviews, tracking this against
the originally agreed implementation dates as described above.
This allows the Committee to effectively monitor management’s
response. Having reviewed these reports, and received assurance
from the internal auditor around the effectiveness of the overall
tracking process, the Committee was satisfied that actions were
being implemented on a timely basis.

The Chair of the Committee, independent of management,
maintains direct contact with the internal auditor, allowing open
dialogue and feedback.

Health, safety and environment
Where relevant, and agreed between the Committee and the
main internal auditor, additional external parties may be engaged
to support with independent internal audit reviews. This is
typically in highly specialised areas, to increase the overall level
of assurance gained from the programme of internal audit work.

As reported in the 2021 Annual Report and Accounts, during
2021 the Committee reviewed and supported the appointment
of a new external consultant DNV Limited (DNV) to provide
an assessment of the Group’s health, safety and environment
practices. The Committee received an update from management
on progress against previously agreed actions at its meeting
in July 2022, and a deeper dive update from DNV at its meeting
in November 2022.

Changes implemented during 2022 included improvements
around contractor management, as well as the roll-out of a new
Group-wide IT system to capture and report on incidents,
allowing increased transparency and accountability for site
performance.

During 2022 DNV’s programme of work has continued to focus
on the three dimensions of Human, Organisational and Technical
processes across the Group, and has also expanded to cover
additional areas including safety culture within Pellet Production
and a HSE governance review in relation to the BECCS project
at Drax Power Station. Opportunities for improvement
identified during 2022 include a continued focus on learning
from past events and further development of emergency
response identification.

Effectiveness of internal audit
The Committee reviewed the overall effectiveness of the
approach to internal audit, and in particular the effectiveness
of KPMG, at its meeting in November 2022. This review included
the Committee’s own views, and also incorporated feedback from
members of the wider management team, covering areas such
as scoping of reviews, level of subject matter knowledge and
reporting of findings. KPMG also provided their feedback
on interactions and engagement with management, and updated
the Committee on this at each meeting during the year.

Based on its review, the Committee is satisfied that the approach
to internal audit remains effective and that KPMG, as the Group’s
main internal auditor, continue to provide the requisite quality,
experience, and expertise in both its work and reporting
to the Committee.

This report was reviewed and approved by the Audit Committee.

Vanessa Simms
Chair of the Audit Committee
22 February 2023

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Remuneration Committee report

We are proposing a new
Remuneration Policy which
rewards long-term
sustainable performance
and value creation for
shareholders.

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Nicola Hodson, Chair

Committee members
John Baxter
Philip Cox
Kim Keating
Vanessa Simms

Attending by invitation
CEO, Chief People Officer, Group Head of Reward, and
external remuneration advisers. The Group Company
Secretary is the Secretary to the Committee.

Number of meetings held in 2022: Three
In addition to the below, Nicola regularly attended planning
meetings to consider key agenda items.

Attendance in 2022

Committee member

Date appointed
a member

No. of
scheduled
meetings

No. of
meetings
attended

% of
meetings
attended

17 April 2019
John Baxter
22 April 2015
Philip Cox
21 October 2021
Kim Keating
Nicola Hodson
12 January 2018
David Nussbaum(1) 1 August 2017
19 June 2018
Vanessa Simms

3
3
3
3
3
3

100%
100%
100%
100%
100%
100%

(1) David Nussbaum stepped down as a member of the Committee on

31 December 2021. David still attended all meetings in 2022 by invitation to
provide input on the review of the Directors’ Remuneration Policy.

This Directors’ Remuneration Report has been prepared in
accordance with Schedule 8 of the Large and Medium-sized
Companies and Groups (Accounts and Reports) Regulations
2008, as amended (the Regulations) and the provisions
of the Code.

Terms of reference
The Committee regularly reviews its terms of reference,
as does the Board. The most recent review was in November
2022. The terms of reference are available on the Company
website at www.drax.com/governance

Role of the Remuneration Committee
The principal responsibilities of the Remuneration Committee
(the Committee) are to:

• Develop the Directors’ Remuneration Policy (the Policy)
• Keep under review the implementation of the Policy
• Determine the remuneration strategy and framework
for the Executive Directors and Executive Committee
members, ensuring that executive remuneration
is aligned to the Group’s purpose, values and strategy

• Determine, within that framework, the individual remuneration
packages for the Executive Directors and senior management

• Approve the design of annual and long-term incentive

arrangements for Executive Directors and senior management,
including agreeing targets and payments under
such arrangements

• Determine and agree the general terms and conditions

of service and the specific terms for any individual
within the remit of the Committee, either upon recruitment
or termination

• Oversee any major changes in colleague remuneration
throughout the Group, ensuring there is consistency
with the culture and values of Drax

Drax Group plc Annual report and accounts 2022 127

Governance

Remuneration Committee report continued

Key Remuneration Committee activities in 2022

The key matters considered, and decisions reached, by the Committee in 2022 are shown in the table below:

Our workforce

Executives and senior management

Committee governance

• Considered and approved the

• Conducted a process for recruiting,

• Considered the remuneration
of the wider workforce in the
context of cost of living pressures.
Also received updates on broader
remuneration matters relating
to the wider workforce.

• Reviewed the application of the
increases from the annual pay
review effective 1 April 2022
and 1 January 2023.

remuneration of Executive Directors
and senior management.

• Approved Executive Director and

Executive Committee member annual
bonus awards for 2021.

• Approved the Deferred Share Plan
awards (for Executive Directors)
and LTIP awards for 2022.
• Approved the vesting of the

and subsequently appointed,
a new independent adviser
to the Committee.

• Considered and approved the
Committee’s Annual Report
on Remuneration for 2021.

• Conducted a full review of the Policy,

including a comparison of the
Policy against the requirements
of the Corporate Governance Code.

• Developed the terms of a new

Policy and initiated engagement
with shareholders for feedback.
• Reviewed the fees paid to PwC

and Korn Ferry, as the Committee’s
remuneration advisers in 2022,
together with fees paid by the
Group to PwC for other matters.

• Approved the outcome of the 2021

2019 PSP awards.

Group Scorecard and in turn
approved the outturn of the 2021
Group Bonus Plan.

• Reviewed and approved the

reporting of the 2021 Gender
Pay Gap statistics.

• Adopted the 2022 Group Scorecard

for the purpose of determining
the 2022 Group Bonus Plan.
• Approved the operation of the
2022 Sharesave Share Plan
for UK colleagues.

Annual Statement to Shareholders

Dear shareholders,
On behalf of the Remuneration Committee, I am pleased
to present the Directors’ Remuneration Report for the 2022
financial year. The Group delivered impressive financial
performance in 2022 and made significant progress on the
Group’s key strategic objectives. It is noted that the strong
performance was not without its challenges for the business
and for our colleagues. The rising cost of living has had
a significant impact on our colleagues across the Group.
Their response in contributing to the delivery of the Group’s
plans is recognised and appreciated.

Management and the Board believe the financial stability and
wellbeing of our colleagues is of paramount importance and
therefore we took decisions in the year to support our colleagues
through these difficult times. The Committee firmly believes that
remuneration outcomes must be fair, appropriate in the context
of business performance, and consistent across the wider
workforce. The remuneration outcomes for 2022 have been
assessed in line with these principles.

The Generation and Commercial businesses performed very
strongly in 2022. The performance of Pellet Production was
slightly behind budget but it still delivered robust performance,
particularly in the context of external factors such as the impact
of adverse weather during 2022. A detailed review of the
achievement against the performance metrics in the Scorecard
can be found on page 147.

The Committee determined that the overall performance
outcome of the Scorecard represents a fair reflection
of the business performance during 2022. The level of payout
is commensurate with the experience of both shareholders and
colleagues over this period. The Committee did however accept
Will Gardiner’s recommendation to reduce the formulaic outturn
of the bonus to reflect safety performance in 2022. Whilst there
were no serious safety incidents in 2022, the number of injuries
recorded was higher than the standards we set. The Scorecard
specifically has a safety moderator provision to allow for such
eventualities. The final outturn of the annual bonus plan was
1.75 and this score results in 87.5% of the maximum annual bonus
being paid to the Executive Directors. In accordance with our
Policy, 40% of the overall bonus award will be deferred into
shares and 60% will be paid in cash in the March 2023 payroll.

Review of decisions made during 2022
Annual assessment of performance
The Committee determines the remuneration of the Executive
Directors and members of the Executive Committee against the
objectives and priorities of the Group. For 2022 we achieved this
through considering performance against a combination of strategic
and financial metrics. The 2022 Group Scorecard (Scorecard)
included metrics reflecting key objectives for all business areas,
including Generation, Pellet Production and Commercial. It also
included metrics reflecting progress on strategic objectives,
people, sustainability and environmental practices.

Long-term assessment of performance
Awards granted in 2020 under the Long Term Incentive Plan
(LTIP) were subject to performance criteria stated in the Policy
approved by shareholders in 2020. Vesting of these awards
was determined based on performance against two measures
over the three-year period from 1 January 2020 to 31 December
2022. The measures were Total Shareholder Return (TSR),
relative to the FTSE 350, and Cumulative Adjusted Earnings
Per Share (EPS), each accounted for 50% of the award.
TSR over the three-year period was above the upper quartile
(a rank of 5 out of the FTSE 350). The EPS outcome was 144.7p,

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which was 23% ahead of the maximum target of 117.5p.
The TSR and EPS performance resulted in full vesting
for both performance measures.

The full performance vesting of the 2020 LTIP is reflective
of the exceptional shareholder returns. The data in the chart
at the bottom of the page shows how the value of £100 invested
in both Drax and other leading Energy companies on 1 January
2020 has changed in the period to 31 December 2022.

The vesting of the 2020 LTIP is also relative to Drax’s performance
over the period. This included the impact of the pandemic
(which includes the impact on earnings for 2020 and 2021:
a reduction in EBITDA of £75 million), inflationary pressures and
higher commodity prices. Over this same period, there has been
considerable progress made on Drax’s strategy and purpose.
This included the divestment of the combined cycle gas
generation turbine assets (CCGT); the acquisition of Pinnacle
and significant progress in the development of plans for BECCS.
This progress and prospects for long-term growth have remained
underpinned by good operational and financial performance,
with strong cash generation and dividend growth.

In addition to looking at Drax’s performance in the round,
the Committee also recognised other factors. Specifically, over
the period since the grant of the 2020 award, Drax’s share price
has increased from 200p to an average share price over the last
quarter of 2022 of 579p. Whilst being cognisant of the guidance
from the Investment Association on potential windfall gains
from 2020 awards granted during the first pandemic lockdown,
we are not scaling back the award on vesting because:

• The 2020 award was not granted at a Covid ‘low point’.
The share price was as low as 134p in 2020 and was at
250-350p for most of the preceding year. The 2020 award
was granted from a share price of 200p.

• With a rank of 5 out of the FTSE 350 constituents, Drax’s

TSR performance has been exceptional over the performance
period (measured from the start of 2020, when the share price
was higher than the grant price). This shows that the share
price is not simply reflective of a general market bounce-back.
The chart shows Drax’s performance was well into the top
quartile and that Drax has the highest TSR in the sector. Drax’s
closing share price on 31 December 2022 was 703p, 124%
higher than the 314p share price at the beginning of the
three-year period that pre-dated the pandemic impact.

• The three-year EPS target was established prior to the date

of grant for the performance period 1 January 2020

to 31 December 2022, considering both internal forecasts and
market expectations at that time. Whilst power prices started
to increase during 2021, the Group’s hedging policy meant the
impact on the results was limited to the unhedged element
of 2022, the final year of the performance period. Much of the
value delivered across the performance period was achieved as
the Group successfully optimised and leveraged its integrated
supply chain to provide security of supply during several
challenging years for the UK energy system, whilst delivering
significant additional value. The pandemic materially negatively
impacted the 2020 and 2021 financial year EPS performance.
While there was a modest benefit from the UK Government’s
request to provide winter contingency through coal for part of
the 2022 financial year, this was more than offset by the net
earnings lost during the period from the combined effect of the
sale of CCGT and acquisition of Pinnacle.

• Drax has an important role in the security of supply. Despite

significant operational challenges, we maintained the supply of
power during the pandemic which required robust supply chains
for the supply of sustainable biomass as well as the operational
demands at Drax Power Station. More recently following the
request from UK Government, we made the coal units available
when called upon for operation.

• Subsequent LTIP awards have been granted at higher share

prices (429p in 2021 and 701p in 2022) and the 2019 and 2018
awards were granted at share prices of 380p and 255p.
• Vested awards for Executive Directors remain subject to a

holding period. With the two-year holding period that applies,
the share price could be lower by the time shares are released.

The Committee determined that the vesting outcome was
appropriate in the context of performance over the three-year
performance period. The Committee also believed the outcome
was appropriate in the context of the response by management
to the impacts of the pandemic on operational continuity and
looking after colleagues. On this basis, the Committee decided
not to exercise any discretion to reduce the overall vesting
outcome.

All-employee remuneration

In September 2022, Drax completed the acquisition of Princeton
Standard Pellet Corporation and thereby welcomed more
colleagues in Canada (following the acquisition of Pinnacle
in 2021). Careful consideration was given at that time to ensure
that Princeton’s colleagues smoothly transitioned to the Group’s
remuneration and broader HR policies.

Drax’s TSR over the 2020 LTIP performance period versus other energy companies

300

250

200

150

100

Jan 20

Jul 20

Jan 21

Jul 21

Jan 22

Jul 22

Jan 23

Drax

FTSE 250 FX Investment Trust

National Grid

SSE

Centrica

Contourglobal

EDF

E ON N

Iberdrola

Drax Group plc Annual report and accounts 2022 129

Governance

Remuneration Committee report continued

In addition, Drax expanded operations into Japan in 2022,
with the intention of further advancing biomass sales to support
energy security and decarbonisation in Asia.

At this stage our footprint in Japan is modest but our presence
there, including the number of colleagues we have, is likely
to expand as that business grows. Management is currently
considering remuneration and broader HR arrangements which
are appropriate and competitive in the local market in Japan.

Inflation increased significantly in 2022 in all countries where
Drax operates, leading to a significant cost of living impact on all
colleagues. The Committee spent time considering how best to
offer support. We took the decision to bring forward the effective
date of the 2023 pay review to 1 January (from 1 April) for all
colleagues not under collective bargaining (colleagues under
collective bargaining already had 1 January as an effective pay
review date). We felt that bringing forward the pay review was
the most meaningful way to support colleagues during these
difficult times. A budget of 8%, which is higher than recent years,
was set. This was consistent with inflation rates in the US and
Canada at the time the budget was set. This was also broadly
in line with the Retail Price Index (RPI) in the UK when adjusting
for the direct impact of energy prices.

For the two Executive Directors, the Committee decided on a 4%
base pay increase, effective 1 January 2023. The Committee took
this decision as they were mindful of the knock-on impact on the
relativity of Executive Directors’ total pay to the total pay of the
wider workforce in awarding the Executive Directors base pay
increases that were directly aligned with the average increase
of the wider workforce (which is our standard approach).
The median base pay increase for members of the Executive
Committee was also 4%.

To further support colleagues with the rising cost of living,
Drax implemented Nudge globally. This provided all colleagues
with access to financial education, such as advice on day-to-day
budgeting and how to help money go further. We will continue
to monitor the cost of living situation throughout 2023 and
consider whether there is anything further we can appropriately
do to support our colleagues.

New remuneration policy
Context
The Committee undertook a full review of the current Policy in
2022. This took into account the evolution of the Drax strategy
since the last Policy review in 2019, plus evolving market practice
and feedback from our shareholders. Consensus from the
feedback we received was our current Policy is working
effectively and it remains aligned with our strategy.

Proposed changes
The key Policy changes which will be proposed for shareholder
consideration at the AGM to be held in April 2023 are:

• Annual bonus deferral and holding periods – we are not

proposing a change to the quantum of the bonus opportunities
for the Executive Directors. While retaining the Scorecard
methodology, there will be more flexibility in the choice of
performance metrics. We will achieve this by removing the
specification that 60% of metrics must be financial, albeit on
the proviso that the majority of metrics will be financial (and
the Committee note that 60% of the metrics in the 2023
Scorecard are financial). The current approach to deferral of
the bonus for Executive Directors will be simplified. A flat 40%
of any bonus earned is to be paid in shares and deferred for
three years. This is to simplify the current arrangement
whereby the deferral operates differently for bonus earned

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for financial and non-financial targets. In addition, to align with
market practice, the holding period on deferred bonus shares is
to be removed. The deferred bonus shares will continue to have
a three-year vesting period and, on vesting, these shares will
still need to be held (as a minimum, on a net of tax basis) until
Drax share ownership guidelines have been met.

• Non-Executive Directors – consistent with wider market

practice in FTSE 350 companies with an international footprint,
there will be an introduction of flexibility to provide a limited
range of benefits and travel allowances to Non-Executive
Directors. These changes are being made in recognition of the
additional time and expenses incurred by Non-Executive
Directors based overseas in providing their services to a UK
based listed company (e.g. the changes will enable the
additional time which the Non-Executive Directors concerned
commit in travelling to and from UK Board meetings to be
reflected in the total fees provided). The Policy will also specify
that our default approach is to increase their fees each year at
a rate that is up to the rate applied to the wider workforce. This
will bring the Drax Policy into line with market practice. With
respect to 2023, the Chair received a 4% increase and Non-
Executive Directors received an increase of 4.1%, which was
less than the average increase of the wider workforce although
in line with the annual base pay increases of the two Executive
Directors and median base pay increase of the broader
Executive Committee members.

BECCS
As explained in other sections of this Annual Report, Drax
continues to make good progress with its business transformation
strategy. This we believe can be achieved through delivering both
UK BECCS and global BECCS, with options including the delivery
of 4Mt of negative CO2 emissions each year from new-build
BECCS outside of the UK by 2030, with a primary focus on North
America. This includes the development of options for a pellet
plant with BECCS, coal-to-biomass-to-BECCS and industrial
models for BECCS as a service.

In respect of BECCS in the UK, our stated ambition is to develop
8Mt of BECCS at Drax Power Station by 2030. Management are
progressing with the planning phases and during 2023, site
preparation works will be undertaken, supporting the target of a
final investment decision in 2024. The development of the BECCS
opportunity in the UK will require the right investment framework
from the UK Government.

Internationally, as outlined in our Trading Update in December
2022, management made progress on the objective to deliver
4Mt of negative CO2 emissions annually from 2030. Opportunities
under consideration include two new-build 300MW BECCS
power units, each capable of producing 2TWh of renewable
electricity from sustainable biomass and each capturing over
2Mt of CO2 annually. Drax is also developing options for a pellet
plant with BECCS, and the addition of BECCS to existing
generation assets, including coal-to-biomass-to-BECCS.

The US was a key focus during 2022. The regulatory environment
there continued to gain momentum, with the inclusion of BECCS
as an eligible technology under the Department of Energy climate
goals funding scheme. At state level, progress has been made
through enabling legislation in Louisiana and Texas, with the
Louisiana legislature approving a bill that classifies biomass
as carbon neutral and BECCS as carbon negative. In addition,
California’s net zero strategy identifies carbon removal
technologies as important to deliver the state’s climate targets.

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We are evaluating a range of potential financial models for these
projects, which could include long-term power purchase
agreements (PPAs), long-term CDR sales and government
investment frameworks.

In 2022 the Committee gave much consideration to an
appropriate mechanism by which management should be
remunerated for the delivery of the high impact and high value
opportunity of BECCS. The Committee’s view is that the long term
incentive plan provides a more appropriate mechanism for
assessing and rewarding the delivery of BECCS over the medium
to long term than the annual bonus plan. Having considered this in
the context of the current Policy, the Committee has, after careful
reflection, and after taking into account shareholder feedback,
concluded that the timing of implementing such a change is more
appropriate for 2024. This will allow time for necessary clarity on
the outcome of engagement with the UK Government in relation
to UK BECCS and further evolution of Drax’s global BECCS policy.
The Committee expects to be in a position to engage shareholders
on this potential change later this year.

Shareholder Engagement
In developing the proposed Policy, we considered comments
provided by shareholders on our current Policy and we engaged
with our largest shareholders to explain our proposed revisions.
In December we wrote to our leading shareholders (which
accounted for circa 40% of our shareholder register at that time)
to share the proposed revisions and our thinking behind them. In
January and February 2023 we had conversations with some of
these shareholders to discuss their feedback. We really appreciate
the time taken by our shareholders and we found their input both
helpful and constructive. The Committee took this feedback into
consideration and it helped to inform our proposals, for example
the decision to delay reviewing the mechanism through which
management are remunerated for the delivery of BECCS.

Application of Remuneration Policy in 2023
Base pay review
The Committee reviewed the base pay of both Executive
Directors for 2023 and determined that a below workforce
increase of 4% would apply from 1 January 2023. From that date,
the base pay of Will Gardiner increased to £663,000 and the base
pay of Andy Skelton increased to £421,750. As noted previously,
the Committee took this decision while mindful of the knock-on
impact on the relativity of Executive Directors’ base pay to the
base pay of the wider workforce in awarding the Executive
Directors base pay increases that were directly aligned with the
average increase for the wider workforce (which was 8%).

Pension
As reported in 2019, effective 1 January 2023, the pension
contribution rates of the Executive Directors reduced to 10% of
base pay (from 20% for Will Gardiner and 16% for Andy Skelton).

Annual bonus
Feedback provided as part of the Policy review indicated that the
construct of the current annual bonus plan is working effectively.
Bonus awards for 2023 will continue to be based on a Scorecard
methodology. The maximum bonus opportunities of the
Executive Directors remain unchanged at 175% and 150% of
base pay for the CEO and CFO respectively. The majority of the
bonus remains subject to challenging financial targets with 40%
based on Group Adjusted EBITDA and 20% on Leverage. The
remaining 40% will be earned against a range of strategic, safety
and ESG targets. The 2023 Scorecard will determine the bonus
awards for all colleagues across the Group who participate in the
bonus plan for 2023, including the Executive Directors. More
information on the targets is on page 156.

Long-Term Incentive Plan
As detailed above, no changes are proposed to the existing LTIP
structure. For the TSR element, performance will continue to be
assessed against the constituents of the FTSE 350 with threshold
vesting (25% of maximum) for performance in line with the
median and maximum vesting for performance in line with the
upper quartile. The targets for the EPS element are provided on
page 157.

Workforce engagement
We believe engagement with our colleagues is extremely important
in informing decisions of the Committee and in communicating
how the Committee reaches decisions. There are several ways
we engage with our colleagues on remuneration matters.

One of the key vehicles is the MyVoice Forums. In 2022 there
were four meetings with the respective Forum Chairs, Will Gardiner
and Philip Cox. At these meetings, a variety of matters were
discussed and this feedback has informed HR decisions.
For example, we received feedback that we need to improve
on recognising the contribution of colleagues beyond our reward
programmes. The Chairs are supporting HR to develop options.
We are increasingly making use of this workforce engagement
platform to seek views on remuneration and to help shape
initiatives. For example, the participation of our UK Sharesave
scheme is very high with over 50% of UK colleagues participating
in at least one scheme. We have partnered with Wealth at Work to
deliver a financial education programme in Q1 2023 and engaged
our MyVoice Forum Chairs for feedback on how we communicate
to ensure the content lands appropriately. This support will enable
colleagues to understand their options with respect to the
Sharesave contract that matures in June 2023. Each business
area also had their own Forum meetings in 2022.

In 2022, I also recorded a video explaining the construct of the
2022 Scorecard and the rationale for each metric. The purpose
was to improve the level of understanding of how the Scorecard
works, to reinforce the importance of each metric to our strategic
aims, and to explain how colleagues can directly influence them.
The video was published on the intranet and made available
to all colleagues. Feedback from colleagues suggests this
was a valuable exercise.

During 2022, colleagues continued to have the opportunity to put
questions to Will Gardiner on any topic, with his responses made
available to all colleagues. Colleagues could also share their views
with management through the all-employee annual engagement
survey. Although the engagement score is no longer a metric
in the annual bonus plan, we are still committed to assessing
the findings and addressing them through targeted actions.

Summary
The Committee recognises the excellent performance of the
Group in 2022. We believe the 2022 remuneration outcomes
for the Executive Directors and senior management fairly
reflect performance, provide a fair and consistent approach
to remuneration across the Group, and is appropriate to the
shareholder experience. We are confident that the proposed
Policy underpins our purpose and the delivery of our strategy,
and rewards long-term sustainable performance and value
creation for shareholders. We hope that having read this report
you will vote in support of the resolutions for the Annual Report
on Remuneration and the separate proposed Remuneration
Policy at the AGM being held on 26 April 2023.

Drax Group plc Annual report and accounts 2022 131

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Remuneration Committee report continued

2022 Remuneration at a glance
The charts below provide a summary of the remuneration earned by the Executive Directors in 2022. Figures are rounded up to the
nearest £000. Full details can be found in the Annual Report on Remuneration from page 147.

Total remuneration

Will Gardiner (CEO) £000s

2022

2021

631

126

966

3,636

570

114

802

1,722

Andy Skelton (CFO) £000s

2022

2021

401

527

2,073

371

Base salary

59
Pension

448
Annual bonus

LTIP

1,154

16
Other beneﬁts and ShareSave

Total
5,377

Total
3,226

Total
3,081

Total
2,049

Implementation of the Policy in 2022

Element

Implementation of the Policy in 2022

Base salary

• As stated in the Annual Report for the 2021 financial year, effective 1 January 2022,
adjustments were made to the base salaries of the Executive Directors to reflect
changes to the business. This decision was made in accordance with the relevant
provision in the Policy and was supported by external market data.

• The base pay increases in April 2022 were made as part of the annual pay review
process which resulted in Executive Directors receiving an increase in base pay
of 4.5%, consistent with the average increase of the wider workforce.

• For reference, the effective date of the 2023 annual pay review process was brought
forward to 1 January. Effective 1 January 2023, the Executive Directors received
an increase in base pay of 4%, which is below the average increase of the
wider workforce.

Will Gardiner (CEO)
000s

Andy Skelton (CFO)
000s

£631

£401

Pension and
other benefits

• The employer pension contribution rate for Will Gardiner and Andy Skelton in 2022

£145

£80

was 20% and 16% of base salary respectively. From 1 January 2023, their respective
pension contribution rates have been reduced to 10% to align with new joiners of
the UK wider workforce.

• Other benefits received include a car benefit, life assurance, income protection, the
opportunity to participate in all-employee share plans on the same basis as other
colleagues, and private medical cover.

Annual bonus

• The 2022 annual bonus outcome as a percentage of maximum opportunity was
87.5%, of which 62.3% was based on performance against financial metrics and
37.7% on performance against strategic metrics.

• In line with the Policy, for the Executive Directors, 40% of the overall bonus award

will be deferred into shares under the Deferred Share Plan.

£966

£527

Long-term
incentive plan
(LTIP)

• The 2022 LTIP award is measured on the three-year performance period to

£3,636

£2,073

31 December 2024, based on Total Shareholder Return (TSR) relative to the FTSE
350 which has a 50% weighting, and Cumulative Adjusted Earnings Per Share (EPS),
which also has a 50% weighting.

• The 2020 LTIP will vest in May 2023 at 100% of the maximum and was based on the

performance of TSR (50% weighting) and Cumulative Adjusted EPS (50%
weighting), over the preceding three-year performance period.

Shareholding
requirements

• Will Gardiner has met the shareholding requirement, with a shareholding

at 31 December 2022, equivalent to 881% of base salary.

• Andy Skelton has also met the shareholding requirement, with a shareholding

at 31 December 2022, equivalent to 487% of base salary.

>250% of
base pay

>200% of
base pay

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Alignment of Remuneration of Executive Directors and Wider Workforce
Many aspects of the remuneration for Executive Directors are also applicable to the wider workforce, such as the basis of the annual
bonus award through the scorecard, pension, and benefits entitlements. Below is a summary of the remuneration arrangements
broken down by the colleague grouping. In this table as indicated in the key below, specific areas of remuneration which are not
highlighted represent remuneration which is fully aligned across all colleagues, whilst those highlighted in blue are not aligned.

Key

Aligned across workforce

Unique to a specific colleague group

Remuneration element

Executive Directors(1)

Executive Leadership and
Senior Management(2)

Wider workforce(3)

Base salary Approach
Increases

Pension

New hires

To target the appropriate market rate, as determined by comparisons with appropriate companies.
Keep pay for colleagues consistent with market rate and reviewed in line with inflation; base salary increases
for Executive Directors will generally be in line with those for the UK workforce.
All UK colleagues have the option to participate in the Company’s defined contribution pension plan, with company
contribution rate for new hires of up to 10% of base salary. Some colleagues choose to take a cash payment in lieu
of their pension, or a combination of pension contribution and cash in lieu of a contribution.

Benefits(4)

Health and
wellbeing
Risk and
protection
Car benefit

Bonus

Eligibility

Metrics

Deferral

Eligibility

Long-term
incentive
plan (LTIP)

Metrics

Shareholding
requirement

All-colleague plans
(Sharesave)

From 1 January 2023, the contribution rates for the CEO and CFO were reduced from 20% and 16% respectively
to 10%, to align with the rate for new joiners to the UK workforce.
All colleagues receive medical cover, and access to an annual private health assessment or a local equivalent
arrangement.
All colleagues have company-funded life assurance and income protection, or a local equivalent arrangement,
unless they are covered under alternative collective bargaining arrangements.
Not applicable. Some colleagues have
£12,000
a car as job requirement

Not applicable.
Some colleagues have
a car as job requirement

All colleagues are eligible to take part in the annual bonus programme, unless precluded by alternative arrangements
with their respective trade union group. The bonus award is designed to reward the delivery of targets and objectives
directly linked to the financial and strategic performance of the Group set each year and detailed in a scorecard.
Bonus awards are conditional on achieving thresholds set in the scorecard, which combines financial and strategic
metrics. These metrics are the same for all colleagues, so there is Group-wide consistency.
40% of the total bonus outcome will
be deferred into shares in the form of
nil cost options or conditional awards
under a Deferred Share Plan (DSP).
The period over which shares are
deferred is normally three years.
Vesting is subject to continued
service or “good leaver” termination
provisions.
Discretionary annual grant of shares,
under the LTIP.

Discretionary annual grant of shares,
under the LTIP.

Not applicable,
no deferral

One Drax Awards are a discretionary
grant of share awards to recognise
performance and to aid retention of
key talent below Executive
Leadership and Senior Management
level.
No performance conditions
for One Drax Awards.

For awards made under the LTIP,
vesting is subject to long-term
performance conditions, and typically
are measured over a three-year
performance period.
Not applicable

For awards made under the LTIP,
vesting is subject to long-term
performance conditions, and typically
are measured over a three-year
performance period.
Requirements of 250% and 200% of
salary for the CEO and CFO
respectively. A post-cessation
shareholding requirement, equal
to the employment sharing
requirement, applies for a two-year
period after cessation.
All UK colleagues have the option to buy shares in Drax at a discounted price (after a three-year or five-year saving
period elapses). For colleagues outside the UK, management will continue to monitor whether there is sufficient local
interest to participate in an equivalent scheme.

Not applicable

Notes:
(1) The Executive Directors are the CEO and CFO.
(2) Executive Leadership and Senior Management includes all colleagues in the three most senior job grades, excluding the CEO and CFO.
(3) Wider workforce includes all colleagues in job grades below the three most senior job grades.
(4) Drax opened an office in Japan in 2022. We are reviewing our benefits there and will introduce local competitive arrangements in 2023.

Drax Group plc Annual report and accounts 2022 133

Governance

Remuneration Committee report continued

Corporate Governance Code
The Directors’ Remuneration Policy has been subject to a full review by the Committee which was undertaken in 2022. Proposed
changes will be put to shareholders for approval at the AGM being held on 26 April 2023.

When reviewing the Remuneration Policy, the Committee considered a number of factors, including but not limited to, Drax’s
ambitious growth strategy, shareholder feedback on the current policy, the UK Corporate Governance Code (see below) and wider
best practice. This has culminated in the formulation of a revised remuneration policy (the Policy) which will apply for three years
from the date of the 2023 AGM, subject to shareholder approval.

The table below sets out how the Policy specifically addresses the provisions of the UK Corporate Governance Code.

Our remuneration policy is aligned with the provisions of the 2018 Corporate Governance Code

Clarity
• Alignment between the delivery

of strategic goals and remuneration
outcomes.

• Remuneration which rewards growth
in shareholder value over the medium
to longer-term.

• Performance related elements, relevant

for the Group as a whole, creating
alignment across the wider workforce
in delivering financial, operational and
strategic imperatives.

Predictability
• Transparent performance measures
and targets make clear the possible
range of remuneration outcomes and
these potential outcomes are illustrated
in the Policy.

Simplicity
• Annual bonus: a simple Scorecard

structure focusing on a small number
of financial, strategic and ESG metrics,
which provides clarity, focus and ease
of understanding.

• The vesting of the long-term incentive
plan (LTIP) is conditional in part on
cumulative adjusted EPS, which
reflects the capability to deliver stable
earnings, and TSR, which ensures
strong alignment with the shareholder
experience.

Proportionality
• Performance measures are linked to
Drax’s strategy and aligned with
long-term creation of value for
shareholders.

• Stretching targets ensure that

payments are only made for strong
corporate performance.

• The Committee has discretion to

override formulaic outcomes to ensure
that remuneration appropriately
reflects overall performance, the
interests of stakeholders and
shareholder experience.

Risk
• A significant proportion of remuneration
is linked to the longer-term performance
of the Group.

• A significant shareholding requirement
for Executive Directors during and
post-employment.

• Malus and clawback provisions mitigate
behavioural risks by enabling payments
to be reduced or reclaimed in specific
circumstances.

Alignment to culture
• Annual bonus metrics for all employees,
including Executive Directors, are the
same so that all participating colleagues
are focused collectively on, and
rewarded for, the delivery of financial
and strategic goals and Drax’s purpose.

• The annual bonus for 2023 (and in

previous years) contains metrics related
to the environment, sustainability and
people which underpin Drax’s values
and business strategy.

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Summary of changes to the Policy
The table provide provides an overview of the proposed changes to the Policy and the associated rationale for these changes.

Element

Proposed Change

Rationale

Salary

• Adopt consistent wording for the ability to move base
salaries to the market rate where Executive Directors
are either (i) an external appointment made on a below
market base salary; or (ii) an internal promotion on
a below market base salary.

Annual bonus

• The following changes are proposed:

1. Simplifying the wording on the choice of performance
metrics. The majority of the annual bonus must still be
earned based on performance against financial targets
as opposed to the current approach that defined a set
percentage of the bonus (60%) as being subject to
financial targets.

2. Simplification of current approach to that part of

annual bonus which is deferred in shares. The change
will specify that 40% of any annual bonus earned
is deferred into Drax’s shares. This approach replaces
the prevailing more complex approach whereby 100%
of any bonus earned against strategic targets takes
place subject to 40% of the total bonus outcome
being deferred.

3. Removal of the two-year holding period on deferred

bonus shares so that any deferred shares that vest will
be released at the end of the three-year vesting period.
These shares will need to continue to be held (as a
minimum on a net of tax basis) until Drax’s share
ownership guidelines have been met.

• The change aligns Drax with standard FTSE 350 market
practice. The default base salary increase for Executive
Directors remains an increase up to the rate typically
applied to the workforce. Where the quantum increase
exceeds the norm, an explanation will be provided
by the Committee.

• The changes to the operation of the annual bonus plan
align Drax with standard FTSE 350 market practice.

• Requiring at least half the bonus to be subject to financial
targets provides greater flexibility for the Remuneration
Committee in operating the annual bonus plan and
mirrors standard market practice.

• The current approach to bonus deferral was overly

complex with differing proportions of the parts of the
bonus subject to financial and strategic targets taking
place dependent upon the level of bonus earned against
each measure. This was administratively complex with
the change simplifying the deferral process.

• Deferring a proportion of any bonus into shares which

vest at a future date is standard practice. Holding periods
are not typically applied to deferred share bonus awards
at the point of release. To note, the holding period will
continue to apply to shares vesting under the long-term
incentive plan. The change brings Drax into line with
standard FTSE 350 market practice.

Pension

• The policy is being updated to reference that Executive
Director pensions are now aligned with the rate typically
provided to the UK wider workforce for new joiners at
10% of base salary.

• The change conforms the policy with institutional

investors best practice expectations with Executive
Director pensions being reduced to the rate typically
provided to the UK wider workforce of 10% from their
prior rates of 20% (CEO) and 16% (CFO) of base salary.

LTIP

• The overall LTIP structure remains the same.

• N/A

Non-Executive
Directors

• The changes to the current Policy provide flexibility
for Drax to provide a limited range of benefits and
travel allowances.

• The Policy will also specify that the default is to increase
Non-Executive Director base fees at a rate that is up to
the rate typically applied to the UK wider workforce.

• The changes to the Non-Executive Directors’ Policy
mirror standard practice for FTSE 350 companies
with an international footprint.

• The ability to provide a limited range of benefits

and allowances will ensure that Drax has the flexibility
to appoint international Non-Executive Directors of an
appropriate calibre to support Drax through the next
phase of its development. The change will enable Drax
to provide support to Non-Executive Directors
(specifically from outside the UK) in relation to initial set
up and ongoing support with filing tax returns such that
this is cost neutral to the individual.

• Introducing the ability to increase Non-Executive

Director fees up to the rate of increase awarded to the
wider workforce bring the Company Policy into line
with standard market practice.

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Remuneration Committee report continued

Directors’ Remuneration Policy for approval at the 2023 AGM
Below is the proposed Policy which, if approved by shareholders, will be effective immediately after the AGM on 26 April 2023
and will be binding until the close of the 2026 AGM.

Base salary
Base salary helps to attract, reward and retain the right calibre of Executive Director to deliver the leadership and management
needed to execute the Group’s strategy and business plan.

Proposed Change (for adoption in 2023)
Adopt consistent wording for the ability to move base salaries to the market rate where Executive Directors are either
(i) an external appointment made on a below market base salary; or (ii) an internal promotion on a below market base salary.

Practical operation
Base salary reflects the role, the executive’s skills and
experience, and market level. To determine the market level,
the Committee reviews remuneration data on executive
positions at companies which the Committee considers to be
appropriate comparators. The comparator companies are
selected, with advice from the Committee’s remuneration
advisers, taking into account factors such as, but not limited
to, sector, size, and international presence.

Where base salary on appointment is below market level
to reflect experience, it will be increased over time to align
with the market level, subject to performance.

Base salaries of all Executive Directors are generally
reviewed once each year, with increases applying from
January. Reviews cover individual performance, experience,
development in the role, market comparisons and pay
reviews for the wider workforce.

Maximum potential value
The base salaries of Executive Directors in post at the start
of the policy period, and who remain in the same role
throughout the policy period, are eligible for increases during
the policy period but will not usually be increased by a higher
percentage than the average annual percentage increase
in salaries of all other employees in the Group at the time
of increase.

Exceptions to this, subject to performance and development,
are where:

(i) An Executive Director has been appointed at below

market level to reflect experience.

(ii) An Executive Director has been promoted internally
(or the scope or nature of their role has changed)
and their salary is below market level.

Pension
Pension provision is one of the components to attract, reward and retain the right calibre of executive, to ensure delivery
of the leadership and management needed to execute the Group’s purpose and strategy.

Proposed Change (for adoption in 2023)
The policy is updated to reference that Executive Director pensions are now aligned with the rate typically provided to the UK
wider workforce for new joiners of up to 10% of base salary.

Practical operation
Executive Directors are entitled to a contribution to the
Group’s defined contribution pension plan, a cash payment
in lieu of pension (subject to normal statutory deductions),
or a combination of pension contributions and cash
in lieu of pension.

Maximum potential value
The contribution rates for existing Executive Directors are
limited to the rate for new joiners to the UK wider workforce,
which is currently 10% of base salary. This is also the most
common pension contribution rate for UK-based employees.

The pension contribution rate for any new Executive Director
will also be limited to the rate for new joiners to the
wider workforce.

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Benefits

Benefits are provided to be market competitive as an integral part of Executive Directors’ total remuneration.

Practical operation
Executive Directors receive a car benefit, life assurance,
income protection, the opportunity to participate in all-
employee share plans on the same basis as other employees,
annual private health assessment and annual private medical
cover. Additional benefits may be provided if the Committee
considers them appropriate (including tax equalisation
expenses and benefits or allowances which are customarily
provided in the country where an Executive Director resides).

Relocation expenses are paid, where appropriate,
in individual cases. Executive Directors’ relocation expenses
are determined on a case-by-case basis. The Policy is
designed to assist the Executive Director to relocate
to a home of similar standing.

Maximum potential value
Benefits are set at a level appropriate to the individual’s role
and circumstances.

The maximum opportunity will depend on the type of benefit
and cost of its provision, which will vary according to the
market and individual circumstances.

Annual bonus
The award of annual bonus will be based on annual performance against financial and operational metrics linked to the business
plan. The aim of the deferred portion of the annual bonus is to further align Executive Directors to shareholders’ interests, by
linking share-based reward to long-term sustainable performance.

Proposed Change (for adoption in 2023)
(i) Simplification of the wording on the choice of performance metrics. The majority of the annual bonus must still be earned

based on performance against financial targets.

(ii) Simplification of current approach to that part of annual bonus which is deferred in shares. The change will specify that
40% of any annual bonus earned is deferred into Drax’s shares. This approach replaces the prevailing more complex
approach whereby 100% of any bonus earned against strategic targets takes place subject to 40% of the total bonus
outcome being deferred.

(ii) Removal of the two-year holding period on deferred bonus shares so that any deferred shares awarded vest after three years.
These shares will need to continue to be held (as a minimum on a net of tax basis) until Drax’s share ownership guidelines
are met.

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Governance

Remuneration Committee report continued

Practical operation
The Committee will determine the annual bonus payable
after the year-end, based on performance against targets.

40% of the total bonus outcome will be deferred into shares
in the form of nil cost options or conditional awards under
a Deferred Share Plan (DSP). The period over which shares
are deferred is normally three years. Vesting is subject to
continued service or “good leaver” termination provisions.

Deferred shares vest based on continued employment and
lapse other than in defined good leaver circumstances.

Dividends or dividend equivalents (which may assume
notional reinvestment) are paid on DSP awards.

In certain circumstances, the Committee can apply malus
and clawback to bonus awards.

Maximum potential value

Role

CEO
Other Executive Directors

Maximum opportunity
(% of base salary)

175%
150%

Performance measures
The majority of the annual bonus will be based on financial
metrics. The Remuneration Committee reviews and
determines the metrics, weightings and calibration of targets
annually taking into account business objectives and the
strategic priorities of the business.

The performance metrics applicable to the annual bonus
awards are split between financial and strategic metrics.

• Financial – performance measures based on annual financial
and operational targets, which will be linked directly to the
performance of the Group and determined by the Board.
• Strategic – performance measures based on non-financial
and strategic targets, which will be determined annually by
the Board and will be aligned with the business strategy.

There is no payment for below threshold performance.
The outcome for threshold performance is 0% of maximum.
The outcome for target performance is 50% of maximum.

Targets, outcomes and resulting payouts are published in the
Annual Report on Remuneration.

The Committee will review the formulaic outcome of the
bonus award and has the discretion to amend the final
outcome to make sure that bonus payments reflect overall
performance. The use of such discretion will be explained fully
in the relevant Annual Report on Remuneration.

In exceptional circumstances such that the Committee
believes the original measures and/or targets are no longer
appropriate, the Committee has discretion to amend
performance measures and targets during the year.

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Long Term Incentive Plan (LTIP)
The Group’s LTIP provides long-term alignment with shareholders based on the outcome of performance against the conditions
set for each award (which for awards granted in 2023 will be Relative Total Shareholder Return and Cumulative Adjusted
Earnings Per Share).

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Maximum potential value

Role

CEO
Other Executive Directors

Maximum opportunity
(% of base salary)

200.0%
175.0%

In exceptional circumstances the Committee may on
recruitment grant a percentage of base salary in excess
of these amounts.

Performance measures
Awards will be subject to a combination of long-term
measures which are aligned to the shareholder experience
and may include financial metrics, shareholder value metrics,
capital efficiency measures and ESG or strategic measures.

Practical operation
Under the LTIP, Executive Directors may at the discretion
of the Committee receive an annual grant of shares subject
to performance conditions.

Shares vest on the third anniversary of the grant, subject
to continued service or in exceptional circumstances earlier
subject to specified “good leaver” termination provisions,
and the achievement of performance conditions over
a three-year period determined by the Committee.
Vested awards are then subject to a further holding period
of two years for Executive Directors.

Dividends or dividend equivalents (which may assume
notional reinvestment) may be paid on LTIP awards.

There is no payment for below threshold performance.

The outcome for threshold performance is 25% of maximum.

The Committee will include an override provision in each
grant under the LTIP. This will give the Committee discretion
to determine that no vesting shall occur, or that vesting shall
be reduced, if there are circumstances (relating to the
Group’s overall performance or otherwise) which make
vesting when calculated by reference to the performance
conditions alone inappropriate.

In certain circumstances, the Committee can apply malus or
clawback to unvested/vested awards.

The Committee reserves discretion to:

(i) amend the performance conditions/targets attached to

outstanding awards granted under this Policy, in the event
of a major corporate event or significant change in
economic circumstances, or a change in accounting
standards having a material impact on outcomes; and

(ii) adjust the vesting of LTIP awards and/or the number
of shares underlying unvested LTIP awards, on the
occurrence of a corporate event or other reorganisation.
In the event of a change of control, the treatment of
long-term incentives will be determined in accordance
with the plan rules.

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Governance

Remuneration Committee report continued

Shareholding requirement
The shareholding requirement aligns the interests of Executive Directors with shareholders.

Maximum potential value
N/A

Performance measures
N/A

Practical operation
The shareholding requirement for the CEO is 250% of salary
and for the other Executive Directors is 200% of salary.
This is to be achieved within a period five years after the date
of the 2020 AGM (or after the date of appointment for new
Executive Directors if this is later) from vested shares derived
from awards under the Company’s share plans.

Until this level is reached, Executive Directors who receive
shares by virtue of any share plan award or who receive
DSP awards are expected to retain 50% of the shares
received net (i.e. after income tax and national insurance
contributions). Shares which have not vested and are subject
to performance conditions will not count towards the
requirement. Unvested awards subject to service only
(e.g. DSP awards) will count towards the guideline on
a net of tax basis.

Post cessation shareholding requirement
The Group’s post-cessation shareholding requirement aligns the interests of Executive Directors with shareholders
over the longer term beyond their departure from the Group.

Maximum potential value
N/A

Performance measures
N/A

Practical operation
A post-cessation shareholding requirement, equal to the
employment shareholding requirement (or the shareholding
on departure if lower) applies for a two year period after
cessation of employment. For clarity, the post cessation
shareholding requirement is 250% of salary for the CEO
and for the other Executive Directors is 200% of salary.
In addition, shares vesting during this period will remain
subject to the two-year post-vesting holding period, which
may therefore extend beyond the two year period for which
the post-cessation shareholding requirement applies.

Shares purchased by the Executive Director (including those
from all employee share plans), will not be included.

Shares counting towards this requirement will not be
released from the Employee Benefit Trust during the period
in which the post-cessation shareholding requirement
applies, to support enforceability. Acceptance of the
post-cessation shareholding requirement will be a condition
of participation in all share awards granted, and will be
included in the grant documentation for awards.

Both Will Gardiner and Andy Skelton have entered into such
an agreement.

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Performance measures and approach to setting targets
The measures for elements of variable pay will be:

• In respect of the annual bonus plan, financial, strategic and operational measures consisting of targets set by the Committee
each year in conjunction with the Board. The targets are aligned with key business goals determined at the start of each year

• In respect of shares awards granted under the LTIP, targets typically relate to a combination of:

– Relative TSR, which aligns Executive Director remuneration with creation of long-term shareholder value;
– Cumulative Adjusted EPS, which aligns Executive Director remuneration with the realisation of our earnings growth plans,

which is a major determinant of shareholder value.

• The Committee sets targets for the performance measures each year, taking into account market conditions, the business

plan and other circumstances as appropriate. A summary of the measures that apply for the following year are disclosed in the
Annual Report on Remuneration.

• The Committee retains flexibility during the Policy period to change the weighting and choice of performance metrics

to better align with strategy as it evolves.

Circumstances in which malus or clawback may apply
The Committee may, at any time within two years of the LTIP and DSP vesting or annual bonus payment, determine that malus
and/or clawback provisions should be applied, in circumstances of:

• material financial misstatement;
• fraud or misconduct;
• material failure of risk management and corporate failure;
• if assessment of a performance condition is found to have been based on an error, inaccuracy or misleading information; and,
• in other circumstances that the Committee considers justifying the operation of the clawback provision.

Committee’s judgement and discretion
In addition to assessing and making judgements on the meeting of performance targets and the appropriate incentives payable,
the Committee has certain operational discretions it can exercise in relation to Executive Directors’ remuneration. These include,
but are not limited to the following and in all cases any use of discretion will align with the discretions afforded to the Committee
in the relevant plan rules:

• reviewing the formulaic outcome of the annual bonus, DSP and LTIP awards and applying discretion to amend the final

outcomes, to ensure that the outcomes reflect overall performance or an individual executive’s performance;

• deciding whether to apply malus or clawback to an award;
• determining whether a leaver is a “good leaver”; and
• determining the treatment of awards in the event of a change of control.

Where such discretion is exercised, it will be explained in the relevant Annual Report on Remuneration.

Drax Group plc Annual report and accounts 2022 141

Governance

Remuneration Committee report continued

Remuneration scenarios
The composition and value of the Executive Directors’ remuneration packages at below threshold (minimum), target and
maximum performance scenarios under the Drax Group Policy are set out in the charts below based on salary on projected
earnings for 2023 based on current salary. The assumptions used in the charts are provided in the following table:

Description
Minimum

Target

Maximum

Maximum
(with 50%
share price
appreciation)

Fixed remuneration
Base salary is the rate payable as
determined by the Committee
following the annual review.
Benefits and pension entitlement
remain as disclosed in the Policy.

Annual bonus
None

Long-term incentive
None

50% of the maximum opportunity.

Maximum cash bonus and deferred
shares (175% of salary for CEO and
150% of salary for other Executive
Directors).

62.5% vesting (midpoint between
threshold and maximum).
Maximum LTIP opportunity (200%
of salary for CEO and 175% of salary
for other Executive Directors) with no
allowance for share price appreciation
or dividend equivalents.

Maximum LTIP opportunity
(200% of salary for CEO and 175% of
salary for other Executive Directors)
with allowance for 50% share price
appreciation over the three-year
performance period and no allowance
for dividend equivalents.

Will Gardiner (CEO)
£000s

Andy Skelton (CFO)
£000s

Fixed remuneration
Annual bonus
Long-term incentive

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

£3,897

51%

£3,234

41%

36%

30%

23%

19%

£2,157

38%

27%

35%

£748
100%

Minimum

Target

Maximum

Maximum
(with 50%
share price
appreciation)

5000

4500

4000

3500

3000

2500

2000

1500

1000

500

£1,258
36%
25%
39%

£480
100%

£1,851
39%

34%

27%

£2,220
49%

28%

23%

Minimum

Target

Maximum

Maximum
(with 50%
share price
appreciation)

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Approach to recruitment remuneration
The Committee will apply the components of this Policy to determine the remuneration of newly appointed Executive Directors.
Base salary will be set at a level appropriate to the role and the experience of the Executive Director being appointed. Where this
is below the market level, it will be adjusted over time to align with the market level, subject to good performance.

A new Executive Director would be eligible to receive an annual bonus of up to 150% of salary, or 175% for a new CEO, in each
case with financial and strategic elements as set out in the Policy table above. In addition, a new Executive Director would
be eligible to receive an LTIP award of up to 175% of salary, or 200% in the case of a new CEO, (in exceptional circumstances the
Committee may on recruitment grant a percentage of salary in excess of these amounts but in such circumstances it would
be capped at 300% of salary).

The Committee may also determine it appropriate to honour prevailing contract commitments for an individual in the event
they are promoted to an Executive Director position.

In relation to Executive Directors appointed from outside the Group, where the Committee considers it to be necessary to secure
the appointment of the Executive Director, the Committee may:

• pay compensation for loss of benefits on resignation from a previous employer, or grant ‘buyout awards’ to replace awards or
amounts forfeited by a previous employer (subject to the right to phase any payment to reflect performance, the requirement
to mitigate loss and the Group’s right to clawback any amount which is subsequently paid to the Executive Director by the
former employer, and to claw back an appropriate proportion of the payment if the Executive Director leaves soon after
appointment). Any compensation or buyout award made will not exceed the value of the benefits, awards or amounts lost
as determined by the Committee acting fairly and reasonably. Any buyout award would have equivalent terms (including
vesting dates, performance conditions and malus/clawback provisions) to the original award it replaces. Where possible,
the Committee will use existing share-based plans to grant such awards. However, in the event that these are not appropriate,
the Committee retains the discretion to use the exception in Listing Rule 9.4.2 for the purpose of making an award
to compensate the individual for amounts forfeited upon leaving a previous employer;

• agree a rate for employer pensions contributions, or salary supplements in lieu of pension contribution, which reflects

the contribution rate for the wider workforce at the date of appointment;

• make appropriate payments in circumstances where an Executive Director is relocated from outside the UK; and,
• approve the inclusion in the Executive Director’s service contract of any terms required by mandatory law in the

jurisdiction where the Executive Director is resident.

Drax Group plc Annual report and accounts 2022 143

Governance

Remuneration Committee report continued

Service agreements and termination
Executive Directors’ service agreements are of indefinite duration, terminable at any time by either party giving 12 months’
notice. They are available for inspection at the Group’s registered office.

Element
Notice periods

Details
Executive Directors may be required to work during the notice period or may be provided with pay in lieu of notice
if not required to work the full notice period.

Compensation
for loss of office

Under each of the Executive Directors’ service agreements, the Group has the right to make a payment in lieu of
notice of termination, the amount of that payment being the salary and benefits that would have accrued to the
Executive Director during the contractual notice period. For the avoidance of any doubt this excludes any
performance bonus (or cash equivalent) for the relevant period of unworked notice.

If an Executive Director’s employment is brought to an end by either party, and if the Committee considers that
it is necessary to pay the Executive Director a termination payment, the Committee’s policy, in the absence of a
breach of the service agreement by the Executive Director, is to determine an Executive Director’s termination
payment in accordance with his/her service agreement. The termination payment will be calculated based on the
value of base salary and contractual benefits that would have accrued to the Executive Director during the
contractual notice period. The Committee will seek mitigation to reduce the amount of any termination payment
to a leaving Executive Director when appropriate to do so, having regard to the circumstances and the law
governing the agreement. It may, for example, be appropriate to consider mitigation if the Executive Director
has secured another job at a similar level. Mitigation would not apply retrospectively to a contractual payment
in lieu of notice.

In addition, the Executive Director may be entitled to a payment in respect of his/her statutory rights (including,
where necessary to comply with the mandatory laws of the jurisdiction in which the Executive Director is resident,
a remuneration payment or payment for loss of office in excess of the Executive Director’s pre-established
contractual terms). The Group may pay reasonable fees for a departing Executive Director to obtain independent
legal advice in relation to their termination arrangements and appropriate consideration for agreement to any
contractual terms protecting the Group’s rights following termination. Moreover, reasonable fees in respect
of outplacement support, insurance for a period following termination of office and repatriation assistance,
which may include relocation back and tax advisory support. No service agreement includes any provision
for the payment of compensation upon termination. Any compensation payable in those circumstances would
need to be determined at the time and in the light of the circumstances.

Element
Treatment of
annual bonus
on termination

Details
All bonus payments are discretionary. The Committee will consider whether a departing Executive Director should
receive a cash bonus and deferred share award in respect of the financial year in which, and/or immediately
preceding which, the termination occurs, pro-rated to reflect the period of the performance year completed to the
date on which the Executive Director ceases active service. The Committee will take into account performance;
the reason for termination; cooperation with succession; any breach of goodwill; adherence to contractual
obligations/restrictions; and any other factors which they believe should be taken into account. The service
contract for Will Gardiner as CEO, does not entitle him to any payment of bonus on termination of employment.

If the employment ends in any of the following circumstances, the Executive Director will be treated as a
“good leaver” and the Executive Director will be eligible for an annual bonus:

• redundancy;
• retirement;
• ill-health or disability, proved to the satisfaction of the Group; and,
• death.

If the termination is for any other reason, an award will be at the Committee’s discretion and it is the Committee’s
policy to ensure that any such award properly reflects the departing Executive Director’s performance and
behaviour towards the Group. Therefore the amount of any such award will be determined, taking into account
(i) the Executive Director’s personal performance and behaviour towards the Group and (ii) the Group’s performance.

If an award is made, it will normally be paid/granted as soon as is reasonably practicable after the Group
performance element has been determined for the relevant period. Any bonus award will be paid in such
proportions of cash and shares, and subject to such deferral arrangements as the Committee may determine.
There may be circumstances in which the Committee considers it appropriate for the award to be made earlier,
for example, on termination due to ill-health, in which case, on-target performance shall be assumed.

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Element
Treatment of
unvested long-
term incentive and
deferred share
awards on
termination

Details
The Committee will consider the extent to which deferred and conditional share awards held by the Executive
Director under the DSP and LTIP should lapse or vest. Any determination by the Committee will be in accordance
with the rules of the relevant plan.

In summary, the rules of the LTIP provide that awards will vest (pro-rated to the date of employment termination)
if employment ends for any of the following reasons (“long-term good leaver reasons”):

• redundancy;
• retirement;
• ill-health or disability, proved to the satisfaction of the Company;
• death; and,
• change of control.

If employment ends for any other reason, the participant may be deemed a “good leaver” at the Committee’s
discretion. In doing so, it will take account of all relevant circumstances, in particular, the Group’s performance;
the Executive Director’s performance and behaviour towards the Group during the performance cycle of the
relevant awards; and other relevant factors, including the proximity of the award to its maturity date.

Awards which vest subject to satisfaction of performance conditions, will be time pro-rated, and will ordinarily vest
on the normal vesting date subject to the post-vesting shareholding period.

The rules of the DSP provide that deferred bonus awards will vest (in full) if employment ends for any of the good
leaver reasons detailed above. If employment ends for any other reason, the participant may be deemed a “good
leaver” at the Committee’s discretion. In doing so it will take account of all relevant circumstances, in particular,
the Group’s performance; the Executive Director’s performance and behaviour towards the Group during the
performance cycle of the relevant awards, and a range of other relevant factors, including the proximity of the
award to its maturity date.

The rules of the DSP and LTIP also provide that in circumstances where awards vest, they do so at the normal
vesting date, unless the Committee exercises discretion to vest awards earlier. Vested LTIP awards will remain
subject to any post-vesting holding period unless the Committee exercises its discretion to allow for earlier release.

Outside
appointments

Executive Directors may accept external Board appointments, subject to the Chair’s approval. Normally only one
appointment to a listed company would be approved. Fees may be retained by the Executive Director.

Consideration of circumstances for leavers

The Committee will consider whether the overall value of any benefits accruing to a leaving Executive Director is fair and
appropriate, taking account of all relevant circumstances. Examples of circumstances in which the Committee may be minded
to award a cash bonus, DSP award and/or permit the vesting of LTIP and/or DSP awards include:

• the Executive Director’s continued good performance up to and following the giving of notice; and,
• the Executive Director accommodating the Company in the timing of his/her departure and handover arrangements.

Conversely, the Committee may be minded not to allow such payments if the reason for the departure is (for example)
due to poor performance or if the Executive Director does not continue to perform appropriately following notice.

Drax Group plc Annual report and accounts 2022 145

Maximum potential value
Overall aggregate fees paid
to all Non-Executive Directors
will remain within the limit
as stated in the Company’s
Articles (currently £1,000,000).

Governance

Remuneration Committee report continued

Remuneration of Non-Executive Directors and Chair

Remuneration component
and link to strategy
Fees
To attract a Chair and
independent Non-Executive
Directors who, together
with the Executive
Directors, form a Board
with a broad range of skills
and experience.

Benefits:
Reimbursed role-based
expenses incurred during
performance of the duties
of the role.

Travel allowance
To recognise the additional
time commitment
associated with travel
on Company business.

Practical operation
The Chair’s remuneration is determined by the Committee whilst that
of the other Non-Executive Directors is determined by the Chair and
the Executive Directors. These are determined in the light of:

• fees of the Chair and Non-Executive Directors of other listed

companies selected for comparator purposes, on the same basis
as for Executive Directors;

• the responsibilities and time commitment; and,
• the need to attract and retain individuals with the necessary skills

and experience.

Non-Executive Directors’ fees may be paid in GBP or the currency
of the location of the individual Non-Executive. Fees are reviewed
annually and will typically be increased by up to the rate of increase
awarded to the wider workforce.

Non-Executive Directors receive an annual base fee. Additional
annual fees are paid to the Senior Independent Director and Chair
of any Board Committees.

Non-Executive Directors are not entitled to participate in any pension
or performance related remuneration arrangements.

The Company will reimburse any reasonable travel and other
business related expenses incurred (e.g. support with the
completion of tax returns for international Non-Executive Directors)
and the related tax thereon, if applicable.

Set by reference to anticipated travel times and allowances provided
by FTSE 350 companies in similar circumstances.

A travel allowance may be structured as appropriate from time
to time, taking into account market practice, the location of the
Non-Executive Director and travel commitments, including but not
limited to an annual allowance, an allowance per meeting and
different allowances payable for Non-Executive Directors based in
different countries or continents.

Where travel allowances are paid, these will be disclosed.

The Chair’s notice period is six months whilst the other Non-Executive Directors have a notice period of one month. Further
information on the service agreements of the Non-Executive Directors can be found on page 152 of the Annual Report and Accounts.

Remuneration arrangements elsewhere in the Group
Wider employee population
In determining Executive Director remuneration, the Committee also takes into account the level of general pay increases within
the Group. Employees are not directly consulted on the Policy, but there are a number of existing channels designed to capture
the views of the workforce on remuneration, including the MyVoice forums.

The Committee’s policy is that annual salary increases for Executive Directors should not exceed the average annual salary
increase for the wider employee population unless there is a particular reason for a higher increase, such as a change in the
nature or scope of responsibilities or if an Executive Director has been appointed at a salary below market level reflecting
experience in the role.

The Committee also considers external market benchmarking to inform executive remuneration decisions. External market
benchmarking is also considered in relation to remuneration decisions of the wider workforce.

Environmental, social and governance issues
The Committee is able to consider corporate performance on environmental, social and governance issues when setting
the remuneration of Executive Directors. Specific measures can be included in the strategic element of the annual bonus.
The Committee is also able to consider these issues in determining whether to exercise its discretion to adjust formulaic
outcomes of the annual bonus and LTIP.

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Annual Report on Remuneration
The relevant sections of this Report have been audited as required by the Regulations and, in accordance with the Regulations,
this part of the Report will be subject to an advisory vote by shareholders at the AGM to be held on 26 April 2023.

Single total figure of remuneration – Executive Directors (audited information)
The table below sets out the single figure of remuneration and the breakdown for each Executive Director for the financial year
to 31 December 2022, together with comparative earnings for 2021. Figures are rounded up to the nearest £000.

Director

Will Gardiner

Andy Skelton

Year

2022
2021
2022
2021

Salary
(£000)

Benefits (1)
(£000)

Bonus(2)
(£000)

631
570
401
371

19
18
16
16

966
802
527
448

Long-Term
Incentives(3)
(£000)

3,636
1,722
2,073
1,154

Pension
(£000)

126
114
64
59

Other(4)
(£000)

Total
Remuneration
(£000)

Total
Fixed Pay
(£000)

Total
Variable Pay
(£000)

0
0
0
0

5,377
3,226
3,081
2,049

775
702
481
446

4,602
2,524
2,600
1,602

Notes:
(1) Benefits include car allowance, private medical insurance, life assurance and permanent health insurance.
(2) Bonus is the value of the award from the 2021 and 2022 annual bonus plans. It includes the value of bonus deferred and paid in shares after three years subject only

to continuous service. For 2021, 40% of the overall bonus was deferred and for 2022, 40% of the overall bonus will be deferred too.

(3) The 2022 numbers represent the value of the 2020 LTIP award which should vest in May 2023, together with the dividend equivalent shares in relation to those vested
shares. The value of the award is calculated based on the average share price over the last quarter of 2022, which was £5.798. The value of the award attributable
to share price appreciation for Will Gardiner is £2.38m and for Andy Skelton is £1.36m. This is based on the growth in the value of the shares due to vest (including
dividend equivalent shares) from the grant share price to the average share price over the last quarter of 2022 (£5.798). The 2021 number (for the 2019 PSP award)
are restated to reflect the actual share price on vesting of £7.706 on 28 March 2022.

(4) Other includes the value of Sharesave awards granted. Note no Sharesave awards were made in 2021 or 2022 as both Will Gardiner and Andy Skelton had maximum

contributions under contract.

Annual bonus outcome (audited information)
A summary of the Committee’s assessment in respect of the 2022 Group Scorecard is set out in the following table:

Key Performance Indicator

Weighting

Threshold

Target

Stretch

Outturn

Score
(out of 2)

Weighted
Score
(out of 2)

Plan Targets

Scoring

Financial

Group Adjusted EBITDA (£m)
Leverage (£m)

40.0%
20.0%

513
(1,145)

Strategic

UK BECCS

10.0%

Partially
Achieved

North America BECCS

Cruachan Expansion

5.0%

Partially
Achieved
Partially
Achieved

570
(1,041)

Achieved

Strongly
Achieved

Strongly
Achieved
Strongly
Achieved

627
(937)

731
(968)

ESG Dashboards

6.7%

Partially
Achieved

Achieved

Strongly
Achieved

Blueprint for Ultra-low Carbon
Pellet Mill
Inclusion Index

6.7%

6.7%
100%

Partially
Achieved
71%

Achieved

77%

Strongly
Achieved
83%

Overall bonus outcome adjusted for Safety (with -0.08 downward modifier applied):

1.75 (87.50% of maximum)

Proportion of total bonus award earned for Financial KPIs (pre-Safety modifier):
Proportion of total bonus award earned for Strategic KPIs (pre-Safety modifier):

62.30% (1.14/1.83)
37.70% (0.69/1.83)

Drax Group plc Annual report and accounts 2022 147

2.00
1.69

1.54

2.00

1.66

1.75

2.00

Between
Achieved &
Strongly
Achieved
Strongly
Achieved
Between
Achieved &
Strongly
Achieved
Between
Achieved &
Strongly
Achieved
Strongly
Achieved
80%

1.50
2022 Bonus Outturn:

1.14

0.69

1.83

Governance

Remuneration Committee report continued

The targets were aligned with the Group strategy and 2022 Business Plan and reviewed regularly by the Board as part of their ongoing
scrutiny of business and executive performance. No adjustment to the performance targets was made. Outlined below is a brief
synopsis of the Key Performance Indicators (KPIs) used and their strategic rationale.

• Group Adjusted EBITDA – was our principal financial metric, combining the underlying performance of each business to give a Group
outcome. Group Adjusted EBITDA for 2022 was £731 million relative to a stretch target of £627 million (score of 2.00). The outturn
of this metric was part of the Group’s independent financial audit.

• Leverage (Average Net Debt) – a progressive and sustainable structural reduction in debt is a key objective for the Group
with progress assessed against weighted average net debt targets measured within the financial year. Average net debt
was (£968) million which fell between the budget target and stretch target (score of 1.69). The outturn was adjusted for collateral
payments made to counterparties to ensure consistency with the target.

• Progress on Strategic Projects – progress on key projects is of critical importance for Drax in progressing the Group’s strategy.

There were three projects which were included in this metric. The first project was progress on advancing options for our UK BECCS
strategy. Significant progress was made in 2022 against the objectives set, across all critical path activities of our UK BECCS
strategy (score of 1.54). The second project was on progress of advancing our options for BECCS in North America. As noted
throughout this Annual Report, our ambitions for the deployment of new build BECCS across sites in North America are now
a key part of Drax’s long-term strategic aims (score of 2.00). Further information on the progress of our aims for UK BECCS
and BECCS in North America is detailed on page 16. The third project was on progress on advancing the expansion of the Cruachan
pumped storage power station. Significant progress was made on this project as well in 2022, as evidenced by the submission
of the S36 application to the Scottish Government and subsequent signing of a Grid Connection offer with National Grid ESO.
In addition, significant progress was made across other critical path activities (score of 1.66). The choice of projects, and assessment
of performance of them in 2022 was subject to the Committee’s scrutiny and approval.

• People, carbon reduction, and sustainability practices are a critical part of our values, vision and how Drax will create long-term
sustainable returns for shareholders. In 2022 the assessment of our carbon reduction aims was focused on the development
of a blueprint for an ultra-low carbon and particulate emissions pellet mill by the end of the year with learnings from this ready
to deploy for future projects (score of 2.00). This was combined with an independent rating of how included our colleagues feel
across the Group, which directly links bonus outcomes to positive cultural change and influencing behaviours which can benefit our
people and engender better organisational attitudes and initiates. The rating is derived through an all-employee survey administered
by a leading and globally recognised management consultancy. Drax’s score for 2022 was 2% above the energy and utilities sector
norm score (score of 1.50). In 2022 the assessment of our sustainable business practice was focused on the development of
and implementation of ESG dashboards across the Group. The intention of these dashboards was to provide visibility of data
on key metrics to the management teams at site and pellet mill level. These dashboards have now been implemented and insights
from them have already started to influence important decision making (score of 1.75).

The Committee completed an in-depth review of the score for each of the performance measures, to ensure that the result was
appropriate individually and in aggregate. The Committee believes that the outcome reflected the strong financial and strategic
performance of the Group, as well as wider employee and shareholder experiences. Discretion was exercised by the Committee
to reduce the formulaic outturn of the bonus to reflect safety performance in 2022 as described on page 128. The Committee
approved the Group Scorecard result for 2022 at a meeting held on 21 February 2023, subject to the final approval of the financial
results and Annual Report and Accounts by the Directors on 22 February 2023.

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Bonus earned for 2022 (audited information)
The table below sets out the bonuses earned for the 2022 financial year and the split between cash and deferred elements.

Director

Will Gardiner
Andy Skelton

Max bonus opportunity
(as % base salary)

Total bonus outcome
(as % of maximum)

Total bonus outcome
(as % base salary)

Total bonus outcome
(£000)

175%
150%

87.5%
87.5%

153.1%
131.3%

966
527

Amount paid
in cash
(£000)

Amount deferred
in shares
(£000)

579
316

386
211

For 2022, 40% of the total bonus award will be deferred into shares for a period of three years and the remaining 60% will be paid in
cash in March 2023. The deferral element will in ordinary circumstances vest in March 2026, subject to the Executive Director being
employed by Drax at that time. If the Executive Director leaves, other than as a “good leaver”, the deferral element will be forfeited.

LTIP incentive outcomes (audited information)
The vesting outcome for awards granted in 2020 under the LTIP, which were subject to performance conditions over the three-year
period from 1 January 2020 to 31 December 2022, and will vest in May 2023, is provided in the tables below.

Performance Condition

Relative TSR vs FTSE 350 constituents

Weighting

50%

Performance for
threshold vesting
(25% vesting)

Performance for
maximum vesting
(100% vesting)

Median Upper Quartile

Cumulative Adjusted EPS

50%

100.1p

117.5p

Actual
performance

158.9%
(rank of 5 out
of FTSE 350)
144.7p

The Committee considered the Group’s overall performance for 2022 and felt no discretion to the 2020 LTIP outcome was required.
A full explanation of factors which were taken into account is provided on page 129.

Director

Will Gardiner
Andy Skelton

Awards Granted
(as % of base salary)

Awards granted

Awards vesting
(as % of base salary)

200%
175%

562,506
320,697

577%
517%

Awards vesting

562,506
320,697

Dividend shares
earned

64,641
36,852

Total shares
due to vest

627,147
357,549

Total value
(£000)(1)

3,636
2,073

Notes:
(1) Represents the value of the 2020 LTIP award which should vest in May 2023, together with the dividend shares in relation to those vested shares. The value of the award

is calculated based on the average share price over the last quarter of 2022, which was £5.798. The value of the award attributable to share price appreciation for
Will Gardiner is £2.38m and for Andy Skelton is £1.36m. This is based on the growth in value of the shares due to vest (including dividend shares) from the grant share
price £1.995 to the average share price over the quarter of 2022 (£5.798).

Drax Group plc Annual report and accounts 2022 149

Governance

Remuneration Committee report continued

LTIP awards granted in 2022 (audited information)
The table below shows the conditional awards granted under the LTIP to Executive Directors on 18 March 2022.

Director

Will Gardiner
Andy Skelton

Award granted
(as % of salary)

200%
175%

Number of shares granted(1)

Face value of awards granted
(£000)

174,119
96,907

1,220
679

Note:
(1) The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £7.007. In accordance with the LTIP rules,

dividend shares are awarded at the time and in the event that awards actually vest. No dividend shares are awarded where the initial awards lapse.

The performance conditions that apply to the LTIP awards granted in 2022 are set out below.

Performance Condition

Relative TSR vs FTSE 350 constituents
Cumulative Adjusted EPS

Weighting

50%
50%

Performance for
threshold vesting
(25% vesting)

Performance for
maximum vesting (100%
vesting)

Median
239.5p

Upper Quartile
292.7p

Straight line vesting occurs between performance levels for both conditions. Performance for both conditions is measured over three
financial years to 31 December 2024.

DSP awards granted in 2022 (audited information)
The table below shows the deferred conditional share awards granted under the Deferred Share Plan (DSP) to Executive Directors
on 18 March 2022 in respect of bonus earned for performance in the financial year ending 31 December 2021. These shares
will vest on 18 March 2025.

Director

Will Gardiner
Andy Skelton

Value of deferred bonus
(£000)

Number of shares granted(1)

321
179

45,809
25,590

Note:
(1) The number of shares awarded was based on the average share price in the three-day period prior to grant, which was £7.007. In accordance with the DSP rules,

dividends in respect of the deferred shares are reinvested in additional shares, which vest when the deferred shares vest.

Sharesave options granted in 2022 (audited information)
No grants of Sharesave options were made to Will Gardiner or Andy Skelton in 2022. Both have ongoing Sharesave contracts to the
maximum permitted monthly savings.

Pension entitlements for defined contribution schemes (audited information)
Executive Directors are entitled to receive a contribution to the Group’s defined contribution pension plan, cash in lieu of pension
contributions or a mixture of these. The employer contribution for Will Gardiner in 2022 was 20% of base salary and for Andy Skelton
it was 16%. Will Gardiner’s employer contribution was delivered as cash in lieu of pension, whereas for Andy Skelton it was delivered
in part as contributions to Group pension plan and part as cash in lieu. No Executive Director was a member of a defined benefit
pension scheme.

Effective 1 January 2023 the employer pension contributions for Will Gardiner and Andy Skelton were reduced to 10% in line with
the rate for new joiners to the UK wider workforce. This is also the most common pension contribution rate for UK-based employees.

Payments to former directors (audited information)
There were no payments to former Directors.

Payments for loss of office (audited information)
There were no payments in 2022 to former Directors with respect to loss of office.

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Statement of Directors’ shareholding and share interests (audited information)
The shareholding guidelines under the current Directors’ Remuneration Policy require Executive Directors who receive shares
by virtue of share plan awards, or who receive deferred bonus share awards under the DSP, to retain 50% of the shares received net
(i.e. after income tax and national insurance contributions) until the value held is equal to at least 250% of salary for the CEO and 200%
of salary for other Executive Directors. Only shares that are not subject to performance conditions count towards the shareholding
requirement (shares owned by the Director and unvested awards subject to service only – DSP awards – on a net of tax basis).

As at 31 December 2022, the shareholding guidelines were met as detailed in the table below.

Directors’ interests in shares

Director
Will Gardiner(3)
Andy Skelton(4)

Number of shares(1)

Value at year end(2)

790,101
277,667

£5,554,410
£1,108,562

Shareholding
(as % of base salary)

Shareholding guideline

881%
487%

250%
200%

Notes:
(1) The number of shares also includes shares purchased in the open market by the Executive Director and those acquired through participation in Sharesave programmes.
(2) Based on the mid-market quotation on 31 December 2022 of £7.030.
(3) The total figure includes 693,375 shares owned, plus 96,726 unvested DSP shares on a net of tax basis. For reference, Will Gardiner purchased 338,105 shares in the

open market between 2015 and 2022 but sold 46,667 shares and gifted 61,345 to charity leaving a net balance of 230,093 shares

(4) The total figure includes 221,479 shares owned, plus 56,188 unvested DSP shares on a net of tax basis. 142,976 shares were purchased by Andy Skelton in the open

market between 2019 and 2022.

Directors’ interests under share plans

Director

Will Gardiner
2019 DSP
2019 PSP
2020 DSP
2020 LTIP
2020 Sharesave
2021 DSP
2021 LTIP
2022 DSIP
2022 LTIP
Total

Andy Skelton
2019 PSP
2020 DSP
2020 LTIP
2020 Sharesave
2021 DSP
2021 LTIP
2022 DSIP
2022 LTIP
Total

Date of grant

As at
1 January 2022

Awards made
during the year

Number of
shares vesting
during
the year

Number of
shares lapsing
during
the year

As at
31 December
2022

Date of vesting(1)

Value of
awards(2)

28 March 2019
28 March 2019
30 March 2020
7 May 2020
15 April 2020
1 April 2021
1 April 2021
18 March 2022
18 March 2022

28 March 2019
30 March 2020
7 May 2020
15 April 2020
1 April 2021
1 April 2021
18 March 2022
18 March 2022

38,941
247,245
82,195
562,506
23,603
54,498
266,650
0
0
1,275,638

165,607
49,985
320,697
23,603
30,441
152,022
0
0
742,355

0
0
0
0
0
0
0
45,809
174,119
219,928

0
0
0
0
0
0
25,590
96,907
122,497

38,941
191,071
0
0
0
0
0
0
0
230,012

127,981
0
0
0
0
0
0
0
127,981

0
56,174
0
0
0
0
0
0
0
56,174

37,626
0
0
0
0
0
0
0
37,626

562,506
23,603
54,498
266,650

0 28 March 2022
0 28 March 2022
82,195 30 March 2023

£0
£0
£577,831
7 May 2023 £3,954,417
£135,930
1 June 2025
£383,121
1 April 2024
1 April 2024 £1,874,550
45,809 18 March 2025
£322,037
174,119 18 March 2025 £1,224,057
407,407 £8,471,942

1,209,380

0 28 March 2022
49,985 30 March 2023

£0
£351,395
7 May 2023 £2,254,500
£135,930
1 June 2025
1 April 2024
£214,000
1 April 2024 £1,068,715
£179,898
£681,256
£4,885,693

320,697
23,603
30,441
152,022

699,245

25,590 18 March 2025
96,907 18 March 2025

Notes:
(1) The vesting date shown reflects the three-year anniversary, but the Committee reserves the right to change the vesting date by a period not exceeding 30 days.
(2) Based on the mid-market quotation on 31 December 2022 of £7.030. For Sharesave options, this is the intrinsic value, e.g. based on the excess value at 31 December

2022 over and above the exercise price.

There was one movement in share interests between 31 December 2022 and the last practicable date for recording changes prior to
the date of publication. On 23 February 2023 Andy Skelton, CFO, purchased 13,246 shares, and Andy’s Person Closely Associated,
Nichola Skelton, purchased 6,244 shares, taking Andy’s total interest in shares to 297,157.

Drax Group plc Annual report and accounts 2022 151

Governance

Remuneration Committee report continued

Service agreements or contracts for services
The following table shows, for each Director of the Company as at the date this Annual Report and Accounts is published, or those
who served as a Director of the Company at any time during the year ended 31 December 2022, the start date and term of the service
agreement or contract for services, and details of the notice periods. A new contract for services was agreed with John Baxter in 2022.

Director

Will Gardiner
Andy Skelton
Philip Cox
John Baxter
Nicola Hodson
Kim Keating
David Nussbaum
Erika Peterman
Vanessa Simms

Date appointed as a director
and member of the Board

Contract start date/
renewal date

Permitted Contract
term (years)

Notice period
by the Company
(months)

Notice period
by the Director
(months)

16 November 2015
2 January 2019
1 January 2015
17 April 2019
12 January 2018
21 October 2021
1 August 2017
21 October 2021
19 June 2018

16 November 2015
2 January 2019
1 January 2021
17 April 2022
12 January 2021
21 October 2021
1 August 2020
21 October 2021
19 June 2021

Indefinite term
Indefinite term
3 years
3 years
3 years
3 years
3 years
3 years
3 years

12
12
6
1
1
1
1
1
1

Relative importance of spend on pay
The table below illustrates the relative importance of spend on pay compared to distributions to shareholders. At the AGM on the
26 April 2023 the Board will recommend to shareholders that a resolution is passed to approve payment of a final dividend for
the year ended 31 December 2022. The cost with respect to dividends for 2022 in the table below relates to the interim dividend,
which was paid in October 2022, and the final dividend to be paid in May 2023, subject to approval at the AGM.

Remuneration – 2022

Remuneration – 2021

£255.8m

£227.7m

Dividends – 2022

£84.0m

Dividends – 2021

£75.0m

£50m

£100m

£150m

£200m

£250m

£300m

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Drax 10 year Total Shareholder Return performance to 31 December 2022
The graph below shows how the value of £100 invested in both Drax and the FTSE 350 Index (Index) on 31 December 2012 has
300
changed. This Index has been chosen as a suitable broad comparator against which Drax’s shareholders may judge their relative
returns given that Drax is a member of the Index. The graph reflects the TSR for Drax and the Index referred to on a cumulative
250
basis over the period from 31 December 2012 to 31 December 2022.

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200

150

100

Dec 12

Dec 13

Dec 14

Dec 15

Dec 16

Dec 17

Dec 18

Dec 19

Dec 20

Dec 21

Dec 22

Drax

FTSE 350

CEO’s pay – last 10 financial years

Year

Group CEOs total
single figure (£000)
Bonus % of
maximum awarded
LTIP award % of
maximum vesting

2013

2014

2015

2016

2017

2018

3,360

1,854

1,248

1,581

1,236

1,885

2019

1,121

2020

2021

2,013

3,226

2022

5,377

100.00% 73.00% 46.00% 88.00% 53.00% 53.00% 45.00% 45.00% 80.50% 87.50%

– 40.52% 21.66% 15.43% 0.00% 57.63% 18.00% 57.20% 77.28% 100.00%

Percentage change in Directors’ remuneration compared with the wider employee population
The table below shows how the percentage change in the Directors’ salary/fees, benefits and bonus (where applicable) between
2020 and 2022 compares with the percentage change in the average of each of those components of pay for a group of employees.
There are several employer entities but no employees who are specifically employed by Drax Group plc. As a result, the Committee
has selected all Group employees below Executive Director level based in the UK, as the majority of employees are based in the UK
and this provides the most appropriate comparison.

Will Gardiner
Andy Skelton
Philip Cox
John Baxter
Nicola Hodson
Kim Keating(4)
David Nussbaum
Erika Peterman(4)
Vanessa Simms
Average for UK employees

Salary/fees
(percentage increase)

Taxable benefits
(percentage increase)

Bonus
(percentage increase)

2020

3.0%
3.0%
0.0%
0.0%
0.0%
N/A
0.0%
N/A
0.0%
3.0%

2021

2.0%
2.0%
2.0%
2.0%
2.0%
N/A
2.0%
N/A
2.0%
2.0%

2022

10.7%
8.1%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%
4.5%

2020

0.0%
0.0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.0%

2021

0.0%
0.0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.0%

2022(1)

0.0%
0.0%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.0%

2020(2)

19.2%
9.4%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
0.0%

2021

82.9%
82.9%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
78.9%

2022(3)

20.3%
17.5%
N/A
N/A
N/A
N/A
N/A
N/A
N/A
8.7%

Notes:
(1) With respect to taxable benefits, there has been no material change to Drax’s existing benefits policies over the three reporting years.
(2) The maximum bonus opportunity for Will Gardiner and Andy Skelton increased for 2021 to 175% and 150% respectively, which explains the percentage difference
compared to UK colleagues. The bonus scorecard outcome for 2019 and 2020 was the same and this is reflected in the 0% change for the average UK employee.
(3) The percentage change for 2022 shows an increase from 2021. This is because the bonus scorecard outcome for 2022 (1.75) is higher than it was for 2021 (1.61).

Both Will Gardiner and Andy Skelton received higher base pay increases in 2022 than the average UK employee reflective of the changes to the business and therefore
their bonus change for 2022 is larger when compared to the average UK employee.

(4) Kim Keating and Erika Peterman joined the Board on 21 October 2021 and therefore the percentage change in their fees has not been provided for 2020 and 2021.

Drax Group plc Annual report and accounts 2022 153

Governance

Remuneration Committee report continued

CEO pay ratio
The table below sets out the CEO pay ratio for 2022, along with the comparative ratios since 2019. The pay ratios have been
calculated using actual earnings for the CEO and UK employees. The CEO total single figure remuneration is given on page 147
of this report.

Financial Year

2022
2021
2020
2019

Methodology

Option A
Option A
Option A
Option A

25th Percentile
Pay Ratio (P25)

50th Percentile
Pay Ratio (P50)

75th Percentile
Pay Ratio (P75)

114:1
84.1
65:1
42:1

79:1
52:1
38:1
25.1

57:1
34.1
25:1
16.1

The methodology used for calculating the 2019, 2020, 2021 and 2022 pay ratios was the same. For 2022, the total remuneration of all
UK employees of the Group on 31 December 2022 has been calculated on a full-time (and full-year) equivalent basis using the single
figure methodology and reflects their actual earnings for 2022. The only exception is for employees with Defined Benefit (DB)
pensions, where the employer contribution to the respective schemes has been used in the calculation (rather than the single figure
methodology) to reduce the administrative complexity. This is likely to undervalue the DB pension value. No adjustments, other than
to achieve full-time and full-year equivalent rates, were made and no components of remuneration have been omitted. Of the three
options permitted to calculate the percentiles, the Committee has chosen option A (the calculation of the total pay and benefits
for 2022 for all UK employees on an FTE basis), as we believe it is the most robust and most statistically accurate method of the
options permitted.

Set out in the table below is the base salary and the total pay and benefits for each of the identified employees in respect of 2022.

Element

Base Salary
Total Pay and Benefits

25th Percentile (P25)

50th Percentile (P50)

75th Percentile (P75)

£23,358
£47,370

£36,697
£68,326

£52,825
£94,770

Base salaries of all employees, including Executive Directors, are set with reference to a range of factors including market practice,
experience and performance in role. The CEO has a larger portion of his pay based on performance of the business than the individuals
at P25, P50 and P75. The Committee believe that our senior executives should have a significant portion of their pay directly linked
to the performance of the business but recognise that this does mean the pay ratios will fluctuate each year depending on business
performance and associated outcomes of incentive plans.

The 2022 pay ratios report a wider gap between actual earnings of the CEO and UK employees (than compared to the 2019, 2020
and 2021 CEO pay ratios). This is ultimately due to the higher vesting of the 2020 LTIP versus the vesting of the 2019, 2018 and 2017
PSP awards (100% versus 77.28%, 57.2% and 18.0% respectively). To a lesser extent, this is also driven by the higher Scorecard
outcome for 2022 than in the previous years in the sample (1.75 versus, 1.61, 0.90 and 0.90).

The Group is comprised of different business units and teams with different levels of pay, including call centre staff, support staff
and engineers. The Committee reviews information about employee pay, reward and progression policies of the Group and (given the
relative differences in responsibilities of the roles, the pay relativities between grades within the organisation, and the positioning
of pay versus the wider market) is comfortable that the median pay ratio is consistent with these policies.

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Single total figure of remuneration – Non-Executive Directors (audited information)
The fees for the Chair and Non-Executive Directors were reviewed at the start of 2022 and were subsequently increased by 4.5% with
effect from 1 January 2022. This was aligned with the average increase for the wider workforce in 2022. For completeness, the table
below sets out the single figure of remuneration and breakdown for each Non-Executive Director for 2022 together with comparative
figures for 2021. The figures are rounded up to the nearest £000.

Director

Philip Cox

John Baxter

Nicola Hodson

Kim Keating(1)

David Nussbaum(2)

Erika Peterman(3)

Vanessa Simms

Year

2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021
2022
2021

Base fee
(£000)

Additional fee for
Senior Independent
Director
(£000)

Additional fee for
Chairing a Committee
(£000)

267
255
59
56
59
56
59
11
59
56
59
11
59
56

–
–
–
–
–
–
–
–
11
10
–
–
–
–

–
–
–
–
11
10
–
–
–
–
–
–
11
10

Total
(£000)

267
255
59
56
70
66
59
11
70
66
59
11
70
66

Notes:
(1) Kim Keating joined the Board on 21 October 2021. The 2021 payments show pro-rated payments made. Kim is based in Canada and her fee was paid in Canadian dollars.

Her base fee was in line with the fee structure in the Policy and was converted into Canadian dollars based on the exchange rate £1 = C$1.72.

(2) From 1 January 2019 to 31 March 2022, David Nussbaum donated his gross fees to charity.
(3) Erika Peterman joined the Board on 21 October 2021. The 2021 payments show pro-rated payments made. Erika is based in the US and her fee was paid in US dollars.

Her base fee was in line with the fee structure in the Policy and was converted into US dollars based on the exchange rate £1=$1.37.

Non-Executive Directors’ shareholdings
There is no shareholding requirement for Non-Executive Directors. The table below shows the shareholdings of the Non-Executive
Directors, and their connected persons, and the value is based on the mid-market quotation on 31 December 2022 of £7.030.
There was no movement in share interests between 31 December 2022 and the date of publication.

Director

Philip Cox
John Baxter
Nicola Hodson
Kim Keating
David Nussbaum
Erika Peterman
Vanessa Simms

Number of shares

Value at year end

60,000
10,000
0
0
0
0
0

£421,800
£70,300
£0
£0
£0
£0
£0

Drax Group plc Annual report and accounts 2022 155

Governance

Remuneration Committee report continued

Statement of Implementation of the Remuneration Policy in 2023
This section sets out the proposed implementation of the Directors’ Remuneration policy in 2023. No deviations from the procedure
for the implementation of the policy are proposed.

Base Salary
Below are the base salaries of the Executive Directors which took effect from 1 January 2023. There are no further planned increases
for 2023. The base salary increase in January 2023 was 4.0% and this was made as part of the annual pay review process.
This increase was less than the average increase for the wider workforce. A more thorough explanation on the pay increase is given
on page 130 which also outlines the decision to bring forward the effective date of the 2023 pay review from 1 April to 1 January.

Will Gardiner
Andy Skelton

Base Salary
as at 1 April 2022
(£000)

Base Salary
as at 1 January 2023
(£000)

£638
£406

£663
£422

Percentage
increase

4.0%
4.0%

Benefits and pension
There are no changes intended to the benefits provided to the Executive Directors. The pension contribution rate for Will Gardiner
reduced from 20% to 10% and for Andy Skelton reduced from 16% to 10%, effective 1 January 2023. The purpose of this change
was to align their pension contribution rate with the applicable rate for new joiners to the UK wider workforce.

Annual bonus
The Group Scorecard metrics for 2023 are shown below. The performance targets for the scorecard are commercially sensitive
therefore protective disclosure would not be in the best interest to stakeholders. The outcome of the 2023 scorecard will be disclosed
in the 2023 Annual Report on Remuneration.

Target

Reason for use

Financial metrics (overall weighting of 60% in the Scorecard)

Group adjusted EBITDA
(40% weighting)
Leverage
(20% weighting)
Strategic metrics (overall 40% weighting in the Scorecard)

Adjusted EBITDA is our principal financial metric, combining the underlying performance of each
business to give a Group outcome.
A progressive and structural reduction in debt is a key objective for the Group with progress
assessed against weighted average net debt targets measured within the financial year.

Progress on strategic projects
(20% weighting)

Safety and ESG
(20% weighting)

This element of the Scorecard will be assessed on progress against three key strategic imperatives.
The first is a KPI based on progress made on BECCS, both in respect to advancing our roadmap for
the implementation of BECCS at Drax Power Station and the deployment of new build BECCS in
the US. The second KPI focuses on the expansion of the Cruachan pumped storage power station.
Performance will be assessed against a range of technical and commercial milestones. The third
KPI focuses on the delivery of the stretching budget volume growth in 2023 of our pellet
production.
Safety and ESG are a critical part of our values and how Drax will create long-term sustainable
returns for shareholders. This element of the Scorecard will be assessed against three facets.
The first is a KPI focused on improving inclusion across Drax, assessed based on an independent
rating. This KPI was included in the prior year Scorecard. The second KPI is focused on reducing
Drax’s carbon emissions across the Group and at a site level. Finally, a safety KPI is re-introduced
to the Scorecard providing a holistic view of the Group’s safety performance.

LTIP
The Committee intends to grant LTIP awards to Executive Directors of 200% of salary for the CEO and 175% of salary for the CFO.

For the TSR element, performance will be assessed versus the constituents of the FTSE 350 with threshold vesting (25% of maximum)
for performance in line with the median and maximum vesting for performance in line with upper quartile. TSR performance will be
measured over the period 1 January 2023 to 31 December 2025.

For the EPS element, targets for the 2023 grant have been agreed by the Committee at the meeting in February. The EPS target was set
after considering the company’s internal forecasts, market expectations and sector peers. The EPS target is ‘Adjusted EPS’, derived from
Adjusted Results as reported in the Company’s audited financial statements. Instances where such adjustments might apply include
acquisition and restructuring costs, asset obsolescence charges and certain remeasurements on derivative contracts. EPS performance
will be measured over the period 1 January 2023 to 31 December 2025 and vesting will be in accordance with the following schedule.
Note, vesting between the threshold and maximum will be on a straight-line basis. The Committee will undertake a final review of the
proposed grants for the 2023 financial year, including the performance targets, immediately prior to making the grant in order, where
necessary, to reflect changes to market conditions. This recognises current market volatility.

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Performance

Below threshold
Threshold
Maximum

Target

<322.8p
322.8p
394.6p

% of Award Vesting
(of EPS performance condition)

0%
25%
100%

With regards to targets set in 2023 for each of the performance related incentives, the Committee retains discretion to restate or
make adjustment to those targets in appropriate circumstances (such as material acquisitions, divestments, changes in capital
structure or capital returns to shareholders). This would take account of the importance of such performance targets fulfilling their
original intent and that they are not more or less challenging than intended when set and of relevant events in the performance period.
Any amendments would be disclosed in the Remuneration Report at the relevant time.

Non-Executive Directors’ fees
The annual fee structure for the Non-Executive Directors for 2023 is shown in the table below. The fee structure for 2022 is also
provided for reference. The increase in base fee for the Chair and Non-Executive Directors is consistent with the increase that the
Executive Directors received as part of the 2023 annual pay review process (which was less than the average increase of the wider
workforce of 8%). Following an exercise with the Committee’s independent adviser, it was identified that the additional fees were
significantly below market rate given the current and expected future time commitment of the roles. The proposed increase to the
additional fees is to bring them in line with the median of constituents of the FTSE 250 of a similar size to Drax. As outlined in the
Policy, subject to shareholder approval, flexibility will be introduced to provide a travel allowance to recognise the additional time
and expenses incurred by non-executives based overseas in providing services to a UK based listed company.

Director

Chair
Non-Executive Director base fee (1)
Senior Independent Director
Audit Committee Chair
Remuneration Committee Chair
Nomination Committee Chair(2)

Fees at
1 January 2022
(£)

Fees at
1 January 2023
(£)

Percentage
increase
(1 January 2023)

266,500
58,600
10,660
10,660
10,660
7,995

277,250
61,000
12,750
12,750
12,750
12,750

4.0%
4.1%
19.6%
19.6%
19.6%
59.5%

Notes:
(1) The 2023 fees for the two Non-Executive Directors based outside of the UK will be paid in their respective local currency.
(2) No fee was is currently paid for chairing this sub-Committee as the Chair is also the Nomination Committee Chair.

Shareholder voting
The table below shows the voting outcome at the 2022 AGM on the 2021 Annual Report on Remuneration. The votes cast represent
80.92% of the issued share capital. In addition, shareholders holding 2,325,760 shares abstained.

Voting on the 2021 Annual Report on Remuneration

Number of votes
Proportion of votes

For

314,846,755
97.20%

Against

9,078,526
2.80%

The table below shows the voting outcome for the Directors’ Remuneration Policy at the 2020 AGM. The voting for the Directors’
Remuneration Policy for 2023-2026 will take place at the AGM to be held on 26 April 2023.

Voting on the 2020-2023 Annual Report on Remuneration

Number of votes
Proportion of votes

For

Against

304,206,978
94.61%

17,334,456
5.39%

Adviser to the Committee
Until 24 May 2022, PwC were the adviser to the Committee. PwC is an independent adviser appointed by the Committee in October
2010. PwC were paid £18,700, excluding VAT, during 2022 in respect of advice given to the Committee determined on a time and
material basis. As noted in last year’s report, the Committee began a review of its independent adviser and on conclusion appointed
Korn Ferry as the new adviser to the Committee. This appointment took effect on 25 May 2022. Korn Ferry were paid £108,360,
excluding VAT, during 2022 in respect of advice given to the Committee determined on a time and material basis. Both PwC and
Korn Ferry are members of the Remuneration Consultants Group and are signatory to its Code of Conduct. The Committee
has satisfied itself that the advice it received from PwC and Korn Ferry was, and remains, objective and independent. Korn Ferry has
no other connection with the company or individual Directors, and Korn Ferry has confirmed that there are no conflicts of interest,
as has PwC for the period of 2022 where they were the adviser to the Committee.

This report was reviewed and approved by the Remuneration Committee.

Nicola Hodson
Chair of the Remuneration Committee
22 February 2023

Drax Group plc Annual report and accounts 2022 157

Governance

Directors’ report

This report contains information which the Company is obliged to disclose and which cannot be found in the strategic, financial,
sustainability or corporate governance reports of this document.

The Directors present their Annual Report on the affairs of the Group, together with the financial statements and Auditor’s report
for the year ended 31 December 2022. The Directors’ report required under the Companies Act 2006 is comprised of this report,
the Corporate Governance Report and the Audit, Nomination and Remuneration Committee reports.

Information about the use of financial instruments by the Company and its subsidiaries is given in note 7.1 to the Consolidated financial
statements on page 252.

Directors
The following Directors held office during the year:

Philip Cox
Will Gardiner
Andy Skelton
David Nussbaum Erika Peterman
Nicola Hodson

Vanessa Simms
John Baxter
Kim Keating

The appointment and replacement of Directors is governed by the Company’s Articles of Association (Articles), the UK Corporate
Governance Code, the Companies Act 2006 and related legislation. See Articles 77 to 86 of the Company’s Articles, available
on the Company’s website at www.drax.com/about-us/corporate-governance/compliance-and-policies/.

Annual General Meeting (AGM)
The AGM will be held at 12.30pm on Wednesday 26 April 2023 at etc.venues St Paul’s, 200 Aldersgate, London EC1A 4HD. A separate
document contains the notice convening the AGM and includes an explanation of the business to be conducted at the meeting.

Dividends
An interim dividend of 8.4 pence per share was paid on 7 October 2022 (2021: 7.5 pence), to shareholders on the register
on 26 August 2022.

The Directors propose a final dividend of 12.6 pence per share (2021: 11.3 pence), which will, subject to approval by shareholders
at the AGM, be paid on 19 May 2023, to shareholders on the register on 21 April 2023.

Details of past dividends can be found on the Company’s website at www.drax.com/investors/shareholder-information/dividends/.

Share capital
Drax Group plc has a Premium Listing on the London Stock Exchange and currently trades as part of the FTSE 250 Index,
under the symbol DRX and with the ISIN number GB00B1VNSX38.

The Company has only one class of equity shares, being ordinary shares of 1116⁄29 pence each, with each ordinary share having
one vote. Shares held in treasury do not carry voting rights.

Details of movements in the Company’s issued share capital can be found in note 4.4 to the Consolidated financial statements
on page 229.

Shares in issue

At 1 January 2022
Issued in period
At 31 December 2022
Treasury shares at 31 December 2022
Total voting rights at 31 December 2022
Issued between 1 January and 22 February 2023
At 22 February 2023
Treasury shares at 22 February 2023
Total voting rights at 22 February 2023

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413,068,027
1,804,464
414,872,491
13,841,295
401,031,196
38,131
414,910,622
13,841,295
401,069,327

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Authority to purchase own shares
At the AGM held on 27 April 2022, shareholders authorised the Company to make market purchases of up to 10% of the issued
ordinary share capital. At the 2023 AGM, shareholders will be asked to renew the authority to make market purchases of up to 10%
of the issued ordinary share capital. More details on resolution 20 can be found in the Notice of Meeting. During 2022, the Directors
did not use their authority to purchase shares in the Company.

Interests in voting rights
Information provided to the Company in accordance with the Financial Conduct Authority’s Disclosure and Transparency Rules (DTR)
is published in a timely manner on the London Stock Exchange’s Regulatory News Service – a Regulatory Information Service – and
on the Company’s website.

As at 22 February 2023, the following information had been received in accordance with DTR5 from holders of notifiable interests
in the voting rights of the Company. The information provided below was correct at the date of notification. However, investors are
only obliged to notify the Company when a notifiable threshold is crossed and therefore it should be noted that the holdings below
may have changed but without crossing a threshold.

Invesco Limited
Schroders plc
BlackRock Inc
Orbis Holdings Limited

Date last
notification
made

Number of
voting rights
directly held

22 Oct 2020
29 Jun 2021
17 May 2022
15 Jul 2022

–
–
–
–

Number of
voting rights
indirectly held

38,578,024
38,333,806
30,287,345
19,744,793

Number of
voting rights
in qualifying
financial
instruments

–
67,765
439,227
–

Total number
of voting
rights held

% of the issued
share capital
held (1)

38,578,024
38,401,571
30,726,572
19,744,793

9.71%
9.64%
7.66%
4.93%

Notes:
(1) As at the date of the last notification made to the Company by the investor, in compliance with DTR.

Rights and obligations attaching to shares
The rights attaching to the Company’s Ordinary Shares are set out in the Articles, available on the Company’s website at
www.drax.com/about-us/corporate-governance/compliance-and-policies/. The Articles may only be changed by shareholders
by special resolution.

Attention should be given to the following sections within the Articles, covering the rights and obligations attaching to shares:

• Variation of rights – which covers the rights attached to any class of shares that may be varied with the written consent of the

holders of not less than three-quarters in nominal value of the issued shares of the relevant class (excluding any shares of that class
held as treasury shares), or with the sanction of a special resolution passed at a separate General Meeting of the holders
of shares of the class duly convened and held in accordance with the Companies Act.

• Transfer of shares – provides detail of how transfers of shares may be undertaken. It also sets out the Directors’ rights of refusal
to effect a transfer and the action that Directors must take following such refusal. It should be noted that a shareholder does not
need to obtain the approval of the Company, or of other holders of shares in the Company, for a transfer of shares to take place.
• Voting, deadlines and proxies – these sections of the Articles deal with voting on a show of hands and on a poll. They also cover the
appointment of a proxy or corporate representative. In respect of appointment of a proxy or corporate representative, the Articles
provide for the submission of proxy forms not less than 48 hours (or such shorter time as the Board may determine) before the time
appointed for the holding of the meeting. It has been the Company’s practice since incorporation to hold a poll on every resolution
at Annual General Meetings and General Meetings.

Disabled employees
The Company gives full consideration to applications for employment by disabled persons, bearing in mind the aptitudes of the
applicant concerned. In the event of employees becoming disabled, every effort is made to ensure that their employment with
the Group continues, and that appropriate training is arranged. It is the policy of the Group that the training, career development and
promotion of disabled persons should, so far as possible, be identical to that of other employees.

Drax Group plc Annual report and accounts 2022 159

Governance

Directors’ report continued

Political donations
Drax is a politically neutral organisation and, as further explained below, did not make any political donations or incur any political
expenditure (within the ordinary meaning of those words) in 2022. The Company regularly engages with regulators and policymakers
(including those associated with political parties and governments) to listen and contribute to discussions on a wide range of matters.
Such engagement is an important part of our strategy and contributing to initiatives enabling the UK in its goal of reaching net zero by
2050. Further information on how we engage with stakeholders can be found on pages 26 to 33, and our Political Engagement Policy
can be found on the Company’s website at: www.drax.com/about-us/corporate-governance/compliance-and-policies/drax-political-
engagement-policy/. Due to the broad definition of political donations under the Companies Act 2006 (the Act),and as a matter of good
governance and transparency, we have provided information on areas of expenditure incurred as a result of this engagement which
may be regarded as falling within the scope of the Act. During the year ended 31 December 2022, Drax exhibited at, sponsored, and
held events at, conferences organised by political parties, spending a total of £94,572 (2021: £75,925). This included sponsorship of
events at the Labour Party business conference (£12,000) and the Yorkshire and the Humber Labour Party annual conference
(£12,000), and hiring exhibition stands at the Conservative Party annual conference (£45,377) and Scottish National Party annual
conference (£10,495). These events allow Drax to present its views on a non-partisan basis to politicians from across the political
spectrum and non-political stakeholders such as NGOs and other listed and non-listed companies. These payments do not indicate
support for any political party. Overall, the recipients were the Conservative Party (£57,977), the Labour Party (£26,100) and the
Scottish National Party (£10,495).

At the 2023 AGM, Drax will be seeking renewal from shareholders of the existing authority approved at the 2022 AGM. More details
are contained in the Notice of Meeting.

Other significant agreements
• A £300 million facility agreement dated 20 December 2012 (as amended and restated on 10 December 2015 and 21 April 2017,
as further amended and restated on 18 November 2020 and as further amended and restated on 14 September 2021) between,
amongst others, Drax Corporate Limited and Barclays Bank PLC (as facility agent) (the Facility Agreement).

• An indenture dated 26 April 2018 (as amended and supplemented from time to time, including by a supplemental indenture dated
12 February 2019 and a supplemental indenture dated 16 May 2019) between, amongst others, Drax Finco plc and BNY Mellon
Corporate Trustee Services Limited (as Trustee) governing $500 million 6.625% senior secured notes due November 2025 (the 2018
Indenture).

• An indenture dated 4 November 2020 between, amongst others, Drax Finco plc and BNY Mellon Corporate Trustee Services

Limited (as Trustee) governing €250 million 2.625% senior secured notes due 2025 (the 2020 Indenture and, together with the 2018
Indenture, the Indentures).

• A £375 million term loan facilities agreement dated 24 July 2019 between, amongst others, Drax Corporate Limited and Banco

Santander S.A., London Branch (as facility agent) as amended and restated on 20 September 2021 (the ‘2019 Private Placement’).
• A £98 million and €126.5 million term loan facilities agreement dated 18 August 2020, amongst others, Drax Corporate Limited and

Banco Santander S.A., London Branch (as facility agent) as amended and restated on 21 September 2021 (the 2020 Private
Placement).

• A loan facilities agreement dated 12 July 2021 between, amongst others, Pinnacle Renewable Energy Inc. and Royal Bank of Canada

(as facility agent) which includes a C$300 million term loan facility and C$10 million revolving credit facility
(2021 Facility Agreement).

• A £200,000,000 revolving credit facility agreement dated 9 December 2022 made between amongst others Drax Corporate Limited

and Lloyds Bank plc as facility agent (the 2022 RCF Agreement).

Under the Indentures, a change of control (a Notes Change of Control) occurs if any person other than Drax Group plc becomes the
ultimate beneficial owner of more than 50% of the voting rights of Drax Group plc’s direct subsidiary, Drax Group Holdings Limited
(unless replaced by a successor parent company), or else if all or substantially all of the assets of Drax Group Holdings Limited are
disposed of outside of the Group. No later than 60 days after any change of control, Drax Group Holdings Limited must offer to
purchase any outstanding notes at 101% of the principal amount of such notes plus accrued interest and other unpaid amounts.

Under the Facility Agreement, the 2019 Private Placement, the 2020 Private Placement, the 2021 Facility Agreement, and the 2022
RCF Agreement, a change of control occurs if any person or group of persons acting in concert gains control of Drax Group plc
or if Drax Group plc no longer holds directly 100% of the issued share capital of Drax Group Holdings Limited (subject to carve-outs
for the interposition of an intermediate holding company) or else if a Notes Change of Control occurs. Following a change of control,
if any lender requires, it may by giving notice to the relevant Group entity within 30 days of receiving notice from such Group entity
that a change of control has occurred, cancel its commitments and require the repayment of its share of any outstanding amounts
within three business days of such cancellation notice being given.

Further information in respect of the Group’s financial risk management programme (including commodity risk, foreign currency risk,
interest rate risk, inflation risk, liquidity risk, and credit risk) appears in note 7.2 to the Consolidated financial statements on page 257.

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Directors’ interests and indemnity arrangements
Other than a service contract between the Executive Directors and a Group company, no Director had a material interest at any time
during the year in any significant contract with the Company or any of its subsidiary undertakings. There are no agreements between
the Group and its Directors providing for compensation for loss of office or employment because of a takeover bid. The Company has
appropriate indemnity insurance cover in place in respect of legal action against Directors of the Company and its subsidiaries.

Strategic report
The Strategic report on pages 1 to 91 contains disclosures in relation to workforce engagement, stakeholder engagement,
diversity, Greenhouse Gas emissions, streamlined energy and carbon reporting requirements (SECR), future development
and research activities.

Auditors and the disclosure of information to the auditor
So far as each person serving as a Director at the date of approving this report is aware, there is no relevant audit information,
being information needed by the auditor in connection with preparing the report, of which the auditor is unaware. Having made
enquiries of fellow directors, each Director has taken all steps that they ought to have taken as a Director to ascertain any relevant
audit information and to establish that the auditor is aware of that information. This information is given and should be interpreted
in accordance with the provisions of Section 418 of the Companies Act.

During 2021 the Audit Committee conducted an audit tender process for the external auditor. The result of this tender process was
the appointment of PricewaterhouseCoopers LLP (PwC) as the new external auditor, to take effect from, and including, the financial
year ending 31 December 2024. The appointment will be recommended to shareholders for approval at the AGM in 2024. Deloitte LLP
continued in its role as external auditor to Drax for the financial year ending 31 December 2022 and, subject to shareholder approval
at the 2023 AGM, Deloitte LLP will continue in its role as external auditor to Drax for the financial year ending 31 December 2023.
Resolutions will be proposed at the AGM for (i) the re-appointment of Deloitte LLP as the auditor of the Group; and (ii) authorising
the Directors to determine the auditor’s remuneration. The Audit Committee reviews the appointment of the auditor, the auditor’s
effectiveness and its relationship with the Group, including the level of audit and non-audit fees paid to the auditor. Further details
on the work of the auditor and the Audit Committee are set out in the Audit Committee report on pages 116 to 126.

The Directors’ report was approved by the Board on 22 February 2023 and is signed on its behalf by:

Brett Gladden
Group Company Secretary

Registered office: Drax Power Station, Selby, North Yorkshire, YO8 8PH

Registered in England and Wales Number 5562053

Drax Group plc Annual report and accounts 2022 161

Governance

Directors’ responsibilities statement

The Directors are responsible for preparing the Annual Report and the Financial Statements in accordance with applicable law
and regulations.

Company law requires the Directors to prepare financial statements for each financial year. Under that law the Directors are required
to prepare the group financial statements in accordance with international accounting standards in conformity with the requirements
of the Companies Act 2006 and United Kingdom adopted International Accounting Standards and have elected to prepare the
Parent Company financial statements in accordance with United Kingdom Generally Accepted Accounting Practice (United Kingdom
Accounting Standards and applicable law), set out in FRS 101 Reduced Disclosure Framework. Under company law the Directors must
not approve the accounts unless they are satisfied that they give a true and fair view of the state of affairs of the Company and of the
profit or loss of the Company for that period.

In preparing the Parent Company financial statements, the Directors are required to:

• select suitable accounting policies and then apply them consistently;
• make judgements and accounting estimates that are reasonable and prudent;
• state whether applicable UK Accounting Standards have been followed, subject to any material departures disclosed and explained

in the financial statements; and

• prepare the financial statements on the going concern basis unless it is inappropriate to presume that the Company will continue

in business.

In preparing the Group financial statements, International Accounting Standard 1 requires that Directors:

• properly select and apply accounting policies;
• present information, including accounting policies, in a manner that provides relevant, reliable, comparable and

understandable information;

• provide additional disclosures when compliance with the specific requirements in IFRSs are insufficient to enable users
to understand the impact of particular transactions, other events and conditions on the entity’s financial position and
financial performance; and

• make an assessment of the Company’s ability to continue as a going concern.

The Directors are responsible for keeping adequate accounting records that are sufficient to show and explain the Company’s
transactions and disclose with reasonable accuracy at any time the financial position of the Company and enable them to ensure that
the financial statements comply with the Companies Act 2006. They are also responsible for safeguarding the assets of the Company
and hence for taking reasonable steps for the prevention and detection of fraud and other irregularities.

The Directors are responsible for the maintenance and integrity of the corporate and financial information included on the Company’s
website. Legislation in the United Kingdom governing the preparation and dissemination of financial statements
may differ from legislation in other jurisdictions.

Responsibility statement
We confirm that to the best of our knowledge:

• the financial statements, prepared in accordance with the relevant financial reporting framework, give a true and fair view

of the assets, liabilities, financial position and profit or loss of the Company and the undertakings included in the consolidation taken
as a whole;

• the Strategic report includes a fair review of the development and performance of the business and the position of the Company

and the undertakings included in the consolidation taken as a whole, together with a description of the principal risks and
uncertainties that they face; and

• the Annual Report and financial statements, taken as a whole, are fair, balanced and understandable and provide the information

necessary for shareholders to assess the Company’s performance, business model and strategy.

This responsibility statement was approved by the Board of Directors on 22 February 2023 and is signed on its behalf by:

Will Gardiner
CEO

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Verification statements

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LRQA Independent Assurance Statement
Relating to the Drax Group Plc Environmental and Social Governance data for the period 1 January 2022 to 31 December 2022.

LRQA Limited (LRQA) has provided independent limited assurance to Drax Corporate Limited (Drax) over specific data within
the Drax Group plc Annual Report 2021 (the Report) including the following:

Summary Assurance Statement from Bureau Veritas UK Ltd
Bureau Veritas UK Ltd has provided independent assurance to Drax Group Plc over its ‘average biomass supply chain greenhouse
gas emissions’ data as reported in its Annual Report and Accounts 2022.

The assurance process was conducted in accordance with International Standard on Assurance Engagements (ISAE) 3000 Revised,
Assurance Engagements Other than Audits or Reviews of Historical Financial Information (effective for assurance reports dated
on or after 15 December, 2015), issued by the International Auditing and Assurance Standards Board.

Bureau Veritas’ full assurance statement includes certain limitations, exclusions, observations, and a detailed assurance methodology
and scope of work.

The full assurance statement with Bureau Veritas’ independent opinion can be found at www.drax.com/sustainability

London, 20 February 2023

Drax Group plc Annual report and accounts 2022 163

Financial statements

Supporting a
secure, renewable,
energy system.

Richard Gwilliam,
Carbon Storage Director

We want to be carbon
negative by 2030.
Deploying BECCS at scale
will be crucial to meeting
that target.

It’ll bring about a
significant change for
Drax. Not only will we
continue to be the
backbone of the UK’s
electricity grid, but we’ll be
producing negative
emissions through BECCS.

Converting an asset that
started life as a coal-fired
power station into
something that can make
a tangible difference to
climate change and the
UK’s climate targets is
something we should be
really proud of.”

Climate positive

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Lewis Byron,
Graduate Mechanical Engineer
at Cruachan Power Station

It’s an exciting time to be
at Drax. The expansion
of pumped storage
generation at Cruachan
will require a lot of people
with specialist knowledge,
and it will be good to be
able to learn from them.

I’ve been able to apply
what I learned at
university by working on
outages and learning from
other engineers on site
– it’s an experience you
can’t really teach.

The expansion of
Cruachan will mean more
people getting to have the
same opportunities that
I’ve had.”

Climate positive

People positive

Drax Group plc Annual report and accounts 2022 165

Section 5
Other assets and liabilities
233 5.1 Business combinations
236 5.2 Goodwill and intangible assets
239 5.3 Provisions
240 5.4 Discontinued operations

Section 6
People costs
242 6.1 Colleagues including directors and employees
242 6.2 Share-based payments
245 6.3 Retirement benefit obligations

Section 7
Risk management
252 7.1 Financial instruments and their fair values
257 7.2 Financial risk management
271 7.3 Hedge reserve
272 7.4 Cost of hedging reserve
273 7.5 Offsetting financial assets and financial liabilities
273 7.6 Contingent assets and liabilities
274 7.7 Commitments

Section 8
Reference information
275 8.1 General information
275 8.2 Adoption of new and revised accounting standards
276 8.3 Related party transactions

Drax Group plc
277 Company financial statements
279 Notes to the Company financial statements

Financial statements

Financial statements contents

Financial statements
167 Independent Auditor’s report to the members

of Drax Group plc
176 Financial statements

Section 1
Consolidated financial statements
181 Consolidated income statement
182 Consolidated statement of comprehensive income
183 Consolidated balance sheet
184 Consolidated statement of changes in equity
185 Consolidated cash flow statement

Section 2
Financial performance
186 2.1 Segmental reporting
189 2.2 Revenue
193 2.3 Operating and administrative expenses
194 2.4 Impairment review of fixed assets and goodwill
199 2.5 Net finance costs
200 2.6 Current and deferred tax
203 2.7 Alternative performance measures
208 2.8 Earnings per share
209 2.9 Dividends
209 2.10 Retained profits

Section 3
Operating assets and working capital
210 3.1 Property, plant and equipment
214 3.2 Leases
216 3.3 Renewable certificate assets
217 3.4 Inventories
218 3.5 Trade and other receivables and contract assets
221 3.6 Contract costs
222 3.7 Trade and other payables and contract liabilities
223 3.8 Climate change

Section 4
Financing and capital structure
224 4.1 Cash and cash equivalents
224 4.2 Borrowings
227 4.3 Notes to the consolidated cash flow statement
229 4.4 Equity and reserves
230 4.5 Non-controlling interests

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Independent Auditor’s report to the members of Drax Group plc

Report on the audit of the financial statements

1. Opinion
In our opinion:

• the financial statements of Drax Group plc (the ‘parent company’) and its subsidiaries (the ‘group’) give a true and fair view of the
state of the group’s and of the parent company’s affairs as at 31 December 2022 and of the group’s profit for the year then ended;
• the group financial statements have been properly prepared in accordance with United Kingdom adopted international accounting

standards;

• the parent company financial statements have been properly prepared in accordance with United Kingdom Generally Accepted

Accounting Practice, including Financial Reporting Standard 101 “Reduced Disclosure Framework”; and

• the financial statements have been prepared in accordance with the requirements of the Companies Act 2006.

We have audited the financial statements which comprise:

• the consolidated income statement;
• the consolidated statement of comprehensive income;
• the consolidated and parent company balance sheets;
• the consolidated and parent company statements of changes in equity;
• the consolidated cash flow statement;
• the basis of preparation and statement of accounting policies on pages 176 to 180;
• the notes in Section 2.1 to 8.3 related to the consolidated financial statements; and
• the notes in Section 1 to 9 related to the parent company financial statements.

The financial reporting framework that has been applied in the preparation of the group financial statements is applicable law,
United Kingdom adopted international accounting standards. The financial reporting framework that has been applied in the
preparation of the parent company financial statements is applicable law and United Kingdom Accounting Standards,
including FRS 101 “Reduced Disclosure Framework” (United Kingdom Generally Accepted Accounting Practice).

2. Basis for opinion
We conducted our audit in accordance with International Standards on Auditing (UK) (ISAs (UK)) and applicable law.
Our responsibilities under those standards are further described in the auditor’s responsibilities for the audit of the financial
statements section of our report.

We are independent of the group and the parent company in accordance with the ethical requirements that are relevant to our audit
of the financial statements in the UK, including the Financial Reporting Council’s (the ‘FRC’s’) Ethical Standard as applied to listed
public interest entities, and we have fulfilled our other ethical responsibilities in accordance with these requirements. The non-audit
services provided to the group for the year are disclosed in Section 2.3 of the notes to the financial statements. We confirm that
we have not provided any non-audit services prohibited by the FRC’s Ethical Standard to the group or the parent company.

We believe that the audit evidence we have obtained is sufficient and appropriate to provide a basis for our opinion.

3. Summary of our audit approach

Key audit
matters

The key audit matters that we identified in the current year were:

• Valuation of goodwill and other intangible assets
• Valuation of commodity, inflation and foreign exchange contracts
• Estimation of Customers accrued income
• Estimation of expected credit loss provision in Opus Energy Limited (Opus Energy)

Within this report, key audit matters are identified as follows:

! Newly identified

Increased level of risk

Similar level of risk

Decreased level of risk

Materiality

The materiality that we used for the group financial statements was £15m, representing approximately 2% of current
year’s Adjusted EBITDA1.

Scoping

As further explained in Section 7.1, we performed full scope audit on eight significant components, and audit of
specified account balances on a non- significant component. These components represent the group’s principal
business units and account for substantially all the group’s net assets, revenue, and profit before tax.

Significant
changes in our
approach

Changes in key audit matters

Estimation of expected credit loss provisions in Opus Energy has been identified as a key audit matter in the current
year due to the increase in risk of customer default associated with the current macro-economic conditions and
uncertainties.

1 Adjusted EBITDA is Adjusted Earnings before Interest, Taxation, Depreciation and Amortisation, excluding the impact of exceptional

items and certain remeasurements

Drax Group plc Annual report and accounts 2022 167

Financial statements

Independent Auditor’s report to the members of Drax Group plc continued

4. Conclusions relating to going concern
In auditing the financial statements, we have concluded that the directors’ use of the going concern basis of accounting in the
preparation of the financial statements is appropriate.

Our evaluation of the directors’ assessment of the group’s and parent company’s ability to continue to adopt the going concern basis
of accounting included:

• evaluating the availability of adequate funding, repayment terms and covenants;
• assessing the historical accuracy of forecasts prepared by management and key assumptions underpinning the forecasts;
• checking the mathematical accuracy of the model used to prepare the forecasts;
• challenging the assumptions used in the forecasts, including performing sensitivity analyses in relation to assumptions for future

commodity prices;

• checking the amount of headroom in the forecasts;
• assessing whether the directors have considered and reflected the impact of climate risks and opportunities in the group’s going

concern assessment; and

• evaluating the appropriateness of the going concern disclosures in the financial statements.

Based on the work we have performed, we have not identified any material uncertainties relating to events or conditions that,
individually or collectively, may cast significant doubt on the group’s and parent company’s ability to continue as a going concern
for a period of at least twelve months from when the financial statements are authorised for issue.

In relation to the reporting on how the group has applied the UK Corporate Governance Code, we have nothing material to add or draw
attention to in relation to the directors’ statement in the financial statements about whether the directors considered it appropriate
to adopt the going concern basis of accounting.

Our responsibilities and the responsibilities of the directors with respect to going concern are described in the relevant sections
of this report.

5. Key audit matters
Key audit matters are those matters that, in our professional judgement, were of most significance in our audit of the financial
statements of the current period and include the most significant assessed risks of material misstatement (whether or not due
to fraud) that we identified. These matters included those which had the greatest effect on the overall audit strategy, the allocation
of resources in the audit, and directing the efforts of the engagement team.

These matters were addressed in the context of our audit of the financial statements as a whole, and in forming our opinion thereon,
and we do not provide a separate opinion on these matters.

5.1. Valuation of goodwill and other intangible assets

Key audit
matter
description

As at 31 December 2022, the carrying amount of the group’s goodwill and other intangible assets amounted to
£424.2m (2021: £416.3m) and £142.3m (2021: £188.6m).

The group’s impairment assessment of the carrying value of each cash generating units to which goodwill is allocated,
is performed in accordance with IAS 36 Impairment of Assets. The recoverable amount of the group’s goodwill was
assessed by reference to value in use calculations which require estimates, including significant assumptions regarding
future cash flows and discount rates. The cash flow forecasts are derived from the group’s business plan, which
considers variables such as margins, supply volumes and inflation. The forecasts also reflect relevant impact of climate
risks such as future commodity prices on cash flows.

Goodwill and other intangible assets are disclosed in Section 5.2 of the notes to the financial statements. Climate and
biomass acceptability risks are disclosed in the principal risk section of the strategic report.

How the scope
of our audit
responded to
the key audit
matter

We obtained an understanding of relevant controls related to the impairment review of goodwill and other intangible assets.

We checked the mathematical accuracy of the impairment models and the methodology applied for consistency with
the requirements of IAS 36. We evaluated the key assumptions including margins, future commodity prices and
inflation rates, and assessed retrospectively whether prior year assumptions were appropriate.

With the assistance of our valuation specialists, we evaluated the reasonableness of management’s discount rates.
We benchmarked the discount rate to comparable companies and considered the underlying assumptions based on our
knowledge of the group and its industry

We assessed the accuracy of management’s cash flow forecasts by comparing historical forecasts with actual cash
flows, external industry benchmarks and the impact of any climate change risks. We checked whether projected cash
flows were consistent with Board approved forecasts. Furthermore, we performed sensitivity analyses, including the
impact of physical and transition climate change risks, as part of our overall evaluation of the forecasts

In respect of climate-related risks, we assessed whether key assumptions, such as future commodity prices, relating
to the group’s principal climate change risks have been incorporated into the group’s forecasts. We further considered
whether the forecasts and related cash flow sensitivities are consistent with the scenarios applied in the group’s
Task Force on Climate-Related Financial Disclosures (TCFD).

We also assessed the completeness and accuracy of the financial statements’ disclosures in relation to the impairment
assessments performed.

Key
observations

We conclude that the valuation of goodwill and other intangible assets as well as the relevant disclosures are
appropriate based on the results of our work.

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5.2. Valuation of commodity, inflation and foreign exchange contracts

Key audit
matter
description

Net losses on derivative contracts amounted to £302.4m (2021: £43.3m), with related derivative assets of £1,218.0m
(2021: £1,246.1m) and liabilities of £1,724.8m (2021: £1,504.5m) recognised as at 31 December 2022. The group uses a
variety of derivative contracts, including commodity contracts and cross currency swaps to mitigate its exposures to
financial risks such as foreign exchange risk and commodity risk.

The valuation of derivative contracts is complex and requires judgement such as in the selection of appropriate
valuation methodologies and relevant assumptions, including future market prices, credit risk factors, time value of
money and spread adjustments. Due to these complexities and the large volume of data used in the valuation, we have
identified the risk of error and risk of fraud in this regard.

Specifically, this risk has been pinpointed to the valuation of inflation swaps and the application of credit risk data
calculations as part of deriving overall fair value estimates for derivative contracts.

Furthermore, the group enters into contracts to buy and sell biomass. As disclosed in the critical accounting
judgements, these contracts are currently considered to be outside the scope of IFRS 9 on the basis that they are not
settleable on net basis. An error in this judgement could lead to excluding material amounts from the consolidated
balance sheet. Accordingly, we identified a risk of error in relation to the judgement reached on the accounting for
these biomass contracts.

Further detail of the key judgements is disclosed in the Audit Committee report section on page 123 and Section 1
on page 183 of the notes to the financial statements. Financial risk management disclosures are set out in Section 7.1
of the notes to the financial statements.

We obtained an understanding of and tested the operating effectiveness of relevant controls related to the valuation
of commodity, inflation and foreign exchange contracts.

With the involvement of our financial instrument specialists, we tested management’s key judgements and calculations.
This included testing a sample of trades undertaken to trade tickets and checking key contractual terms such as
volumes and contracted prices.

We assessed the valuation models used by management, including any manual adjustments to determine the fair value
of the derivative instruments, and performed independent valuations on a sample of commodity, inflation and foreign
exchange contracts.

We checked the appropriateness of management’s assumptions by benchmarking these to third party sources. We also
evaluated the consistency of these assumptions against other relevant areas of the financial statements such as asset
impairment.

We challenged management’s approach and assumptions for assessing fair value adjustments such as credit risk,
time value of money and spread adjustments through consideration of third-party data.

We challenged the group’s assessment and judgement on whether biomass contracts are “net settleable” against the
requirement of IFRS 9 and relevant accounting standards and by considering contradictory sources of evidence.

How the scope
of our audit
responded to
the key audit
matter

Key
observations

The valuation of commodity, inflation and foreign exchange contracts, and the judgement reached on the net
settlement of biomass contracts are reasonable, based on the results of our audit.

We consider the valuation methodologies used by management to be appropriate and the valuations are within
acceptable ranges for all instruments.

Drax Group plc Annual report and accounts 2022 169

Financial statements

Independent Auditor’s report to the members of Drax Group plc continued

5.3. Estimation of Customers accrued income

Key audit
matter
description

The recognition of retail revenue requires an estimation of customer usage between the date of the last billing and year
end, which is known as accrued income. Across the Customers division, accrued income at year-end amounted to
£342.6m (2021: £153.1m).

The method of estimating accrued income is complex and judgemental and requires assumptions for both the volumes
of energy consumed by customers and the related value attributed to those volumes in the range of tariffs. Therefore,
we identified the risk of error and the risk of fraud on the estimation of accrued income.

Accrued income is disclosed in Section 3.5 of the notes to the financial statements.

How the scope
of our audit
responded to
the key audit
matter

We obtained an understanding of relevant controls over the estimation of accrued income, including the reconciliation
of meter readings provided by the energy markets and used by management to estimate the power supplied; and the
controls over the price per unit applied in the valuation of certain aspects of accrued income.

We agreed the volume data for customer usage of energy in the year used in the calculation to external settlement
systems and agreed the volume data in relation to customer billings for the year to internal billing systems to assess for
consistency and assess any residual estimation risk. When external market information was not available at the balance
sheet date, our data analytics specialists assisted us in testing the group’s reconciliation of the volume of power
purchased and their calculation of revenue supplied to assess whether accrued income as at 2022 year end was
subsequently billed.

We compared the unbilled unit pricing by agreeing historical pricing to sample bills, sensitising the pricing to understand
the impact of different pricing assumptions.

We evaluated the historical accuracy of management’s forecasting of accrued income by comparing estimates to final
billed and settlement amounts.

Key
observations

We consider the estimated accrued income to be appropriate.

5.4. Estimation of expected credit loss provision in Opus Energy !

Key audit
matter
description

The current macro-economic conditions including rising energy bills, increases in the cost of living and rising inflation
has increased the rate of credit defaults across several industries. The group is therefore required to make judgements
and estimates on expected credit loss provision for trade receivables. Opus Energy is an entity within the Customers’
segment whose customers are Small and Medium Enterprises (SMEs) – including retail, entertainment, and hospitality
businesses – where the range of judgement that could apply is far broader relative to the other group entities. We
therefore identified a risk of error and a risk of fraud on the estimation of expected credit loss provisions in Opus Energy.
The group uses a machine learning algorithm to calculate expected credit losses for its SME customer base. The
algorithm predicts the future performance of debt on an individual account basis using a broad range of indicators and
that are specific to the customer. Further detail on the estimation of expected credit loss model is provided in note 3.5
of the financial statements.

A credit loss provision of £60.9m (2021: £46.6m) has been recorded at year end. Total Trade receivables were £337.5m
(2021: £234.1m) against which a total provision associated with Opus Energy at the balance sheet date amounted to
£54.9m (2021: £44.4m).

How the scope
of our audit
responded to
the key audit
matter

We obtained an understanding of the relevant controls related to the estimation of expected credit losses in line
with the requirements of IFRS 9 Financial Instruments.

We tested the completeness and accuracy of the data used in the expected credit loss model. With the involvement
of our expected credit loss specialists and data analytics specialists, we evaluated the appropriateness of the model
parameters and output of the expected credit loss model including its mathematical accuracy. Further we challenged
the group’s assumptions, including forward-looking assumptions regarding ongoing macro-economic conditions and
whether they reflect the lifetime expected credit outcomes for the amount receivable at year end.

We challenged the overall reasonableness of the provisions recognised at year end by assessing trends in cash
payments, cancellation of direct debits and benchmarking the recorded provision against alternative valuation models,
cash collection rates and external valuations.

We tested the historical accuracy of management’s estimation of expected credit loss provision by comparing
estimates to actual write offs.

Based on the work performed we concluded that the expected credit loss provision has been appropriately stated.

Key
observations

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6. Our application of materiality

6.1. Materiality
We define materiality as the magnitude of misstatement in the financial statements that makes it probable that the economic
decisions of a reasonably knowledgeable person would be changed or influenced. We use materiality both in planning the scope
of our audit work and in evaluating the results of our work.

Based on our professional judgement, we determined materiality for the financial statements as a whole as follows:

Group financial statements

Parent company financial statements

Materiality

£15.0m (2021: £11.4m)

£4.2m (2021: £4.0m)

Basis for
determining
materiality

Approximately 2% of current year’s Adjusted EBITDA
(2021: 3% of Adjusted EBITDA) and corresponds to 3%
of last three year’s average Adjusted EBITDA.

0.5% of net assets (2021: 0.5%) capped at 28% (2021: 35%)
of the materiality identified for the group.

Rationale for
the benchmark
applied

In determining our materiality for the current year, we
have applied a lower factor of 2% (2021: 3%) to the
Adjusted EBITDA to reflect the impact of volatility in
current macro-economic conditions on current year’s
results.

Adjusted EBITDA was applied as it is considered to be of
particular relevance to users of the financial statements as
a key profit-based measure of performance used by the
group. This measure allows the underlying profitability of
the group’s core business activities to be assessed year on
year. It excludes fluctuations caused in particular by the
remeasurements of derivative contracts and exceptional
items, defined as those transactions that, by their nature,
do not reflect the trading performance of the group in the
period.

Net asset is considered the relevant benchmark for
materiality determination due to the principal activity
of the parent company as an investment holding entity
for the group.

Adjusted EBITDA
£731.0m

Adjusted EBITDA
Group materiality

Group materiality
£15.0m

Component materiality range
£0.2m to £9.5m

Audit Committee
reporting threshold £0.8m

Drax Group plc Annual report and accounts 2022 171

Financial statements

Independent Auditor’s report to the members of Drax Group plc continued

6.2. Performance materiality
We set performance materiality at a level lower than materiality to reduce the probability that, in aggregate, uncorrected and
undetected misstatements exceed the materiality for the financial statements as a whole.

Performance
materiality

Basis and
rationale for
determining
performance
materiality

Group financial statements

Parent company financial statements

70% (2021: 70%) of group materiality

70% (2021: 70%) of parent company materiality

In determining performance materiality, we considered the following factors:
a) our risk assessment, including our assessment of the overall control environment and that we consider it

appropriate to rely on controls over a number of business processes;

b) no significant changes in the nature of the entity’s business during the year which would impact on our ability to

identify potential misstatements; and

c) history of low level of misstatements identified in the previous audits and managements willingness to correct

those adjustments.

6.3. Error reporting threshold
We agreed with the Audit Committee that we would report to the Committee all audit differences in excess of £0.8m (2021: £0.6m),
as well as differences below that threshold that, in our view, warranted reporting on qualitative grounds. We also report to the Audit
Committee on disclosure matters that we identified when assessing the overall presentation of the financial statements.

7. An overview of the scope of our audit

7.1. Identification and scoping of components
Our group audit was scoped by obtaining an understanding of the group and its environment, including group- wide controls, and
assessing the risks of material misstatement at the group level. We performed full scope audit work at eight components: Drax Power
Limited, Drax Pumped Storage Limited, Drax Smart Generation Holdco Limited, Drax Energy Solutions Limited, Drax Corporate
Limited, Drax Group Holdings Limited, Drax Biomass Inc and Opus Energy Limited. Audit of specified account balances was performed
at Northern Pellet Operations. These components represent the group’s principal business units and account for substantially all of the
group’s net assets, revenue, and profit before tax.

The group audit was performed by the group audit team in the UK and a component Deloitte team in Canada under the supervision of
the Senior Statutory Auditor. The full scope entities are all based in the United Kingdom and audited by the group audit team. Our audit
work at all significant component locations was executed at levels of materiality applicable to each individual entity which were lower
than group materiality and ranged from £4.2m to £9.5m (2021: £4.0m to £6.0m). Component materiality levels were set based on the
size and nature of each component on a range of applicable metrics.

At the group level, we also tested the consolidation process and performed analytical reviews to confirm our conclusion that there
were no significant risks of material misstatement of the aggregated financial information of the remaining components not subject to
audit or audit of specified account balances.

7.2. Our consideration of the control environment
Our audit approach was to place reliance on management’s relevant controls over revenue and financial instruments business cycles.
As part of our controls testing, we obtained an understanding of and tested controls through a combination of inquiry, observation,
inspection, and re-performance.

We also involved our IT specialists in assessing relevant controls over the group’s IT systems. Working with IT specialists we obtained
an understanding of the IT environment to assess the relevant risks of material misstatement arising from each relevant IT system and
the supporting infrastructure technologies based on the role of each application in the group’s flow of transactions. For the assessed
risks on key IT systems, we obtained an understanding of and tested relevant automated and general IT controls.

7.3. Our consideration of climate-related risks
The group has considered climate change risk and biomass acceptability risk as part of their risk assessment process when considering
the principal risks and uncertainties facing the group. This is set out in the strategic report on pages 87 to 90, and Section 3.8 of the
notes to the financial statements on page 227. The areas of the financial statements that are notably impacted by climate-related
considerations are associated with future forecasts in the medium to long term. These include the valuation of property, plant and
equipment, goodwill, and other intangible assets. Our response is highlighted in section. 5.1 above. In addition, we have

• assessed and challenged the key financial statement line items and estimates which are more likely to be materially impacted by climate

change risks given the more notable impacts of climate change on the business are expected to arise in the medium to long term.

• challenged how the directors considered climate change in their assessment of going concern and viability based on our

understanding of the business environment and by benchmarking relevant assumptions with market data.

• involved our Environmental Social and Governance (ESG) specialist in in challenging the group’s climate and biomass acceptability
principal risk assessments. The ESG specialists were also involved in reviewing the Sustainable Development section of the annual
report and assessing TCFD on pages 38 – 43 against the recommendations of the TCFD framework.

• assessed whether climate risk assumptions underpinning specific account balances were appropriately disclosed.
• read the climate risk and biomass acceptability risk disclosures included in the strategic report section of the annual report

for consistency with the financial statements and our knowledge of the business environment.

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7.4. Working with other auditors
The group audit team are responsible for the scope and direction of the audit process and provide direct oversight, review, and
coordination of our component audit teams. The group audit team interacted regularly with the component teams during each stage
of the audit and reviewed key working papers. The group audit team maintained continuous and open dialogue with the component
teams in addition to holding formal regular meetings to ensure that the group audit team were fully aware of their progress and results
of their procedures. The group audit team also sent detailed instructions to the component audit teams and attended audit closing
meetings.

8. Other information
The other information comprises the information included in the annual report, other than the financial statements and our auditor’s
report thereon. The directors are responsible for the other information contained within the annual report.

Our opinion on the financial statements does not cover the other information and, except to the extent otherwise explicitly stated in
our report, we do not express any form of assurance conclusion thereon.

Our responsibility is to read the other information and, in doing so, consider whether the other information is materially inconsistent
with the financial statements, or our knowledge obtained in the course of the audit, or otherwise appears to be materially misstated.

If we identify such material inconsistencies or apparent material misstatements, we are required to determine whether this gives rise
to a material misstatement in the financial statements themselves. If, based on the work we have performed, we conclude that there
is a material misstatement of this other information, we are required to report that fact.

We have nothing to report in this regard.

9. Responsibilities of directors
As explained more fully in the directors’ responsibilities statement, the directors are responsible for the preparation of the financial
statements and for being satisfied that they give a true and fair view, and for such internal control as the directors determine is
necessary to enable the preparation of financial statements that are free from material misstatement, whether due to fraud or error.

In preparing the financial statements, the directors are responsible for assessing the group’s and the parent company’s ability
to continue as a going concern, disclosing as applicable, matters related to going concern and using the going concern basis of
accounting unless the directors either intend to liquidate the group or the parent company or to cease operations, or have no realistic
alternative but to do so.

10. Auditor’s responsibilities for the audit of the financial statements
Our objectives are to obtain reasonable assurance about whether the financial statements as a whole are free from material
misstatement, whether due to fraud or error, and to issue an auditor’s report that includes our opinion. Reasonable assurance is a high
level of assurance but is not a guarantee that an audit conducted in accordance with ISAs (UK) will always detect a material
misstatement when it exists. Misstatements can arise from fraud or error and are considered material if, individually or in the
aggregate, they could reasonably be expected to influence the economic decisions of users taken on the basis of these financial
statements.

A further description of our responsibilities for the audit of the financial statements is located on the FRC’s website at:
www.frc.org.uk/auditorsresponsibilities. This description forms part of our auditor’s report.

11. Extent to which the audit was considered capable of detecting irregularities, including fraud
Irregularities, including fraud, are instances of non-compliance with laws and regulations. We design procedures in line with our
responsibilities, outlined above, to detect material misstatements in respect of irregularities, including fraud. The extent to which our
procedures are capable of detecting irregularities, including fraud is detailed below.

11.1. Identifying and assessing potential risks related to irregularities
In identifying and assessing risks of material misstatement in respect of irregularities, including fraud and non- compliance with laws
and regulations, we considered the following:

• the nature of the industry and sector, control environment and business performance including the design of the group’s

remuneration policies, key drivers for directors’ remuneration, bonus levels and performance targets;
• the group’s own assessment of the risks that irregularities may occur either as a result of fraud or error;
• results of our inquiries of management, internal audit, and the audit committee about their own identification and assessment of the

risks of irregularities;

• the involvement of our internal fraud specialists in planning our response to potential fraud risk factors, in particular through

attending engagement team discussions;

• any matters we identified having obtained and reviewed the group’s documentation of their policies and procedures relating to:

– identifying, evaluating and complying with laws and regulations and whether they were aware of any instances of non-

compliance;

– detecting and responding to the risks of fraud and whether they have knowledge of any actual, suspected or alleged fraud;
– the internal controls established to mitigate risks of fraud or non-compliance with laws and regulations;

• the matters discussed among the audit engagement team including significant component audit team and relevant internal

specialists, including forensics, tax, pensions, IT, valuations, financial instruments and ESG specialists regarding how and where
fraud might occur in the financial statements and any potential indicators of fraud.

Drax Group plc Annual report and accounts 2022 173

Financial statements

Independent Auditor’s report to the members of Drax Group plc continued

As a result of these procedures, we considered the opportunities and incentives that may exist within the organisation for fraud
and identified the greatest potential for fraud in the following areas: valuation of commodity, inflation and foreign exchange contracts,
estimation of Customers accrued income and expected credit loss provision in Opus Energy, as well as cut-off of bilateral sales.
In common with all audits under ISAs (UK), we are also required to perform specific procedures to respond to the risk of
management override.

We also obtained an understanding of the legal and regulatory framework that the group operates in, focusing on provisions of those
laws and regulations that had a direct effect on the determination of material amounts and disclosures in the financial statements.
The key laws and regulations we considered in this context the UK Companies Act, Listing Rules, Pensions legislation, Tax legislation,
and Regulations established by regulators in the key markets in which the group operates, including the Office of Gas and Electricity
Markets and biomass- related regulations.

In addition, we considered provisions of other laws and regulations that do not have a direct effect on the financial statements
but compliance with which may be fundamental to the group’s ability to operate or to avoid a material penalty.

11.2. Audit response to risks identified
As a result of performing the above, we identified valuation of commodity, inflation and foreign exchange contracts, estimation
of Customers accrued income and estimation of expected credit loss provision in Opus Energy as key audit matters related to the
potential risk of fraud. The key audit matters section of our report explains these matters in more detail and also describes the specific
procedures we performed in response to those key audit matters.

In addition to the above, our procedures to respond to risks identified included the following:

• reviewing the financial statement disclosures and testing to supporting documentation to assess compliance with provisions

of relevant laws and regulations described as having a direct effect on the financial statements

• inquiring of management, the audit committee and in-house legal counsel concerning actual and potential litigation and claims;
• performing analytical procedures to identify any unusual or unexpected relationships that may indicate risks of material

misstatement due to fraud;

• reading minutes of meetings of those charged with governance, reviewing internal audit reports and reviewing correspondence

with HMRC and Ofgem;

• in addressing the risk of fraud in cut-off of bilateral sales, in addition to our testing described above we have performed focused
testing on trades close to the year-end combined with analytical review procedures to assess accuracy and completeness of
revenue recognised; and

• in addressing the risk of fraud through management override of controls, testing the appropriateness of journal entries and other

adjustments; assessing whether the judgements made in making accounting estimates are indicative of a potential bias; and
evaluating the business rationale of any significant transactions that are unusual or outside the normal course of business.

We also communicated relevant identified laws and regulations and potential fraud risks to all engagement team members including
internal specialists and component audit teams and remained alert to any indications of fraud or non-compliance with laws and
regulations throughout the audit.

Report on other legal and regulatory requirements

12. Opinions on other matters prescribed by the Companies Act 2006
In our opinion the part of the directors’ remuneration report to be audited has been properly prepared in accordance with the
Companies Act 2006.

In our opinion, based on the work undertaken in the course of the audit:

• the information given in the strategic report and the directors’ report for the financial year for which the financial statements

are prepared is consistent with the financial statements; and

• the strategic report and the directors’ report have been prepared in accordance with applicable legal requirements.

In the light of the knowledge and understanding of the group and the parent company and their environment obtained in the course
of the audit, we have not identified any material misstatements in the strategic report or the directors’ report.

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13. Corporate Governance Statement
The Listing Rules require us to review the directors’ statement in relation to going concern, longer-term viability and that part of the
Corporate Governance Statement relating to the group’s compliance with the provisions of the UK Corporate Governance Code
specified for our review.

Based on the work undertaken as part of our audit, we have concluded that each of the following elements of the Corporate
Governance Statement is materially consistent with the financial statements and our knowledge obtained during the audit:

• the directors’ statement with regards to the appropriateness of adopting the going concern basis of accounting and any material

uncertainties identified set out on pages 76 and 77;

• the directors’ explanation as to its assessment of the group’s prospects, the period this assessment covers and why the period

is appropriate set out on page 76 and 77;

• the directors’ statement on fair, balanced and understandable set out on page 166;
• the board’s confirmation that it has carried out a robust assessment of the emerging and principal risks set out on pages 76 and 77;
• the section of the annual report that describes the review of effectiveness of risk management and internal control systems set out

on pages 76 and 77; and

• the section describing the work of the audit committee set out on page 120.

14. Matters on which we are required to report by exception

14.1. Adequacy of explanations received and accounting records
Under the Companies Act 2006 we are required to report to you if, in our opinion:

• we have not received all the information and explanations we require for our audit; or
• adequate accounting records have not been kept by the parent company, or returns adequate for our audit have not been received

from branches not visited by us; or

• the parent company financial statements are not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

14.2. Directors’ remuneration
Under the Companies Act 2006 we are also required to report if in our opinion certain disclosures of directors’ remuneration have not
been made or the part of the directors’ remuneration report to be audited is not in agreement with the accounting records and returns.

We have nothing to report in respect of these matters.

15. Other matters which we are required to address

15.1. Auditor tenure
Following the recommendation of the audit committee, we were appointed by the shareholders at the Annual General Meeting on
27 April 2021 to audit the financial statements for the years ending 31 December 2022 and 2023. The period of total uninterrupted
engagement including previous renewals and reappointments of the firm is 18 years, covering the years ending 31 December 2005
to 2022. Our last audit of the group, due to mandatory auditor rotation, will be the year ending 31 December 2023.

15.2. Consistency of the audit report with the additional report to the audit committee
Our audit opinion is consistent with the additional report to the audit committee we are required to provide in accordance
with ISAs (UK).

16. Use of our report
This report is made solely to the company’s members, as a body, in accordance with Chapter 3 of Part 16 of the Companies Act 2006.
Our audit work has been undertaken so that we might state to the company’s members those matters we are required to state to them
in an auditor’s report and for no other purpose. To the fullest extent permitted by law, we do not accept or assume responsibility
to anyone other than the company and the company’s members as a body, for our audit work, for this report, or for the opinions
we have formed.

As required by the Financial Conduct Authority (FCA) Disclosure Guidance and Transparency Rule (DTR) 4.1.14R, these financial
statements form part of the European Single Electronic Format (ESEF) prepared Annual Financial Report filed on the National Storage
Mechanism of the UK FCA in accordance with the ESEF Regulatory Technical Standard (‘ESEF RTS’). This auditor’s report provides
no assurance over whether the annual financial report has been prepared using the single electronic format specified in the ESEF RTS.

Makhan Chahal, FCA (Senior statutory auditor)
For and on behalf of Deloitte LLP

Statutory Auditor

London, United Kingdom

22 February 2023

Drax Group plc Annual report and accounts 2022 175

Financial statements

Introduction
The Consolidated financial statements provide detailed
information about the financial performance (Consolidated
income statement and Consolidated statement of comprehensive
income), financial position (Consolidated balance sheet), reserves
(Consolidated statement of changes in equity), and cash flows
(Consolidated cash flow statement) of Drax Group plc (the
Company) together with all of the entities controlled by the
Company (collectively, the Group).

The notes to the Consolidated financial statements provide
additional information on the items in the Consolidated income
statement, Consolidated statement of comprehensive income,
Consolidated balance sheet, Consolidated statement of changes
in equity and Consolidated cash flow statement. The notes
include explanations of the information presented. In general,
the additional information in the notes to the Consolidated
financial statements is required by law, International Financial
Reporting Standards (IFRS) or other regulations to facilitate
increased understanding of the primary statements set out
on pages 185 to 189, as well as voluntary information which
management believe users of the accounts may find useful,
in line with the principles of IFRS.

Basis of preparation
The Consolidated financial statements have been prepared in
accordance with the United Kingdom adopted International
Accounting Standards (as issued by the UK Endorsement Board)
and in conformity with the requirements of the Companies
Act 2006.

The Consolidated financial statements have been prepared on
the historical cost basis, except for certain assets and liabilities
that are measured at fair value (principally derivative financial
instruments) and the assets and liabilities of the Group’s defined
benefit pension schemes (measured at fair value and using the
projected unit credit method respectively).

Foreign currency transactions
Transactions in foreign currencies are translated into sterling
at the average monthly exchange rate to the extent that this
approximates the exchange rate prevailing at the date of the
transaction. If the average monthly exchange rate is not a
reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, income and expenditure are
translated at the rates prevailing at the date of the transaction.

At each reporting date, monetary assets and liabilities that are
denominated in foreign currencies are translated at the rates
prevailing at that date. Non-monetary items measured at
historical cost are translated at the date of the transaction using
the average monthly exchange rate to the extent that this
approximates the rate prevailing on the date the transaction
occurred. Non-monetary items that are measured at fair value are
translated at the exchange rate at the date when fair value was
determined. Foreign exchange gains and losses arising on such
translations are recognised in the Consolidated income statement
within foreign exchange gains or losses unless they relate to
qualifying cash flow hedges. Foreign exchange gains and losses
on qualifying cash flow hedges are recognised within the
Consolidated statement of comprehensive income, within Other
comprehensive income (OCI) and deferred within equity, to the
extent the hedges are effective, until the hedged item impacts
the Consolidated income statement.

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Foreign operations
The assets and liabilities of foreign operations with a functional
currency other than sterling are translated into sterling using
the exchange rates prevailing at the reporting date. The income
and expenditure of such operations are translated into sterling
using the average monthly exchange rate to the extent that this
approximates the exchange rates prevailing at the date of the
transactions. If the average monthly exchange rate is not a
reasonable approximation of the cumulative effect of the rates
prevailing on the transaction dates, income and expenditure are
translated at the rates prevailing at the date of the transaction.
Foreign exchange gains and losses resulting from the
retranslation of the operation’s net assets, and its results for
the year, are recognised in OCI.

Climate change
The impact of climate change has been considered throughout
the preparation of the Annual report and accounts. In particular,
in the Strategic report the TCFD disclosures contain information
on the four recommendations and 11 recommended disclosures
of the FCA LR 9.8.6(8). Consideration in respect of the
Consolidated financial statements focused on:

• Critical accounting judgements
• Impairment of assets
• Going concern and viability
• Useful economic lives of fixed assets

Further information on these areas can be found in note 3.8
to the Consolidated financial statements.

Going concern
The Group’s business activities, along with future developments
that may affect its financial performance, position and cash
flows, are discussed within the Strategic report on pages 4 to 91
of this Annual report and accounts. The current energy market
conditions and their impact on the Group are considered in the
Financial review on page 20.

In the Viability statement on pages 75 to 76, the Directors state
that they have a reasonable expectation that the Group will be
able to continue in operation and meet its liabilities as they fall
due over the next five years based on forecasts and projections
that take into account reasonably possible changes in trading
performance and other key assumptions. Consequently, the
Directors also have a reasonable expectation that the Group
will continue in existence for the next 12 months from the date
of signing these Consolidated financial statements and have
therefore adopted the going concern basis in preparing these
Consolidated financial statements.

Basis of consolidation
These Consolidated financial statements incorporate the
financial results of the Company and of all its subsidiaries made
up to 31 December each year. Subsidiaries are entities controlled
by the Group. The Group controls an entity when it is exposed to,
or has rights to, variable returns from its involvement with the
entity and has the ability to affect those returns through its
power over the entity. Subsidiaries are fully consolidated from the
date on which the Group obtains control of an entity to the date
control ceases. Accounting policies of subsidiaries have been
aligned where necessary to ensure consistency with the policies
adopted by the Group.

All intra-group assets and liabilities, equity, income, expenses,
unrealised profits and cash flows relating to transactions
between the members of the Group are eliminated on
consolidation. Unrealised losses are also eliminated unless
the transaction provides evidence of an impairment of the
transferred asset.

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Non-controlling interests in subsidiaries are identified separately
from the Group’s equity. The interests of non-controlling
shareholders that are current ownership interests, entitling their
holders to a proportionate share of net assets upon liquidation,
may initially be measured at fair value or at the non-controlling
interests’ proportionate share of the fair value of the acquiree’s
identifiable net assets. Subsequent to acquisition, the carrying
amount of non-controlling interests is the amount of those
interests at initial recognition plus the non-controlling interests’
share of subsequent changes in equity.

Profit or loss and each component of OCI are attributed to the
owners of the Parent Company and to the non-controlling
interests. Profit or loss and each component of OCI of the
subsidiaries is attributed to the owners of the Parent Company
and to the non-controlling interests even if this results in the
non-controlling interests having a deficit balance.

See note 4.5 for the accounting policy and further details on the
Group’s accounting for non-controlling interests.

Joint arrangements are contractual arrangements where two
or more parties have joint control over the arrangement. Joint
arrangements are classified as either a joint operation or a joint
venture based upon an analysis of the rights and obligations
of the parties in the normal course of business. If the parties
to the joint arrangement have direct rights to the assets, and
direct obligations for the liabilities, relating to the arrangement,
then it is a joint operation. If the parties to the joint arrangement
have rights to the net assets of the arrangement, then it is
a joint venture.

The Group currently only has one joint operation and no joint
ventures. The Group recognises its direct right to assets,
liabilities, revenue and expenses of the joint operation, as well
as its share of any jointly entitled assets, liabilities, income and
expenditure. These amounts are recognised within the
appropriate Consolidated financial statement line items in
accordance with the IFRS applicable for that line item.

Associates are those entities in which the Group has significant
influence, but not control or joint control, over the financial and
operating policies. This is generally the case where the Group
holds between 20% and 50% of the voting rights of an entity.

Associates are accounted for using the equity method.
Investments in associates are initially recognised at cost, which
includes transaction costs. Goodwill is not separately recognised
in relation to associates. Subsequent to initial recognition, the
carrying amount of investments in associates is adjusted to
recognise the Group’s share of after tax profit or loss and OCI
of equity-accounted associates, that are recognised in the
Consolidated income statement and Consolidated statement
of comprehensive income respectively. Dividends received
or receivable from associates are recognised as a reduction in
the carrying amount of the investment. If the carrying amount
of an associate reaches £nil, the Group only recognises its share
of losses of the associate to the extent it has incurred obligations
or made payments on behalf of the associate.

Unrealised gains on transactions between the Group and its
associates are eliminated against the investment to the extent
of the Group’s percentage ownership in these entities.
Unrealised losses are also eliminated unless the transaction
provides evidence of impairment. Accounting policies of equity-
accounted associates have been aligned where necessary to
ensure consistency with the policies adopted by the Group.

Associates are tested for impairment whenever there are any
indicators of impairment. An impairment loss is recognised to the
extent that the carrying amount of the investment exceeds its
recoverable amount. Impairment losses on associates are
recognised within Income from associates in the Consolidated
income statement.

Accounting policies
The significant accounting policies for the measurement of an
individual item in the Consolidated financial statements are
described in the note to the Consolidated financial statements
relating to the item concerned (see contents on page 166).

The accounting policies adopted in the preparation of the
Consolidated financial statements are consistent with those
followed in the preparation of the Group’s Consolidated financial
statements for the year ended 31 December 2021, except for the
change in accounting policy for Software as a Service (SaaS)
costs (see Change in accounting policy section below for further
details) and the adoption of new standards and amendments
effective as of 1 January 2022. The Group has not early-adopted
any standard, interpretation or amendment that has been issued
but is not yet effective.

A full listing of new standards, interpretations and
pronouncements under IFRS applicable to these Consolidated
financial statements is presented in note 8.2. The application
of these new requirements has not had a material effect on the
Consolidated financial statements.

Change in accounting policy
In 2021, the IFRS Interpretations Committee (IFRIC) finalised
its agenda decision regarding how to account for costs of
configuring or customising a supplier’s application software in
a SaaS arrangement that conveys to the customer the right to
receive access to the supplier’s application software over the
contract term.

The agenda decision concluded that the right to receive access
does not provide the customer with a software asset and
therefore, the access to the software is a service that the
customer receives over the contract term. The agenda decision
also concluded that often the configuration and customisation
costs do not result in an intangible asset belonging to the
customer. Therefore, these costs should be recognised as an
expense over the period to which they relate.

In limited circumstances, certain configuration and customisation
activities may result in separate assets controlled by the
customer. If this is the case the asset should be assessed
to determine whether it is separately identifiable and if it meets
the recognition criteria of IAS 38.

Any changes resulting from this agenda decision are a change in
accounting policy. Assessing the impact of the agenda decision
on the Group required detailed analysis of the historical amounts
capitalised. The Group has now concluded its analysis on the
impact of this agenda decision and has subsequently applied a
new accounting policy for SaaS costs, consistent with the agenda
decision, from 1 January 2022.

SaaS costs capitalised as intangible assets by the Group at 1
January 2022, and impacted by this change in accounting policy,
had a net book value of £5.7 million. As the impact of this change
in accounting policy is immaterial, and the new policy has been
applied prospectively from 1 January 2022, no restatement of
prior periods has been necessary. These assets have been written
off in the current period as an exceptional cost (see note 2.7).
SaaS costs incurred from 1 January 2022 have been recognised
in Operating and administrative expenses.

Drax Group plc Annual report and accounts 2022 177

Financial statements

Financial statements continued

Judgements and estimates
The preparation of these Consolidated financial statements
requires judgement to be made in selecting and applying the
Group’s accounting policies. It also requires the use of estimates
and assumptions that affect the reported amounts of assets,
liabilities, income and expenditure. Actual results may
subsequently differ from these estimates.

Estimates and underlying assumptions are reviewed on an
ongoing basis, with revisions recognised in the period in which
the estimates are revised and in any future periods affected.

The judgements which have the most significant effect on the
amounts recognised in the Consolidated financial statements,
and the key estimates and assumptions that have a significant
risk of causing a material adjustment to the carrying amounts
of assets and liabilities within the next financial year, are set
out below. Further detail, including sensitivity analyses where
appropriate for the key estimates and assumptions, is included
in the related notes.

Critical accounting judgements
The critical judgements made in the process of applying the
Group’s accounting policies during the year that have the most
significant effect on the amounts recognised in the Consolidated
financial statements are set out below.

Certain remeasurements and exceptional items
Each year management confirms the judgements made
regarding transactions to exclude from the Adjusted results
of the Group, as described under Alternative performance
measures below. The judgement as to whether a transaction
or group of transactions should or should not be classified
as a certain remeasurement or an exceptional item can have
a significant impact on the Adjusted results of the Group.
An internal policy governs the judgements made by management
and in all instances, these judgements are approved by the Audit
Committee as set out on page 120.

See note 2.7 on page 203

Accounting for biomass purchase and sale contracts
The Group buys and sells biomass for operational requirements
in its Pellet Production and Generation segments. The Group’s
risk management policies also permit some flexibility in trading
activity to optimise the overall portfolio position and potentially
release value in certain circumstances. As such, the Group
undertook an assessment of whether contracts it holds to buy
and sell biomass are within the scope of IFRS 9. If the contracts
were deemed to be within the scope of IFRS 9, this would result
in these contracts being recognised at fair value as derivative
financial instruments from inception.

The Group assessed both biomass purchase and sale contracts
and concluded that the nature of these contracts means they
cannot be readily net settled in cash or other financial
instruments and, as a result, they remain outside of the scope of
IFRS 9. The Group concluded this due to the contractual terms
having no net settlement provisions and the highly illiquid nature
of the biomass market meaning contracts cannot be readily
converted into cash. The lack of an active spot market means
market participants cannot readily seek to make trading profits
from short-term price fluctuations as prices and contracts are
negotiated bilaterally with no active market price and no
guarantee there will be a willing buyer or seller to trade with.
Accordingly, biomass contracts are not recognised as derivative
assets or liabilities in the Consolidated balance sheet prior to
delivery, consistent with the accounting in prior years.

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Had the Group concluded biomass contracts were within the
scope of IFRS 9, a £1 per tonne increase or decrease in the
market price of biomass purchases would result in a £20.5 million
fair value gain or loss respectively being recognised. The Group
continues to assess developments in the biomass market on an
ongoing basis to identify any impact on this assessment.

Capitalisation of development project costs
As the Group executes its strategy, as outlined on page 16,
significant investment is likely to be required in large development
projects, including bioenergy carbon capture and storage in the
UK (UK BECCS) and the development of Cruachan 2. In
accounting for this expenditure, judgements are required
to determine whether these costs meet the criteria to be
capitalised, or whether they should be expensed as incurred.
The capitalisation of costs under IAS 16 and IAS 38 are based
around the expectation that it is probable that economic benefit
will flow to the Group as a result of the costs incurred to bring the
asset into working condition. This judgement can be complex as it
is dependent on several qualitative factors, including
technological feasibility, economic feasibility and availability
of finance. At 31 December 2022 the Group had capitalised
£24.5 million relating to the UK BECCS development project,
including £19.1 million in 2022. Had it been judged that the
criteria for capitalisation had not yet been met, these costs would
have been expensed as incurred. The Group has not capitalised
any costs in relation to Cruachan 2 or any global BECCS projects
as the recognition criteria of IAS 16 have not been judged to have
been met.

Key sources of estimation uncertainty
The following are the key sources of estimation uncertainty that
carry a significant risk of resulting in a material adjustment to the
carrying values of assets and liabilities within the next financial
year. These are the items where actual outcomes in the next 12
months could vary materially from the estimates made
in determining the reported amount of an asset or liability within
the Consolidated financial statements.

Property, plant and equipment
Property, plant and equipment at Drax Power Station is
depreciated on a straight-line basis over its useful economic life
(UEL). UELs are estimated based on past experience, anticipated
future replacement cycles and other available evidence and are
reviewed at least annually.

Given the continued focus on climate change, renewable sources
of energy and transitioning to a net zero economy, the power
generation industry is going through a period of transformation,
which can impact on the UELs of assets. As the UK Government’s
net zero strategy continues to evolve and become clearer,
particularly in relation to UK BECCS, the Group will continue to
assess any potential impact of these developments on UELs in
relation to Drax Power Station. Once certainty over UK BECCS at
Drax Power Station is achieved, UELs will be reassessed. The net
book value of fixed assets being depreciated at Drax Power
Station at 31 December 2022 is £911.5 million and depreciation
on these assets in the year, based on the UELs disclosed in note
3.1, was £74.6 million. If the UELs of assets, that are limited to the
current assumed end of station life of 2039, were to increase by
ten years the impact on the depreciation charge for the year
would be a reduction of approximately £14.2 million.

See note 3.1 on page 211

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Pension liabilities
The Group records a net surplus or liability in its Consolidated
balance sheet for the fair value of assets held by the pension
schemes, less its obligation to provide benefits under approved
defined benefit pension schemes. The actuarial valuations of the
schemes’ liabilities are performed annually by an independent
qualified actuary and contain assumptions regarding interest
rates, inflation, future salary and pension increases, mortality and
other factors, any of which are subject to future change. Three of
the key estimates within the valuation are the discount and
inflation rates, and life expectancy. Sensitivities in the valuations
are discussed in note 6.3. The value of the pension surplus
recognised by the Group at 31 December 2022 in relation to the
DPG ESPS scheme is £32.4 million and the value of the pension
surplus recognised in relation to the Drax 2019 scheme is
£6.1 million.

See note 6.3 on page 245

Derivative valuations
Derivative financial instruments are recorded in the Group’s
Consolidated balance sheet at fair value. The assessment of fair
value is derived in part by reference to a market price for the
instrument in question. The Group bases its assessment of
market prices upon forward curves that are largely derived from
readily obtainable quotations and published prices from third-
party sources. However, any forward curve is based, at least in
part, upon assumptions about future transactions and market
movements. Where such instruments extend beyond the liquid
portion of the forward curve, the level of estimation increases as
the number of observable transactions decreases. More detail on
the assumptions used in the assessment of fair values is provided
in note 7.1, and a range of sensitivities is provided in note 7.2.

Alternative performance measures (APMs)
The Group uses APMs throughout the Annual report and
accounts that are not defined within IFRS but provide additional
information about financial performance and position that is used
by the Board to evaluate the Group’s performance. These
measures have been defined internally and may therefore not
be comparable to similar APMs presented by other companies.
Additionally, certain information presented is derived from
amounts calculated in accordance with IFRS but is not itself a
measure defined by IFRS. Such measures should not be viewed
in isolation or as an alternative to the equivalent IFRS measure.

Defined below are the key APMs used by the Board to assess
performance. The APMs glossary table on page 287 provides
details of all APMs used, including the APM’s closest IFRS
equivalent, the reason why the APM is used by the Group and
a definition of how each APM is calculated.

Adjusted results
The Group’s financial performance for the period, measured in
accordance with IFRS, is shown in the Total results column on the
face of the Consolidated income statement. Exceptional items
and certain remeasurements are deducted from the Total results
in arriving at the Adjusted results for the year. The Group’s
Adjusted results are consistent with the way Executive
management and the Board assess the performance of the
Group. Adjusted results are intended to reflect the underlying
trading performance of the Group’s businesses and are presented
to assist users of the Consolidated financial statements in
evaluating the Group’s trading performance and performance
against strategic objectives.

Adjusted basic earnings per share
Adjusted basic earnings per share (Adjusted basic EPS) is
Adjusted profit from continuing and discontinued operations
attributable to the owners of the Parent Company divided by the
weighted average number of shares outstanding. This is the same
denominator used when calculating basic EPS. This metric is used
in discussions with the investor community.

Adjusted EBITDA
Adjusted EBITDA is earnings before interest, tax, depreciation
and amortisation, excluding the impact of exceptional items and
certain remeasurements (defined in note 2.7). Adjusted EBITDA
excludes gains or losses in disposal of fixed assets, income from
associates and amounts directly attributable to non-controlling
interests. Adjusted EBITDA is the primary measure used by
Executive management and the Board to assess the financial
performance of the Group as it provides a more comparable
assessment of the Group’s year-on-year trading performance.
It is also a key metric used by the investor community to assess
the performance of the Group’s operations.

Exceptional items and certain remeasurements
Exceptional items are those transactions that, by their nature,
do not reflect the trading performance of the Group in the period.
For a transaction to be considered exceptional, management
considers the nature of the transaction, the frequency of similar
events, any related precedent, and commercial context.
Presentation of a transaction as exceptional is approved by the
Audit Committee in accordance with an agreed policy.

There has been no change to the policy during the year ended
31 December 2022. During the year, the application guidance
for this policy was enhanced, in particular setting de minimis
thresholds for classifying items as exceptional. These
enhancements would not have materially changed the
transactions classified as exceptional in the comparative period
contained within these Consolidated financial statements.

Certain remeasurements comprise fair value gains and losses
on derivative forward contracts to the extent those contracts
do not qualify for hedge accounting (or hedge accounting is
not effective) which, under IFRS, are recorded in revenue, cost
of sales, interest payable and similar charges or foreign exchange
gains or losses. Management believes adjusting for fair value
gains and losses recognised on derivative contracts provides
readers of the accounts with useful information as this removes
the volatility caused by movements in market prices over the
life of the derivative. The Group regards all of its forward
contracting activity to represent economic hedges and,
therefore, the contracted price at delivery or maturity is relevant
to the Group and its performance, rather than how the
contracted price compares to the prevailing market price, as the
Group is not seeking to make trading profits on these contracts
through market price movements.

The impact of excluding these fair value remeasurements is
to reflect commodity sales and purchases at contracted prices
(the price paid or received in respect of delivery of the commodity
in question), taking into account the impact of associated
financial derivative contracts (such as forward foreign currency
purchases), in Adjusted results at the time the transaction
takes place.

See note 2.7 on page 203

Drax Group plc Annual report and accounts 2022 179

Financial statements

Financial statements continued

Net debt
The Group defines Net debt as total borrowings less cash and
cash equivalents. Borrowings denominated in foreign currencies,
and where the Group has entered into hedging arrangements
associated with this currency exposure, are translated at the
hedged rate. This is to take into account the effect of financial
instruments entered into to hedge movements in, for example,
foreign exchange rates in relation to debt principal repayments.
Borrowings that have no hedging instruments attributed
to them are translated at the closing rate. Total borrowings
includes external financial debt, such as loan notes, term loans
and amounts drawn in cash under revolving credit facilities
(RCFs) (see note 4.2) but excludes other financial liabilities
such as pension obligations (see note 6.3), trade and other
payables (see note 3.5) and lease liabilities calculated in
accordance with IFRS 16 (see note 3.2). Net debt excludes the
proportion of cash and borrowings in non-wholly owned entities
that would be attributable to the non-controlling interests.

As noted above, the Group does not include lease liabilities,
calculated in accordance with IFRS 16, in the definition of
Net debt. This reflects the nature of the contracts included in
this balance which are predominantly entered into for operating
purposes rather than as a way to finance the purchase of an
asset. The exclusion of lease liabilities from the calculation
of Net debt is also consistent with the Group’s covenant
reporting requirements.

Net debt is a key metric used by debt rating agencies and
the investor community as a measure of liquidity and the ability
of the Group to manage its current obligations.

Prior to 2022, the Group’s definition of Net debt did not include
translating borrowings denominated in foreign currencies,
for which the Group had entered into hedging arrangements
associated with the currency exposure at the hedged rate. The
impact of relevant hedging instruments was presented alongside
the Net debt figures rather than being included in the definition.

In 2022, the Group has updated its definition of Net debt,
which now includes translating borrowings at the hedged rate.
This is deemed to provide more useful information and to better
reflect the economic reality, as it includes the sterling value
of borrowings that will ultimately be settled.

The table below shows Net debt calculated using both the
current and prior year definitions:

Current definition
Previous definition

Year ended 31 December

2022
£m

1,206.0
1,203.6

2021
£m

1,108.0
1,043.6

Net debt to Adjusted EBITDA ratio
This metric is the ratio of Net debt to Adjusted EBITDA, expressed
as a multiple. The Group has a long-term target for Net debt
to Adjusted EBITDA of around 2.0 times. The Group’s 2.0 times
target has not changed as a result of the update in the definition
of Net debt described above, nor has the Group’s expectations
in regard to meeting this target.

The Net debt to Adjusted EBITDA ratio gives an indication of the
size of the Group’s Net debt in relation to its trading performance.

180

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Section 1: Consolidated financial statements

Consolidated income statement

Revenue
Cost of sales
Gross profit
Operating and administrative
expenses
Impairment losses on financial
assets
Depreciation
Amortisation
Impairment of non-current assets
Other losses
Income from associates
Operating profit/(loss)
Foreign exchange gains/(losses)
Interest payable and similar
charges
Interest receivable
Profit/(loss) before tax
Tax:
– Before effect of changes

in tax rate

– Effect of changes in tax rate
Total tax (charge)/credit

Net profit/(loss) from
continuing operations(2)

Net profit from discontinued
operations

Profit/(loss) for the period
Attributable to:
Owners of the Parent Company
Non-controlling interests

Earnings per share:

For net profit from continuing
operations attributable to the
owners of the Parent Company
– Basic
– Diluted

For net profit for the period
attributable to the owners of the
Parent Company
– Basic
– Diluted

Year ended 31 December 2022

Year ended 31 December 2021

Adjusted

results (1)
£m

8,159.2
(6,837.7)
1,321.5

Exceptional
items and
certain
remeasurements
£m

(383.9)
85.7
(298.2)

Total
results
£m

7,775.3
(6,752.0)
1,023.3

Exceptional
items and
certain
remeasurements
£m

(85.9)
134.3
48.4

Adjusted

results (1)
£m

5,173.9
(4,331.1)
842.8

Total
results
£m

5,088.0
(4,196.8)
891.2

Notes

2.2

2.3

(542.8)

–

(542.8)

(448.4)

(21.5)

(469.9)

3.1
5.2
2.7

2.5

2.5
2.5

2.6
2.6

(48.0)
(208.0)
(31.4)
(16.6)
(5.8)
0.5
469.4
14.8

(83.1)
4.3
405.4

(64.5)
(2.9)
(67.4)

–
–
–
(24.9)
–
–
(323.1)
(3.8)

(0.4)
–
(327.3)

62.2
9.6
71.8

(48.0)
(208.0)
(31.4)
(41.5)
(5.8)
0.5
146.3
11.0

(83.5)
4.3
78.1

(2.3)
6.7
4.4

(16.3)
(164.5)
(34.4)
–
(9.4)
0.3
170.1
0.9

(70.9)
0.4
100.5

(11.7)
(0.4)
(12.1)

–
(0.5)
–
–
–
–
26.4
(5.1)

(0.3)
–
21.0

(5.7)
(48.6)
(54.3)

(16.3)
(165.0)
(34.4)
–
(9.4)
0.3
196.5
(4.2)

(71.2)
0.4
121.5

(17.4)
(49.0)
(66.4)

338.0

(255.5)

82.5

88.4

(33.3)

55.1

5.4

–

16.7

7.4

24.1

338.0

(255.5)

82.5

105.1

(25.9)

79.2

340.6
(2.6)

(255.5)
–

85.1
(2.6)

105.6
(0.5)

(25.9)
–

Pence

2.8
2.8

85.1
82.2

21.3
20.5

22.3
21.5

21.3
20.5

26.5
25.6

79.7
(0.5)

Pence

13.9
13.5

20.0
19.3

Notes:
(1) Adjusted results are stated after adjusting for exceptional items (including impairment of non-current assets, acquisition costs and restructuring costs), and certain

remeasurements. See note 2.7 for further details.

(2) The 2022 Adjusted net profit from continuing operations of £338.0 million (2021: £88.4 million) is inclusive of £(2.6) million (2021: £(0.5) million) attributable to non-

controlling interests.

Drax Group plc Annual report and accounts 2022 181

Financial statements

Section 1: Consolidated financial statements continued

Consolidated statement of comprehensive income

Profit for the period
Items that will not be subsequently reclassified to profit or loss:
Remeasurement of defined benefit pension scheme
Deferred tax on remeasurement of defined benefit pension scheme
Deferred tax on share-based payments
Net fair value (losses)/gains on cost of hedging
Deferred tax on cost of hedging
Net fair value gains on cash flow hedges
Deferred tax on cash flow hedges
Items that may be subsequently reclassified to profit or loss:
Exchange differences on translation of foreign operations attributable to the owner of
the Parent Company
Exchange differences on translation of foreign operations attributable to non-
controlling interests
Net fair value losses on cash flow hedges
Net gains on cash flow hedges reclassified to profit or loss
Deferred tax on cash flow hedges
Other comprehensive income/(expense)
Total comprehensive income/(expense) for the year

Attributable to:
Owners of the Parent Company
Non-controlling interests

Notes

6.3
2.6
2.6
7.4
2.6
7.3
2.6

4.4

7.3
7.3
2.6

Year ended 31 December

2022
£m

82.5

(24.4)
6.1
–
(19.0)
2.2
205.5
(49.5)

2021
£m

79.2

30.7
(7.2)
5.4
17.3
(7.7)
1.1
3.6

42.4

8.7

3.4
(593.1)
432.9
43.9
50.4
132.9

132.1
0.8

(2.6)
(182.0)
12.6
37.6
(82.5)
(3.3)

(0.2)
(3.1)

182

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Consolidated balance sheet

Assets
Non-current assets
Goodwill
Intangible assets
Property, plant and equipment
Right-of-use assets
Investments
Retirement benefit surplus
Deferred tax assets
Derivative financial instruments

Current assets
Inventories
Renewable certificate assets
Trade and other receivables and contract assets
Derivative financial instruments
Cash and cash equivalents

Liabilities
Current liabilities
Trade and other payables and contract liabilities
Lease liabilities
Current tax liabilities
Borrowings
Derivative financial instruments

Net current assets
Non-current liabilities
Borrowings
Lease liabilities
Provisions
Deferred tax liabilities
Derivative financial instruments

Net assets
Shareholders’ equity
Issued equity
Share premium
Hedge reserve
Cost of hedging reserve
Other reserves
Retained profits
Total equity attributable to the owners of the Parent Company
Non-controlling interests
Total shareholders’ equity

As at 31 December

2022
£m

2021
£m

Notes

5.2
5.2
3.1
3.2

6.3
2.6
7.1

3.4
3.3
3.5
7.1
4.1

3.7
3.2

4.2
7.1

4.2
3.2
5.3
2.6
7.1

4.4
4.4
7.3
7.4
4.4
2.10

4.5

424.2
142.3
2,388.0
138.3
6.9
38.5
37.3
421.7
3,597.2

348.1
187.8
1,227.0
796.3
238.0
2,797.2

(1,527.9)
(22.7)
(23.3)
(44.3)
(989.4)
(2,607.6)
189.6

(1,396.6)
(130.4)
(58.6)
(141.6)
(735.4)
(2,462.6)
1,324.2

47.9
433.3
(152.0)
40.1
747.7
193.8
1,310.8
13.4
1,324.2

416.3
188.6
2,310.7
119.8
5.5
48.9
28.7
357.5
3,476.0

199.1
301.4
641.9
888.6
317.4
2,348.4

(1,211.1)
(15.1)
(3.4)
(40.6)
(962.7)
(2,232.9)
115.5

(1,320.4)
(110.8)
(86.4)
(225.3)
(541.8)
(2,284.7)
1,306.8

47.7
432.2
(177.4)
78.5
706.0
198.3
1,285.3
21.5
1,306.8

The Consolidated financial statements of Drax Group plc, registered number 5562053, were approved and authorised for issue by the
Board of directors on 22 February 2023.

Signed on behalf of the Board of directors:

Andy Skelton
CFO

Drax Group plc Annual report and accounts 2022 183

Financial statements

Section 1: Consolidated financial statements continued

Consolidated statement of changes in equity

At 1 January 2021
Profit/(loss) for the year
Other comprehensive (expense)/income
Total comprehensive (expense)/income
for the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.4)
Acquisition of subsidiary with non-controlling
interests (note 5.1)
Contributions from non-controlling interests
Acquisition of non-controlling interests without a
change in control (note 4.5)
Total transactions with the owners in their
capacity as owner
Movements on cash flow hedges released
directly from equity (note 7.3)
Deferred tax on cash flow hedges released
directly from equity (notes 7.3 and 2.6)
Movements on cost of hedging released directly
from equity (note 7.4)
Deferred tax on cost of hedging released directly
from equity (notes 7.4 and 2.6)
Movement in equity associated with share-based
payments (note 6.2)
At 1 January 2022
Profit/(loss) for the year

Other comprehensive income/(expense)
Total comprehensive income/(expense)
for the year
Equity dividends paid (note 2.9)
Issue of share capital (note 4.4)
Contributions from non-controlling interests
Acquisition of non-controlling interests without a
change in control (note 4.5)
Total transactions with the owners in their
capacity as owner
Movements on cash flow hedges released
directly from equity (note 7.3)
Deferred tax on cash flow hedges released
directly from equity (notes 7.3 and 2.6)
Movements on cost of hedging released directly
from equity (note 7.4)
Deferred tax on cost of hedging released directly
from equity (notes 7.4 and 2.6)
Movement in equity associated with share-based
payments (note 6.2)
Deferred tax on share-based payments released
directly from equity (note 2.6)
At 31 December 2022

184

Drax Group plc Annual report and accounts 2022

–

–
47.7
–

–

–
–
0.2
–

–

0.2

–

Issued
equity
£m

47.5
–
–

–
–
0.2

–
–

–

Share
premium
£m

430.0
–
–

–
–
2.2

–
–

–

0.2

2.2

–

Hedge
reserve
£m

(76.0)
–
(127.1)

(127.1)
–
–

–
–

–

33.2

(7.5)

–

Cost of
hedging
£m

87.2
–
9.6

9.6
–
–

Other
reserves
£m

697.3
–
8.7

8.7
–
–

–
–

–

–
–

–

(23.7)

5.4

–
78.5
–

–
432.2
–

–
(177.4)
–

–

39.7

(16.8)

–
–
1.1
–

–

1.1

–

39.7
–
–
–

–

(19.1)

4.8

(16.8)
–
–
–

–

(28.8)

7.2

–

Retained
profits
£m

153.4
79.7
28.9

108.6
(70.9)
–

–
–

Non-
controlling
interests
£m

Total
£m

– 1,339.4
79.2
(82.5)

(0.5)
(2.6)

(3.1)
–
–

39.6
6.5

(3.3)
(70.9)
2.4

39.6
6.5

(0.2)

(21.5)

(21.7)

(71.1)

24.6

(44.1)

–

33.2

(7.5)

(23.7)

5.4

–

7.4
21.5 1,306.8
82.5
(2.6)

3.4

0.8
–
–
1.3

50.4

132.9
(78.9)
1.3
1.3

–
706.0
–

42.4

42.4
–
–
–

7.4
198.3
85.1

(18.3)

66.8
(78.9)
–
–

(0.7)

(9.3)

(10.2)

(20.2)

(0.7)

(88.2)

(8.9)

(96.5)

–

9.5

–

(19.1)

4.8

(28.8)

7.2

9.5

–
47.9

–
433.3

–
(152.0)

–
40.1

–
747.7

7.4
193.8

–

7.4
13.4 1,324.2

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Consolidated cash flow statement

Year ended 31 December

Cash generated from operations
Income taxes (paid)/refunded
Interest paid
Interest received
Net cash from operating activities
Made up of:
Net cash from continuing operating activities
Net cash from discontinued operating activities
Cash flows from investing activities
Purchases of property, plant and equipment
Purchases of intangible assets
Proceeds from the sale of property, plant and equipment
Acquisition of businesses net of cash acquired
Proceeds on disposal of subsidiary net of cash disposed and costs of disposal
Net cash used in investing activities
Made up of:
Net cash used in continuing investing activities
Net cash used in discontinued investing activities
Cash flows from financing activities
Equity dividends paid
Contributions from non-controlling interests
Acquisition of non-controlling interests without a change in control
Proceeds from issue of share capital
Draw down of facilities
Repayment of facilities
Payment of principal of lease liabilities
Net cash absorbed by financing activities
Made up of:
Net cash absorbed by continuing financing activities
Net cash absorbed by discontinued financing activities
Net (decrease)/increase in cash and cash equivalents
Cash and cash equivalents at 1 January
Effect of changes in foreign exchange rates
Cash and cash equivalents at 31 December

Notes

4.3

5.1

2.9

4.2
4.2

4.1

2022
£m

320.3
(38.7)
(77.2)
3.3
207.7

207.7
–

(163.9)
(10.8)
1.6
(7.6)
–
(180.7)

(180.7)
–

(78.9)
1.3
(19.6)
1.2
188.5
(186.4)
(18.0)
(111.9)

(111.9)
–
(84.9)
317.4
5.5
238.0

2021
£m

354.5
12.4
(60.5)
0.1
306.5

322.9
(16.4)

(191.0)
(18.7)
0.7
(203.5)
183.7
(228.8)

(412.5)
183.7

(70.9)
6.5
(21.5)
2.4
302.6
(256.3)
(13.2)
(50.4)

(50.4)
–
27.3
289.8
0.3
317.4

Non-cash transactions recognised in the Consolidated income statement are reconciled to operating cash flow as part of the
disclosure provided in note 4.3. Further details of the cash flow impact of exceptional items can be found in note 2.7.

Drax Group plc Annual report and accounts 2022 185

Financial statements

Section 2: Financial performance

The financial performance section gives further information about the items in the Consolidated income statement. It includes a
summary of financial performance by each of the Group’s businesses (see note 2.1), analysis of certain Consolidated income statement
items (notes 2.2–2.6) and information regarding the Adjusted and Total results, dividends and retained profits (notes 2.7–2.10).
Further commentary on the Group’s trading and operational performance during the year can be found in the Strategic report
on pages 1 to 91, with particular reference to key transactions and market conditions that have affected the results.

2.1 Segmental reporting
Reportable segments are presented in a manner consistent with internal reporting provided to the chief operating decision maker
which is considered to be the Board. The Group is organised into three businesses, with a dedicated management team for each.
Central corporate and commercial functions provide certain specialist and shared services, including optimisation of the Group’s
positions. The Board reviews the performance of each of these businesses separately, and each represents a reportable segment:

• Pellet Production: production and subsequent sale of biomass pellets at the Group’s processing facilities in North America;
• Generation: power generation activities in the UK; and
• Customers: supply of electricity and gas to non-domestic customers in the UK.

Operating costs are allocated to the reportable segments to the extent they are directly attributable to the activities of that segment.
Central corporate function costs that are not directly attributable to the activities of a reportable segment are included within
Innovation, capital projects and other costs. Innovation, capital projects and other costs is not a reportable segment as it does
not earn revenues.

When defining gross profit within the Consolidated financial statements, the Group follows the principal trading considerations applied
by its Pellet Production, Generation and Customers businesses when making a sale. In respect of the Pellet Production business, this
reflects the direct costs of production, being fibre, fuel and drying costs, direct freight and port costs, or third-party pellet purchases.
In respect of Generation, this reflects the direct costs of the commodities to generate the power and the relevant grid connection
costs that arise. In respect of Customers, this reflects the direct costs of supply, being the costs of the power or gas supplied, together
with costs levied on suppliers such as network costs, broker costs and renewables incentive mechanisms.

Accordingly, cost of sales excludes indirect overheads and staff costs (presented within operating and administrative expenses), and
depreciation (presented separately on the face of the Consolidated income statement). See note 3.4 for details of the costs included in
inventories.

Seasonality of trading
The primary activities of the Group are affected by seasonality. Demand in the UK for electricity and gas is typically higher in the winter
period (October to March) when temperatures are lower, and thus drives higher prices and higher generation. Conversely, demand is
typically lower in the summer months (April to September) when temperatures are milder, and therefore prices are generally lower.

This trend is experienced by all of the Group’s UK-based businesses, as they operate within the UK electricity and gas markets.
It is most notable within the Generation business due to its scale and the flexible operation of its thermal generation plant.

The Pellet Production business incurs certain costs that are higher in winter months due to the impact of weather conditions, such
as fibre drying costs and heating costs. Production volumes and margins are typically higher in the summer months. The business is
protected from demand fluctuations as a result of seasonality by regular production and dispatch schedules under its contracts with
customers, both intra-group and externally.

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2.1 Segmental reporting continued
Segment revenues and results
The following is an analysis of the Group’s performance by reportable segment for the year ended 31 December 2022. Revenue for
each segment is split between sales to external parties and inter-segment sales. Inter-segment sales are eliminated in the intra-group
eliminations column along with any adjustment required for unrealised profits.

The financial information in these tables is comprised solely of results from continuing operations. There were no amounts attributable
to discontinued operations in the year ended 31 December 2022. Adjusted EBITDA by reportable segment is presented in note 2.7.

Pellet
Production
£m

Generation
£m

Customers
£m

Year ended 31 December 2022

Innovation,
capital
projects and
other
£m

Intra-group
eliminations
£m

Adjusted
results
£m

Exceptional
items
and certain
remeasurements
£m

Total
results
£m

Revenue
External sales
Inter-segment sales
Total revenue
Cost of sales
Segment gross profit/(loss)
Operating and administrative expenses
Impairment losses on financial assets
Depreciation and amortisation
Impairment of non-current assets

Other losses
Income from associates
Operating profit/(loss)

3,638.9
3,719.3
7,358.2

4,143.1
377.2
–
425.4
802.6
4,143.1
(501.9) (6,479.2) (3,985.0)
158.1
879.0
300.7
(84.3)
(183.5)
(167.3)
(48.0)
–
–
(25.5)
(98.6)
(119.9)
–
(16.6)
–

8,159.2
–
–
– (4,144.7)
–
– (4,144.7) 8,159.2
4,128.4 (6,837.7)
–
(16.3) 1,321.5
–
(542.8)
(113.6)
(48.0)
–
(239.4)
(3.3)
(16.6)
–

5.9
–
7.9
–

(383.9)
–
(383.9)
85.7

7,775.3
–
7,775.3
(6,752.0)
(298.2) 1,023.3
(542.8)
(48.0)
(239.4)
(41.5)

–
–
–
(24.9)

(2.0)
0.5
12.0

(3.8)
–
576.5

–
–
0.3

–
–
(116.9)

–
–
(2.5)

(5.8)
0.5
469.4

–
–
(323.1)

(5.8)
0.5
146.3

Further information on the main revenue streams of each segment is presented in note 2.2.

The impact of exceptional items and certain remeasurements is set out in note 2.7.

The following is an analysis of the Group’s performance by reportable segment for the year ended 31 December 2021:

Pellet
Production
£m

Generation
£m

Customers
£m

Year ended 31 December 2021

Innovation,
capital
projects and
other
£m

Intra-group
eliminations
£m

Adjusted
results
£m

Exceptional
items
and certain
remeasurements
£m

Total
results
£m

Revenue
External sales
Inter-segment sales
Total revenue
Cost of sales
Segment gross profit
Operating and administrative expenses
Impairment losses on financial assets
Depreciation and amortisation
Other losses
Income from associates
Operating profit/(loss)

163.1 2,651.2 2,359.6
286.7
–
2,031.1
449.8 4,682.3 2,359.6
(4,131.9) (2,255.9)
(267.0)
103.7
182.8
(81.7)
(96.9)
(16.3)
–
(30.5)
(61.4)
(0.4)
(1.0)
–
0.3
(25.2)
23.8

550.4
(198.9)
–
(103.4)
(7.8)
–
240.3

5,173.9
–
–
– (2,317.8)
–
– (2,317.8) 5,173.9
– 2,323.7 (4,331.1)
842.8
–
(448.4)
(70.9)
(16.3)
–
(198.9)
(3.6)
(9.4)
(0.2)
0.3
–
170.1
(74.7)

5.9
–
–
–
–
–
5.9

–

(85.9) 5,088.0
–
(85.9) 5,088.0
134.3 (4,196.8)
891.2
(469.9)
(16.3)
(199.4)
(9.4)
0.3
196.5

48.4
(21.5)
–
(0.5)
–
–
26.4

Adjusted operating profit from discontinued operations for the year ended 31 December 2021 was £20.3 million. This amount was
attributable entirely to the Generation segment and is described in further detail in note 5.4.

The accounting policies applied for the purpose of measuring the reportable segments’ profits or losses, assets and liabilities are the
same as those used in measuring the corresponding amounts in the Consolidated financial statements.

Drax Group plc Annual report and accounts 2022 187

Financial statements

Section 2: Financial performance continued

2.1 Segmental reporting continued
Capital expenditure by reportable segment
Assets and working capital are monitored on a consolidated basis; however, capital expenditure is monitored by reportable segment.

Pellet Production
Generation
Customers
Innovation, capital projects and other
Total

Year ended 31 December

Additions to intangible assets

Additions to property, plant and
equipment

2022
£m

–
2.8
2.3
4.3
9.4

2021
£m

8.2
3.4
8.9
1.8
22.3

2022
£m

66.0
171.5
0.3
8.2
246.0

2021
£m

108.6
103.2
0.1
3.6
215.5

Total cash outflows in relation to capital expenditure during the year for continuing operations were £174.7 million (2021:
£209.7 million). In 2022, the cash outflow in relation to property, plant and equipment is lower than the cost capitalised in property,
plant and equipment (see note 3.1) predominantly as a result of £64.6 million (2021: £nil) of deferred letters of credits issued in relation
to the construction of the OCGT assets.

Intra-group trading
Intra-group transactions are carried out at management’s best estimate of arm’s-length, commercial terms that, where possible,
equate to market prices. During 2022, the Pellet Production segment sold biomass pellets and provided associated services with a
total value of £425.4 million (2021: £286.7 million) to the Generation segment and the Generation segment sold electricity, gas and
renewable energy certificates with a total value of £3,719.3 million (2021: £2,031.1 million) to the Customers segment.

The impact of all intra-group transactions, including any unrealised profit arising, is eliminated on consolidation.

Major customers
There was no individual customer, in either the current or previous financial year, that represented 10% or more of total revenue.

Geographical analysis of revenue and non-current assets
The geographic information analyses the Group’s revenue and non-current assets by the entity’s country of domicile. In presenting
the geographic information, segment revenue has been based on the geographic location of customers and segment assets were
based on the geographic location of the assets.

The Group’s revenue and non-current assets for the Generation and Customers segments are all UK based. The Group’s Pellet
Production segment has third-party pellet sales to both the UK and other locations around the world. The Pellet Production segment’s
non-current assets are located in North America, in both Canada and the US.

Revenue from continuing operations
(based on location of customer)

31 December
2022
£m

31 December
2021
£m

10.6
27.6
275.4
7,461.7
7,775.3

11.5
39.1
93.0
4,944.4
5,088.0

Non-current assets(1)

(based on asset’s location)

31 December
2022
£m

31 December
2021
£m

542.6
502.6
2,054.5
3,099.7

513.6
473.8
2,053.5
3,040.9

North America (Canada and US)
Europe
Asia
UK
Total

Canada
US
UK
Total

(1) Non-current assets comprise goodwill, intangible assets, property, plant and equipment, right-of-use assets and investments.

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2.2 Revenue
The majority of the Group’s revenue is within the scope of IFRS 15. The other sources of the Group’s revenue outside the scope of
IFRS 15 comprise certain remeasurements, amounts reclassified to revenue for gains and losses on UK CPI inflation swaps and income
from the Government’s Energy Bill Relief Scheme (EBRS). See note 2.7 for further details of certain remeasurements and note 7.2 for
inflation risk management.

Revenue from contracts with customers

Other revenue

Total revenue

Year ended 31 December 2022

Year ended 31 December 2021

Exceptional
items and
certain
remeasurements
£m
–

Adjusted
results
£m

7,882.5

Total
results
£m

Adjusted
results
£m

Exceptional
items and
certain
remeasurements
£m

Total
results
£m

7,882.5

5,170.3

–

5,170.3

276.7

(383.9)

(107.2)

3.6

(85.9)

(82.3)

8,159.2

(383.9) 7,775.3

5,173.9

(85.9) 5,088.0

Accounting policy
Revenue represents amounts receivable for goods or services provided to customers in the normal course of business, net of trade
discounts, VAT and other sales-related taxes and excludes transactions between Group companies. Revenue is presented gross in the
Consolidated income statement when the Group controls the specified good or service prior to the transfer to the customer.

A summary of the Group’s principal revenue streams, along with the nature and timing of performance obligations, payment terms,
methods of recognising revenue, and any estimation uncertainties, is given in the table below. Further details on significant elements
of revenue, principally how the Contract for Difference (CfD) and Renewable Obligation (RO) schemes operate and the related
accounting, are provided below the table.

Revenue stream
(Segment)
Pellet sales
(Pellet Production)

Electricity sales
(Generation)

Renewable certificate
sales
(Generation)

Nature and timing of performance obligations,
including significant payment terms
The Group produces biomass pellets which are
sold to external customers. Customers generally
obtain control of the pellets at the point the
pellets are loaded onto the shipping vessel for
freight on board (FOB) sales.

Where freight is also arranged for the customer,
these sales are known as Cost, insurance and
freight (CIF) sales. The freight component is
considered a separate performance obligation.

Invoices are raised in line with contractual terms
and are usually payable within four-10 days.
The Group’s Generation business has contracts
for wholesale electricity sales. Performance
obligations for these contracts are deemed to be
a series of distinct goods that are substantially
the same and transfer consecutively. Control is
deemed to have passed to the customer at the
point that the electricity has been supplied. This is
measured based on energy supplied to the
customer with the amount billed based on the
units of electricity supplied.

Invoices are raised in line with the Grid Trade
Master Agreement (GTMA) contractual terms and
are payable on the fifth banking day following the
date of invoice.
Renewable Obligation Certificates (ROCs) and
Renewable Energy Guarantees of Origins (REGOs)
are sold to counterparties at a point in time.

ROCs sold to optimise working capital are
invoiced in line with contractual terms and are
usually payable within two days.

Invoices for ROC sales to third parties are raised
when the ROCs are transferred, typically four-five
months following the end of the compliance
period in which they were generated. Invoices are
usually payable within seven days.

Method of recognising revenue, including any estimation uncertainties
Revenue is recognised at the point that the pellets
are loaded onto the shipping vessel. The amount of
revenue recognised is based on the contracted price
of the pellets.

For CIF sales, revenue for the freight portion is
recognised over the period the vessel sails.

Revenues are measured based upon metered output
at rates specified under contract terms or prevailing
market rates as applicable. These are recognised
under the output method, whereby revenue
is recognised based on the value transferred
to the customer.

External ROC and REGO sales are recognised
at the point the relevant certificates are transferred
to the counterparty.

See below for further details.

Drax Group plc Annual report and accounts 2022 189

Financial statements

Section 2: Financial performance continued

2.2 Revenue continued

Revenue stream
(Segment)

Nature and timing of performance obligations,
including significant payment terms

CfD income/payment
(Generation)

Ancillary services
(Generation)

Other income
(All segments)

Electricity and gas sales
(Customers)

The Group is party to a CfD with the Low Carbon
Contracts Company (LCCC), a Government-
owned entity responsible for delivering elements
of the Government’s Electricity Market Reform
Programme. Under the contract, the Group
makes or receives payments in respect of
electricity dispatched from a specific biomass-
fuelled generating unit.

Invoices are raised seven days following the date
of supply and are settled within 10-28 days.
Ancillary services refers to the provision of a
range of system support services to National Grid.
Most contracts are for the delivery of a specific
service either continually or on an ad-hoc basis
over a period of time.

Invoices are raised and subsequently settled in
line with National Grid Company Ancillary
Services settlement calendar, typically monthly.
Other income is derived from the sale of goods
(for example, by-products from electricity
generation such as ash and gypsum) or the
provision of services. The customer obtains
control typically at the point of delivery to their
premises or upon collection.
The Group’s Customers business sells electricity
and gas directly to business customers.
Energy supplied is measured based upon metered
consumption and contractual rates.

The Customers business also has long-term
contracts for the sale of electricity and gas,
which are deemed as being satisfied over time in
line with the progress of the contracts.

Invoices are raised in line with contractual terms.
For small and medium-sized enterprise (SME)
customers, payment is generally due within
10-14 days. For Industrial and Commercial (I&C)
customers, payment is generally due between
28-90 days.

EBRS income
(Customers)

The UK Government introduced the EBRS,
running from 1 October 2022 to 31 March 2023.
Energy supplied to non-domestic customers in
this period will have a discount applied for the
customer under the scheme to cap their energy
tariff. The Customers business is claiming this
discount back from the Government.

Payment is due 10 days post submission
of a claim, which typically occurs monthly.

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Method of recognising revenue, including any estimation uncertainties

The Group recognises the income or costs arising
from the CfD in the Consolidated income statement
as a component of revenue at the point the Group
meets its performance obligation under the CfD
contract. This is considered to be the point at which
the relevant generation is delivered and the payment
becomes contractually due.

See below for further details.

Revenue is recognised by reference to the stage
of completion of the contractual performance
obligations, which are calculated by reference to
the amount of the contract term that has elapsed.

Depending on contract terms, this approach
may require judgement in estimating probable future
outcomes.

Revenue is recognised at the point the control of the
goods is transferred to the customer.

Revenue is recognised on the supply of electricity or
gas when a contract exists, supply has taken place,
a quantifiable price has been established or can be
determined and the amounts receivable are expected
to be recovered.

Where supply has taken place but has not yet been
measured or billed, revenue is estimated based on
consumption statistics and selling price estimates
and is recognised as accrued income. This estimate
is not considered to be a key source of estimation
uncertainty because historical experience has
demonstrated that these estimates are materially
accurate based on the subsequent billings
and settlements.

Where contracts for the sale of electricity and gas are
held, revenue is recognised in line with the progress
of the contracts.

The revenue recognised per unit of energy supplied is
based on the total estimated revenue and cost inputs
for fixed price contracts and contracted prices for
variable price contracts. Assumptions are applied
consistently but third-party costs can vary, therefore
actual outcomes may vary from initial estimates.

The discounted price of electricity and gas supplied
under the EBRS is recognised in revenue as it is
supplied. The discount amount claimed back from
the UK Government is recognised within revenue
over the same period as the underlying discounted
revenue it relates to is recognised.

The revenue received from the UK Government is
included within EBRS income in the table on page
192. The Group does not recognise any additional
revenue from the scheme than it would have done
if it were not introduced.

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2.2 Revenue continued
Renewable certificate sales
The generation and sale of renewable certificates, primarily ROCs and REGOs, is a key driver of the Group’s financial performance.

The Renewable Obligation (RO) scheme places an obligation on electricity suppliers to source an increasing proportion of their
electricity from renewable sources. Under the RO scheme, ROCs are certificates issued to generators of renewable electricity
which are then sold bilaterally to counterparties, including suppliers, to demonstrate that they have fulfilled their obligations under
the RO scheme. ROCs are managed in compliance periods (CPs), running from April to March annually. CP1 commenced in April 2002.
At 31 December 2022 the Group is operating in CP21.

To meet its obligations a supplier can either submit ROCs or pay the buy-out price at the end of the CP. The buy-out price rises annually
in line with the UK Retail Price Index (RPI). The buy-out price for CP21 is £52.88 (2021: CP20 £50.80). ROCs are typically procured
in arm’s-length transactions with renewable generators at a market price slightly lower than the buy-out price for that CP. At the end
of the CP, the amounts collected from suppliers paying the buy-out price form the recycle fund, which is distributed on a pro-rata basis
to the suppliers who presented ROCs during a CP.

The financial benefit of a ROC recognised in the Consolidated income statement at the point of generation is comprised of two parts:
the expected value to be obtained in a sale transaction with a third-party supplier relating to the buy-out price, and the expected value
of the recycle fund benefit to be received at the end of the CP. During the year, the Group also made sales and related purchases of
ROCs to help optimise its working capital position.

External sales of ROCs in the table below includes £604.5 million of such sales (2021: £339.8 million), with a similar value reflected
in cost of sales.

REGOs are certificates that enable suppliers to prove that energy supplied to their customers came from a renewable source.
One REGO is issued to a generator for every MWh of renewable energy they generate.

See note 3.3 for further details of ROCs and REGOs generated and sold by the Generation business and those utilised by the
Customers business during the year.

CfD income/payment
The payment is calculated by reference to a strike price per MWh. The base year for the strike price was 2012 and it increases each
year in line with the UK Consumer Price Index (CPI) and changes in system balancing costs. The strike price at 31 December 2022
was £126.37 per MWh (2021: £118.54).

When market prices (based on average traded prices in the preceding season) are above or below the strike price, the Group makes an
additional payment to or receives additional income from LCCC equivalent to the difference between that market power price and the
strike price, for each MWh produced from the relevant generating unit. Such payments are in addition to amounts received from the
sale of the associated power in the wholesale market.

Gas sales
To support the Group’s ambition to be carbon negative by 2030, a decision was made in January 2023 to phase out the Group’s gas
supply contracts in the Opus Energy part of the Customers business. Having already ceased acquiring new gas customers, following
internal processes and a regulatory driven 60-day grace period, no renewal contracts will be offered after May 2023. It is anticipated
that the portfolio will reduce by over 50% by the end of 2023 and be almost entirely gone by the end of 2024.

Drax Group plc Annual report and accounts 2022 191

Financial statements

Section 2: Financial performance continued

2.2 Revenue continued
Further analysis of revenue for the year ended 31 December 2022 is provided in the table below:

Pellet Production
Pellet sales

Other income
Total Pellet Production
Generation
Electricity sales
Renewable certificate sales
CfD payment
Ancillary services
Other income
Total Generation
Customers
Electricity and gas sales
EBRS income
Other income
Total Customers
Elimination of inter-segment sales
Total consolidated revenue in Adjusted results
Certain remeasurements
Total consolidated revenue in Total results

Year ended 31 December 2022

External
£m

Inter-segment
£m

Total
£m

369.3

7.9
377.2

2,633.1
851.5
(45.7)
73.0
127.0
3,638.9

3,853.1
289.2
0.8
4,143.1
–
8,159.2
(383.9)
7,775.3

425.2

0.2
425.4

3,293.3
426.0
–
–
–
3,719.3

–
–
–
–
(4,144.7)
–
–
–

794.5

8.1
802.6

5,926.4
1,277.5
(45.7)
73.0
127.0
7,358.2

3,853.1
289.2
0.8
4,143.1
(4,144.7)
8,159.2
(383.9)
7,775.3

Certain remeasurements losses of £383.9 million (2021: £85.9 million) is comprised of gains and losses on derivative contracts that are
used to manage risk exposures associated with the Group’s revenue, not designated into hedge accounting relationships under IFRS 9.

Revenue recognised in the period that was included within contract liabilities at the start of the year was £6.6 million (2021:
£5.4 million). See note 3.7 for further details on contract liabilities.

Revenue recognised in the period from performance obligations satisfied or partly satisfied in the previous period was £nil in the
current and previous financial year.

Electricity sales in the Generation segment were net of a £6.1 million payment to a Voluntary Energy Redress Fund.

The following is an analysis of the Group’s revenues for the year ended 31 December 2021:

Pellet Production
Pellet sales
Other income
Total Pellet Production
Generation
Electricity sales
Renewable certificate sales
CfD income
Ancillary services
Other income
Total Generation
Customers
Electricity and gas sales
Other income
Total Customers
Elimination of inter-segment sales
Total consolidated revenue in Adjusted results
Certain remeasurements
Total consolidated revenue in Total results

192

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Year ended 31 December 2021

External
£m

Inter-segment
£m

157.4
5.7
163.1

1,790.2
538.6
234.9
50.6
36.9
2,651.2

2,358.9
0.7
2,359.6
–
5,173.9
(85.9)
5,088.0

286.5
0.2
286.7

1,688.5
342.6
–
–
–
2,031.1

–
–
–
(2,317.8)
–
–
–

Total
£m

443.9
5.9
449.8

3,478.7
881.2
234.9
50.6
36.9
4,682.3

2,358.9
0.7
2,359.6
(2,317.8)
5,173.9
(85.9)
5,088.0

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2.2 Revenue continued
The Group is eligible for, and applies, the practical expedient available under IFRS 15 and has not disclosed information related to the
transaction price allocated to remaining performance obligations. The right to receive consideration from a customer is at an amount
that corresponds directly with the value to the customer of the Group’s performance completed to date.

For accounting policies and other disclosures related to contract assets and liabilities, please see notes 3.5 and 3.7.

For accounting policies and other disclosures related to costs incurred to acquire customer contracts, please see note 3.6.

2.3 Operating and administrative expenses
This note sets out certain components of operating and administrative expenses in the Consolidated income statement and a detailed
breakdown of the fees paid to the Group’s external auditor, Deloitte LLP, in respect of services they provided to the Group during
the year:

The following expenditure has been charged in arriving at operating profit:

Staff costs (note 6.1)
Repairs and maintenance expenditure on property, plant and equipment
Other operating and administrative expenses
Total operating and administrative expenses

Auditor’s remuneration

Audit fees:
Fees payable for the audit of the Group’s Consolidated financial statements
Fees payable for the audit of the Company’s subsidiaries’ statutory accounts
Total audit fees
Other fees:
Review of the Group’s half-year Condensed consolidated financial statements
Assurance services provided to non-material affiliates
Other services
Total audit and audit-related fees
Other assurance services
Total non-audit fees
Total auditor’s remuneration

Year ended 31 December

2022
£m

2021
£m

248.9
110.3
183.6
542.8

218.6
109.1
142.2
469.9

Year ended 31 December

2022
£’000

2021
£’000

1375.0
40.0
1,415.0

115.0
18.0
46.2
1,594.2
65.0
65.0
1,659.2

1,250.0
40.0
1,290.0

110.0
16.4
42.3
1,458.7
469.0
469.0
1,927.7

The fees payable for the audit of the Group’s Consolidated financial statements above relates to the audit of all of the Group’s
subsidiaries to a statutory materiality. In addition, certain head office companies are not required for the Group audit opinion, the
allocation of which is included in the fees payable for the audit of the Company’s subsidiaries’ statutory accounts disclosed above.

During 2022 there was a decrease in the level of non-audit services provided by Deloitte LLP in 2022. 2021 fees included agreed upon
procedures and other assurance services provided in connection with the acquisition of Pinnacle Renewable Energy Inc. (Pinnacle).
See note 5.1 for more information on the acquisition. See the Audit Committee report on page 116 for further details on other
assurance services provided by Deloitte LLP.

Drax Group plc Annual report and accounts 2022 193

Financial statements

Section 2: Financial performance continued

2.4 Impairment review of fixed assets and goodwill
Accounting policy
Goodwill is tested for impairment at least annually. For the purpose of impairment testing, goodwill is allocated to each of the Group’s
cash-generating units (CGUs) or group of CGUs expected to benefit from the synergies of the business combination.

The Group reviews its fixed assets (or, where appropriate, groups of assets combined into a CGUs) whenever there is an indication that
an impairment loss may have been suffered. The Group assesses the existence of indicators of impairment at least annually.

If an indication of potential impairment exists, the recoverable amount of the asset or CGU in question is assessed with reference
to the present value of the future cash flows expected to be derived from the continuing use of the asset or CGU (value in use),
or the expected price that would be received if the asset or CGU were sold to market participant (fair value less costs to sell). The initial
assessment of the recoverable amount is normally based on value in use.

The assessment of future cash flows is based on the approved long-term forecasts used to support the Board’s strategic planning
process. It includes all of the necessary costs expected to be incurred to generate the cash inflows from the CGU’s assets in
their current state and condition, including an allocation of centrally managed costs. Future cash flows include, where relevant,
contracted cash flows arising from the Group’s cash flow hedging activities and as a result the carrying amount of each CGU includes
the mark-to-market value of those cash flow hedges. Assessments of future cash flows consider relevant environmental and climate
change factors. In particular, macro-economic, commodity price and third-party cost assumptions reflect considerations in respect of
the impact of climate change, growth in renewable technologies, electrification and the impact of relevant policies on longer-term
supply and demand profiles.

As required by IAS 36, the additional value that could be obtained from enhancing the Group’s assets and the potential benefit of any
future restructuring or reorganisation that the Group is not yet committed to, is not reflected in the value in use calculation. In
determining value in use, the estimate of future cash flows is discounted to present value using a pre-tax nominal discount rate
reflecting the specific risks attributable to the asset or CGU in question.

The recoverable amount of an asset or CGU is the higher of its fair value less costs to sell, based on its value in use and what a market
participant would pay. If the recoverable amount is less than the current carrying amount in the Consolidated financial statements, an
impairment charge is recorded to reduce the carrying amount of the asset or CGU to the estimated recoverable amount.
Any impairment loss is recognised immediately in the Consolidated income statement.

An impairment loss relating to a CGU is allocated first to reduce the carrying amount of any goodwill allocated and then to the other
assets pro-rata on the basis of the carrying amount of each asset. When allocating an impairment loss to the other assets in the CGU,
if the recoverable amount of an individual asset within that CGU is determinable, the impairment loss allocated to the individual asset
will be limited to reducing the assets, carrying value to its individual recoverable amount. If this results in the impairment loss allocated
to an asset being less than its pro-rata share the excess is allocated on a pro-rata basis to the remaining assets in the CGU.
An impairment loss recognised for goodwill is not reversed in a subsequent period. Non-financial assets other than goodwill that
have an impairment loss recognised are reviewed in subsequent reporting periods for possible reversal of the impairment. Where an
impairment reversal is identified, this is reversed immediately in the Consolidated income statement.

CGUs

Segment name

Pellet Production
Generation

Customers

CGUs contained within segment

Northern Operations and Southern Operations
Drax Power Station (biomass)
Lanark
Galloway
Cruachan
OCGTs
Daldowie
Drax Energy Solutions
Opus Energy

Year ended 31
December 2022

Goodwill
£m

176.0
–
11.3
40.1
26.9
–
–
10.7
159.2
424.2

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The Pellet Production business consists of two CGUs – Northern Operations and Southern Operations. Goodwill recognised on the
acquisition of Pinnacle was allocated to the Pellet Production segment due to the pellet operations as a whole being expected to
benefit from the synergies of the larger, combined pellet operations.

In respect of the Generation business, the Group generally considers the smallest groups of assets that generate independent cash
inflows to be the individual sites that share common infrastructure and control functions. Drax Power Station is comprised of two
separate CGUs, one for biomass generation assets and one for coal generation assets. The coal CGU was previously fully written down
following the decision to cease commercial coal generation. At the request of the UK Government, the Group has entered into an
agreement with National Grid to keep its two coal units available to provide a “winter contingency” service to the UK power system
from October 2022 until the end of March 2023. The units will not generate commercially for the duration of the agreement and will
only operate if, and when, instructed to do so by National Grid. Had no impairment loss been previously recognised on the coal assets,
they would have already been fully depreciated at the time the contract with National Grid was agreed. As such, management have
assessed the impact of this agreement on the coal CGU and determined no reversal of any prior impairment is required.

In respect of the Customers business, the Group considers the smallest groups of assets that generate independent cash inflows to be
equivalent to the operating entities within those businesses.

The OCGT development projects are considered one CGU due to the intention to operate and contract the plants using a portfolio
approach, resulting in forecast cash inflows that are interdependent.

The Innovation, capital projects and other function does not have any external cash inflows and therefore does not meet the definition
of a CGU and so is not included in the assessment below.

Assessment of indicators of impairment

CGU

Goodwill?

Impairment indicators identified?

Impairment review required?

Northern Operations and Southern Operations
Drax Power Station (biomass)
Lanark
Galloway
Cruachan
OCGTs
Daldowie
Drax Energy Solutions
Opus Energy

Y
N
Y
Y
Y
N
N
Y
Y

N
N
N
N
N
Y
Y
N
N

Y
N
Y
Y
Y
Y
Y
Y
Y

A review of the Group’s CGUs gave rise to an indicator of impairment for two CGUs: the Daldowie fuel plant, due to the increase
in energy prices resulting in a significant increase in input costs, and the OCGTs, due to a strategic review conducted during the year
concluding that it was unlikely the Group’s fourth OCGT project at Abergelli would be developed.

In determining that no indicators of impairment existed in respect of the remaining CGUs, the Group considered changes in market
prices for commodities, foreign currency exchange rates, changes in macro-economic conditions, potential impacts of climate change
and regulatory requirements since the previous reporting date, and the impact of such changes on the Group’s long-term planning
models and future forecast cash flows. In particular, consideration was given to the impact of higher commodity prices and the
changes in the economic environment, including market interest rates and inflation.

Whilst higher commodity prices (e.g. power, gas and fibre) were an impairment indicator for Daldowie, they were not deemed an
impairment indicator for other CGUs which are less exposed to the impact of these higher prices. This is due to the nature of the
industries in which they operate and the corresponding impact on revenues. In the Generation and Customers businesses, higher
energy costs are an input cost but these are offset by higher revenues. Additionally, in the Pellet Production segment, higher fibre
costs and energy prices have been offset by increased revenues, reflecting strong demand for biomass pellets.

In considering the economic environment, management concluded the Group’s CGUs tend to be less sensitive to changes in the economy,
as energy and pellet production are required to power and heat homes and businesses in the UK and abroad, which are generally
considered essential spend. The Generation, Pellet Production and Drax Energy Solutions CGUs also contract with high quality, stable
counterparties. For the Opus Energy CGU, customers are typically in the SME sector and therefore the impact of the economic
environment, combined with higher market prices could potentially impact the recoverability of debt. However this impact is offset by
the work done to improve the average credit quality of customers, along with achieved operational efficiencies and so was not deemed
to be an impairment indicator.

Higher interest rates were also considered, including their impact on discount rates. In the prior year, only the Galloway CGU was
sensitive to changes in the discount rate. Therefore, whilst interest rates have increased, any impact on discount rates was not
considered to be an impairment indicator. For the Galloway CGU, the impact of increases to power prices during 2022 would more
than offset the impact of a higher discount rate and therefore this was not considered to be an impairment indicator.

Drax Group plc Annual report and accounts 2022 195

Financial statements

Section 2: Financial performance continued

2.4 Impairment review of fixed assets and goodwill continued
Consideration was also given to assumptions regarding biomass generation and biomass prices post-2027, when current subsidies
for biomass generation at Drax Power Station are due to expire, and whether that was an indicator of impairment (See the Principal
risks section starting on page 77 for further details on biomass acceptability). The Group aims to reduce biomass costs over time,
as part of a strategy to secure a long-term future for biomass generation. Whilst management’s forecasts extend beyond 2027,
they indicate that a majority of the carrying amount of the Drax Power Station (biomass) CGU is supported by pre-2027 cash flows.
Accordingly, the end of current subsidies in 2027 was not deemed to be an indicator of impairment. Drax Power Station is currently
deemed to have a useful life until at least 2039 and an expectation of continuing to be in operation until that time.

Impairment review
For the purpose of impairment reviews the recoverable amounts of these CGUs, or groups of CGUs, were measured based on value in
use calculations using the Group’s established planning models. These calculations depend on a broad range of assumptions, the most
significant of which are outlined below for each CGU, or Group of CGUs, to which an impairment test has been performed in the
current year. Management’s bases for these estimates are also outlined below.

CGUs
Northern
Operations and
Southern
Operations

Significant assumptions for value
in use calculation
• Production costs
• Production volumes
• Sales prices
• Discount rate

Drax Energy
Solutions and
Opus Energy

• Customer margins
• Supply volumes
• Collection rates
• Power prices
• Third party cost estimates
• Discount rate

OCGTs, Lanark,
Galloway and
Cruachan

• Power prices
• Sources of stability income
• Volume of generation (hydros

only)

• Construction cost (OCGTs only)
• Discount rate

Daldowie

• Gas prices
• Estimated contract end date
• Discount rate

Management’s bases for determining estimates used in value in use calculation
• Future production costs are estimated based on current year actual

production costs plus inflation.

• Production volumes are estimated based on the current capacity of the

Group’s pellet plants and the historical operational performance of the plants.

• Sales prices are estimated based on contractual sales agreements.
• See below for details of the basis used to estimate discount rates.
• Customer margin estimates are based on previously achieved profitability.
• The expectation of future organic volumes is based on past performance

and management’s expectations of market development.

• Future wholesale energy price estimates are based on market traded power
prices for around three years (the period they are liquid), gas market prices
as a proxy for power for another two years, then the Group’s long-term
power price forecast, which is prepared using externally provided gas price
forecast and demand inputs.

• Third-party cost estimates are based on a combination of externally

published rates, management analysis of key market input assumptions, and
forecasts from external experts.

• Collection rates are estimated based on historical data and adjusted for

expected changes in future circumstances.

• See below for details of the basis used to estimate discount rates.
• Future wholesale energy price estimates are based on market traded power
prices for around three years (the period they are liquid), gas market prices
as a proxy for power for another two years, then the Group’s long term
power price forecast, which is prepared using externally provided gas price
forecast and demand inputs.

• Stability income assumptions are based on past performance and current

agreed prices with National Grid.

• Volume of generation for the hydro assets is derived from historical rainfall

averages.

• Construction costs are estimated based on agreed contracted prices and

obtained quotes.

• See below for details of the basis used to estimate discount rates.

• Future wholesale gas price estimates are based on market traded prices

for around five years (the period they are liquid).

• The end date of the current contract is based on the contractual term and
expectations about future extensions or changes to the contract term.

• See below for details of the basis used to estimate discount rates.

For each group of CGUs, management has projected detailed cash flows based on a period of 15 years, reflecting consideration of
aspects of the plan which are realised over a long-term horizon. This is longer than the five-year period specified by IAS 36, and the
period the Group assesses viability over in the Viability statement, to align to the Group’s long-term strategic planning, which is
relevant to take into account future structural changes forecast within the industries in which the Group operates. These longer-term
structural changes are mainly linked to climate change and the transition to more renewable forms of energy and net zero. They are
explained in more detail in each section below.

Cash flows beyond the 15 year period are inflated into perpetuity using a growth rate of 2% in all models. This growth rate is based on
prudent expectations of market share and profitability along with more general macro-economic factors which were obtained from
the Group’s established planning model along with external macro-economic forecasts. The growth rate does not exceed the relevant
long-term average growth rate for each of the industries in which the Group operates.

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The discount rates used reflect the weighted average cost of capital derived using the Capital Asset Pricing Model (CAPM). The
estimations use a risk free rate based on government bonds, market participant capital structures and beta estimates adjusted
for the specific industry and markets in which the CGU operates (taking into account relevant peer data sets). This calculation uses
the relevant tax rates to calculate a pre-tax discount rate.

As the Group does not believe that any reasonably possible change in the key assumptions would result in an impairment it is not
considered a key source of estimation uncertainty and therefore any sensitivities provided below are for additional information only.

Further details on the assessments for each group of CGUs are given below.

Pellet Production
The recoverable amount of the Pellet Production group of CGUs, consisting of the Northern Operations and Southern Operations
CGUs, is measured at least annually due to the goodwill allocated to the group of CGUs. These CGUs are principally engaged in the
production and sale of biomass pellets. Management has projected detailed cash flows based on a period of 15 years, reflecting
consideration of aspects of the plan which are realised over a long-term horizon. This is longer than the five-year period specified by
IAS 36, and the period the Group assesses viability over in the Viability statement, to align to the Group’s long-term strategic planning,
which is relevant to take into account future structural changes forecast within the pellet industry such as climate change and the
expected growth in the biomass industry as economies transition to more renewable forms of energy and net zero. Cash flows beyond
the 15 year period are inflated into perpetuity using a growth rate of 2%. This growth rate is based on prudent expectations of market
share and profitability along with more general macro-economic factors which were obtained from the Group’s established planning
model along with external macro-economic forecasts. The growth rate does not exceed the relevant long-term average growth rate
for the pellet industry.

Group of CGUs

Pellet Production

Carrying
amount
(including
allocated
goodwill)
£m

1,024.7

Discount
rate

10.5%

The pre-tax nominal discount rate of 10.5% (2021: 8.5%) was calculated based on independent analysis commissioned by the Group.

The value in use for the Pellet Production group of CGUs was significantly in excess of its carrying amount. An increase in production
costs of $20 per tonne in the calculation would reduce the headroom by £711.4 million and a 15% decrease in production volumes
would reduce the headroom by £572.3 million. Neither scenario would result in an impairment. No reasonably possible change in the
key assumptions would result in a recoverable amount that was lower than its carrying amount.

Drax Energy Solutions and Opus Energy
The recoverable amounts of the Drax Energy Solutions and Opus Energy CGUs are measured annually due to the existence of goodwill
allocated to these CGUs. These businesses are principally focused on renewable electricity sales and therefore consideration of
climate and environmental impacts are already a key feature of the business models. Management has projected detailed cash flows
based on a period of five years, consistent with the period specified by IAS 36, and the period the Group assesses viability over in the
Viability statement. Cash flows beyond the five-year period are inflated into perpetuity using a growth rate of 2%. This growth rate is
based on prudent expectations of market share and profitability along with more general macro-economic factors which were
obtained from the Group’s established planning model along with external macro-economic forecasts. The growth rate does not
exceed the relevant long-term average growth rate for the energy supply industry.

The carrying amounts and discount rates applied to each CGU are set out in the table below:

CGU

Drax Energy Solutions
Opus Energy

Carrying
amount
(including
allocated
goodwill)
£m

25.7
230.5

Discount
rate

10.3%
10.3%

The expected future cash flows of the Drax Energy Solutions CGU were discounted using a pre-tax nominal discount rate of 10.3%
(2021: 8.7%), calculated based on independent analysis commissioned by the Group, adjusted to the specific circumstances and risk
factors affecting the Group’s Customers business. The Group believes that this rate reflects the prospects for a well-established
Customers business, reflecting the comparatively long trading record and customer bases the business holds.

The value in use of the Drax Energy Solutions CGU was significantly in excess of its carrying amount. An increase in the discount
rate to 11.4% combined with factoring in 0% growth in the calculation would reduce the headroom by £36.0 million, which would not
result in an impairment. Reflecting the significant headroom in the analysis, the Group does not believe that any reasonably possible
change in the key assumptions would result in a recoverable amount for the Drax Energy Solutions CGU that was lower than its
carrying amount.

Drax Group plc Annual report and accounts 2022 197

Financial statements

Section 2: Financial performance continued

2.4 Impairment review of fixed assets and goodwill continued

The expected future cash flows of the Opus Energy CGU were also discounted using a pre-tax nominal discount rate of 10.3%
(2021: 8.7%). The forecast future cash flows of the CGU are adjusted to reflect the relative risk profile of its customer base compared
to Drax Energy Solutions, for example by incorporating higher levels of expected credit losses. Opus Energy operates in the same
industry, under the same macro-economic conditions and is impacted by the same commodity prices and impacts of climate
change as Drax Energy Solutions. As such, it is considered appropriate to use the same discount rate for both CGUs, supported
by independent analysis.

The value in use of the Opus Energy CGU was significantly in excess of its carrying amount. An increase in the discount rate to 11.4%
combined with factoring in 0% growth in the calculation would reduce the headroom by £57.9 million. This would not result in an
impairment. Reflecting the significant headroom in the analysis and sensitivities performed, the Group does not believe that any
reasonably possible change in the key assumptions would result in a recoverable amount for the Opus Energy CGU that was lower
than its carrying amount.

Lanark, Galloway and Cruachan
The Group tests the Lanark, Galloway and Cruachan CGUs for potential impairment annually due to the existence of goodwill allocated
to these CGUs. These CGUs are engaged in hydro and pumped storage power generation. Management has projected detailed cash
flows based on a period of 15 years, reflecting consideration of aspects of the plan which are realised over a long-term horizon.
This is longer than the five-year period specified by IAS 36, and the period the Group assesses viability over in the Viability statement,
to align to the Group’s long-term strategic planning, which is relevant to take into account future structural changes forecast within
the generation industry in the models used, such as climate change, changing weather patterns, and the continued transition to
renewable forms of energy and net zero. Cash flows beyond the 15 year period are inflated into perpetuity using a growth rate of 2%.
This growth rate is based on prudent expectations of market share and profitability along with more general macro-economic factors
which were obtained from the Group’s established planning model along with external macro-economic forecasts. The growth rate
does not exceed the relevant long-term average growth rate for the generation industry.

CGU

Lanark
Galloway
Cruachan

Carrying
amount
(including allocated
goodwill)
£m

49.9
169.8
250.6

Discount
rate

8.5%
8.5%
8.5%

The expected future cash flows of these CGUs were discounted using a pre-tax nominal discount rate of 8.5% (2021: 7.3%)
The discount rates were calculated based on independent analysis commissioned by the Group, adjusted to the specific circumstances
and risk factors affecting the Group’s hydro and pumped storage generation operations.

The value in use for all three CGUs (Lanark, Galloway and Cruachan) was in excess of their carrying amounts. An increase in the discount
rate to 15% in each of the calculations would reduce the headroom for Lanark, Galloway and Cruachan by £26.0 million, £87.2 million
and £257.6 million respectively. A decrease in power prices of 25% in each of the calculations would reduce the headroom for Lanark,
Galloway and Cruachan by £28.9 million, £101.1 million and £154.4 million respectively. None of these changes would result in an
impairment. No reasonably possible change in the key assumptions would result in a recoverable amount that was lower than their
carrying amount.

Daldowie
The Daldowie CGU does not have any goodwill allocated to it but in the current year had an indicator of impairment present. The
impairment indicator was due to higher energy input costs resulting in a reduction in the forecast earnings. A full impairment review
was carried out as a result of this impairment indicator. This CGU is engaged in processing wastewater sludge into biomass pellets.
Management has projected detailed cash flows based on a period of three years, reflecting the expected contract end date.

The carrying amount and discount rate applied to the CGU is set out in the table below:

CGU

Daldowie

Carrying
amount
(including allocated
goodwill)
£m

8.9

Discount
rate

8.9%

An independent analysis commissioned by the Group calculated a pre-tax nominal discount rate of 8.9% which was applied to the
expected future cash flows to determine the value in use of the fuel plant. The carrying amount of £16.9 million was higher than the
value in use calculation and so an impairment charge was therefore recorded. As there is no goodwill associated with the Daldowie
fuel plant, this charge of £8.0 million was applied to its fixed assets on a pro rata basis as described in the accounting policy section
of this note. An increase in estimated energy input costs of 25% in the value in use calculation would increase the impairment by
£4.2 million.

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OCGTs
The OCGT CGU does not have any goodwill allocated to it but in the current year had an indicator of impairment present. Following a
strategic review during the year, it was concluded that it was currently unlikely that the Group would develop its fourth OCGT project
at Abergelli. The Abergelli OCGT development does not hold a Capacity Market contract. As a result of this strategic review, the Group
has recognised an impairment charge of £8.6 million, representing the previously capitalised development costs for the individual
project. The impairment indicator was specific to the Abergelli assets with the CGU. No impairment indicators were identified in
relation to the other assets within the CGU, or the CGU as a whole, and therefore a full impairment assessment was not required.

Impairment of non-current assets
Due to a change in accounting policy in the current year an impairment charge has been recognised on intangible assets relating to
SaaS costs previously capitalised (See Change in accounting policy section in the Basis of preparation on page 177 for further details).
An impairment charge has also been recognised on a billing system where the Group has stopped development and is engaged in
active discussion with the supplier reflecting the supplier’s failure to perform under this contract. See note 5.2 for further details.

The Group has incurred impairment losses in the year. It is the Group’s policy that any impairments of assets that have not yet been
brought into use and depreciated or amortised are reflected in the cost of the asset being impaired. For impairments of assets that
have already been brought into use, the impairment is reflected as an accelerated charge in the accumulated depreciation or
amortisation of the asset.

Impairment

Property, plant and equipment – cost
Property, plant and equipment – accumulated
depreciation
Intangible assets – cost
Intangible assets – accumulated amortisation
Total impairment of non-current assets

Daldowie
£m

–

8.0
–
–
8.0

OCGTs
£m

6.9

–
1.7
–
8.6

Customers
billing system
£m

–

–
19.2
–
19.2

SaaS
assets
£m

–

–
–
5.7
5.7

Total
£m

6.9

8.0
20.9
5.7
41.5

The total impairments for the year of £41.5 million are recognised in the impairment of non-current assets line in the Consolidated
income statement. The impairment of SaaS intangible assets and the Customers billing system, totalling £24.9 million, have been
treated as exceptional items. See note 2.7 for further details.

2.5 Net finance costs
Net finance costs reflect expenses incurred in managing the debt structure (such as interest payable on bonds) as well as foreign
exchange gains and losses, the unwinding of discounts on provisions for reinstatement of the Group’s sites at the end of their useful
lives (see note 5.3), interest income on the Group’s defined benefit pension scheme surplus (see note 6.3) and lease liabilities (see note
3.2). These are offset by interest income that the Group generates through use of short-term cash surpluses, for example through
investment in money market funds.

A reconciliation of net finance costs is shown in the table below:

Year ended 31 December

Interest payable and similar charges:

Interest payable on borrowings measured at amortised cost
Interest on lease liabilities
Unwinding of discount on provisions
Amortisation of deferred finance costs
Other financing charges
Total interest payable and similar charges included in Adjusted results
Interest receivable:
Interest income on bank deposits
Interest income on defined benefit surplus (note 6.3)
Total interest receivable included in Adjusted results

Foreign exchange gains included in Adjusted results

Net finance costs included in Adjusted results

Certain remeasurements on financing derivatives

Net finance costs in Total results

2022
£m

(68.6)
(6.8)
(1.1)
(6.1)
(0.5)
(83.1)

3.3
1.0
4.3

14.8

2021
£m

(59.2)
(4.9)
(0.6)
(5.7)
(0.5)
(70.9)

0.1
0.3
0.4

0.9

(64.0)

(69.6)

(4.2)

(5.4)

(68.2)

(75.0)

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Financial statements

Section 2: Financial performance continued

2.5 Net finance costs continued

Foreign exchange gains and losses in net finance costs arise on the retranslation of non-derivative balances denominated in foreign
currencies to prevailing rates at the reporting date.

Changes in the Group’s financing structure during 2022 are described in note 4.2.

The Group has a number of intercompany loans denominated in the functional currency of certain foreign subsidiaries, that are owed
to a sterling functional currency entity, and sterling intercompany loans owed by foreign subsidiaries to a sterling functional currency
entity. Due to the weakening of sterling during the year, this has resulted in a foreign exchange gain of £29.0 million (2021: gain of
£4.2 million) on the retranslation of intercompany loans in the Consolidated income statement of the sterling functional currency
entity. The foreign exchange loss (2021: loss) on translating the foreign subsidiaries’ intercompany loans into the Group’s sterling
presentational currency is recognised within the translation reserve. As such, on consolidation, a foreign exchange gain (2021: gain)
arises in the Consolidated income statement and is part of the foreign exchange gains included in Adjusted results in the table above.

2.6 Current and deferred tax
The tax credit or charge includes both current and deferred tax. It reflects the estimated tax on the profit before tax for the Group for
the year ended 31 December 2022 and the movement in the deferred tax balance in the year, so far as it relates to items recognised in
the Consolidated income statement, in line with IAS 12.

Accounting policy
Current tax includes UK corporation tax, corporate income tax in Canada and US income tax. It is based on the taxable profit or loss for
the year in the relevant jurisdiction. Taxable profit or loss differs from profit or loss before tax as reported in the Consolidated income
statement, because it excludes items of income or expenditure that are either taxable or deductible in other years or never taxable or
deductible. The Group’s liability (or asset) for current tax is provided at amounts expected to be paid (or recovered) using the tax rates
and laws that have been enacted or substantively enacted by the reporting date.

A provision is made for those matters for which the tax determination is uncertain, but it is considered probable that there will be a
future outflow of funds to a tax authority. The provisions are measured at the best estimate of the amount expected to become
payable. The assessment is based on the judgement of tax professionals within the Group supported by previous experience in respect
of such activities and in certain cases is based on specialist independent tax advice. No uncertain tax provisions have been recognised
in the current or prior year.

Deferred tax is the tax expected to be payable or recoverable on differences between the carrying amounts of assets and liabilities in
the financial statements and the corresponding tax bases used in the computation of taxable profit. Deferred tax liabilities are
generally recognised for all taxable temporary differences and deferred tax assets are recognised to the extent that it is probable that
taxable profits will be available against which deductible temporary differences can be utilised.

Current and deferred taxes are credited or charged against profit or loss in the Consolidated income statement, except when they
relate to items that are recognised in OCI or directly in equity, in which case the current and deferred taxes are recognised in the
Consolidated statement of comprehensive income or directly in the Consolidated statement of changes in equity respectively.

The Group has utilised the relief available under the Research and Development expenditure credit regime (RDEC). Under this regime,
research and development tax credits are accounted for as development grants in line with IAS 20 and are recorded in operating profit
within the Consolidated income statement. The credit is subject to corporation tax with the corresponding receivable offset against
total corporation tax payable.

In accounting for tax, the Group makes assumptions regarding the treatment of items of income and expenditure for tax purposes.
The Group believes that these assumptions are reasonable, based on prior experience and consultation with advisers. These
assumptions are consistent with other assumptions used in these financial statements. Full provision is made for deferred tax at the
rates of tax prevailing at the reporting date unless future rates have been substantively enacted. Deferred tax assets are recognised
where it is considered more likely than not that they will be recovered. The recoverability of the deferred tax asset is considered an
estimate as it relies on the future profitability of the Group’s businesses. See table on page 202 for a breakdown of the net deferred tax
asset or liability position for each jurisdiction.

Total tax credit/(charge) from continuing operations comprises:
Current tax
– Current year
– Adjustments in respect of prior periods
Deferred tax
– Before impact of tax rate changes
– Adjustments in respect of prior periods
– Effect of changes in tax rate
Total tax credit/(charge)

200

Drax Group plc Annual report and accounts 2022

Year ended 31 December

2022
£m

2021
£m

(66.0)
1.9

61.9
(0.1)
6.7
4.4

(7.7)
(1.4)

(7.3)
(1.0)
(49.0)
(66.4)

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2.6 Current and deferred tax continued

Tax credited/(charged) on items recognised in other comprehensive income:
Deferred tax on remeasurement of defined benefit pension scheme
Deferred tax on share-based payments
Deferred tax on cash flow hedges
Deferred tax on cost of hedging
Total tax credit

Tax credited/(charged) on items released directly from equity:
Deferred tax on cost of hedging
Deferred tax on cash flow hedges
Deferred tax on share-based payments
Total tax credit/(charge)

Year ended 31 December

2022
£m

6.1
–
(5.6)
2.2
2.7

Year ended 31 December

2022
£m

7.2
4.8
7.4
19.4

2021
£m

(7.2)
5.4
41.2
(7.7)
31.7

2021
£m

5.4
(7.5)
–
(2.1)

UK corporation tax is the main income tax for the Group and is calculated at 19% (2021: 19%) of the assessable profit or loss
for the year.

Due to the Group’s overseas operations, the US income tax rate of 21% (2021: 21%) and the Canadian corporate income tax rate
of 27% (2021: 27%) are also relevant to the Group’s tax charge.

The tax rate for the full year, before the impact of changes in tax rates, is lower than the standard corporation tax rate applicable in the
UK, principally due to the tax benefit arising from UK Patent Box claims and the UK super-deduction introduced in the Finance Act
2021, which allows for a 130% in-year deduction for tax purposes against the cost of qualifying capital expenditure on plant and
machinery incurred between 1 April 2021 and 31 March 2023.

Drax Power Limited was granted a patent to protect certain intellectual property it owns and which attaches to the technology
developed to manage the combustion process in generating electricity from biomass. Under UK tax legislation, the company is entitled
to apply a lower tax rate of 10% to profits derived from utilisation of the patented technology.

The Finance Act 2021 also contained legislation to increase the main rate of UK corporation tax from 19% to 25% with effect from
1 April 2023. The impact of this rate increase is a net £6.7 million deferred tax credit through Total results in the Consolidated income
statement (2021: £49.0 million charge).

The Group tax charge for the year can be reconciled to the profit before tax as follows:

Year ended 31 December 2022

Year ended 31 December 2021

Profit/(loss) before tax from
continuing operations
Profit/(loss) before tax multiplied by the rate of
corporation tax in the UK of 19% (2021: 19%)
Effects of:
Adjustments in respect of prior periods
Expenses not deductible for tax purposes
Impact of tax rate change
Difference in overseas tax rates
Patent Box benefit
Tax effect of RDEC credit
UK super-deduction
Total tax charge/(credit)

Exceptional
items
and certain
remeasurements
£m

Adjusted
results
£m

405.4

(327.3)

77.0

(62.2)

(1.8)
4.5
2.9
(1.3)
(9.6)
(0.8)
(3.5)
67.4

–
–
(9.6)
–
–
–
–
(71.8)

Total
results
£m

78.1

14.8

(1.8)
4.5
(6.7)
(1.3)
(9.6)
(0.8)
(3.5)
(4.4)

Exceptional
items
and certain
remeasurements
£m

Adjusted
results
£m

Total
results
£m

100.5

21.0

121.5

19.2

4.0

23.2

2.4
2.8
0.4
(1.1)
(8.0)
(0.9)
(2.7)
12.1

–
1.7
48.6
–
–
–
–
54.3

2.4
4.5
49.0
(1.1)
(8.0)
(0.9)
(2.7)
66.4

Drax Group plc Annual report and accounts 2022 201

Financial statements

Section 2: Financial performance continued

2.6 Current and deferred tax continued
The movements in deferred tax assets and liabilities during each year are shown below.

At 1 January 2021
(Charged)/credited to the
income statement

Charged to other comprehensive income
in respect of actuarial gains

Credited to other comprehensive income in
respect of share-based payments

Credited to other comprehensive income
in respect of cash flow hedges

Charged to other comprehensive income
in respect of cost of hedging
Charged to equity in respect of
cash flow hedges
Credited to equity in respect of cost
of hedging
Impact of acquisition
Effect of changes in foreign
exchange rates
At 1 January 2022
Credited/(charged)to the
income statement
Credited to other comprehensive income
in respect of actuarial gains

Charged to other comprehensive income
in respect of cash flow hedges

Credited to other comprehensive income
in respect of cost of hedging

Credited to equity in respect of
cash flow hedges

Credited to equity in respect of cost
of hedging

Credited to equity in respect of
share-based payments
Impact of acquisition
Effect of changes in foreign
exchange rates
At 31 December 2022
Deferred tax balances (after offset)
for financial reporting purposes:
Net Canadian deferred tax asset at
31 December 2022
Net US deferred tax asset at
31 December 2022
Net UK deferred tax liability at
31 December 2022
Net Canadian deferred tax asset at
31 December 2021
Net US deferred tax asset at
31 December 2021
Net UK deferred tax liability at
31 December 2021

Financial
instruments
£m

Accelerated
capital
allowances
£m

Non-trade
losses
£m

Intangible
assets
£m

13.0

(183.0)

2.3

(15.7)

Trade
losses
£m

33.5

Other
liabilities
£m

(23.3)

Other
assets
£m

16.5

Total
£m

(156.7)

(5.6)

(64.4)

–

41.2

(7.7)

(7.5)

5.4
–

–

–
(44.7)

–

–
–

–
38.8

(0.5)
(292.6)

–
2.3

(3.5)

11.7

5.4

(0.9)

(57.3)

–

–
(0.6)

(0.1)
(19.9)

–
14.4

0.4
60.0

–
(0.8)

–
(18.7)

(7.2)

5.4

–

–
19.6

0.1
33.5

41.2

(7.7)

(7.5)

5.4
(12.1)

(0.1)
(196.6)

77.3

(24.9)

(1.8)

7.0

15.7

(20.7)

16.0

68.6

–

( 5.6)

2.2

4.8

7.2

–
–

–

–
(0.8)

–

–
–

–

–
–

–

–
–

6.1

–

–
–

–
124.7

(3.0)
(321.3)

–
0.5

–
(12.9)

4.4
80.1

–
(33.3)

–

7.4
–

1.0
57.9

6.1

(5.6)

2.2

4.8

7.2

7.4
(0.8)

2.4
(104.3)

–

(49.6)

(30.6)

–

0.2

27.1

(1.0)

32.7

9.4

–

53.0

–

5.5

27.9

124.7

(241.1)

0.5

(13.1)

–

(32.3)

19.7

(141.6)

–

(38.1)

(27.6)

–

(0.2)

17.5

(0.4)

26.6

5.4

–

42.5

(0.3)

8.7

23.3

38.8

(226.9)

2.3

(19.7)

–

(18.0)

(1.8)

(225.3)

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2.6 Current and deferred tax continued
Deferred tax assets and liabilities are offset where the Group has a legally enforceable right to do so, otherwise they are shown
separately in the Consolidated balance sheet. Within the above trade losses deferred tax asset of £80.1 million (2021: £60.0 million)
there is £53.0 million (2021: £42.5 million) in relation to losses in the US Pellet Production business. The remaining £27.1 million relates
to losses of the Canadian Pellet Production business (2021: £17.5 million).

The future expected reversal of accelerated capital allowances and other timing differences, coupled with the profitability
(inclusive of the impact of transfer pricing adjustments), stable output and forecast improvement in operational performance, mean
that the US and Canadian businesses expect to generate sufficient profits in the short to medium term against which to utilise the
deferred tax assets. The estimates used when assessing the future profitability of the US and Canadian businesses have been
approved by the Board and are consistent with estimates used in the going concern assessment and in the Viability statement
on page 75.

As at 31 December 2022 the Group held £79.2 million (2021: £79.2 million) of UK capital losses available for offset against future
chargeable gains. These losses are unrecognised for deferred tax purposes as the Group does not currently expect UK taxable
gains to arise that would be eligible to offset against these losses.

2.7 Alternative performance measures
The APMs glossary to these Consolidated financial statements on page 287 provides details of all APMs used, each APM’s closest
IFRS equivalent, the reason why the APM is used by the Group and a definition of how each APM is calculated.

The Group presents Adjusted results in the Consolidated income statement. The Directors believe that this approach is useful as it
provides a clear and consistent view of underlying trading performance. Certain remeasurements and exceptional items are excluded
from Adjusted results and presented in a separate column. The Group believes that this presentation provides useful information about
the financial performance of the business and is consistent with the way Executive management and the Board assess the
performance of the business.

The Group has a policy and framework for the determination of transactions to present as exceptional. All transactions presented
as exceptional are approved by the Audit Committee. See the Audit Committee Report on page 116 for further details.

In these Consolidated financial statements, the following transactions have been designated as exceptional items
and presented separately:

• Impairment charges incurred on the application of the Group’s new accounting policy for SaaS costs, consistent with the IFRIC
agenda decision (see Change in accounting policy section in the Basis of preparation on page 177) (2022, All segments), and on
costs associated with the Customers billing system (2022, Customers). See note 5.2 for further information.

• Costs associated with the acquisition and integration of Pinnacle (2021, Pellet Production).
• Costs relating to the restructuring of the Customers business (2021, Customers).
• Operating expenditure which was incurred as a direct result of the decision to cease commercial coal generation (2021, Generation).
• Impact of UK tax rate change on deferred tax balances (2022 and 2021, Generation and Customers). See note 2.6 for further

information.

Certain remeasurements comprise gains or losses on derivative contracts to the extent that those contracts do not qualify for hedge
accounting, or hedge accounting is not effective, and those gains or losses are either i) unrealised and relate to derivative contracts
with a maturity in future periods, or ii) are realised in relation to the maturity of derivative contracts in the current period. The effect of
excluding certain remeasurements from Adjusted results is to reflect commodity sales and purchases at contracted prices i.e. at the
all-in-hedged amount paid or received in respect of the delivery of the commodity in question, and financial contracts in the period
they are intended to hedge, to reflect the underlying trading performance of the Group in Adjusted results.

Drax Group plc Annual report and accounts 2022 203

Financial statements

Section 2: Financial performance continued

2.7 Alternative performance measures continued
Volatility in financial and commodity markets has continued in 2022, in part due to the conflict in Ukraine. This has resulted in
significant movements in the remeasurement gains and losses on certain derivative financial instruments which do not qualify for
hedge accounting, or where hedge accounting is ineffective, as shown in the table below, principally relating to gas, certain foreign
currency contracts, inflation and oil. Further detail on the Group’s derivative financial instruments is provided in Section 7.

Year ended 31 December

Exceptional items:
Inventory provision as a result of coal closure
Acquisition costs
Restructuring costs
Integration costs
Coal closure costs
Impairment of non-current assets
Exceptional items included within operating profit and profit before tax
Tax on exceptional items
Impact of tax rate change
Exceptional items after tax
Certain remeasurements:
Net fair value remeasurements on derivative contracts included in revenue
Net remeasurements realised on maturity of derivative contracts included in revenue
Net hedge ineffectiveness reclassified to profit or loss included in revenue
Net fair value remeasurements on derivative contracts included in cost of sales
Net remeasurements realised on maturity of derivative contracts included in cost of sales
Certain remeasurements included within operating profit
Net remeasurements on maturity of derivative contracts included in interest payable and similar charges
Net fair value remeasurements on derivative contracts included in foreign exchange gains/(losses)
Certain remeasurements included in profit before tax
Tax on certain remeasurements
Impact of tax rate change
Certain remeasurements after tax

Reconciliation of profit after tax from continuing operations:
Adjusted profit after tax
Exceptional items after tax
Certain remeasurements after tax
Total profit after tax

2022
£m

–
–
–
–
–
(24.9)
(24.9)
4.7
(9.8)
(30.0)

(441.4)
107.7
(50.2)
32.6
53.1
(298.2)
(0.4)
(3.8)
(302.4)
57.5
19.4
(225.5)

338.0
(30.0)
(225.5)
82.5

2021(1)
£m

(0.3)
(7.9)
(5.2)
(4.1)
(4.8)
–
(22.3)
2.5
(50.2)
(70.0)

(77.0)
(8.9)
–
36.6
98.0
48.7
(0.3)
(5.1)
43.3
(8.2)
1.6
36.7

88.4
(70.0)
36.7
55.1

(1) Comparative amounts for the year ended 31 December 2021 have been re-presented to split out the impact of tax rate change between exceptionals

and certain remeasurements.

204

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2.7 Alternative performance measures continued
For each item designated as exceptional or as a certain remeasurement, the table below summarises the impact of the item
on the Adjusted profit after tax and Adjusted basic EPS from continuing operations and the total cash flow from continuing and
discontinued operations.

Total results IFRS measure
Certain remeasurements:
Net fair value remeasurement on derivative
contracts
Impact of tax rate change
Exceptional items:
Impairment of non-current assets
Impact of tax rate change
Total
Adjusted results totals

Total results IFRS measure
Certain remeasurements:
Net fair value remeasurement on derivative
contracts
Impact of tax rate change
Exceptional items:
Inventory provision as a result of coal closure
Acquisition costs
Restructuring costs
Integration costs
Coal closure costs
Impact of tax rate change
Total
Adjusted results totals

Year ended 31 December 2022

Revenue
£m

Gross profit
£m

Operating
profit
£m

Profit
before tax
£m

Tax credit/
(charge)
£m

Profit/(loss)
for the
period
£m

Basic
earnings/
(loss)
per
share
Pence

Net cash
from
operating
activities
£m

7,775.3

1,023.3

146.3

78.1

4.4

82.5

21.3

207.7

383.9
–

298.2
–

302.4
–

(57.5)
(19.4)

244.9
(19.4)

61.2
(4.8)

–
–

–
–
383.9

–
–
298.2
8,159.2 1,321.5

24.9
–
323.1
469.4

24.9
–
327.3
405.4

(4.7)
9.8
(71.8)
(67.4)

20.2
9.8
255.5
338.0

5.0
2.4
63.8
85.1

–
–
–
207.7

Year ended 31 December 2021(1)

Revenue
£m

Gross profit/
(loss)
£m

Operating
profit/(loss)
£m

Profit/(loss)
before tax
£m

Tax (charge)/
credit
£m

Profit/(loss)
for the
period
£m

Basic
earnings/
(loss) per
share
Pence

Net cash
from
operating
activities
£m

5,088.0

891.2

196.5

121.5

(66.4)

55.1

13.9

306.5

85.9
–

(48.7)
–

(43.3)
–

8.2
(1.6)

(35.1)
(1.6)

(8.8)
(0.4)

–
–

–
–
–
–
–
–
85.9
5,173.9

0.3
–
–
–
–
–
(48.4)
842.8

0.3
7.9
5.2
4.1
4.8
–
(26.4)
170.1

0.3
7.9
5.2
4.1
4.8
–
(21.0)
100.5

(0.1)
–
(0.8)
(0.8)
(0.8)
50.2
54.3
(12.1)

0.2
7.9
4.4
3.3
4.0
50.2
33.3
88.4

0.1
1.8
1.1
0.8
1.2
12.6
8.4
22.3

–
7.9
4.4
3.3
–
–
15.6
322.1

(1) Comparative amounts for the year ended 31 December 2021 have been re-presented to split out the impact of tax rate change between exceptionals

and certain remeasurements.

Drax Group plc Annual report and accounts 2022 205

Financial statements

Section 2: Financial performance continued

2.7 Alternative performance measures continued
Adjusted EBITDA from continuing and discontinued operations is a key measure of performance for the Group. A reconciliation from
Adjusted operating profit from continuing operations as per the Consolidated income statement is shown below:

Adjusted operating profit/(loss)
Depreciation and amortisation
Impairment losses on non-current assets
Other losses
Income from associates
Adjusted EBITDA

Adjusted operating profit
Depreciation and amortisation
Other losses
Income from associates
Adjusted EBITDA from continuing operations
Adjusted EBITDA from discontinued operations
Adjusted EBITDA from continuing and discontinued operations

Year ended 31 December 2022

Attributable to

Owners of the
Parent Company
£m

472.0
237.2
16.6
5.7
(0.5)
731.0

NCI
£m

(2.6)
2.2
–
0.1
–
(0.3)

Year ended 31 December 2021

Attributable to

Owners of the
Parent Company
£m

170.6
198.3
9.3
(0.3)
377.9
20.3
398.2

NCI
£m

(0.5)
0.6
0.1
–
0.2
–
0.2

Total
£m

469.4
239.4
16.6
5.8
(0.5)
730.7

Total
£m

170.1
198.9
9.4
(0.3)
378.1
20.3
398.4

Segment Adjusted EBITDA:

Continuing operations

Segment Adjusted EBITDA:
Continuing operations
Discontinued operations
Total

Pellet Production
£m

Generation
£m

Customers
£m

Innovation, capital
projects and other
£m

Intra-group
eliminations
£m

Total
£m

Year ended 31 December 2022

133.7

695.5

25.8

(113.6)

(10.4)

731.0

Pellet Production
£m

Generation
£m

Customers
£m

Innovation, capital
projects and other
£m

Intra-group
eliminations
£m

Year ended 31 December 2021

85.7
–
85.7

351.5
20.3
371.8

5.7
–
5.7

(70.9)
–
(70.9)

5.9
–
5.9

Total
£m

377.9
20.3
398.2

Net debt
Net debt is calculated by taking the Group’s borrowings (note 4.2), adjusting for the impact of associated hedging instruments,
and subtracting cash and cash equivalents (note 4.1).

The Group has entered into cross-currency interest rate swaps, fixing the sterling value of the principal repayments and interest in
respect of the Group’s US dollar (USD) and euro (EUR) denominated debt (see note 4.2). USD and EUR balances are translated at the
hedged rate, rather than the rate prevailing at the reporting date, which impacts the carrying amount of the Group’s borrowings. Net
debt excludes the share of borrowings and cash and cash equivalents attributable to NCI. See the APMs glossary and the APMs
section within the Basis of preparation for further details on the calculation of Net debt.

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2.7 Alternative performance measures continued

Borrowings
Cash and cash equivalents
Net cash and borrowings
NCI’s share of cash and cash equivalents in non-wholly owned subsidiaries
Net debt excluding the impact of hedging instruments
Impact of hedging instruments
Net debt
Collateral posted/(received)
Net debt excluding collateral

The table below reconciles Net debt in terms of changes in these balances across the year:

Net debt at 1 January
(Decrease)/increase in cash and cash equivalents
Increase in borrowings
Effect of changes in foreign exchange rates
Movement in the impact of hedging instruments
Net debt at 31 December

As at 31 December

2022
£m

(1,440.9)
238.0
(1,202.9)
(0.7)
(1,203.6)
(2.4)
(1,206.0)
234.0
(972.0)

2021
£m

(1,361.0)
317.4
(1,043.6)
–
(1,043.6)
(64.4)
(1,108.0)
(172.8)
(1,280.8)

Year ended 31 December

2022
£m

(1,108.0)
(85.6)
(8.6)
(65.8)
62.0
(1,206.0)

2021
£m

(819.1)
27.3
(310.2)
15.2
(21.2)
(1,108.0)

Borrowings include listed bonds, bank debt and RCFs (to the extent drawn in cash), net of any deferred finance costs. Borrowings
do not include other financial liabilities such as lease liabilities and trade and other payables (including working capital facilities as
described in note 3.7).

The Group does not include lease liabilities, calculated in accordance with IFRS 16, in the definition of Net debt. This reflects the
nature of the contracts included in this balance which, prior to the application of IFRS 16, were predominantly not held on the
Consolidated balance sheet and instead disclosed as operating commitments. The exclusion of lease liabilities from the calculation
of Net debt is also consistent with the Group’s covenant reporting requirements.

The Group does not include balances related to supply chain financing or factoring in the definition of Net debt. These facilities do not
increase the Group’s working capital cycle beyond the Group’s standard payment terms and are only short-term balances. Therefore,
the balances do not meet the Group’s definition of borrowings and so are excluded from Net debt.

A reconciliation of the change in borrowings during the year is set out in the table on note 4.2.

As explained in the Basis of preparation, the Group has a long-term target for Net debt to Adjusted EBITDA of around 2.0 times.

Adjusted EBITDA (continuing and discontinued operations) (£m)
Net debt (£m)
Net debt excluding collateral (£m)
Net debt to Adjusted EBITDA ratio
Net debt (excluding collateral) to Adjusted EBITDA ratio

As at 31 December

2022

2021

731.0
(1,206.0)
(972.0)
1.6
1.3

398.2
(1,108.0)
(1,280.8)
2.8
3.2

Drax Group plc Annual report and accounts 2022 207

Financial statements

Section 2: Financial performance continued

2.7 Alternative performance measures continued
Cash and committed facilities
The below table reconciles the Group’s available cash and committed facilities:

Cash and cash equivalents (note 4.1)
RCF available but not utilised (1)
Liquidity facility available but not utilised
Total cash and committed facilities

As at 31 December

2022
£m

238.0
260.1
200.0
698.1

2021
£m

317.4
231.4
–
548.8

(1) The Group’s available balance on the RCF facility (includes £300 million and C$10 million RCF, see note 4.2) is reduced by letters of credit drawn under the RCF.

At 31 December 2022 £46.0 million letters of credit were drawn (2021: £74.4 million).

Further commentary on total cash and committed facilities is contained within the Financial review starting on page 20.

2.8 Earnings per share
Earnings per share (EPS) represents the amount of earnings (post-tax profit or losses) attributable to each ordinary share in issue.
Basic EPS is calculated by dividing the Group’s earnings attributable to owners of the Parent Company (profit or loss after tax in
accordance with IFRS excluding amounts attributable to NCI) by the weighted average number of ordinary shares that were in issue
during the year. Diluted EPS demonstrates the impact of all outstanding share options that would vest on their future maturity dates if
the conditions at the end of the reporting period were the same as those at the end of the contingency period (such as those to be
issued under employee share schemes – see note 6.2), were exercised and treated as ordinary shares as at the reporting date.
Repurchased shares of 13.8 million (2021: 13.8 million) held in the Treasury shares reserve (see note 4.4) are not included in the
weighted average calculation of shares. For the purpose of calculating diluted EPS, the weighted average calculation of shares
excludes any share options that would have an anti-dilutive impact.

Earnings attributable to equity holders of the Parent Company for the purposes of basic and diluted
earnings per share (£m), made up of:
Net result from continuing operations
Net result from discontinued operations
Number of shares (millions):
Weighted average number of ordinary shares for the purposes of basic earnings per share
Effect of dilutive potential ordinary shares under share plans
Weighted average number of ordinary shares for the purposes of diluted earnings per share

Year ended 31 December

2022

2021

85.1
85.1
–

400.4
14.0
414.4

79.7
55.6
24.1

398.4
14.2
412.6

Earnings per share attributable to the owners of the Parent Company
Earnings – profit after tax (£m)
Earnings per share – basic (pence)
Earnings per share – diluted (pence)

Adjusted results

Total results

Adjusted results

Total results

340.6
85.1
82.2

85.1
21.3
20.5

105.6
26.5
25.6

79.7
20.0
19.3

Year ended 31 December

2022

2021

Year ended 31 December

2022

2021

Earnings per share from continuing operations attributable to the
owners of the Parent Company
Earnings – profit after tax (£m)
Earnings per share – basic (pence)
Earnings per share – diluted (pence)

Adjusted results

Total results

Adjusted results

Total results

340.6
85.1
82.2

85.1
21.3
20.5

88.9
22.3
21.5

55.6
13.9
13.5

There were no discontinued operations in the year. The Total profit after tax from discontinued operations in 2021 of £24.1 million,
resulted in Total basic EPS of 6.1 pence and Total diluted EPS of 5.8 pence. Application of the same calculation to Adjusted profit after
tax from discontinued operations in 2021 of £16.7 million, resulted in Adjusted basic EPS of 4.2 pence and Adjusted diluted EPS of
4.1 pence.

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2.9 Dividends

Amounts recognised as distributions to equity holders in the year (based on the number of shares
in issue at the record date):
Interim dividend for the year ended 31 December 2022 of 8.4 pence per share paid on 7 October 2022
(2021: 7.5 pence per share paid on 8 October 2021)

Final dividend for the year ended 31 December 2021 of 11.3 pence per share paid on 13 May 2022
(2020: 10.3 pence per share paid on 14 May 2021)
Total distributions

Year ended 31 December

2022
£m

2021
£m

33.7

45.2
78.9

29.9

41.0
70.9

At the forthcoming Annual General Meeting, the Board will recommend to shareholders that a resolution is passed to approve
payment of a final dividend for the year ended 31 December 2022 of 12.6 pence per share (equivalent to approximately £50 million)
payable on or before 19 May 2023. The final dividend has not been included as a liability as at 31 December 2022. This would bring
total dividends payable in respect of the 2022 financial year to approximately £84 million.

The Group has a long-standing capital allocation policy. This policy is based on a commitment to robust financial metrics that underpin
the Group’s strong credit rating: investment in the core business; paying a sustainable and growing dividend; and returning surplus
capital to shareholders. The Board is confident that the dividend is sustainable and expects it to grow as the implementation of the
Group’s strategy generates an increasing proportion of stable earnings and cash flows. In determining the rate of growth in dividends,
the Board will take account of future investment opportunities and the less predictable cash flows from the Group’s commodity-linked
revenue streams.

In future years, if there is a build-up of capital in excess of the Group’s investment needs, the Board will consider the most appropriate
mechanism to return this to shareholders.

Consideration of sustainability, including a link to the Group’s dividend, can be found in the Market context section on pages 4 and 5.

2.10 Retained profits
Retained profits are a component of equity reserves. The overall balance reflects the total profits the Group has generated over its
lifetime that are attributable to the equity holders of the Parent Company, reduced by the amount of that profit distributed to
shareholders. The table below sets out the movements in retained profits during the year:

At 1 January
Profit for the year
Remeasurement of defined benefit pension scheme (note 6.3)

Deferred tax on remeasurement of defined benefit pension scheme (note 2.6)
Deferred tax on share-based payments (note 2.6)
Equity dividends paid (note 2.9)
Movements in equity associated with share-based payments (note 6.2)
Acquisition of NCI without a change in control (note 4.5)
At 31 December

Year ended 31 December

2022
£m

198.3
85.1
(24.4)

6.1
7.4
(78.9)
9.5
(9.3)
193.8

2021
£m

153.4
79.7
30.7

(7.2)
5.4
(70.9)
7.4
(0.2)
198.3

Distributable reserves
The capacity of the Group to make dividend payments is primarily determined by the availability of retained distributable profits and
cash resources.

The Parent Company’s financial statements are set out on pages 277 to 283 of this Annual report, disclose the Parent Company’s
distributable reserves of £306.3 million. Sufficient reserves are available across the Group as a whole to make future distributions in
accordance with the Group’s dividend policy for the foreseeable future.

The majority of the Group’s distributable reserves are held in holding and operating subsidiaries. Management actively monitors the level
of distributable reserves in each company in the Group, ensuring adequate reserves are available for upcoming dividend payments and
that the Parent Company has access to these reserves.

The immediate cash resources of the Group of £238.0 million are set out in note 4.1 and the recent history of cash generation within
note 4.3. The majority of these cash resources are held centrally within the Group by Drax Corporate Limited for treasury management
purposes and are available for funding the working capital and other requirements of the Group.

The Group’s financing facilities (see note 4.2) place customary conditions on the amount of dividend payments to be made in any given
year. The Group expects to be able to make dividend payments, in line with its policy, within these conditions for the foreseeable
future. See the Viability statement on page 75 and note 4.2 for further details on the covenants relating to the financing facilities.

Drax Group plc Annual report and accounts 2022 209

Financial statements

Section 3: Operating assets and working capital

This section gives further information on the operating assets the Group uses to generate revenue and the short-term liquid assets
and liabilities, managed during day-to-day operations, that comprise the Group’s working capital balances.

3.1 Property, plant and equipment
This note shows the cost, depreciation and net book value of the physical assets controlled by the Group.

Accounting policy
Property, plant and equipment is stated at net book value, which is its cost less any accumulated depreciation less impairment,
if required, charged to date. Property, plant and equipment assets are initially measured at cost. Cost comprises: the purchase price
(after deducting trade discounts and rebates); any directly attributable costs of bringing the asset to the location and condition
necessary for it to be capable of operating in the manner intended by management; and the estimate of the present value of the costs
of dismantling and removing the item and restoring the site, where required. Depreciation reflects the usage of the asset over time and
is calculated by taking the cost of the asset, net of any expected residual value, and charging it to the Consolidated income statement
on a straight-line basis from the date that the asset is brought into use and over its UEL. Where relevant, this is limited to the expected
decommissioning date of the site where the asset is located.

The Group constructs many of its assets as part of long-term development projects. Assets that are under the course of construction
are not depreciated until they are ready for use in the way intended by management.

The table below shows the weighted average remaining UELs of the main categories of assets held at the reporting date:

Freehold buildings
Plant and equipment
Electricity generation assets:
Drax Power Station common plant
Drax Power Station biomass-specific assets
Hydro-electric plants (including pumped storage)
Pellet production plant
Other plant, machinery and equipment
Reinstatement asset
Plant spare parts

Freehold land held at cost is considered to have an unlimited UEL and is not depreciated. The value of freehold land held
at 31 December 2022 is £37.5 million (2021: £26.9 million).

Average UEL
remaining
2022
(years)

14
16
39
10
14
17
17

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3.1 Property, plant and equipment continued
An impairment charge is recognised immediately if the net book value of an asset exceeds its recoverable amount, which is defined
to be the higher of an asset’s value in use and its fair value less costs to sell. The Group’s policy is to recognise an impairment charge
through accumulated depreciation if the asset will continue to be used by the Group or if the asset will be subsequently sold. However,
if the asset is still under construction, as no depreciation has yet been charged, the impairment charge is recognised in cost. Assets
that will no longer be used by the Group are disposed of by removing both the cost and any accumulated depreciation and impairment.

Electricity generation assets are grouped according to the fuel type of the relevant plant. Certain assets at Drax Power Station are
common to the whole plant.

Pellet Production plant includes the US and Canadian based assets of the Group’s Pellet Production business and the assets at the
Daldowie fuel plant near Glasgow.

Plant spare parts are depreciated over the remaining UEL of the relevant power station or plant.

Occasionally, plant spare parts are required to be used within maintenance projects. In this instance the net book value of the part
is transferred from the property, plant and equipment balance and recognised as an expense in the Consolidated income statement
within operating and administrative expenses. These issues are reflected on the issues to maintenance projects line in the table below.

Costs relating to major inspections, overhauls and upgrades to assets are included in the carrying amounts or recognised as separate
assets, as appropriate, if the recognition criteria are met; namely, when it is probable that future economic benefits associated
with the expenditure will flow to the Group and the cost can be measured reliably. All other repairs and maintenance costs are
expensed as incurred.

Estimated UELs and residual values are reviewed annually, taking into account regulatory changes and commercial and technological
obsolescence, as well as normal wear and tear. Residual values are based on prices prevailing at the reporting date. Any changes to
estimated UELs or residual values are applied prospectively.

At each reporting date the Group reviews its property, plant and equipment to determine whether there is any indication that these
assets may be impaired. The Group’s accounting policy in respect of impairment, along with details of the impairment review
conducted during 2022 and disclosures relating to the impairment of Daldowie and Abergelli assets, are set out in note 2.4.

During the year, the Group has capitalised £19.1 million (2021: £5.4 million) of costs relating to the UK BECCS project at Drax Power
Station. The Group has also commenced construction of the Group’s three OCGT projects that have obtained Capacity Market
contracts. The costs capitalised in the year on the OCGT projects total £90.2 million (2021: £7.8 million).

The Group’s total commitment for future capital expenditure is disclosed in note 7.7.

Significant estimation uncertainty
Assets’ UELs are reviewed annually at each reporting date, taking into consideration the impact of climate and environmental change.
See note 3.8 for further details.

As disclosed on page 178, the Group has made an estimate regarding the UEL of Drax Power Station. Given the continued focus on
climate change, renewable sources of energy and transitioning to a net zero economy, the power generation industry is going through
a period of transformation, which can impact on the UELs of assets. As the UK Government’s net zero strategy becomes clearer,
particularly in relation to UK BECCS, the Group will continue to assess any potential impact of these developments and whether
the UEL of Drax Power Station is impacted. The continued rate of change in these areas increases the risk that UELs of Drax Power
Station will be updated in the future as new information becomes available. As such, a change in UELs in relation to Drax Power
Station’s biomass assets has been disclosed as a key source of estimation uncertainty. If UK BECCS is deployed at Drax Power Station
this could result in an extension of the end of station life beyond the current assumed end date of 2039. If the UELs of Drax Power
Station assets currently limited to end of station life of 2039 were to increase by a further 10 years, the annual depreciation charge
for the year would decrease by approximately £14.2 million.

Drax Group plc Annual report and accounts 2022 211

Financial statements

Section 3: Operating assets and working capital continued

3.1 Property, plant and equipment continued

Freehold land
and buildings
£m

Plant and
equipment
£m

Plant spare
parts
£m

Assets under the
course of
construction
£m

Cost:
At 1 January 2021
Additions at cost
Acquired in business combinations
Disposals(1)
Movement in reinstatement asset(1)
Issues to maintenance projects
Transfers from inventories
Transfers from right-of-use assets
Transfers from intangibles(2)
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 1 January 2022
Additions at cost
Acquired in business combinations
Impairment
Disposals
Movement in reinstatement asset
Issues to maintenance projects
Transfers from inventories
Transfers from/(to) intangibles
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 31 December 2022
Accumulated depreciation:
At 1 January 2021
Depreciation charge for the year
Disposals
Issues to maintenance projects
Transfers from right-of-use assets
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 1 January 2022
Depreciation charge for the year
Impairment
Disposals
Issues to maintenance projects
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 31 December 2022
Net book value:
At 31 December 2021
At 31 December 2022

389.3
13.9
43.8
(1.4)
–
–
–
0.3
–
5.7
2.2
453.8
8.2
3.3
(0.2)
(1.3)
–
–
–
–
22.3
17.2
503.3

102.4
15.8
(0.1)
–
0.1
(0.4)
0.4
118.2
21.5
0.5
(1.7)
–
(0.3)
4.1
142.3

335.6
361.0

2,836.3
0.9
185.0
(24.1)
(2.7)
–
–
0.7
–
156.4
8.0
3,160.5
2.2
4.6
–
(23.7)
(22.4)
–
–
0.3
202.6
52.6
3,376.7

1,415.6
130.2
(16.2)
–
0.7
0.4
3.4
1,534.1
171.6
7.5
(19.7)
–
(3.2)
15.8
1,706.1

1,626.4
1,670.6

69.6
5.3
–
–
–
(5.5)
3.7
–
–
(0.8)
–
72.3
3.8
–
–
–
–
(3.3)
0.5
–
7.7
–
81.0

24.9
3.8
–
(0.8)
–
–
–
27.9
2.5
–
–
(0.4)
3.5
–
33.5

44.4
47.5

Total
£m

3,484.0
215.5
289.9
(25.5)
(2.7)
(5.5)
3.7
1.0
18.1
–
12.4
3,990.9
246.0
7.9
(6.9)
(25.9)
(22.4)
(3.3)
0.5
–
–
83.1
4,269.9

1,542.9
149.8
(16.3)
(0.8)
0.8
–
3.8
1,680.2
195.6
8.0
(21.4)
(0.4)
–
19.9
1,881.9

188.8
195.4
61.1
–
–
–
–
–
18.1
(161.3)
2.2
304.3
231.8
–
(6.7)
(0.9)
–
–
–
(0.3)
(232.6)
13.3
308.9

–
–
–
–
–
–
–
–
–
–
–
–
–
–
–

304.3
308.9

2,310.7
2,388.0

(1) The comparative amounts have been re-presented to split out the movement in the reinstatement asset. The reduction in the reinstatement asset of £2.7 million in the

year ended 31 December 2021 was previously reported within the disposals line.

(2) The comparative amounts have been re-presented to present the OCGT development costs in assets under the course of construction.

Included in the amount for assets under the course of construction are capitalised borrowing costs of £5.2 million (2021: £nil) related
to the construction of the three OCGT projects that have obtained a Capacity Market contract.

In the table above, impairments within cost of £6.9 million relate to the write down of the Group’s fourth OCGT project that has not
obtained a Capacity Market contract. Impairments within accumulated depreciation of £8.0 million relate to the write down of assets
at the Daldowie fuel plant. See note 2.4 for further details of the Group’s accounting policy for impairments of fixed assets.

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3.1 Property, plant and equipment continued
Plant and equipment shown above includes the following categories of assets:

Biomass and
coal plant
£m

Hydro-electric
plant
£m

Pellet
production
plants
£m

Cost:
At 1 January 2021
Additions at cost
Acquired in business combinations
Disposals(1)
Movement in reinstatement asset(1)
Transfers from right-of-use assets
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 1 January 2022 (2)
Additions at cost
Acquired in business combinations
Disposals

Movement in reinstatement asset
Transfers from intangibles
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 31 December 2022
Accumulated depreciation:
At 1 January 2021
Depreciation charge for the year
Disposals
Transfers from right-of-use assets
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 1 January 2022
Depreciation charge for the year
Impairment
Disposals
Transfers between PPE categories
Effect of changes in foreign exchange rates
At 31 December 2022
Net book value:
At 31 December 2021
At 31 December 2022

2,072.9
–
–
(17.5)
(2.7)
–
65.1
–
2,117.8
1.0
–
(0.1)

(22.4)
–
45.0
–
2,141.3

1,298.4
70.3
(11.2)
–
(1.0)
–
1,356.5
64.3
–
–
(3.5)
–
1,417.3

761.3
724.0

471.0
–
–
–
–
–
5.0
–
476.0
–
–
–

–
–
3.4
–
479.4

28.1
12.1
–
–
1.0
–
41.2
12.1
–
–
–
–
53.3

434.8
426.1

276.4
0.8
185.0
(5.6)
–
0.7
82.0
8.0
547.3
0.9
4.6
(21.1)

–
0.3
154.2
52.6
738.8

77.3
45.0
(4.2)
0.7
0.4
3.4
122.6
92.9
7.5
(17.3)
0.3
15.8
221.8

424.7
517.0

Other
£m

16.0
0.1
–
(1.0)
–
–
4.3
–
19.4
0.3
–
(2.5)

–
–
–
–
17.2

11.8
2.8
(0.8)
–
–
–
13.8
2.3
–
(2.4)
–
–
13.7

5.6
3.5

Total
plant and
equipment
£m

2,836.3
0.9
185.0
(24.1)
(2.7)
0.7
156.4
8.0
3,160.5
2.2
4.6
(23.7)

(22.4)
0.3
202.6
52.6
3,376.7

1,415.6
130.2
(16.2)
0.7
0.4
3.4
1,534.1
171.6
7.5
(19.7)
(3.2)
15.8
1,706.1

1,626.4
1,670.6

(1) The comparative amounts have been re-presented to split out the movement in the reinstatement asset. The reduction in the reinstatement asset of £2.7 million in the

year ended 31 December 2021 was previously reported within the disposals line.

(2) The comparative amounts have been re-presented to present the OCGT development costs in assets under the course of construction.

The depreciation expense in the Consolidated income statement of £208.0 million comprises of £195.6 million of depreciation charged
on property, plant and equipment, £20.3 million charged on right-of-use assets (see note 3.2) offset by £7.9 million of depreciation
included in closing inventories.

The increase in depreciation of pellet production plants during the year includes the impact of planned higher levels of capital
expenditure in relation to plant upgrades and capacity expansions, and includes some accelerated depreciation for existing equipment
that has been, or will be, replaced following capital investments. The UELs of impacted assets were reviewed and updated at the
start of 2022 to reflect these plans, and the impact of these updates on the depreciation charge for 2022 was around an additional
£22.0 million charge.

Drax Group plc Annual report and accounts 2022 213

Financial statements

Section 3: Operating assets and working capital continued

3.2 Leases
Accounting policy
IFRS 16 determines a control model to distinguish between lease agreements and service contracts on the basis of whether the
use of an identified asset is controlled by the Group for a period of time. If the Group is deemed to have control of an identified asset,
then a right-of-use asset and corresponding lease liability are recognised on the Consolidated balance sheet.

The lease liability is initially measured at the present value of the future lease payments discounted using the discount rate that is
implicit in the lease. If this discount rate cannot be determined from the agreement, the liability is discounted using an incremental
borrowing rate. Incremental borrowing rates are updated biannually. The borrowing rate for leased property is derived with reference
to property yields specific to the location of the leased property and property type. For non-property leases, the borrowing rate is
derived from a series of inputs including counterparty specific proxies for risk-free rates, such as UK Gilt curves, and an adjustment
for credit risk based on the Group’s credit rating. The liability is subsequently adjusted for interest, repayments and other
modifications.

The right-of-use asset is initially measured at cost and is subsequently measured at cost less accumulated depreciation and
accumulated impairment losses. Cost comprises the initial calculation of the lease liability, estimated costs for dismantling or restoring
the asset, any initial direct costs, and lease payments made or incentives received prior to commencement of the lease.

Lease modifications are accounted for as a separate lease where the scope of the lease increases through the right to use one or more
underlying assets, and where the consideration of the lease increases by an amount that is equivalent to the standalone price of the
increase in scope. Where a modification decreases the scope of the lease, the carrying amount of the right-of-use asset and lease
liability are adjusted, and a gain or loss is recognised in proportion to the decrease in scope of the lease. All other modifications are
accounted for as a reassessment of the lease liability with a corresponding adjustment to the right-of-use asset.

Lease extension or termination options are included within the lease term when the Group, as the lessee, has the discretion to exercise
the option and where it is probable that the option will be exercised.

Leases with a term shorter than 12 months, or where the identified asset has a value below £3,500, are expensed to the Consolidated
income statement on a straight-line basis over the term of the agreement.

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3.2 Leases continued
Right-of-use assets

Cost:
At 1 January 2021
Additions at cost
Other movements
Transfers to PPE
Acquired in business combinations
Effect of changes in foreign exchange rates
At 1 January 2022
Additions at cost
Other movements
Effect of changes in foreign exchange rates
At 31 December 2022
Accumulated depreciation and impairment:
At 1 January 2021
Depreciation charge for the year
Other movements
Transfers to PPE
Effect of changes in foreign exchange rates
At 1 January 2022
Depreciation charge for the year
Other movements
Effect of changes in foreign exchange rates
At 31 December 2022
Net book value:
At 31 December 2021
At 31 December 2022

Lease liabilities

Carrying amount:
At 1 January
Additions
Acquired in business combinations
Interest charge for the year
Payments
Other movements
Effect of changes in foreign exchange rates
At 31 December

Land and
buildings
£m

Plant and
equipment
£m

Railcars
£m

Vessels
£m

Total
£m

23.7
0.2
(0.5)
(0.3)
4.7
0.1
27.9
5.1
(3.1)
0.5
30.4

6.1
4.3
(1.9)
(0.1)
0.1
8.5
3.9
(1.1)
0.2
11.5

19.4
18.9

9.1
7.0
(4.2)
(0.7)
4.1
(0.1)
15.2
4.7
4.0
0.9
24.8

4.2
4.6
(3.3)
(0.7)
–
4.8
6.0
(0.4)
0.2
10.6

10.4
14.2

8.7
4.1
(0.3)
–
17.0
0.7
30.2
2.2
(0.8)
2.1
33.7

2.2
3.2
(0.3)
–
0.5
5.6
4.6
–
0.4
10.6

24.6
23.1

–
33.3
–
–
34.6
0.6
68.5
19.8
–
2.5
90.8

–
3.1
–
–
–
3.1
5.8
–
(0.2)
8.7

41.5
44.6
(5.0)
(1.0)
60.4
1.3
141.8
31.8
0.1
6.0
179.7

12.5
15.2
(5.5)
(0.8)
0.6
22.0
20.3
(1.5)
0.6
41.4

65.4
82.1

119.8
138.3

Year ended 31 December

2022
£m

125.9
30.2
–
6.8
(24.8)
3.4
11.6
153.1

2021
£m

30.2
44.7
61.1
4.9
(17.9)
0.2
2.7
125.9

Drax Group plc Annual report and accounts 2022 215

Financial statements

Section 3: Operating assets and working capital continued

3.2 Leases continued
The existence of termination, extension and purchase options has not had a material impact on the determination of the
lease liabilities.

In addition to the payments disclosed above, the Group made payments of £0.1 million during the year (2021: £0.8 million) in relation
to short-term and low value leases.

The maturity of the gross undiscounted lease liabilities at 31 December is as follows:

Within one year
Within one to two years
Within two to five years
After five years
Total gross lease liabilities
Effect of discounting
Lease liabilities recognised in the Consolidated balance sheet
Current portion
Non-current portion

As at 31 December

2022
£m

30.3
26.7
64.3
72.0
193.3
(40.2)
153.1
22.7
130.4

2021
£m

21.2
18.9
46.4
78.4
164.9
(39.0)
125.9
15.1
110.8

The Group recognised the following charges from continuing operations relating to leases in the Consolidated income statement:

Expense relating to short-term leases
Interest charge for the year
Depreciation charge for the year

Year ended 31 December

2022
£m

0.1
6.8
20.3

2021
£m

0.8
4.9
15.2

3.3 Renewable certificate assets
The Group earns renewable certificate assets including ROCs and REGOs which are accredited by the Office for Gas and Electricity
Markets (Ofgem), as a result of burning biomass pellets to generate electricity at Drax Power Station and generating renewable energy
at a number of the Group’s hydro-electric plants. The Group’s ROC and REGO certificates are sold bilaterally to counterparties,
including external suppliers, and also internally for utilisation by the Customers business.

This note sets out the value of these certificate assets that the Group held at the reporting date.

Accounting policy
Renewable certificates, principally ROCs and REGOs, are first recognised as current assets in the period they are generated.
The Group uses their fair value at initial recognition, based on anticipated sales prices, as deemed cost. The value of renewable
certificates earned is recognised in the Consolidated income statement as a reduction to cost of sales in the same period
they are earned.

Where the Customers business incurs an obligation to deliver renewable certificates, that obligation is provided for in the period
incurred within cost of sales.

ROCs and REGOs valuation are comprised of the expected value to be obtained in a sales transaction with a third-party supplier
at the point of generation. If the Group has already agreed sales contracts to cover the renewable certificates generated in a period,
then they are recognised at the contracted price. Any renewable certificates generated above this, or to be utilised by the Customers
business, are recognised at an estimate of the expected market value, which is generally based on the amount to be obtained in
a sales transaction with a third-party supplier.

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3.3 Renewable certificate assets continued
ROC valuations are comprised of two parts: the expected value to be obtained in a sales transaction with a third-party supplier relating
to the buy-out price; and an estimate of the future benefit that may be obtained from the ROC recycle fund at the end of the CP, which
runs from April to March each year. The recycle fund provides a benefit where supplier buy-out charges (incurred by suppliers who
do not procure sufficient ROCs to satisfy their obligations) are redistributed to the suppliers who presented ROCs in a CP on a pro-rata
basis. The estimate of the recycle value is based on assumptions about likely levels of renewable generation and also the demand
for ROCs over the CP, and is thus subject to some uncertainty. The Group utilises external sources of information in addition to its
own forecasts in making these estimates. Historical experience indicates that the assumptions used in the valuations are reasonable,
but the recycle value remains subject to possible variation and may subsequently differ from assumptions at 31 December.

At each reporting date, the Group reviews the carrying value of renewable certificate assets held against updated anticipated sales
prices or anticipated obligation requirements, and the estimated recycle value. Where relevant, this takes account of agreed forward
sales contracts, the likely utilisation of renewable certificates generated to settle the Group’s own obligations, and any relevant
information about the levels of wider renewable generation. Any impairment loss is recognised in the Consolidated income statement
in the period incurred.

Carrying amount:
At 1 January
Earned from generation
Purchased from third-parties
Utilised by the Customers business
Sold to third-parties
At 31 December

Year ended 31 December

2022
£m

301.4
652.5
486.3
(394.1)
(858.3)
187.8

2021
£m

139.6
658.2
361.3
(320.7)
(537.0)
301.4

Recognition of revenue from the sale of renewable certificates is described in further detail in note 2.2.

3.4 Inventories
The Group holds inventories of fuels and other consumable items that are used in the process of generating electricity, and raw
materials used in the production of biomass pellets and waste pellets. This note shows the cost of biomass, coal, other fuels and plant
consumables held at the reporting date.

Accounting policy
The Group’s raw materials and fuel inventory are valued at the lower of the weighted average cost to purchase and net realisable value.

The cost of purchased fuel inventories includes all direct costs and overheads incurred in bringing the fuel to its present location
and condition, including the purchase price, import duties and other taxes, and transport and handling costs. The Group uses forward
foreign exchange contracts to hedge the costs of fuel denominated in foreign currencies. Where these contracts are designated
into hedge relationships in accordance with IFRS 9, the inventory cost is recognised at the hedged value, to the extent these hedges
are effective, and all such gains and losses are included in cost of sales when they arise.

Both biomass and coal inventories are weighed when entering, moving within or exiting the Group’s sites using technology regularly
calibrated to industry standards. Fuel burn in the electricity generation process is calculated using a combination of weights and
thermal efficiency calculations to provide closing inventory volumes. Both calibrated weighers and efficiency calculations are subject
to a range of tolerable error. All fuel inventories are subject to regular surveys to ensure these measurements are sufficiently accurate.

The characteristics of biomass require specialist handling and storage. Biomass at Drax Power Station is stored in sealed domes
with a carefully controlled atmosphere for fire prevention purposes and thus cannot be surveyed using traditional methods. Biomass
inventory is surveyed using regularly calibrated radar scanning technology to validate the accuracy of the weights and efficiency
methods outlined above.

The cost of manufactured fuel inventories includes all direct costs incurred in production and conversion including raw materials,
labour, direct overheads and other costs incurred in bringing the inventories to their existing condition and location. It also includes
an allocation of overheads, including depreciation and other indirect costs. Costs that do not contribute to bringing inventories to their
present condition and location, such as storage and administration overheads, are excluded from the cost of inventories and expensed
as incurred.

The valuation of fibre inventory involves estimations of the conversion rates to determine the volume of residual fibre stockpiles and
log inventory. Third-party surveys are performed regularly to assess the volume of inventory and appropriate adjustments are made,
if required, using conversion factors estimated by management. Internal inventory counts are performed periodically at all locations.

Drax Group plc Annual report and accounts 2022 217

Financial statements

Section 3: Operating assets and working capital continued

3.4 Inventories continued

Biomass – finished goods
Biomass – fibre and other raw materials
Coal
Other fuels and consumables
Total inventories

As at 31 December

2022
£m

294.5
16.5
–
37.1
348.1

2021
£m

144.6
12.8
8.4
33.3
199.1

The net realisable value of coal in the prior year in the table above was stated after provisions of £0.9 million. No inventory provisions
have been recognised in the current year.

The increase in the value of biomass finished goods held at the reporting date results from the planned build-up of inventories
due to the reprofiling of generation into winter from summer when it was originally planned, along with higher biomass prices.

At the request of the UK Government, the Group entered into an agreement with National Grid to keep the two coal units at
Drax Power Station available to provide a “winter contingency” service to the UK power system from October 2022 until the
end of March 2023. The units will not generate commercially for the duration of the agreement and only operate if and when
instructed to do so by National Grid. Under the terms of this contract, the Group no longer has control of any coal inventory.

The cost of inventories recognised as an expense in the year ended 31 December 2022 was £1,587.9 million (2021: £1,352.0 million).
This includes the value of write downs of inventory in the year.

3.5 Trade and other receivables and contract assets
Trade receivables represent amounts owed by customers for goods or services provided that have been invoiced for but have
not yet been paid. Accrued income represents income earned in the period but not yet invoiced, largely in respect of power delivered
to customers that will be invoiced the following month.

Accounting policy
Trade and other receivables are initially measured at the transaction price and subsequently measured at amortised cost.

The Group has access to a receivables monetisation facility under which amounts receivable can be sold to a third-party on a non-
recourse basis. Receivables sold under such facilities are accounted for at fair value through other comprehensive income (FVOCI)
in accordance with IFRS 9, due to the objective of the business model being achieved by both collecting contractual cash flows and
the selling of the financial assets. These receivables are derecognised at the point of sale which is shortly after the initial recognition
of the receivable balance. As a result, no fair value gains or losses have been recognised. Fees are recognised in the Consolidated
income statement as incurred within interest payable and similar charges. At 31 December 2022, the receivables sold under this
facility were £400.0 million (2021: £200.0 million), reflecting the increase in the size of the facility during the year. Refer to note 4.3
for further information about the facility.

Contingent consideration receivable is a financial asset. As the cash flows are not solely payments of principal and interest,
it does not meet the criteria for recognition at either amortised cost or FVOCI, and is therefore recognised at fair value through profit
and loss (FVTPL).

The UK Government introduced the Energy Bill Relief Scheme (EBRS) from 1 October 2022 to 31 March 2023. Energy supplied to
non-domestic customers in this period has a discount applied under the EBRS. The Group claims this discount back from the
Government. The amount the Group is entitled to claim from the Government is either recognised in other receivables, if it has been
claimed but has not yet been received from the Government, or accrued income if not yet claimed at the reporting date. See note 2.2
for details of energy supplied under the EBRS within the Consolidated income statement.

Amounts falling due within one year:
Trade receivables
Accrued income
Prepayments
Other receivables
Contingent consideration
Total trade and other receivables and contract assets

As at 31 December

2022
£m

276.6
522.5
127.7
272.8
27.4
1,227.0

2021
£m

187.5
270.3
97.4
59.0
27.7
641.9

At 31 December 2022, the Group had no amounts receivable from significant counterparties which represented 10% or more of total
trade receivables and accrued income (2021: one significant counterparty).

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3.5 Trade and other receivables and contract assets continued
Of total trade receivables and accrued income at 31 December 2022, £587.0 million (2021: £314.0 million) relates to the Customers
business, £168.0 million relates to the Generation business (2021: £125.9 million), and £44.1 million (2021: £17.9 million) relates to the
Pellet Production business.

The contingent consideration relates to the Group’s disposal of the CCGT generation portfolio in January 2021. Should the acquirer
satisfy certain triggers in respect of the option to develop the land at the Damhead Creek 2 site, which was disposed of as part of this
sale, £29.0 million of contingent consideration would become payable to the Group from the acquirer. The estimated fair value of this
contingent consideration is £27.4 million (2021: £27.7 million). Contingent consideration is disclosed within current assets, however,
the timing of receipt would be dependent on when a trigger was to occur, which may be in a period greater than 12 months from the
end of the reporting period. See note 7.1 for further details on the contingent consideration.

Accrued income includes contract assets which relate to amounts for goods or services provided under customer contracts, where
the entitlement to consideration is contingent on something other than the passage of time. The Group has recognised a contract
asset for any services provided where payment is not yet due. Any amount previously recognised as a contract asset is reclassified
to trade receivables at the point at which it is invoiced to the customer, usually in the following financial period. Contract assets at
31 December 2022 were £20.0 million (2021: £6.0 million).

Impairment of financial assets
Accounting policy
The Group applies the impairment model in IFRS 9 to provide for expected credit losses on the Group’s financial assets including trade
receivables, accrued income, contract assets and other financial assets. The provision for impairment of trade receivables and accrued
income (including contract assets) is measured at an amount equal to the lifetime expected credit loss. Contract assets relate
to amounts for goods or services provided under customer contracts and, therefore, have substantially the same risk characteristics
as trade receivables for the same types of contracts.

For other financial assets, the Group recognises a lifetime expected credit loss provision when there has been a significant increase
in credit risk since initial recognition. If the credit risk of the financial instrument has not increased significantly since initial recognition,
the Group recognises a 12-month expected credit loss provision.

The greatest concentration of credit risk exists in the Customers business. For the larger consumers within the Customers business
(and also customers within the Generation and Pellet Production businesses) a provision matrix method is adopted. For the SME
consumers within the Customers business, the risk is higher due to the wide range of customer characteristics within the portfolio.
The loss provisioning for these customers is complex and requires a provisioning tool that is more dynamic than the provision matrix
method and so a combined probability method is applied. Both of these approaches are described in more detail below.

Under the Group’s debt recovery strategy, a breach in terms could lead to the customer being disconnected or pursued legally
for recovery of the balance. The Group writes off a financial asset when there is no realistic prospect of recovery and all attempts
to recover the balance have been exhausted. An indication that all credit control activities have been exhausted is where the debt
on an account is exclusively greater than 365 days past due and active recovery attempts have failed, or where there are known
insolvency issues relating to the customer.

Combined probability method
The Group uses a machine learning algorithm to calculate expected credit losses for its SME customer base. The algorithm predicts
the future performance of debt on an individual account basis using a broad range of indicators that are specific to the customer.
The algorithm forms predictions, based on historical experience, of the debt on each account reaching greater than 365 days past due.
A timeframe of 13 months is the normal period of historic data to which the algorithm is trained. The customer’s behaviours and
performance in this period inform the current provisioning for the existing debt portfolio.

As required by IFRS 9, the calculation of expected credit losses incorporates both historical and forward-looking information.
Management considers the 13 month period on which the algorithm is trained and determines whether any additional provision is
required as a result of specific factors or forward-looking macro-economic conditions. At 31 December 2022, these factors included,
but were not limited to, expectations around future inflation and interest rates, customer pricing and the impact of Government
support for customers. In the current period, management concluded that no additional provision was required (2021: no additional
provision was required).

Drax Group plc Annual report and accounts 2022 219

Financial statements

Section 3: Operating assets and working capital continued

3.5 Trade and other receivables and contract assets continued
Provision matrix method
Larger consumers within the Customers business and customers within the Generation and Pellet Production businesses are grouped
according to the age of the debt based on the number of days past due. The provision rates are based on historical collection rates
and an expectation of future cash collection.

The movement in the overall allowance for expected credit losses on trade receivables is presented in the following table:

At 1 January
Amounts written off
Net additional amounts provided against
At 31 December
Gross trade receivables
Average Expected Credit Loss %

Combined
probability
method
£m

44.4
(39.7)
50.2
54.9
189.1
29%

2022

Provision
matrix
method
£m

2.2
(2.6)
6.4
6.0
148.4
4%

Total
£m

46.6
(42.3)
56.6
60.9
337.5
18%

Combined
probability
method
£m

51.4
(41.5)
34.5
44.4
144.1
31%

2021

Provision
matrix
method
£m

5.0
(2.0)
(0.8)
2.2
90.0
2%

Total
£m

56.4
(43.5)
33.7
46.6
234.1
20%

The provision above relates to trade receivables in the Customers business. If the calculated provision rates were 10% higher than the
provision rates calculated at the reporting date, the impact to the provision would be an increase of £4.0 million. The provision matrix
method has resulted in a £nil provision applied to both Generation and Pellet Production businesses.

The risk of default within the Pellet Production and Generation businesses is considered to be remote. This is supported by strong
historic collection rates and timely receipts.

The Pellet Production business has a remote risk of default because the external customer base are high-quality counterparties with
long-term supply contracts. Furthermore, invoices are usually settled within seven days with negligible levels of aged debt.

The current economic environment and pressure on energy markets resulted in significantly higher commodity prices during 2022,
and in turn higher bills raised to some of the Group’s customers. This has resulted in an increase in the total gross value of trade
receivables and thus increased the value of the expected loss provision, particularly for SME customers. Prices for the deemed
customer portfolio have seen the most significant increases. Deemed supply is where electricity or gas is supplied to a site or customer
that is yet to enter into a contract and, as a result, they are charged on a standard variable tariff based on merchant power and gas
prices. Given the increases in these standard variable prices during the year, the recoverability of these balances has become more
challenging. The expected credit loss provision has been updated to reflect this change. The coverage levels of the provision are in line
with the outturn performance experienced during Covid-19, a period which was also significantly impacted by challenging macro-
economic conditions.

In October 2022, in response to the significant increase in energy prices, the Government introduced support for non-domestic
customers through the EBRS. This has provided financial support to customers during this period as described in more detail
in note 2.2. The Group received no incremental revenue over that to which it was contractually entitled, due to this scheme.

The net charge to the Consolidated income statement in 2022 for impairment losses on financial assets was £48.0 million
(2021: £16.3 million). This is the net of the additional amounts provided against in relation to trade receivables of £56.6 million
(2021: £33.7 million) less an £8.6 million (2021: £17.4 million) benefit in the period in respect of resolution of legacy credit balances.

The value of provisions calculated using the combined probability model is set out below. This shows the trade receivables balances
for SME consumers within the Customers business grouped by the combined probability assigned by the model.

The following table shows the comparative risk profile of amounts due based on the combined probability model at 31 December:

2022

2021

Estimated gross
carrying amount
at default
£m

Lifetime
expected
credit losses
£m

Estimated gross
carrying amount
at default
£m

Lifetime
expected
credit losses
£m

50.0
16.8
18.2
104.1
189.1

40.4
8.9
5.5
0.1
54.9

43.3
10.7
11.1
79.0
144.1

35.3
5.7
3.3
0.1
44.4

Probability of default range %

80–100
50–79
26–49
0–25
Total

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3.5 Trade and other receivables and contract assets continued
The value of provisions calculated using the Group’s provision matrix method is set out below. This shows the risk profile in 30-day
increments of the trade receivables within the Generation and Pellet Production businesses, the trade receivables of the Group’s larger
consumers within the Customers business, and accrued income (including contract assets) of the Group at each reporting date.

Accrued income balances not yet due
Trade receivables days past due:
Balances not yet due
Between 0-30 days
Between 31-60 days
Between 61-90 days
Over 90 days
Trade receivables total
Total

As at 31 December 2022

As at 31 December 2021

Lifetime
expected
credit losses

Estimated
total gross
carrying amount
at default

Expected
credit loss rate

Lifetime
expected
credit losses

Estimated
total gross
carrying amount
at default

Expected
credit loss rate

£m

7.6

1.8
0.8
0.7
0.6
2.1
6.0
13.6

£m

530.1

115.0
22.1
3.3
1.5
6.5
148.4
678.5

2%
4%
21%
42%
33%
4%
2%

£m

8.6

0.4
0.1
0.2
0.1
1.4
2.2
10.8

£m

278.9

70.8
14.0
1.2
0.8
3.2
90.0
368.9

1%
1%
17%
13%
44%
2%
3%

The expected credit loss provision of £13.6 million (2021: £10.8 million) in the table above wholly relates to the Customers business.
The expected credit loss rates above are expressed as a percentage of the gross carrying amount of all of the Group’s trade receivables
and accrued income balances that are subject to the provision matrix method.

The expected credit loss provision calculated for other financial assets of the Group was negligible.

Credit and counterparty risk are disclosed in further detail in note 7.2.

3.6 Contract costs
The Group incurs costs of obtaining contracts in the Customers business.

Accounting policy
Management expects that incremental broker fees paid to intermediaries as a result of obtaining electricity and gas contracts
are recoverable. The Group has therefore capitalised them as contract costs at the point the fee is paid. The fees are amortised
over the contract period in line with the recognition of revenue and are charged to cost of sales. The balance is included within
prepayments in note 3.5. This amount includes both current and non-current balances. The reconciliation from opening to closing
contract costs is as follows:

At 1 January
Additions
Amortisation
At 31 December

Year ended 31 December

2022
£m

23.7
30.7
(24.6)
29.8

2021
£m

40.1
14.0
(30.4)
23.7

Drax Group plc Annual report and accounts 2022 221

Financial statements

Section 3: Operating assets and working capital continued

3.7 Trade and other payables and contract liabilities
Trade and other payables represent amounts the Group owes to its suppliers for trade purchases and ongoing costs, taxes and social
security amounts due in relation to the Group’s role as an employer, and other creditors that are due to be paid in the ordinary course
of business. The Group makes accruals for amounts that will fall due for payment in the future as a result of the Group’s activities
in the current period (e.g. fuel received but for which the Group has not yet been invoiced). Contract liabilities represent the Group’s
obligation to transfer goods and services to its customers whereby the Group has already received the consideration in advance
or where the amount is due from the customer at the reporting date.

Accounting policy
Trade and other payables are measured at amortised cost.

The Group facilitates a supply chain finance scheme, a form of reverse factoring under which certain suppliers can obtain early access
to payments. There are no changes to the Group’s payment terms under this arrangement, nor would there be if the arrangement
was to cease. The amount due is recognised in trade payables.

The Group also has access to payment facilities, utilised to leverage scale and efficiencies in transaction processing. Under these
facilities the Group benefits from an extension to payment terms of less than 12 months for a small fee. The original liability
is derecognised and the amount due to the facility provider is recognised in other payables. Fees are either recognised
in the Consolidated income statement, or capitalised if they are directly attributable to the construction of a qualifying asset,
in the period incurred.

The Group does not include trade and other payables in its calculation of Net debt (see note 2.7).

Trade payables
Fuel accruals
Energy supply accruals
Other accruals
Other payables
Contract liabilities
Total Trade and other payables and contract liabilities

As at 31 December

2022
£m

152.9
107.7
511.4
370.9
351.0
34.0
1,527.9

2021
£m

147.8
50.3
362.1
269.8
366.5
14.6
1,211.1

Trade payables are unsecured and are usually paid within 60 days of recognition. The carrying amounts of trade and other payables
are the same as their fair values, due to their short-term nature.

Trade payables includes £53.9 million (2021: £50.4 million) related to reverse factoring. Other payables includes £214.5 million
(2021: £62.2 million) due under other payment facilities which includes amounts due under deferred letters of credit in respect of the
construction of the Group’s three OCGT assets that obtained a Capacity Market contract.

Energy supply accruals includes £315.0 million (2021: £264.3 million) in relation to the Group’s obligation to deliver ROCs arising
from activities in the Customers business. The remaining balance principally comprises third-party grid charge accruals of
£108.5 million (2021: £48.2 million) and Feed-in-Tariff accruals of £46.8 million (2021: £19.8 million). Energy supply accruals have
increased as a result of both higher supply volumes and higher prices.

Other accruals includes £11.1 million (2021: £39.3 million) in respect of the Group’s estimated obligation to deliver carbon emissions
allowances under the UK Emission Trading Scheme (UK ETS). Allowances are purchased in the market and are recorded at cost.

Other accruals also includes accruals for capital and operating expenditure where the invoices have not yet been received.

Contract liabilities primarily relate to the advance consideration received from customers for fixed price electricity and gas contracts,
for which revenue is recognised based on the stage of completion of the contract. The balance reduces as revenue is subsequently
recognised in the following periods, offset by further advanced consideration received. Additions in the year include £14.4 million
in the Generation business in relation to the winter coal contract with the National Grid to provide a ‘winter contingency’ service
to the UK power system. The reconciliation of opening to closing contract liabilities is as follows:

At 1 January
Revenue recognised in the year that was included in the contract liability at the start of the period
Additions as a result of cash received from customers in the period not yet recognised in revenue
At 31 December

Year ended 31 December

2022
£m

14.6
(6.6)
26.0
34.0

2021
£m

11.1
(5.4)
8.9
14.6

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3.8 Climate change
Climate change, and tackling it, is pervasive to the Group’s purpose, as set out in the Strategic report on pages 2 to 91. The Sustainable
development report, starting on page 36 sets out how the Group’s ambition is to be climate positive and the TCFD disclosures, starting
on page 52, set out the Group’s approach to managing climate risks, including scenario analysis. Climate change is factored into short,
medium and long-term forecasts and estimates used by the Group.

Several areas of the Consolidated financial statements have climate considerations in relation to them, namely:

Area

Description

Judgements in relation to key sources
of estimation uncertainty

Impairment of assets, UELs of property, plant and equipment and
capitalisation of development project costs are all sensitive to
climate change. Please see further details below.

Page reference

178

Impairment of assets

The Group’s expectations around the impacts of climate
change, and in particular the requirements of the UK Government’s
commitment to reach net zero by 2050, are integral
to the forecasts used to underpin the Group’s impairment analyses.
For example, the forward power price curves used take into
account expectations regarding the impact of climate change and
the changing mix of generating assets on the UK power system.

194

Governmental and societal responses to climate change are still
developing, and therefore financial statements cannot capture all
potential future scenarios as these are not yet known. This
presents uncertainty around future cashflows from an IAS 36
perspective. Sensitivities modelled, including around biomass
acceptability, seek to capture some of these potential scenarios.

Also, operational outages, whether caused by climate related
events or other factors, are some of the sensitivities modelled
in the impairment testing.

Going concern and viability

As above, forecast power prices and operational outages are also
incorporated into the going concern and viability assessments.

176 for going
concern and 75
for viability

Fixed asset UELs

Climate impacts are one of the factors assessed in determining
how long the Group anticipate both additions and existing assets
to operate for. For example, the OCGT assets under development
will be given a UEL commensurate with the Group’s expectations
around the UK’s transition to a net zero position by 2050.

210

Although, as outlined in the Key sources of estimation uncertainty,
the likelihood is that UELs at Drax Power Station will be extended,
were UELs to be shortened by 10 years, whether as a result of
climate change or otherwise, depreciation would increase by
approximately £65 million per year.

Drax Group plc Annual report and accounts 2022 223

Financial statements

Section 4: Financing and capital structure

This section provides further information about the Group’s capital structure (equity and debt financing) and cash generated from
operations during the year.

4.1 Cash and cash equivalents
Cash and cash equivalents comprise cash at bank, short-term bank deposits with a maturity of three months or less, and money
market funds. The carrying amount of these assets is approximately equal to their fair value. It is the Group’s policy to invest available
cash on hand in short-term, low-risk bank accounts or deposit accounts.

Cash at bank
Short-term deposits
Money market funds
Total cash and cash equivalents

As at 31 December

2022
£m

102.1
19.5
116.4
238.0

2021
£m

35.9
23.7
257.8
317.4

Cash collateral is sometimes paid or received in relation to the Group’s commodity and treasury trading activities. When derivative
positions are out of the money for the Group, collateral may be required to be paid to the counterparty. When derivative positions are
in the money, collateral may be received from counterparties. These positions reverse when contracts are settled and the collateral
is returned.

At 31 December 2022, net postings of £234.0 million had been made to counterparties (2021: £172.8 million of net receipts from
counterparties) to support energy hedging activity. Cash collateral payments of £234.0 million (2021: £32.8 million) were recognised
in other receivables and £nil (2021: £205.6 million) of cash collateral receipts were recognised in other payables. The increase in cash
collateral payments is predominantly due to the significant price increases seen in the power, gas and carbon markets as well as an
increase in the use of collateralised exchange based trading. See note 7.6 and 4.3 for details on collateral requirements the Group has
met through its available non-cash credit facilities.

4.2 Borrowings
Accounting policy
The Group measures all debt instruments (whether financial assets or financial liabilities) initially at fair value, which equates to the
principal value of the consideration paid or received. Subsequent to initial measurement, debt instruments are measured at amortised
cost using the effective interest method. Transaction costs (any such costs incremental and directly attributable to the issue of the
financial instrument) are included in the calculation of the effective interest rate and are amortised over the expected life of the
instrument.

Fees paid on the establishment of loan facilities are recognised as transaction costs of the loan to the extent that it is probable that
some or all of the facility will be drawn down. Loan commitment fees payable to the lender that entitle the Group to draw down at any
time over a fixed period, with a fixed repayment date regardless of when the loan is drawn down, are recognised on a systematic basis
over the period the Group is able to draw down if draw down is probable. Loan commitment fees payable to the lender that entitle the
Group to draw down at any time over a fixed period, where the loan has the same fixed term regardless of when the loan is drawn
down, are deferred until draw down and are recognised over the life of the instrument as part of the effective interest rate if draw
down is probable. If drawdown is not probable then loan commitment fees are recognised on a systematic basis over the period the
Group is able to draw down.

Fees that are paid for the availability of a facility where the amount and timing of draw down can vary at the Group’s discretion,
such as a revolving credit facility (RCF), are recognised on a systematic basis over the life of the facility.

Debt instruments denominated in foreign currencies are revalued using period end exchange rates, with any exchange gains and
losses being recognised as a component of foreign exchange gains or losses in the period they arise. The Group hedges foreign
currency risk and interest rate risk in accordance with the policies set out in note 7.2. Where hedging instruments are used to fix
cash flows associated with debt instruments, the debt instrument and the hedging instrument are measured and presented separately
on the Consolidated balance sheet. Where hedge accounting is applied to foreign exchange risk and interest rate risk on debt
instruments, gains and losses are recycled to the Consolidated statement of comprehensive income within either foreign exchange
gains/(losses) or interest payable and similar charges, to match the exposure they are hedging, where effective. The borrowings
amounts disclosed in the tables below exclude any impact of hedging instruments.

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4.2 Borrowings continued
The Group’s net borrowings at each reporting date were as follows:

Secured borrowings at amortised cost:
2.625% loan notes €250m(1)
6.625% loan notes $500m(2)
Index-linked loan £35m(3)
UK infrastructure private placement facilities (2019)(4)
UK infrastructure private placement facilities (2020)(5)
CAD term facility C$300m(6)
Unsecured borrowings at amortised cost:
Uncommitted short-term loan facility €50m(7)
Total borrowings
Split between:
Current liabilities
Non-current liabilities

As at 31 December

2022
£m

2021
£m

219.8
412.8
–
372.5
207.9
183.6

44.3
1,440.9

44.3
1,396.6

207.2
367.0
40.6
370.0
201.2
175.0

–
1,361.0

40.6
1,320.4

(1) These loan notes mature in 2025. Cross-currency interest rate swaps have been used to fix the sterling value of interest payments. This instrument also fixed the sterling

repayment of the principal. This equates to an effective sterling interest rate of 4.6%.

(2) These loan notes mature in 2025. Cross-currency interest rate swaps have been used to fix the sterling value of interest payments. This instrument also fixed the sterling

repayment of the principal. This equates to an effective sterling interest rate of 4.9%.

(3) The index-linked loan facility matured in March 2022. On maturity the principal amount of £35 million plus £6.4 million of indexation was repaid wholly from cash

reserves.

(4) These comprise committed facilities totalling £375 million with a range of maturities extending out to between 2024 and 2029. Interest rate swaps have been used to fix

floating rates. This equates to an effective sterling interest rate of 3.3%.

(5) These comprise committed facilities totalling £98 million and €126.5 million with a range of maturities extending out to between 2024 and 2030. Interest rate swaps have
been used to fix sterling floating rates on sterling facilities. Cross-currency interest rate swaps have been used to fix the sterling value of interest payments on euro
facilities. This instrument also fixed the sterling repayment of the principal. This equates to an effective sterling interest rate of 2.5%.

(6) This facility matures in 2024 with the option to extend by two years and has a customary margin grid reference over the Canadian Dollar Offered Rate (CDOR). No

interest rate or cross-currency interest rate swaps are in place to hedge the facility, so the Group is exposed to movements in both floating interest rates and movements
in the Canadian dollar.

(7) This is an uncommitted short-term facility with a maturity term of one month, however this term may be extended at the option of the lender. The average fixed interest

rate for this facility is 2.4%.

The Group has a committed £300 million RCF and C$10 million RCF. These had no cash drawings as at 31 December 2022 or
31 December 2021. The Group has never had cash drawings under this facility since its inception, three years ago. The Group also
has access to certain non-recourse trade receivable monetisation facilities and payment facilities, as described in note 4.3, which are
utilised to accelerate working capital cash inflows and defer cash outflows.

In December 2022, the Group secured a new £200 million committed liquidity facility with banks within its lending group. This facility
provides an additional source of liquidity to the Group’s existing undrawn RCFs, over the 12 months following the reporting date.
This facility was temporarily drawn during December, to support optimisation of generation and associated cash collateral postings,
but was undrawn at 31 December 2022. The Group has a €50 million uncommitted facility that was drawn during the second half
of 2022 and at 31 December 2022 €50 million remained drawn (2021: £nil). This facility was also drawn to support optimisation of
generation and associated cash collateral postings. See note 2.7 for further details on the Group’s cash and committed facilities.

The Group’s secured borrowings are secured against the assets of a number of the Group’s subsidiaries, with the exception of property
owned by the US subsidiaries.

The weighted average interest rate payable at the reporting date on the Group’s borrowings was 4.14% (2021: 3.49%).

Compliance with loan covenants
The Group has customary financial covenants, principally in relation to consolidated net income and the consolidated net income
to debt ratio. The consolidated net income to debt ratio broadly equates to an EBITDA to Net debt calculation and is calculated in line
with the Group’s financial covenant requirements in the loan facility agreements(1). The Group is required to test its financial covenants
every six months at financial full-year and half-year reporting periods, and has complied with all financial covenants during the current
and prior year. The Group has significant headroom and expects to continue to comply with these financial covenants in future periods
under all reasonably possible downside scenarios. See the Viability statement on page 75 for further details on the scenarios
considered. The Group also has conditions placed on its dividend payments as a result of the financing facilities.

(1) The net debt calculation for financial covenants is based on Net debt including cash and borrowings attributable to non-controlling interests, but excludes the impact

of hedging.

Drax Group plc Annual report and accounts 2022 225

Financial statements

Section 4: Financing and capital structure continued

4.2 Borrowings continued
Reconciliation of borrowings
The table below shows the movement in borrowings during the current and previous year:

Borrowings at 1 January
Cash movements:
Repayment of Index-linked loan
Draw down of facilities
Repayment of facilities
Non-cash movements:
Indexation of linked loan
Amortisation of deferred finance costs (note 2.5)
Amortisation of USD loan note premium
Effect of changes in foreign exchange rates
Borrowings at 31 December

Borrowings at 1 January
Cash movements:
Drawdown of 2020 Infrastructure private placement facilities
Repayment of debt acquired from Pinnacle
Drawdown of C$300m term facility
Other cash movements
Non-cash movements:
Borrowings acquired on acquisition of Pinnacle (note 5.1)
Indexation of linked loan
Amortisation of deferred finance costs (note 2.5)
Amortisation of USD loan note premium
Effect of changes in foreign exchange rates
Borrowings at 31 December

Year ended 31 December 2022

Borrowings before
deferred
finance costs
£m

Deferred
finance costs
£m

1,376.2

(15.2)

(41.4)
188.5
(145.0)

0.8
–
(0.4)
71.1
1,449.8

–
–
–

–
6.1
–
0.2
(8.9)

Year ended 31 December 2021

Borrowings before
deferred
finance costs
£m

Deferred
finance costs
£m

1,085.3

(19.6)

130.8
(253.1)
173.1
(3.2)

256.3
2.2
–
(0.3)
(14.9)
1,376.2

(0.5)
–
(0.8)
–

–
–
5.7
–
–
(15.2)

Net
borrowings
£m

1,361.0

(41.4)
188.5
(145.0)

0.8
6.1
(0.4)
71.3
1,440.9

Net
borrowings
£m

1,065.7

130.3
(253.1)
172.3
(3.2)

256.3
2.2
5.7
(0.3)
(14.9)
1,361.0

As disclosed above, the Group has a number of cross-currency interest rate swaps that fix the principal repayment of certain foreign
currency denominated borrowings. Accordingly, the foreign exchange losses (2021: gains) on borrowings disclosed in the above tables
have been offset by £62.0 million of foreign exchange gains (2021: 21.2 million of losses) on cross-currency interest rate swaps that
have been recycled to profit and loss as part of the hedging relationship. See note 2.7 for further details of the impact of the Group’s
cash flow hedging relationships on Net debt.

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4.3 Notes to the consolidated cash flow statement
Accounting policy
In accordance with IAS 7 the Group has elected to classify cash flows from interest paid and interest received as cash flows from
operations, dividends paid as cash flows from financing activities, and dividends received as cash flows from investing activities.
The interest repayment on lease liabilities is included within interest paid, and the lease principal repayment is presented within
cash flows from financing activities.

Cash generated from operations
Cash generated from operations is the starting point of the Group’s Consolidated cash flow statement on page 185. The table below
makes adjustments for any non-cash accounting items to reconcile the Group’s net profit for the year to the amount of cash generated
from the Group’s operations.

Year ended 31 December

Profit for the year – continuing
Profit for the year – discontinued
Adjustments for:
Interest payable and similar charges
Interest receivable
Tax (credit)/charge
Research and development tax credits
Income from associates
Depreciation of property, plant and equipment
Amortisation of intangible assets
Depreciation of right-of-use assets
Impairment of non-current assets
Losses on disposal of fixed assets
Gain on disposal of subsidiaries
Other losses
Certain remeasurements of derivative contracts(1)
Non-cash charge for share-based payments
Effect of changes in foreign exchange rates
Operating cash flows before movement in working capital
Changes in working capital:
(Increase)/decrease in inventories
Increase in receivables
Increase in payables
Net movement in collateral(2)
Decrease in provisions
Decrease/(increase) in renewable certificate assets
Total cash (absorbed by)/released from working capital
Net movement in defined benefit pension obligations(3)
Cash generated from operations

2022
£m

82.5
–

83.1
(4.3)
(4.4)
(5.5)
(0.5)
187.7
31.4
20.3
41.5
5.5
–
0.3
288.7
9.6
(2.2)
733.7

(133.4)
(379.0)
431.8
(406.8)
(29.1)
113.7
(402.8)
(10.6)
320.3

2021
£m

55.1
24.1

70.9
(0.3)
68.1
(7.5)
(0.3)
149.8
34.4
15.2
–
9.4
(16.2)
–
(74.6)
7.4
1.3
336.8

37.4
(27.4)
15.0
168.3
(4.2)
(161.8)
27.3
(9.6)
354.5

(1) Certain remeasurements of derivative contracts includes the effect of non-cash unrealised gains and losses recognised in the Consolidated income statement and their
subsequent cash realisation. It also includes the cash and non-cash impact of deferring and recycling gains and losses on derivative contracts designated into hedge
relationships under IFRS 9, where the gain or loss is held in the hedge reserve and then released to the Consolidated income statement in the period the hedged
transaction occurs.

(2) The £168.3 million increase in collateral received in the prior year has been re-presented. Previously this was included in the movement in receivables as a £30.6 million

increase and movement in payables as a £198.9 million increase.

(3) The comparative figure has been re-presented to combine the defined benefit scheme current and past service costs and contributions into a net defined benefit

pension obligation.

The Group has generated cash from operations of £320.3 million during the year (2021: £354.5 million). This resulted from a cash
inflow from operating activities before working capital of £733.7 million (2021: £336.8 million). This was offset by a £10.6 million (2021:
£9.6 million) cash outflow in respect of pension obligations and a net working capital outflow of £402.8 million (2021: £27.3 million
inflow), principally due to collateral payments. The most significant factors making up these cash movements are explained in further
detail below.

The £288.7 million adjustment for certain remeasurements of derivative contracts (2021: £(74.6) million adjustment) in the current year
predominantly relates to net unrealised losses recognised within the Consolidated income statement, where cash has not yet been paid
or received by the Group. These net unrealised losses were offset by a net cash outflow due to realised losses on maturing trades.

Drax Group plc Annual report and accounts 2022 227

Financial statements

Section 4: Financing and capital structure continued

4.3 Notes to the consolidated cash flow statement continued

From time to time, where market conditions change, the Group can rebase foreign currency contracts including cross-currency
interest rate swaps. Rebasing trades accelerates certain cash flows at the point of rebasing that would have been received on
maturity or at contractual payment dates per the original terms of the trade. There is an equal and opposite reduction in cash flows
(less rebasing fees) on the original maturity or contractual payment dates. At 31 December 2022 the Group had accelerated
£43.1 million of cash flows through the use of rebasing (2021: £48.1 million). The reduction in accelerated cash flows reflects the
unwinding of the cash benefit as the original maturity or contractual payment dates pass. The accelerated cash flows related wholly
to rebased cross-currency interest rate swaps in the current and prior year. The impact of rebasing is reflected within the Certain
remeasurements of derivative contracts line in the table above.

The Group has a strong focus on cash flow discipline and managing liquidity. The Group enhances its working capital position by
managing payables, receivables, inventories and renewable certificate assets to make sure the working capital committed is closely
aligned with operational requirements. The impact of these actions on the cash flows of the Group is explained further below.

High levels of volatility in power and commodity markets have continued during 2022. Cash collateral is sometimes paid or received
in relation to the Group’s commodity and treasury trading activities. When derivative positions are out of the money for the Group,
collateral may be required to be paid to the counterparty. When derivative positions are in the money, collateral may be received
from counterparties. These positions reverse when contracts are settled and the collateral is returned.

The Group actively manages the liquidity requirements, including collateral, associated with the hedging of power and other
commodities. At 31 December 2022 the Group had a net posting of collateral. However, the design of the Group’s trading agreements
and methods of posting collateral, such as being able to utilise letters of credit and surety bonds to meet collateral requirements,
aims to minimise cash outflows resulting from collateral requirements where possible. The Group has had a net cash outflow of
£406.8 million during the year due to collateral (2021: £168.3 million inflow). At 31 December 2022 the Group held £nil in cash
collateral receipts (2021: £205.6 million) recognised in payables and had posted £234.0 million (2021: £32.8 million) of cash collateral
payments recognised in receivables. The Group also had £54.5 million (2021: £42.5 million) of letters of credit and £165.0 million (2021:
£107.1 million) of surety bonds utilised covering commodity trading collateral requirements. Letters of credit and surety bonds utilised
at the reporting date have reduced the requirement for cash collateral payments, which has reduced the amount by which receivables
has increased. See notes 4.1 and 7.6 for further details on cash collateral receipts and non-cash collateral postings respectively.

The £379.0 million (2021: £27.4 million) cash outflow due to an increase in receivables in 2022 is predominantly related to the
Customers business as a result of higher power and gas prices during the year, resulting in higher amounts receivable from customers.

The Customers business has access to a facility which enables it to accelerate cash flows associated with amounts receivable
from energy supply customers on a non-recourse basis. The Group has refinanced this facility during the year, extending the maturity
to January 2027 and increasing the size of the facility to £300.0 million from £200.0 million. The Group also agreed a further increase
to the £300.0 million limit, to £400.0 million, for the period November 2022 to January 2024. Utilisation of the facility was
£400.0 million at 31 December 2022 (2021: £200.0 million). The additional utilisation of this facility has resulted in a £200.0 million
cash inflow which has offset the increase in receivables described above to lead to the net £379.0 million cash outflow.

The movement in renewable certificate assets during the year includes a combination of generation, utilisation, purchases and sales,
as described in note 3.3. The £113.7 million cash inflow is predominantly due to the Group’s use of standard renewable certificate sale
and renewable certificate purchase arrangements. Cash from renewable certificates, and in particular ROCs, is typically realised
several months after they are earned; however, through these arrangements, the Group is able to accelerate cash flows over a
proportion of these assets. At 31 December 2022 the Group had accelerated £331.2 million of cash flows using these standard
renewable certificate sales (2021: £199.8 million). This cash inflow was offset by a net cash outflow as a result of renewable
certificates generated and still held by the Group.

The Group had a £431.8 million (2021: £15.0 million) cash inflow due to an increase in payables during the year. This increase is
predominantly due to increased levels of power repurchases within the Generation business in the current year, as well as higher
accruals as a result of both increased volumes and higher prices in the Customers business.

The Group has sought to normalise payments across its supplier base resulting in certain suppliers extending payment terms and some
reducing terms. The Group’s suppliers are able to access a supply chain finance facility provided by a bank, for which funds can be
accelerated in advance of the normal payment terms. At 31 December 2022, the Group had trade payables of £53.9 million (2021:
£50.4 million) related to reverse factoring. The facility does not directly impact the Group’s working capital, as payment terms remain
unaltered with the Group and would remain the same should the facility fall away.

The Group also has access to a number of payment facilities to leverage scale and efficiencies in transaction processing,
whilst providing a working capital benefit for the Group due to a short extension of payment terms of less than 12 months.
The amount outstanding under these facilities at 31 December 2022 was £214.5 million (2021: £62.2 million) resulting in a cash
inflow of £152.3 million. Utilisation of these payment facilities has reduced the cash outflow in the purchases of property, plant and
equipment line in the Consolidated cash flow statement by £64.6 million and has also impacted the movement in payables line
in the table above by £87.7 million.

The cash outflow of £133.4 million as a result of the increase in inventories results in part from the planned build-up of inventories
due to the reprofiling of generation from summer into winter.

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4.3 Notes to the consolidated cash flow statement continued
Changes in liabilities arising from financing cash flows
A reconciliation of the movements in liabilities arising from financing activities for both cash and non-cash movements
is provided below:

Balance at 1 January
Cash flows from financing activities
Effect of changes in foreign exchange rates
Other movements
Balance at 31 December

Balance at 1 January
Cash flows from financing activities
Effect of changes in foreign exchange rates
Other movements
Acquisition of subsidiary
Balance at 31 December

As at 31 December 2022

Borrowings
£m

Lease liabilities
£m

1,361.0
2.1
71.3
6.5
1,440.9

125.9
(18.0)
11.5
33.7
153.1

As at 31 December 2021

Borrowings
£m

Lease liabilities
£m

1,065.7
46.3
(14.9)
7.6
256.3
1,361.0

30.2
(13.2)
2.7
45.1
61.1
125.9

Total
£m

1,486.9
(15.9)
82.8
40.2
1,594.0

Total
£m

1,095.9
33.1
(12.2)
52.7
317.4
1,486.9

Other movements principally relate to the amortisation of deferred finance costs, discounting of lease liabilities and lease additions
in the year.

4.4 Equity and reserves
The Group’s ordinary share capital reflects the total number of shares in issue, which are publicly traded on the London Stock Exchange.

Accounting policy
Ordinary shares are classified as equity as evidenced by their residual interest in the assets of the Company after deducting its
liabilities. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a deduction, net of tax,
from the proceeds.

Issued equity

Issued and fully paid:
2022: 414,872,491 ordinary shares of 11 16⁄29 pence each (2021: 413,068,027)

The movement in allotted and fully paid share capital of the Company during the year was as follows:

At 1 January
Issued under employee share schemes
At 31 December

As at 31 December

2022
£m

47.9

2021
£m

47.7

Year ended 31 December

2022
(number)

2021
(number)

413,068,027 410,848,934
2,219,093
414,872,491 413,068,027

1,804,464

The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income.
No shareholders have waived their rights to dividends. Throughout the year, shares were issued in satisfaction of options vesting
in accordance with the rules of the Group’s employee share schemes (see note 6.2).

Drax Group plc Annual report and accounts 2022 229

Financial statements

Section 4: Financing and capital structure continued

4.4 Equity and reserves continued
Share premium
The share premium account reflects amounts received in respect of issued share capital that exceeds the nominal value of the shares
issued, net of incremental transaction costs and tax, that are directly attributable to the issue of new shares. Movements in the share
premium reserve reflect amounts received on the issue of shares under employee share schemes.

At 1 January
Issue of share capital
At 31 December

Year ended 31 December

2022
£m

432.2
1.1
433.3

2021
£m

430.0
2.2
432.2

Other reserves
Other equity reserves reflect the impact of certain historical transactions, which are described under the table below:

At 1 January 2021
Exchange differences on translation of foreign operations
At 1 January 2022
Exchange differences on translation of foreign operations
Exchange differences on acquisition of interest in
Alabama Pellets LLC
At 31 December 2022

Capital
redemption
reserve
£m

Translation
reserve
£m

1.5
–
1.5
–

–
1.5

35.4
8.7
44.1
42.4

(0.7)
85.8

Merger
reserve
£m

710.8
–
710.8
–

–
710.8

Treasury shares
£m

(50.4)
–
(50.4)
–

–
(50.4)

Total other
reserves
£m

697.3
8.7
706.0
42.4

(0.7)
747.7

The capital redemption and treasury share reserves arose when the Group completed previous share buyback programmes.
The 13.8 million shares held in the treasury share reserve have no voting rights attached to them.

Exchange differences relating to the translation of the net assets of the Group’s US and Canadian subsidiaries from their
functional currencies (USD and CAD) into sterling for presentation in these Consolidated financial statements are recognised in the
translation reserve.

Movements in the hedge reserve and the cost of hedging reserve, which reflect the change in fair value of derivative financial
instruments designated into hedge accounting relationships in accordance with IFRS 9, are set out in notes 7.3 and 7.4.

4.5 Non-controlling interests
Accounting policy
In accordance with IFRS 3, the Group elects on an acquisition-by-acquisition basis whether to measure non-controlling interests (NCIs)
at their proportionate share of the identifiable net assets of the acquiree at the acquisition date, or at fair value. The Group treats
transactions with NCIs that do not result in a loss of control as transactions with equity owners of the Parent Company. A change in
ownership interest results in an adjustment between the carrying amounts of the controlling interests and NCIs to reflect their relative
interests in the subsidiary. Any difference between the amount of the adjustment to NCIs and the fair value of any consideration paid
or received is recognised in equity, within retained profits.

At 31 December 2022, the Group has two (2021: three) subsidiary undertakings with NCIs. These subsidiaries were acquired during
the prior year through the acquisition of Pinnacle. During the year, the Group purchased the remaining 10% of NCI in Alabama Pellets
LLC increasing the Group’s interest in the subsidiary to 100%. See the Transactions with NCI section below for further information.

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4.5 Non-controlling interests continued
Summarised financial information
The summarised financial information disclosed is shown on a 100% basis. It represents the results of each entity below that would be
shown in the subsidiaries own financial statements prepared in accordance with IFRS, modified for Group level fair value adjustments
at acquisition. The comparative amounts at 31 December 2021 have been re-presented to include the Group level fair value
adjustments and these adjustments have no impact to cashflow. All amounts are presented before intercompany eliminations.

Alabama Pellets LLC
Lavington Pellet Limited Partnership
Smithers Pellet Limited Partnership
Total

Principal place
of business

North America
North America
North America

As at 31 December 2022

As at 31 December 2021

Non-controlling
interest
%

Non-controlling
interests
£m

Non-controlling
interest
%

Non-controlling
interests
£m

0%
25%
30%

7.7
5.7
13.4

10%
25%
30%

7.2
8.5
5.8
21.5

No dividends were paid to NCIs in the current or previous reporting period.

Summarised statement of total comprehensive income

Year ended 31 December 2022

Re-presented
Year ended 31 December 2021(2)

Loss for the
year
attributable
to the
non-
controlling
interests
£m

Total
comprehensive
loss
attributable
to the
non-controlling
interests
£m

Total
comprehensive
loss
for the year
£m

(Loss)/profit
for the year
attributable
to the
non-
controlling
interests
£m

Total
comprehensive
(loss)/income
attributable
to the
non-controlling
interests
£m

Total
comprehensive
loss
£m

Revenue
£m

Loss
for the year
£m

Revenue
£m

Loss
for the year
£m

39.5

(9.5)

(1.0)

(9.5)

(1.0)

25.6

(9.4)

(1.7)

(9.4)

(1.7)

36.5

(1.7)

(0.7)

(1.7)

(0.7)

29.3

(0.6)

0.1

(0.6)

0.1

13.0
89.0

(3.0)
(14.2)

(0.9)
(2.6)

(3.0)
(14.2)

(0.9)
(2.6)

11.8
66.7

(1.1)
(11.1)

(0.4)
(2.0)

(1.1)
(11.1)

(0.4)
(2.0)

Alabama
Pellets LLC(1)
Lavington
Pellet Limited
Partnership
Smithers
Pellet Limited
Partnership
Total

(1) The 2022 Summarised statement of total comprehensive income for Alabama Pellets LLC is for the period up to acquisition of the remaining NCI on 30 September 2022.
(2) The comparative amounts at 31 December 2021 have been re-presented to include Group level fair value adjustments.

Drax Group plc Annual report and accounts 2022 231

Financial statements

Section 4: Financing and capital structure continued

4.5 Non-controlling interests continued
Summarised Balance sheet

As at 31 December 2022

Non-current
assets
£m

Current
assets
£m

Current
liabilities
£m

Non-current
liabilities
£m

Net assets
£m

Re-presented
As at 31 December 2021(1)

Non-current
assets
£m

120.4

Current
assets
£m

14.7

Current
liabilities
£m

Non-current
liabilities
£m

Net assets
£m

(16.1)

(0.6)

118.4

Alabama Pellets LLC
Lavington Pellet Limited
Partnership
Smithers Pellet Limited
Partnership
Total

27.7

17.3
45.0

6.8

1.8
8.6

(3.1)

(0.6)

30.8

29.1

6.9

(2.1)

(0.7)

33.2

(1.1)
(4.2)

–
(0.6)

18.0
48.8

17.1
166.6

2.0
23.6

(0.7)
(18.9)

–
(1.3)

18.4
170.0

(1) The comparative amounts at 31 December 2021 have been re-presented to include Group level fair value adjustments.

Summarised Cash flow

Alabama Pellets LLC
Lavington Pellet Limited Partnership
Smithers Pellet Limited Partnership
Total

Year ended 31 December 2022

Year ended 31 December 2021

Net cash
inflow/
(outflow)
from
operating
activities
£m

Net cash
outflow
from
investing
activities
£m

Net cash
(outflow)/
inflow from
financing
activities
£m

Net cash
inflow/
(outflow)
£m

Net cash
(outflow)/
inflow from
operating
activities
£m

3.5
(1.9)
1.6

(0.7)
(0.2)
(0.9)

(2.2)
1.8
(0.4)

0.6
(0.3)
0.3

(2.9)
2.2
(0.7)
(1.4)

Net cash
outflow
from
investing
activities
£m

(47.9)
(0.5)
(2.5)
(50.9)

Net cash
inflow/
(outflow)
from
financing
activities
£m

50.6
(0.1)
3.6
54.1

Net cash
(outflow)/
inflow
£m

(0.2)
1.6
0.4
1.8

Transactions with NCI
When the Group acquired Pinnacle during 2021, the NCI in Alabama Pellets LLC (APLLC) was 30%. In July 2021, the Group acquired
a further 20% interest in APLLC for £21.5 million ($29.7 million), increasing the Group’s total interest in APLLC to 90% and reducing
the NCI to 10%. This resulted in a £0.2 million charge recognised in equity, within retained profits, for the difference between the
adjustment to NCI and the fair value of any consideration paid. In September 2022, the Group acquired the remaining 10% of NCI
in APLLC for £20.2 million ($22.2 million), resulting in the Group now owning 100% of APLLC. This resulted in a £9.3 million charge
recognised in equity, within retained profits, for the difference between the adjustment to NCI and the fair value of any consideration
paid, and a decrease in the translation reserve of £0.7 million.

The following table summarises the impact of changes in the Group’s ownership of APLLC:

Carrying amount of non-controlling interest acquired
Consideration paid to non-controlling interest
Decrease in equity attributable to owners of the Parent Company

Year ended 31
December 2022
£m

10.2
(20.2)
(10.0)

Further information on changes during the year in the Group’s NCIs is given in the Consolidated statement of changes in equity.

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Section 5: Other assets and liabilities

This section provides information on the assets and liabilities in the Consolidated balance sheet that are not covered in other sections,
including goodwill, other intangible assets and provisions.

5.1 Business combinations
Accounting policy
Business combinations are accounted for using the acquisition method. Acquisitions of businesses are recognised at the point
the Group obtains control of the target (the acquisition date). The consideration transferred, the identifiable assets acquired, and
the liabilities assumed are measured at their fair value on the acquisition date. Amounts relating to the settlement of pre-existing
relationships are recognised in the Consolidated income statement with a corresponding adjustment to the consideration transferred
to reflect the fact that part of the consideration is deemed to relate to the settlement of the pre-existing relationship.

From the acquisition date, the assets and liabilities of acquired businesses are recognised in the Consolidated balance sheet, and
the revenues and profit or loss of the acquired businesses are recognised in the Consolidated income statement. Acquisition-related
costs are recognised as an expense in the Consolidated income statement in the period that they are incurred.

Goodwill is measured as the excess of the:

• consideration transferred; less
• amount of any non-controlling interest in the acquired entity; and
• acquisition date fair value of any previous equity interest in the acquired entity;

over the fair value of the identifiable net assets acquired.

Share-based payment awards held by employees of the acquired business that are voluntarily replaced are recognised as post-
acquisition remuneration. Share-based payment awards held by employees of the acquired business that are obliged to be replaced
are allocated between post-acquisition remuneration, which is treated as an expense, and pre-acquisition remuneration, which is
treated as part of the overall consideration.

Acquisition of Pinnacle
In the prior year the Group completed the acquisition of Pinnacle. The primary reason for the acquisition was to advance the Group’s
biomass strategy by more than doubling its production capacity, significantly reducing its cost of biomass production and adding a major
biomass supply business underpinned by long-term sales contracts with high-quality Asian and European counterparties. The Group
completed the acquisition on 13 April 2021. The purchase consideration was valued on a fully diluted equity basis at £222 million
(C$385 million), a price of C$11.30 per share representing a premium of 13% based on the closing market price on 5 February 2021
of C$10.04 per share.

The purchase consideration consisted of the following:

Cash paid to ordinary shareholders
Cash paid to settle existing share-based payment awards
Total purchase consideration

As at 13 April 2021
£m

218.1
4.2
222.3

There was no contingent consideration in relation to the acquisition.

Acquisition date fair values
The Group’s one year measurement period from the acquisition date, to finalise the acquisition accounting, ended in the current
reporting period. There were no changes to the provisional fair values of the identifiable assets acquired, liabilities assumed and NCI
as at 13 April 2021 that were recognised in the 2021 Consolidated financial statements. Detailed below are the relevant acquisition
values and the methods used to estimate them, as presented in the prior year.

Property, plant and equipment and intangible assets
Right-of-use assets
Other non-current assets
Inventories
Trade and other receivables
Cash and cash equivalents
Trade and other payables
Lease liabilities
Borrowings
Deferred tax liabilities
Other liabilities
Net identifiable assets acquired
NCI
Goodwill
Net assets acquired

As at 13 April 2021
Fair value
£m
326.2
60.4
4.3
26.8
29.4
18.8
(37.1)
(61.1)
(256.3)
(12.1)
(3.3)
96.0
(39.6)
165.9
222.3

Drax Group plc Annual report and accounts 2022 233

Financial statements

Section 5: Other assets and liabilities continued

5.1 Business combinations continued
As part of the accounting for the Pinnacle acquisition, the assets and liabilities acquired were measured at fair value on the acquisition
date. The valuation was performed by an independent valuation specialist. A fair value uplift of £23.6 million (C$40.8 million) was
recognised on the carrying value of property, plant and equipment acquired as part of the acquisition. If different assumptions and
inputs were used, this could have resulted in a different fair value.

The Pinnacle business held a number of long-term customer contracts at the acquisition date. As part of the acquisition accounting,
these existing customer contracts were required to be measured at their fair value. In determining the fair value of these contracts,
estimates were required for inputs to the valuation, such as the margin associated with these customer contracts, the required return
for assets used to generate these contract revenues, retention rates, and an appropriate discount rate based on the risk profile of
these contracts. A change to any of these inputs could significantly impact the fair value calculated for these customer contracts.
A customer-related intangible asset with a fair value of £35.9 million (C$62.1 million) was recognised in relation to customer contracts
at acquisition and is being amortised over its remaining UEL. See note 5.2 for further details of the valuation approach, the key
valuation inputs, the carrying value and remaining amortisation period.

The Group and Pinnacle had a pre-existing relationship relating to long-term supply contracts under which Pinnacle supplied the
Group with biomass pellets at a fixed price. On acquisition, the Group assessed the terms of these supply contracts compared to
current market transactions for an identical contract. Pricing for current market transactions for the purpose of this exercise was
assessed based on the existing portfolio of the Group and Pinnacle contracts. These supply contracts were determined to be
consistent with the pricing for current market transactions for an identical contract and the settlement provision for terminating these
contracts would have been immaterial. As a result, no consideration was attributed to the settlement of the pre-existing relationship
and therefore no gain or loss relating to the pre-existing relationship was recognised in the prior year.

The fair values of the acquired property, plant and equipment, customer-related intangible asset and pre-existing relationship are
inherently judgemental and involve a high degree of estimation, meaning valuations based on different methodologies or assumptions
may have resulted in a materially different fair value. However, these valuations were performed by specialists, using appropriate
methodologies and information.

Goodwill on acquisition predominantly related to the value of uncontracted revenues and synergies expected to be realised by
combining Pinnacle with the Group’s existing Pellet Production business. The increased size of the Group’s Pellet Production business
has enabled greater flexibility, opportunities to optimise the Group’s operations and logistics across the enlarged portfolio and has
increased knowledge. The goodwill is not deductible for tax purposes. Goodwill is required to be denominated in the functional
currency of the operations to which the goodwill is allocated to. The goodwill on the Pinnacle acquisition relates to both CAD and USD
functional currency operations. This resulted in goodwill of C$97.4 million and $151.9 million which, when translated at the acquisition
date, resulted in £165.9 million of goodwill. These goodwill balances are translated at the rates prevailing at each reporting date into
the Group’s presentational currency of GBP (see note 5.2 for further details).

The NCI was measured at the proportionate share of the identifiable net assets of the acquiree at the acquisition date
(see note 4.5 for further details on NCI).

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5.1 Business combinations continued
Acquired receivables
The Group acquired receivables with a fair value and a gross contracted value of £22.9 million (C$39.6 million). No provision for
receivables was recognised due to the risk of default within the Pinnacle business, as well as the wider Pellet Production business,
being considered to be remote, as explained further in note 3.5.

Contingent liabilities
No contingent liabilities or indemnification assets were recognised on acquisition of Pinnacle.

Reconciliation of net cash outflow from investing activities

Cash paid to acquire Pinnacle
Less balances acquired:
Cash
Net cash outflow

Year ended
31 December 2021

Cash outflow/
(inflow)
£m

222.3

(18.8)
203.5

Acquisition of Princeton pellet plant
On 3 August 2022, the Group announced that it had signed an agreement with Princeton Standard Pellet Corporation (PSPC)
to acquire its pellet plant in Princeton, British Columbia, Canada for consideration of £7.6 million (C$11.5 million), subject to customary
working capital adjustments. The sale subsequently completed on 1 September 2022. The plant has nameplate capacity to produce
90kt of biomass pellets a year from sawmill residuals and will contribute to the Group’s strategy to increase pellet production capacity.

In addition to the pellet plant itself, the Group also acquired certain other assets from PSPC including inventories and other working
capital balances. As part of the transaction, the employees of PSPC joined the Group. Although the legal structure of the transaction
was that of an asset purchase agreement, it was concluded that the substance of the transaction met the criteria of a business
combination as defined by IFRS 3 and therefore the Group accounted for the transaction under the acquisition method.

The fair value of the assets and liabilities acquired were as follows:

Property, plant and equipment
Inventories
Trade and other receivables
Trade and other payables
Deferred tax liabilities
Net identifiable assets acquired

As at 1 September
2022
Fair values
£m

7.9
1.0
0.8
(1.2)
(0.9)
7.6

No goodwill arose from this transaction and no contingent liabilities or indemnification assets have been recognised.

The Group acquired receivables with a fair value and gross contracted value of £0.8 million.

No provision was recognised due to the risk of default within the Princeton business, as well as the wider Pellet Production business,
being considered to be remote.

As the transaction is immaterial in its entirety, the full IFRS 3 disclosures are not presented in these Consolidated financial statements.

Drax Group plc Annual report and accounts 2022 235

Financial statements

Section 5: Other assets and liabilities continued

5.2 Goodwill and intangible assets
Goodwill arises on the acquisition of a business when the consideration paid exceeds the fair value of the net assets acquired.
Intangible assets are not physical in nature but are identifiable and separable from other assets. Intangible assets other than goodwill
can be acquired in business combinations, purchased separately or internally developed.

Accounting policy
Goodwill is measured as the excess of the:

• consideration transferred;
• amount of any non-controlling interest in the acquired entity; and
• acquisition date fair value of any previous equity interest in the acquired entity;

over the fair value of the identifiable net assets acquired.

Goodwill arising on the acquisition of a foreign operation is treated as an asset of that operation and therefore denominated in the
functional currency of the operation to which it is allocated. Goodwill denominated in a foreign currency is translated at the rate
prevailing at each reporting date. Exchange differences arising on retranslation are recognised in the Consolidated statement of
comprehensive income.

Goodwill is considered to have an indefinite useful life, is not depreciated, and is assessed annually for impairment (see note 2.4).

Intangible assets acquired in business combinations are measured at fair value on the acquisition date. Other intangible assets are
measured initially at cost. Cost comprises the purchase price (net of any discount or rebate) and any directly attributable costs to bring
the asset into the condition and location required for use as intended by management.

Intangible assets are amortised over their anticipated UELs, which are reviewed at each reporting date. No changes to UELs were
made during the period. Amortisation calculations are specific to each category of assets and are explained in further detail below.

Brand
Customer-related assets:
Opus Energy
Pinnacle
Other
Computer software and licences
Other intangibles

Method of amortisation

Straight line

Reducing balance
Straight line
Straight line
Straight line
Straight line

Average UEL
remaining
2022
(years)

5
8
11
3
5

Carrying amounts are assessed for indicators of impairment at each reporting date. The customer-related assets are attributable
to the Opus Energy CGU and the Pinnacle CGU. The brand is attributable to the Opus Energy CGU. Details of the impairment tests
relating to these CGUs are included in note 2.4.

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Computer
software and
licences
£m

Development
assets
£m

Other
intangibles
£m

5.2 Goodwill and intangible assets continued

Cost and carrying amount:
At 1 January 2021
Additions at cost (acquired separately)

Additions at cost (internally generated)
Transfers from/(to) tangible
fixed assets
Acquired in business combinations
Effect of changes in foreign
exchange rates
At 1 January 2022
Additions at cost (internally generated)
Disposals
Impairment
Transfers between categories

Transfers to property, plant
and equipment
Effect of changes in foreign
exchange rates
At 31 December 2022
Accumulated amortisation:
At 1 January 2021
Charge for the year
Acquired in business combinations
Effect of changes in foreign
exchange rates
At 1 January 2022
Charge for the year
Disposals
Impairment
Effect of changes in foreign
exchange rates
At 31 December 2022
Net book value:
At 31 December 2021
At 31 December 2022

Customer-
related
assets
£m

211.0
8.2

–

–
35.9

0.4
255.5
–
–
–
–

Brand
£m

11.3
–

–

–
–

–
11.3
–
–
–
–

131.5
–

14.1

1.2
0.4

–
147.2
9.4
(8.2)
(19.2)
(0.5)

21.0
–

–

(19.3)
–

–
1.7
–
–
(1.7)
0.5

–

0.5

(0.5)

2.1
257.6

126.6
22.8
0.1

(0.1)
149.4
21.2
–
–

–
170.6

106.1
87.0

–
11.3

0.3
129.5

4.5
1.1
–

–
5.6
1.2
–
–

–
6.8

5.7
4.5

61.9
10.5
–

–
72.4
9.0
(8.2)
5.7

0.1
79.0

74.8
50.5

–
–

–
–
–

–
–
–
–
–

–
–

1.7
–

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Goodwill
£m

248.2
–

–

–
165.9

2.2
416.3
–
–
–
–

–

Total
£m

623.0
8.2

14.1

(18.1)
202.4

2.7
832.3
9.4
(8.2)
(20.9)

–

7.9
424.2

10.3
822.9

–
–
–

–
–
–
–
–

–
–

416.3
424.2

193.0
34.4
0.2

(0.2)
227.4
31.4
(8.2)
5.7

0.1
256.4

604.9
566.5

–
–

–

–
0.2

0.1
0.3
–
–
–
–

–

–
0.3

–
–
0.1

(0.1)
–
–
–
–

–
–

0.3
0.3

The Group has incurred research and development expenditure of £12.5 million (2021: £11.4 million), which is included within
Operating and administrative expenses in the Consolidated income statement.

Customer-related assets
Customer-related assets primarily reflects the value of customer contracts acquired on the acquisition of Opus Energy in February 2017
and the acquisition of Pinnacle in April 2021, which provided the Group with access to customer bases with contracted cash flows.

The Opus Energy asset acquisition date fair value of £211.0 million reflected the estimated value of the future cash flows associated
with this customer base at the acquisition date and is dependent upon estimates of both current and expected future contract margins
and assumed customer retention rates. The cash flows have been discounted using an asset specific discount rate of 10.7%. The asset
has an estimated UEL from acquisition of 11 years, calculated based on customer churn-rate analysis which shows how many
customers are expected to leave the business in a given year, and is being amortised on a reducing balance basis to reflect the
diminishing rate of contract renewals over time. At 31 December 2022, the Opus Energy asset had a carrying value of £47.8 million
(2021: £64.2 million) and a remaining UEL of approximately five years (2021: six years).

The Pinnacle asset acquisition date fair value of £35.9 million (C$62.1 million) was estimated based on a multi-period excess earnings
method. This was based on the present value of the incremental after-tax cash flows attributable to the customer-related intangible
asset, after deducting a contributory asset charge that represented the required return for fixed assets, net working capital and the
assembled workforce that are required to generate the cash flows. The valuation estimates an appropriate margin to apply to
the contracts.

Drax Group plc Annual report and accounts 2022 237

Financial statements

Section 5: Other assets and liabilities continued

5.2 Goodwill and intangible assets continued
No customer retentions were assumed as part of the valuation. The inputs used as part of the valuation are detailed below:

Asset specific discount rate
Weighted average tax rate
Return on net working capital
Return on fixed assets
Return on the assembled workforce
Useful economic life

Pinnacle customer-
related asset

10.0%
25.2%
1.5%
7.0%
8.5%
10 years

The Pinnacle customer-related asset is being amortised on a straight-line basis to reflect the even spread of contract maturities
over the UEL. At 31 December 2022, the Pinnacle asset had a carrying value of £31.5 million (2021: £33.8 million) and a remaining
UEL of approximately eight years (2021: approximately nine years).

The Other customer-related assets primarily relate to pellet sales contracts acquired from Pacific BioEnergy on 31 December 2021.

Opus Energy brand
The Opus Energy brand was acquired as part of the acquisition in February 2017 and valued at £11.3 million on a relief-from-royalty
method. The brand is being amortised on a straight-line basis over its assumed 10-year UEL from acquisition.

Computer software and licences
Additions in the period include those in the ordinary course of business, which principally reflect ongoing investment in business
systems to support the Customers segment. Software assets are amortised on a straight-line basis over their estimated UEL ranging
from three to 10 years.

In March 2021 The IFRIC finalised its agenda decision regarding how to account for cost of configuring or customising a supplier’s
application software in a SaaS arrangement. The agenda decision concluded that the configuration and customisation costs do not
normally result in an intangible asset and should therefore be recognised as an expense. The Group has subsequently applied a new
accounting policy for SaaS costs, consistent with the agenda decision, from 1 January 2022.

SaaS costs capitalised by the Group at 1 January 2022, and impacted by this change in accounting policy, had a net book value of
£5.7 million. These assets have been impaired during the year, with the charge being recognised against accumulated amortisation
in the table above, and recorded as an exceptional cost (see note 2.7). SaaS costs incurred from 1 January 2022 have been recognised
in Operating and administrative expenses. See the Change in accounting policy section in the Basis of preparation for further details.

As at 31 December 2022, computer software assets under the course of construction amounted to £18.3 million (2021: £39.3 million).
The comparative amount included £19.2 million for a billing system where the Group has stopped development and is engaged in
active discussion with the supplier following the supplier’s failure to perform under the contract. Proceedings have been issued against
the supplier to recover damages for misrepresentation and breach of contract. The Group no longer expects that future economic
benefits will be recovered as an ongoing intangible asset and as a result, the asset has been impaired in the current financial period.
The impairment charge has been recognised against the cost the asset in the table above, and recorded as an exceptional cost.
See notes 2.7 and 7.6 for further information.

See note 2.4 for a summary of impairment charges recognised on fixed assets during the year.

Goodwill
The table below shows the carrying amount of goodwill by CGU:

CGU allocation:
Drax Energy Solutions CGU: Haven Power acquired in 2009
Opus Energy CGU: Opus Energy acquired in 2017
Lanark CGU: Drax Generation Enterprise acquired in 2018
Galloway CGU: Drax Generation Enterprise acquired in 2018
Cruachan CGU: Drax Generation Enterprise acquired in 2018
Pellet group of CGUs: Pinnacle acquired in 2021
Total goodwill

As at 31 December

2022
£m

10.7
159.2
11.3
40.1
26.9
176.0
424.2

2021
£m

10.7
159.2
11.3
40.1
26.9
168.1
416.3

A full impairment assessment of CGUs with goodwill allocated to them has been performed as detailed in note 2.4.

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5.3 Provisions
The Group makes provisions for reinstatement to cover the estimated costs of decommissioning and demolishing or remediating the
sites of its generation assets at the end of their useful economic lives (UELs). The Group has recognised a restructuring provision
in respect of coal closure. Other provisions primarily relate to dilapidation provisions for leased assets.

Accounting policy
Provisions are recognised when the Group has a present obligation (legal or constructive) as a result of a past event, it is probable that
the Group will be required to settle that obligation and a reliable estimate can be made of the amount required to settle the obligation.

Specifically, a provision is made for the estimated decommissioning costs at the end of the UEL of the Group’s generating assets, when
a legal or constructive obligation arises, on a discounted basis. The amount provided is calculated on a site-by-site basis and represents
the present value of the expected future costs. An amount equivalent to the discounted provision is capitalised within property, plant
and equipment and is depreciated over the UELs of the related assets. The unwinding of the discount is included in interest payable
and similar charges.

The Group recognises a restructuring provision when it has developed a detailed formal plan for the restructuring and has raised
a valid expectation that it will carry out the restructuring either by starting to implement the plan or announcing its main features
to those affected by it. The restructuring provision includes only the direct expenditures arising from the restructuring programme.
These are costs that would have been avoided if the restructuring programme did not go ahead. Any costs to be incurred relating
to the ongoing activities of the Group are excluded from the provision.

A provision for termination benefits is recognised at the earlier of when the Group can no longer withdraw the offer of the termination
benefit and when the Group recognises any related restructuring costs.

Carrying amount:
At 1 January 2022
Additions
Utilised
Reclass between provision categories
Unwinding of discount and changes in the discount rate(1)
Effect of changes in foreign exchange rates
At 31 December 2022

Decommissioning
provision
£m

Restructuring
provision
£m

Other
provisions
£m

69.5
–
(2.7)
(1.5)
(21.3)
–
44.0

16.7
0.4
(4.4)
–
–
–
12.7

0.2
0.1
–
1.5
–
0.1
1.9

Total
£m

86.4
0.5
(7.1)
–
(21.3)
0.1
58.6

(1) The unwinding of discount and changes in the discount rate is comprised of a £1.1m increase to the provision relating to unwinding of the discount (see note 2.5) and a

£22.4m decrease in the provision relating to changes in the discount rate (see note 3.1).

Decommissioning provisions are made in respect of Drax Power Station. The decommissioning provision is based on the assumption
that the decommissioning and reinstatement will take place at the end of the expected UEL of Drax Power Station, currently estimated
to be 2039. This has been estimated using existing technology at current prices based on independent third-party advice, updated
on a triennial basis as a minimum, but more regularly where deemed appropriate due to changes in plans for decommissioning the
site that would impact the expected costs. The most recent update took place in December 2020.

This cost of decommissioning was estimated to be £56.0 million. An inflation curve was then applied to estimate the decommissioning
costs in 2039. This value was then discounted to calculate the present value of the provision to be recognised.

The discount rate used is a nominal risk-free rate that reflects the duration of the liability. The discount rate is estimated using forward
UK Gilt curves as a proxy for risk-free rates. The use of a risk-free rate reflects the fact that the estimated future cash flows have
built-in risks specific to the liability. The discount rate used for the Group’s decommissioning provision is 4.05% (2021: 1.16%).

The decommissioning provision is not considered a key source of estimation uncertainty to which there is a significant risk of a material
adjustment to the carrying amount within the next financial year. Decommissioning provisions are based on costs sufficiently far in the
future that, given the length of time, it is not anticipated that any new, more reliable, or accurate information will be available within
the next financial year to update this estimate that would result in a material adjustment. The cost of decommissioning a site the size
of Drax Power Station will be impacted by things such as the exact composition and volumes of materials used in the structures to be
decommissioned, and the presence of contaminants. Full site surveys and investigations will need to be performed once the site
ceases operation to ascertain further information necessary to decommission the site which could impact the potential costs.
Notwithstanding this, due to the high degree of estimation and uncertainty regarding the potential costs and timing of
decommissioning Drax Power Station, there remains a risk of a material adjustment to the carrying amount in the longer-term.

Drax Group plc Annual report and accounts 2022 239

Financial statements

Section 5: Other assets and liabilities continued

5.3 Provisions continued

The present value recognised for the decommissioning provision is dependent on the inflation rate and discount rate used. Inflation
rates are estimated using forward inflation curves. An increase of 10% to the cost estimates would increase the decommissioning
provision by £4.7 million (2021: £6.8 million). An increase of 100 basis points in the inflation and discount rates used would result
in a £9.5 million (2021: £13.8 million) increase and a £7.0 million (2021: £11.1 million) decrease respectively in the amount recognised.

The relationship between the change in basis points and change in amount recognised is relatively linear therefore the impact
of similar sensitivities may be interpolated and extrapolated from these amounts.

The restructuring provision consists of redundancy costs relating to the formal closure of the coal units at Drax Power Station which
was initially planned for September 2022. It also includes costs for engineering works required to make the coal units and related
assets safe when they cease operating. At the request of the UK Government, the Group has entered into an agreement with National
Grid to keep the two coal units available to provide a “winter contingency” service to the UK power system from October 2022 until
the end of March 2023. The units will not generate commercially for the duration of the agreement and will only operate if and when
instructed to do so by National Grid. This has delayed the formal closure of the coal units and has resulted in the utilisation of certain
amounts of the restructuring provision also being delayed. This has not materially impacted the expected costs.

The amount of the restructuring provision utilised in the year predominantly relates to engineering and redundancy costs. Of the
balance remaining at 31 December 2022, £11.6 million relates to engineering works, of which £3.2 million is expected to be utilised
in 2023 with the remaining amounts expected to be utilised in the period 2024 to 2026. A further £0.6 million relates to redundancy
costs, which are expected to be utilised in 2023, and the remaining £0.5 million relates to other costs, which are expected to be utilised
in the period 2024 to 2026. The full provision has been presented within non-current liabilities in the Consolidated balance sheet.

5.4 Discontinued operations

A discontinued operation is a component of the Group that has been disposed of or classified as held for sale and meets one of the
following criteria outlined in IFRS 5:

• represents a separate major line of business or geographic area of operations;
• is part of a single co-ordinated plan to dispose of a separate major line of business or geographic area of operations; or
• is a subsidiary acquired exclusively with a view to resale.

Accounting policy
The component is classified as a discontinued operation at the earlier of when it is disposed of or when the component meets the held
for sale criteria.

When an operation is classified as a discontinued operation its results are presented separately in the Consolidated income statement.
The results of the discontinued operation are also re-presented in the Consolidated income statement as discontinued in the
comparative period.

Sale of CCGT portfolio
On 31 January 2021, the Group completed the sale of its CCGT generation portfolio to VPI Generation Limited for cash consideration
of up to £193 million, subject to customary adjustments. This included £29 million of contingent consideration associated with the
option to develop the site at Damhead Creek (see notes 3.5 and 7.1). The sale price represented a return over the Group’s period of
ownership significantly ahead of the Group’s weighted average cost of capital.

The Group received initial consideration of £188 million in February 2021 which was amended to £186 million in July 2021 following
conclusion of the completion accounts process. The Group recognised an overall net gain on disposal of £8.5 million spread across
the financial years ending 31 December 2020 and 31 December 2021.

The Group recognised certain transaction-related and mark-to-market costs, as incurred, during the year ended 31 December 2020.
As a result, recognition of the net gain on disposal in the Group’s Consolidated income statement is spread across 2020 and 2021,
as illustrated below. No amounts have been recognised in the current financial year in relation to this disposal.

Gross gain on disposal
Transaction costs
Mark-to-market costs
Net gain/(loss) on disposal

2022
£m

–
–
–
–

Year ended 31 December

2021
£m

17.1
(0.9)
(1.1)
15.1

2020
£m

–
(3.3)
(3.3)
(6.6)

Total
£m

17.1
(4.2)
(4.4)
8.5

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5.4 Discontinued operations continued
Discontinued operations
The income and expenditure of the CCGT generation portfolio were classified as discontinued operations in the comparative period.
There are no items of income or expenditure from discontinued operations in the current financial year.

Revenue
Cost of sales
Gross profit/(loss)
Operating and administrative expenses
Adjusted EBITDA
Other gains
Operating profit
Profit before tax on discontinued operations
Total tax (charge)/credit
Profit after tax from discontinued operations and total profit
from discontinued operations

Year ended 31 December 2021

Exceptional
items and
certain
remeasurements
£m

Adjusted
results
£m

51.8
(31.6)
20.2
0.1
20.3
–
20.3
20.3
(3.6)

16.7

(2.5)
(7.2)
(9.7)
(1.9)

17.1
5.5
5.5
1.9

7.4

Total
results
£m

49.3
(38.8)
10.5
(1.8)

17.1
25.8
25.8
(1.7)

24.1

Earnings per share
For net profit for the period from discontinued operations attributable to owners of the
Parent Company
– Basic
– Diluted

Pence

4.2
4.1

6.1
5.8

Drax Group plc Annual report and accounts 2022 241

Financial statements

Section 6: People costs

The notes in this section relate to the remuneration of the Directors and employees of the Group, including the Group’s obligations
under retirement benefit schemes.

6.1 Colleagues including directors and employees
This note provides a more detailed breakdown of the cost of employees, including Executive directors of the Group. The average
number of employees in Operations (staff based at production and generation sites), Customers (employees in the Group’s Customers
segment) and Central corporate and commercial functions are also provided.

Further information in relation to pay and remuneration of the Executive directors can be found in the Remuneration Committee
report, starting on page 127.

Staff costs (including Executive directors)

Wages and salaries
Social security costs
Defined benefit pension service cost (note 6.3)
Defined contribution pension cost (note 6.3)
Share-based payments (note 6.2)
Termination benefits
Total staff costs
Staff costs capitalised
Staff costs included in discontinued operations
Staff costs included in operating and administrative expenses from continuing operations

Year ended 31 December

2022
£m

201.8
21.6
4.7
16.7
9.6
1.4
255.8
(6.9)
–
248.9

2021
£m

167.9
20.0
6.3
15.7
7.4
7.3
224.6
(7.5)
1.5
218.6

Termination benefits of £1.4 million (2021: £7.3 million) includes a defined benefit past service credit of £nil (2021: credit of
£2.6 million). See note 6.3.

Average monthly number of people employed (including Executive directors)

Operations (Generation)
Operations (Pellet Production)
Customers
Central corporate and commercial functions
Total average monthly number of people employed

Year ended 31 December

2022
(number)

685
696
866
880
3,127

2021
(number)

754
520
964
884
3,122

6.2 Share-based payments
The Group operates three share option schemes for employees: the Long Term Incentive Plan (LTIP) for Executive directors and senior
employees (which replaced the Performance Share Plan (PSP) from 2020), the Deferred Share Plan (DSP) for Executive directors, and
the Sharesave Plan (SAYE) for all UK qualifying employees. Awards are made to certain employees below senior management under
the rules of the LTIP – such awards are retention and recognition awards, designated as One Drax Awards, for more junior colleagues.
The Group incurs a non-cash charge in respect of these schemes in the Consolidated income statement, which is set out below along
with a detailed description of each scheme and the number of options outstanding at the reporting date.

Accounting policy
The LTIP, PSP, DSP, One Drax Awards and SAYE share-based payment schemes are equity-settled. In accordance with IFRS 2,
equity-settled share-based payments are measured at the fair value of the equity instrument at the date of grant. The corresponding
expense is recognised in the Consolidated income statement on a straight-line basis over the relevant vesting period, based on an
estimate of the number of shares that will ultimately vest as a result of the effect of non-market based vesting conditions, which is
revised at each reporting date. Market based conditions are factored into the calculation of the fair value of options granted at the
date of grant and are not subsequently remeasured.

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6.2 Share-based payments continued
Costs recognised in the Consolidated income statement in relation to share-based payments during the year were as follows:

Equity-settled
LTIP (granted from 2020)
PSP (granted from 2017 to 2019)
DSP (granted from 2017)
One Drax Awards
SAYE
Total share-based payment expense included within staff costs (note 6.1)

Year ended 31 December

2022
£m

5.6
0.5
0.4
1.0
2.1
9.6

2021
£m

3.6
0.9
0.6
0.7
1.6
7.4

Movements in the number of share options outstanding at the reporting date for each scheme is shown below. Only the SAYE options
have exercise prices listed as all other schemes have no exercise price.

At 1 January 2021
Granted
Forfeited
Exercised
Expired
At 1 January 2022
Granted
Forfeited
Exercised
Expired
At 31 December 2022

LTIP
(number)

PSP
(number)

DSP
(number)

3,055,168
1,990,385
(445,760)
–
(29,565)
4,570,228
1,399,952
(238,121)
–
(32,688)
5,699,371

1,807,607
–
(325,362)
(627,101)
(138,722)
716,422
–
(46,716)
(622,989)
(46,717)
–

690,438
99,367
(40,568)
(135,972)
(45,839)
567,426
71,399
(5,598)
(265,482)
–
367,745

One Drax
Awards
(number)

–
226,852
(10,083)
–
(703)
216,066
143,439
(11,235)
(211,265)
(258)
136,747

SAYE

Three-year
weighted
average
exercise price
(pence)

SAYE three-year
(number)

Five-year
weighted
average
exercise price
(pence)

SAYE five-year
(number)

9,523,816
137
790,701
331
(813,391)
141
(828,697)
174
(295,606)
170
149 8,376,823
700,799
563
(222,311)
176
(545,220)
206
(146,423)
304
8,163,668
178

139 3,649,625
109,566
331
(607,663)
132
(516,317)
180
(95,501)
164
2,539,710
140
107,122
563
(80,928)
154
(72,097)
188
(28,945)
254
2,464,862
155

The fair value of share options is calculated using either a Monte-Carlo model or a Black-Scholes model, depending on which model is
deemed most appropriate for the nature of the share options. The Black-Scholes model compares exercise price to share price at the
date of grant. The Monte-Carlo model takes into account the estimated probability of different levels of vesting for share options with
market based conditions. The key inputs to the valuation models for the options are the share price at the date of grant, expected
volatility and risk-free interest rate. Expected volatility was determined by calculating the historical volatility of the Group’s share price.
The expected life used in the model has been adjusted, based on management’s best estimate, for the effects of non-transferability,
exercise restrictions and behavioural considerations.

Drax Group plc Annual report and accounts 2022 243

Financial statements

Section 6: People costs continued

6.2 Share-based payments continued
Information about the valuation models used and relevant inputs to the models is set out in the table below, along with key information
about each scheme for options granted and exercised in the current and prior year:

Scheme

LTIP

PSP

DSP

One Drax Awards

SAYE three-year

SAYE five-year

Year ended 31 December 2022

Valuation model used
Dividend yield for Black-Scholes model
Annual risk-free interest rate
Expected volatility
Grant date
Share price at grant date (pence)
Weighted average fair value of options
granted at measurement date (pence)
Fair value of options granted (£m)
Vesting period of options granted
Weighted average share price of
options exercised during the period
at the date of exercise (pence)
Number of options exercisable
at year end

Range of exercise price of options
outstanding at year end (pence)
Weighted average remaining
contractual life (months)

Monte-Carlo
N/A
1.20%
40%
18 March 2022
726

697
9.8
3 years

–

Black-Scholes
N/A
1.20%
40%

Black-Scholes
N/A
1.20%
40%
18 March 2022 18 March 2022
726

726

2.85%
2.46%
41%

Black-Scholes Black-Scholes
3.15%
2.38%
38%
12 April 2022 12 April 2022
783

783

726
0.5
3 years

726
1.0
1 year

293
2.1
3 years

291
0.3
5 years

711

729

–

17,058

729

605

722

–

Between 127
and 563

–

Year ended 31 December 2021

Black-Scholes
N/A
0.12%
40%
1 April 2021
418

4.3%
0.43%
38%

Black-Scholes Black-Scholes
4.7%
0.68%
36%
13 April 2021 13 April 2021
413

413

Scheme

LTIP

PSP

DSP

One Drax Awards

SAYE three-year

SAYE five-year

Range of exercise price of options
outstanding at year end (pence)
Weighted average remaining
contractual life (months)

Monte-Carlo
N/A
0.12%
40%
1 April 2021
418

388
7.7
3 years

–

380

–

418
0.4
3 years

380

–

418
0.9
1 year

111
0.9
3 years

105
0.1
5 years

–

449

420

8,551

–

Between 127
and 331

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6.2 Share-based payments continued
LTIP
The LTIP was introduced in 2020 for Executive directors and senior employees. This replaced the PSP, which operated from 2017
to 2019 (see below). Under the LTIP, annual awards of performance and service-related shares are made for no consideration
to Executive directors and other senior employees up to a maximum of 200% of their annual base salary. Vesting of a proportion
of shares (50%) is conditional upon whether the Group’s Total Shareholder Return (TSR) matches or outperforms an index (determined
in accordance with the scheme rules) over three years, and vesting of a proportion of shares (50%) is conditional upon performance
of cumulative Adjusted EPS (defined to be derived from Adjusted results) over three years.

Shares are forfeited due to employees failing to meet the continuing service conditions of the grant and as such do not attract
a charge.

Shares expire due to employees not meeting market-based conditions, withdrawing (by choice) part way through the vesting period
or for any other reason not exercising their options in the exercise period after they vest. Under IFRS 2 such options still attract
a charge.

PSP
The PSP was introduced for Executive directors and senior employees to replace the Bonus Matching Plan from 2017. Under the PSP,
annual awards of performance and service-related shares were made for no consideration up to a maximum of 175% of their annual
base salary. Vesting of a proportion of shares (50%) was conditional upon whether the Group’s TSR matches or outperforms an index
(determined in accordance with the scheme rules) over three years and vesting of a proportion of shares (50%) was conditional upon
performance against the Group Scorecard (see page 147).

DSP
The Group operates the DSP, under which Executive directors receive 40% (2021: 40%) of their annual bonus in shares. DSP awards
are granted at nil cost and vest after three years subject to continued employment or “good leaver” termination provisions.

One Drax Awards
One Drax Awards are granted under the rules of the LTIP to certain employees below senior management and vest after one year
subject to continuous employment. The number of shares awarded to the employee is equivalent to 10% of their base salary based
on the Group’s share price as at the grant date.

SAYE
In April 2022, participation in the SAYE plan was offered again to all UK qualifying employees. Options were granted for employees to
acquire shares at a discount of 20% to the prevailing market price at the grant date, determined in accordance with the scheme rules.
The options are exercisable at the end of three or five-year savings contracts.

Additional information in relation to the Group’s share-based incentive plans is included in the Remuneration Committee report
on pages 138 and 139.

6.3 Retirement benefit obligations
The Group operates two defined benefit and five defined contribution pension schemes.

Name of scheme

Type of Benefit

Status

Country

Drax Power Group (DPG) section of the
Electricity Supply Pension Scheme (ESPS)
Defined benefit final salary
Drax 2019 Scheme
Defined benefit final salary
Defined contribution
Drax Group Personal Pension Plan
Drax Energy Solutions Personal Pension Plan Defined contribution
Defined contribution
Opus Energy Group Personal Pension Plan
Drax Biomass Inc. 401(K) Plan
Defined contribution
Pinnacle Registered Retirement Savings Plan Defined contribution

Closed to new members in 2002
Closed to new members on transfer in 2019
Open to new members
Open to new members
Open to new members
Open to new members
Open to new members

UK
UK
UK
UK
UK
US
Canada

Trustee governance (defined benefit pension schemes)
The UK defined benefit schemes are administered by a board of Trustees, which is legally separate from the Group. The Trustees are
composed of representatives of both the employer and employees. The Trustees are required by law to act in the interest of all relevant
beneficiaries and are responsible for the investment policy for the assets and the day-to-day administration of the benefit schemes.

Accounting policy
Payments to defined contribution schemes are recognised as an expense when employees have rendered services that entitle them
to the contributions. The Consolidated income statement charge for the defined contribution scheme represents the total
contributions to be paid by the Group in respect of the current period.

Drax Group plc Annual report and accounts 2022 245

Financial statements

Section 6: People costs continued

6.3 Retirement benefit obligations continued
For the defined benefit pension schemes, the cost of providing benefits is determined using the projected unit credit method, with
actuarial valuations being carried out at the end of each reporting period. Remeasurement of the obligation, comprising actuarial gains
and losses, the effect of the asset ceiling (if applicable) and the return on scheme assets (excluding interest), is recognised immediately
in the Consolidated balance sheet with a charge or credit to the Consolidated statement of comprehensive income in the period in
which it occurs. Defined benefit costs, including current service costs, past service costs and gains and losses on curtailments and
settlements, are recognised in the Consolidated income statement as part of operating and administrative expenses in the period in
which they occur. The net interest expense or credit is recognised in interest payable and similar charges or interest receivable.

Significant estimation uncertainty
Measurement of the defined benefit pension obligation using the projected unit credit method involves the use of key assumptions,
including discount rates, inflation rates, salary and pension increases and mortality rates. These actuarial assumptions are reviewed
annually and modified as appropriate. The Group believes that the assumptions utilised in measuring obligations under the schemes
are reasonable based on prior experience, market conditions and the advice of pension scheme actuaries. However, actual results may
differ from such assumptions.

The assumptions applied in 2022 have been prepared in accordance with independent actuarial advice received and are consistent
with those applied in the prior period.

Defined contribution schemes
The Group operates five defined contribution schemes for all qualifying employees. Pension costs for the defined contribution
schemes are as follows:

Total included in staff costs (note 6.1)

Year ended 31 December

2022
£m

16.7

2021
£m

15.7

As at 31 December 2022, contributions of £1.5 million (2021: £1.1 million) due in respect of the current reporting period had not been
paid over to the schemes. The Group has no further outstanding payment obligations in respect of the current reporting period once
these contributions have been paid.

Defined benefit schemes
Any pension surplus and obligation are shown gross on the Consolidated balance sheet as there is no legal right of offset between
the two defined benefit pension schemes. The net pension surplus for the two defined benefit pension schemes is as follows:

DPG section of the ESPS (DPG ESPS)
Drax 2019 Scheme
Total net surplus recognised in the Consolidated balance sheet

As at 31 December

2022
£m

32.4
6.1
38.5

2021
£m

44.0
4.9
48.9

The DPG ESPS and the Drax 2019 Scheme are collectively referred to as “the Schemes” below. At 31 December 2022, application of
the accounting assumptions used in relation to the Schemes, which are described in further detail below, continued to result in a net
position of surplus assets over liabilities.

Both of the Schemes are defined benefit final salary pension plans, which provide benefits to members in the form of a guaranteed
level of pension payable for life. The level of benefits provided depends on members’ length of service and their salary in the final years
leading up to retirement. Pension benefits are updated in line with inflationary increases.

The DPG ESPS was closed to new members as of 1 January 2002 unless they had qualified through being existing members of
another part of the ESPS. Employed members who joined before this date continue to build up pension benefits as part of the scheme.
Members are typically entitled to an annual pension on retirement of 1/80th of final pensionable salary for each year of service plus
a tax-free lump sum of three times the member’s annual pension at retirement.

The Drax 2019 Scheme was set up following a transaction on 31 December 2018, when the Group acquired assets from Scottish
Power Limited. Under the terms of the sale and purchase agreement, employees with defined benefit pension rights who moved
to the Group as part of the transaction were able to build up a future defined benefit pension and were also able to transfer their
defined benefits they had already built up to the Group. The scheme was set up to facilitate this from 1 January 2020. From this date,
96 members joined the Drax 2019 scheme and continued to build up a future defined benefit pension. Of these, 81 members agreed
to transfer their past service benefits into the scheme.

Under the Drax 2019 Scheme, employees are entitled to retirement benefits based on final salary on attainment of retirement age
(or earlier withdrawal or death). No other post-retirement benefits are provided. The scheme is open to future accrual of benefits
but closed to new members.

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6.3 Retirement benefit obligations continued
The Group and Trustees have agreed a long-term strategy for reducing investment risk as and when appropriate. This includes an
asset-liability matching policy which aims to reduce the volatility of the funding level of the Schemes by investing in assets that
perform in line with the liabilities to protect against interest rates being lower or inflation being higher than expected, for example.

The Schemes expose the Group to actuarial and other risks, the most significant of which are considered to be:
Investment risk

The Schemes’ liabilities are calculated using a discount rate set with reference to corporate bond yields;
if assets underperform this yield, this creates a deficit. The DPG ESPS holds a significant proportion of growth
assets (diversified growth funds, direct lending and absolute return bonds) which, though expected to
outperform corporate bonds in the long term, create volatility and risk in the short term. The allocation
to growth assets is monitored to ensure it remains appropriate given this scheme’s long-term objectives.

Discount rate risk

Longevity risk

Inflation risk

Credit risk

The Drax 2019 Scheme’s long-term investment strategy and strategic asset allocation is 70% in gilts and
cash to support liability hedging and equity derivative overlay strategies, 15% allocated to synthetic credit
and 15% to credit opportunities. The scheme has moved towards a fully hedged position but continues
to maintain return-generating assets such as equity options and credit strategies.
A decrease in corporate bond yields will increase the value placed upon the Schemes’ liabilities, although
this will be partially offset by an increase in the value of the Schemes’ bond holdings.
The majority of the Schemes’ obligations are to provide benefits for the life of the member, so increases
in life expectancy will result in an increase in the liabilities of the Schemes.
The majority of the Schemes’ obligations to pay benefits are linked to inflation and, as such, higher inflation
leads to higher liabilities. In most cases, caps on inflationary increases are in place to protect against extreme
inflation. The Schemes have a significant holding in liability-driven investments and around 85% of inflation
risk in the Schemes is hedged on a low-risk measure (2021: around 85%).

Around 85% of the Schemes’ overall funded liabilities are currently hedged against interest rates and inflation
using liability-driven investments. The Schemes hedge interest rate risks on a statutory and long-term funding
basis (gilts) whereas AA corporate bonds are implicit in the discount rate and so there is a degree of
mismatching risk to the Group should yields on gilts and corporate bonds diverge. The Schemes’ holding
in corporate bonds mitigates this risk to some extent.

During the year, particularly around September and October 2022, there was significant yield volatility. However, with the exception
of one week over which hedge ratios reduced for the DPG ESPS, the Schemes were able to maintain their target hedge levels
throughout this period.

Other risks include operational risks (such as paying out the wrong benefits), legislative risks (such as the Government increasing
the burden on pension schemes through new regulation) and other demographic risks (such as making a higher proportion
of members with dependents eligible to receive pensions from the Group). The Trustees ensure certain benefits are payable
on death before retirement.

A qualified independent actuary, Aon, carried out the most recent funding valuation of the DPG ESPS as at 31 March 2019,
and the most recent funding valuation of the Drax 2019 Scheme as at 31 March 2021. The actuarial review at 31 December 2022
is based on the same membership and other data as these funding valuations. The Schemes’ Boards accepted the advice of the
actuary and approved the use of these assumptions for the purpose of assessing the Schemes’ costs.

The results of the latest funding valuations have been adjusted to 31 December 2022, taking into account experience over the period
since that date, changes in market conditions and differences in financial and demographic assumptions. The present value of the
defined benefit obligation and the related current service costs were measured using the projected unit credit method.

The principal assumptions for the Schemes are set out below. Where absolute assumptions differ between the two schemes,
reflecting differences in the expected duration of the Schemes’ liabilities, a weighted average is shown.

Discount rate
Inflation (RPI)
Rate of increase in pensions in payment and deferred pensions
Rate of increase in pensionable salaries

As at 31 December

2022
% p.a.

4.8
3.0
2.8
3.6

2021
% p.a.

1.9
3.0
2.9
3.6

Drax Group plc Annual report and accounts 2022 247

Financial statements

Section 6: People costs continued

6.3 Retirement benefit obligations continued
Whilst actual inflation has been high over 2022, long-term expectations as at 31 December 2022 are in line with long-term
expectations as at 31 December 2021. The defined benefit obligation for the Schemes allows for expected benefit increases that
will be awarded in 2023, based on known 2022 indices.

Mortality assumptions are based on recent actual mortality experience of the Schemes’ members and allow for expected future
improvements in mortality rates. The assumptions are that a member aged 60 in 2022 will live, on average, for a further 26 years
if they are male (2021: 26 years) and for a further 28 years if they are female (2021: 28 years). Life expectancy at age 60 for male
and female non-pensioners currently aged 45 is assumed to be 27 and 29 years respectively (2021: 27 and 29 years respectively).

The weighted average duration of the DPG ESPS at 31 December 2022 based on the IAS 19 position was 18 years (2021: 20 years).
The weighted average duration of the Drax 2019 Scheme at 31 December 2022 based on the IAS 19 position was 21 years
(2021: 24 years).

The DPG ESPS defined benefit obligation includes benefits for current employees of the Group (45%), former employees of the Group
who are yet to retire (5%) and retired pensioners (50%). The Drax 2019 Scheme defined benefit obligation includes benefits for current
employees of the Group (55%), former employees of the Group who are yet to retire (43%) and retired pensioners (2%).

The net surplus recognised in the Consolidated balance sheet in respect of the Schemes is the excess of the fair value of the plan
assets over the present value of the defined benefit obligation, determined as follows:

Fair value of plan assets
Defined benefit obligation
Net surplus recognised in the Consolidated balance sheet

As at 31 December

2022
£m

219.6
(181.1)
38.5

2021
£m

369.8
(320.9)
48.9

The total charges and credits recognised in the Consolidated income statement, within other operating and administrative expenses
and interest receivable, are as follows:

Included in staff costs (note 6.1):
Current service cost
Past service credit
Included in interest receivable (note 2.5):
Interest income on net defined benefit surplus
Total amount recognised in the Consolidated income statement

Year ended 31 December

2022
£m

4.7
–

(1.0)
3.7

2021
£m

6.3
(2.6)

(0.3)
3.4

On 31 January 2021, the Group completed the sale of its CCGT generation portfolio to VPI Generation Limited. The past service credit
in 2021 relates to this sale, which led to 42 members, of a pre-transaction total of 96, ceasing to accrue benefits in the Drax 2019
Scheme and becoming deferred members.

The past service credit calculation was performed by a qualified independent actuary using the same assumptions as those applied
to the rest of the Schemes. The past service credit represents the difference between the liability relating to the standard Drax 2019
Scheme benefits as an active member as per the reserve in the calculation of the Group’s IAS 19 position at that time, and the
corresponding liability in respect of the equivalent benefits as deferred members (including allowance for two members who were
offered enhanced past service benefits).

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6.3 Retirement benefit obligations continued
Changes in the present value of the defined benefit obligation of the Schemes are as follows:

Defined benefit obligation at 1 January
Current service cost
Past service credit
Interest cost
Actuarial gains
Benefits paid
Defined benefit obligation at 31 December

Year ended 31 December

2022
£m

320.9
4.7
–
5.7
(123.6)
(26.6)
181.1

2021
£m

378.1
6.3
(2.6)
5.3
(15.4)
(50.8)
320.9

The actuarial gains of £123.6 million (2021: £15.4 million) reflect gains of £133.3 million (2021: £10.3 million) arising from changes
in financial assumptions, losses arising from scheme experience of £9.9 million (2021: gains of £4.3 million) and gains of £0.2 million
(2021: £0.8 million) arising from changes in demographic assumptions.

The gains due to changes in financial assumptions principally reflect the decrease in the present value of the Schemes’ liabilities
arising as a result of the movement in discount rate assumption to 4.8% p.a. (2021: 1.9% p.a.) following an increase in corporate bond
yields, coupled with a slight decrease in overall long-term inflationary assumptions reflecting market pricing.

Changes in the fair value of plan assets are as follows:

Fair value of plan assets at 1 January
Interest on plan assets
Remeasurement (losses)/gains on fair value of plan assets
Employer contributions
Benefits paid
Fair value of plan assets at 31 December

Year ended 31 December

2022
£m

369.8
6.7
(148.0)
17.7
(26.6)
219.6

2021
£m

386.3
5.7
15.3
13.3
(50.8)
369.8

Employer contributions included payments totalling £7.6 million (2021: £7.2 million) to reduce the actuarial deficit in the DPG ESPS.
There were contributions of £3.2 million outstanding at the end of the year (2021: £1.0 million).

The actual return on plan assets in the period was a £141.3 million loss (2021: £21.0 million gain).

Drax Group plc Annual report and accounts 2022 249

Financial statements

Section 6: People costs continued

6.3 Retirement benefit obligations continued
Remeasurement losses on the defined benefit pension scheme of £24.4 million (2021: gains of £30.7 million) were recognised
in the Consolidated statement of comprehensive income. These are made up as follows:

Actuarial gains on defined benefit obligation
Remeasurement (losses)/gains on fair value of plan assets
Total remeasurement (losses)/gains recognised in other comprehensive income

The fair values of the major categories of plan assets were as follows:

Gilts
Equities(1)
Fixed interest bonds(2)
Property
Investment funds
Cash and other assets(3)
Fair value of total plan assets

Year ended 31 December

2022
£m

123.6
(148.0)
(24.4)

As at 31 December

2022
£m

117.2
6.5
4.8
28.6
4.3
58.2
219.6

2021
£m

15.4
15.3
30.7

2021
£m

150.0
26.5
30.3
32.1
25.0
105.9
369.8

(1) At 31 December 2022 DPG ESPS’s long-term asset strategy was: diversified growth funds (37%), direct lending (10%), absolute return bonds (3%), liability driven

investing (40%) and long-lease property (10%). The Drax 2019 Scheme’s long-term investment strategy and strategic asset allocation is 70% in gilts and cash to support
liability hedging and equity derivative overlay strategies, 15% allocated to synthetic credit and 15% to credit opportunities.

(2) Fixed interest bonds include a mixture of corporate, Government and absolute return bonds.
(3) Other assets include £29.9 million (2021: £27.1 million) of investments in direct lending, a type of private equity vehicle which is not quoted in an active market.

The fair value of these investments is derived in accordance with International Private Equity and Venture Capital Valuation (IPEV) Guidelines. All other assets are quoted
in an active market.

The pension plan assets do not include any ordinary shares issued by Drax Group plc or any property occupied by the Group.

The valuation of the pension liabilities has been disclosed as a key source of estimation uncertainty due to the assumptions used in the
valuation. The assumptions for discount rate, inflation rate (and related inflation linked benefits) and life expectancy have a potentially
significant effect on the measurement of the Schemes’ surpluses. The following table provides an indication of the sensitivity of the
net pension surplus at 31 December 2022 to changes in these assumptions, considering the impact on the defined benefit obligation
only. If a combination of the below reasonably possible changes to key assumptions were used in the valuation of the pension liabilities,
this could result in a material change to the amount recognised.

As at 31 December
Discount rate

Inflation rate(1)

Life expectancy

– Increase
– Decrease
– Increase
– Decrease
– Increase
– Decrease

0.25%
0.25%
0.25%
0.25%
1 year
1 year

Increase/(decrease) in net surplus

2022
£m

8.0
(8.5)
(7.0)
6.6
(6.2)
6.4

2021
£m

17.3
(19.5)
(15.1)
13.8
(13.2)
12.7

(1) The sensitivity of the Schemes’ liabilities to salary and pension increases is closely correlated with inflation, therefore separate sensitivities have not been performed

on salary and pension increases and the inflationary sensitivity incorporates these.

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6.3 Retirement benefit obligations continued
The Group is exposed to investment and other risks. However, this risk is mitigated by the Schemes being around 85% hedged against
movements in government bonds and inflation of appropriate duration. This means from a discount rate perspective that the Schemes
are broadly only exposed to changes in credit spreads plus around 15% of changes in underlying gilt yields and, for inflation,
the Schemes’ exposure is around 15% of any actual changes.

Future contributions
UK legislation requires that pension schemes are funded prudently (i.e. to a level in excess of the current expected cost of providing
benefits). This funding is carried out with reference to actuarial valuations which are required by law to take place at intervals of no
more than three years. Following each valuation, the Trustees and the Group must agree the contributions required (if any) such that
the Schemes are fully funded over time on the basis of suitably prudent assumptions.

The Group expects to make total contributions of £12.8 million to the Schemes during the 12 months ending 31 December 2023.

The latest actuarial valuation of the Drax 2019 Scheme which was carried out as at 31 March 2020 resulted in a funding surplus of
£1.3 million and so no deficit recovery plan was required. The last actuarial valuation of the DPG ESPS was carried out as at 31 March
2019. Following this actuarial valuation, the Group agreed to repair the funding deficit of £35.9 million as at 31 March 2019 over the
period to 30 June 2024, subject to the actuarial assumptions adopted for the triennial valuation as at 31 March 2019 being borne out
in practice. The agreement includes payments of £7.2 million per annum (indexed with RPI) to be paid until 30 June 2024.

The Group has also agreed to make additional contributions to the DPG ESPS over the period to 31 December 2025 to eliminate the
self-sufficiency deficit. At this point, the DPG ESPS is expected to be self-sufficient and fully funded, unless material adverse changes
in economic conditions arise compared to those assumed in the valuation. The Group is satisfied that the additional contributions are
manageable within the Group’s business plan.

The Trust Deeds of the DPG ESPS and the Drax 2019 Scheme provide the sponsors of the Schemes with an unconditional right
to a refund of surplus assets assuming the gradual settlement of plan liabilities over time. Furthermore, in the ordinary course of
business, the Trustees have no right to unilaterally wind up, or otherwise augment the benefits due to members of the DPG ESPS.
Based on these rights, any net surplus in the plan is recognised in full in the Consolidated balance sheet.

Post balance sheet event
On 31 January 2023 the DPG ESPS’s assets and liabilities were transferred to the Drax 2019 Scheme, and it is expected that the DPG
ESPS will be wound-up in due course. The Drax 2019 Scheme will continue to provide the same level of pension benefits to current
and former employees as they were previously entitled to, with the combination allowing the resulting scheme to operate in a more
efficient and focused manner, with a reduced administrative burden and associated cost.

Drax Group plc Annual report and accounts 2022 251

Financial statements

Section 7: Risk management

This section provides disclosures around financial risk management, including the financial instruments the Group uses
to mitigate such risks.

7.1 Financial instruments and their fair values
The Group holds a variety of derivative and non-derivative financial instruments, including cash and cash equivalents, borrowings,
payables and receivables arising from operations.

Accounting classifications and fair values
IFRS 13 requires categorisation of the Group’s financial instruments in accordance with the following hierarchy in order to explain
the basis on which their fair values have been determined:

• Level 1 – Fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets

or liabilities;

• Level 2 – Fair value measurements are those derived from inputs, other than quoted prices, included within Level 1,
that are observable for the asset or liability, either directly (i.e. as prices) or indirectly (i.e. derived from prices); and

• Level 3 – Fair value measurements are those derived from valuation techniques that include inputs for the asset or liability

that are not based on observable market data (unobservable inputs).

Categorisation within this fair value measurement hierarchy has been determined on the basis of the lowest level input
that is significant to the fair value measurement of the relevant asset or liability.

The table below shows the carrying amounts and fair values of financial assets and liabilities, including their levels in the fair value
hierarchy as defined by IFRS 13. It does not include fair value information for leases or for financial assets and financial liabilities
not measured at fair value if the carrying amount is a reasonable approximation of fair value. Cash and cash equivalents (note 4.1),
trade and other receivables (note 3.5) and trade and other payables (note 3.7) generally have a short time to maturity. For this reason,
their carrying values, on the historical cost basis, are approximate to their fair values. The Group’s borrowings relate principally to the
publicly traded high-yield loan notes and amounts drawn against term loans (note 4.2). These financial liabilities are measured
at amortised cost.

Carrying amount

Fair value

As at 31 December 2022
£m

Fair value-
hedging
instruments

Mandatorily
at FVTPL-
others

FVOCI-
equity
instruments

Financial
assets at
amortised
cost

Other
financial
liabilities

Financial assets measured at fair value

Total

Level 1

Level 2

Level 3

Total

–
–

130.6

166.5

549.9
–

84.2
232.8

–
27.4
–

54.0
–
–

Commodity contracts
Financial contracts
Foreign currency
exchange contracts
Interest rate and cross-
currency contracts
Contingent consideration
Equity investments
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities measured at fair value
Commodity contracts
Financial contracts
Foreign currency
exchange contracts
Interest rate and cross-
currency contracts
–
Inflation rate contracts
–
Financial liabilities not measured at fair value
Secured bank loans
–
Unsecured bank loans
–
Secured loan notes
–
Lease liabilities
–
Trade and other payables
–

(804.3)
–

(14.3)
(307.3)

–
–
–
–
–

(0.4)

(62.5)
(467.0)

(69.0)

–
–

–

–
–
1.5

–
–

–

–
–
–

–
–

–

–
–
–

634.1
232.8

297.1

54.0
27.4
1.5

– 1,071.9
238.0
–

–
–

–

–
–

–
–
–
–
–

–
–

–

–
–

–

–
–

(866.8)
(467.0)

(69.4)

(14.3)
(307.3)

– (764.0)
(764.0)
–
(44.3)
(44.3)
– (632.6)
(632.6)
(153.1)
(153.1)
–
– (1,065.9) (1,065.9 )

–
–

–

–
–
–

–
–

–

–
–

(593.9)

634.1
232.8

297.1

54.0
–
–

–
–

–

–
27.4
1.5

634.1
232.8

297.1

54.0
27.4
1.5

(866.8)
(467.0)

(69.4)

(14.3)
(307.3)(1)

(759.9)
(44.3)
–

–
–

–

–
–

–
–
–

(866.8)
(467.0)

(69.4)

(14.3)
(307.3)

(759.9)
(44.3)
(593.9)

Note:
(1) The UK CPI inflation rate contracts contain unobservable inputs in their fair value valuation techniques. However, these unobservable inputs are not material to the

valuation and therefore they have been categorised as Level 2 in the fair value hierarchy in line with IFRS 13. Inflation rate contracts contain £23.8 million of derivative
liabilities relating to the UK CPI inflation rate contracts.

252

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7.1 Financial instruments and their fair values continued

As at 31 December 2021
£m

Fair value-
hedging
instruments

Mandatorily
at FVTPL-
others

FVOCI-
equity
instruments

Financial
assets at
amortised
cost

Other
financial
liabilities

Total

Level 1

Level 2

Level 3

Total

Carrying amount

Fair value

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Financial assets measured at fair value
Commodity contracts
Financial contracts

877.5
–

121.3
143.9

Foreign currency exchange
contracts

56.9

40.6

4.6
1.3
–
–

Interest rate and cross-
currency contracts
Inflation rate contracts
Contingent consideration
Equity investments
Financial assets not measured at fair value
Trade and other receivables
Cash and cash equivalents
Financial liabilities measured at fair value
Commodity contracts
Financial contracts

(1,054.8)
–

–
–

–
–
27.7
–

–
–

(33.1)
(90.2)

Foreign currency exchange
contracts

(29.3)

(108.4)

(48.4)
(93.7)

Interest rate and cross-
currency contracts
Inflation rate contracts
Financial liabilities not measured at fair value
Secured bank loans
Secured bond issues
Lease liabilities
Trade and other payables

–
–
–
–

–
(46.6)

–
–

–

–
–
–
1.5

–
–

–

–
–

–
–
–
–

–
–

–

–
–
–
–

516.8
317.4

–
–

–

–
–

–
–
–
–

–
–

–

–
–
–
–

–
–

–

–
–

(786.8)
(574.2)
(125.9)
(869.5)

–
–

–

–
–
–
–

998.8
143.9

97.5

4.6
1.3(1)
–
–

–
–

–

–
–
27.7
1.5

998.8
143.9

97.5

4.6
1.3
27.7
1.5

998.8
143.9

97.5

4.6
1.3
27.7
1.5

516.8
317.4

(1,087.9)
(90.2)

– (1,087.9)
(90.2)
–

–

–
–

(137.7)

(48.4)
(140.3)(1)

–
(598.3)

(805.9)
–

–

–
–

(137.7)

(48.4)
(140.3)

(805.9)
(598.3)

(137.7)

(48.4)
(140.3)

(786.8)
(574.2)
(125.9)
(869.5)

Note:
(1) The UK CPI inflation rate contracts contain unobservable inputs in their fair value techniques. However, these unobservable inputs are not material to the valuation

and therefore they have been categorised as Level 2 in the fair value hierarchy in line with IFRS 13. Inflation rate contracts contain £1.3 million of derivative assets
and £11.5 million of derivative liabilities relating to the UK CPI inflation rate contracts.

The derivative financial instruments used by the Group and not subject to the own-use exemption have been categorised as follows:

• Commodity contracts – forward contracts for the sale or purchase of a physical commodity which is expected to be settled through

delivery of the commodity.

• Financial contracts – weather-related contracts, as well as contracts for commodities that are not expected to be settled through

physical delivery of the commodity.

• Foreign currency exchange contracts – currency related contracts including forwards, vanilla options and structured

option products.

• Interest rate and cross-currency contracts – contracts which swap one interest rate for another in a single currency, including
floating-to-fixed interest rate swaps, and contracts which swap interest and principal cash flows in one currency for another
currency, including fixed-to-fixed and floating-to- fixed cross-currency interest rate swaps.

• Inflation rate contracts – swap contracts, such as floating-to-fixed, which are linked to an inflation index such as RPI or CPI,

and inflation swaptions.

Drax Group plc Annual report and accounts 2022 253

Financial statements

Section 7: Risk management continued

7.1 Financial instruments and their fair values continued
Fair value measurement
• Commodity contracts – The fair value of open commodity contracts that do not qualify for the own-use exemption is calculated

by reference to forward market prices at the reporting date.

• Financial contracts – The fair value of financial contracts is calculated by reference to forward market prices at the reporting date.
• Foreign currency exchange contracts – The fair value of forward foreign currency exchange contracts is determined using forward

currency exchange market rates at the reporting date.

• Interest rate contracts – The fair value of interest rate swaps is calculated by reference to forward market curves at the reporting

date for the relevant interest index.

• Cross-currency interest rate swap contracts – The fair value of cross-currency interest rate swaps is calculated using the relevant
forward currency exchange market rates for fixed-to-fixed swaps and by using the relevant forward currency exchange market
rates and interest index for floating-to-fixed swaps.

• Inflation rate contracts – The fair value of inflation rate swaps is calculated by reference to forward market curves at the reporting

date for the relevant inflation index.

Given the maturity profile of all these contracts, liquid forward market price curves are available for the duration of the contracts.

The fair values of all derivative financial instruments are discounted to reflect both the time value of money and credit risk inherent
within the instrument.

Derivative financial instruments have been considered to be a key source of estimation uncertainty in 2022. The increased volatility
and higher prices in markets during the year has resulted in the fair value of derivative contracts fluctuating significantly.
The assessment of fair value is derived in part by reference to a market price for the instrument in question. The Group bases its
assessment of market prices upon forward curves that are largely derived from readily obtainable quotations and published prices
from third-party sources. However, any forward curve is based at least in part upon assumptions about future transactions and market
movements. Due to the increased volatility in the valuations of derivative financial instruments, minor differences in the inputs,
assumptions or methodologies used can result in appropriate, but materially different, estimates of fair values to those recognised by
the Group. There may be choices to be made of which methodology or data source to use in the calculation of fair value. Assumptions
may also need to be made where forward curves are not an exact match for the Group’s derivative contracts (e.g. due to quoted
product types, maturity dates or time periods not exactly matching the terms of the Group’s derivative contracts). Where such
instruments extend beyond the liquid portion of the forward curve, the level of estimation increases as the number of observable
transactions decreases. Sensitivities are provided in note 7.2 for the impact of changes in inputs on the fair value.

The Group has reviewed all significant contracts for the presence of embedded derivatives. The 2025 USD loan notes, the 2025 EUR
loan notes, and the 2020 Infrastructure private placement facilities all contain early repayment options that meet the definition of
embedded derivatives. However, in all cases, these do not require separate valuation as they are deemed to be closely related to the
host contract.

The fair value of commodity contracts, financial contracts, foreign currency exchange contracts, interest rate, cross-currency
contracts and inflation swaps are largely determined by comparison between forward market prices and the swap price; therefore,
these contracts are categorised as Level 2.

There have been no transfers during the current or prior year between Level 1, 2 or 3 category inputs.

The Group is responsible for determining the policies and approach to valuations required for financial reporting purposes, including
Level 3 fair values. Internal or external specialists are utilised where necessary. Valuation policies, approaches and the results are
discussed with and approved by the CFO and the Audit Committee as required, based on the size, complexity and judgement required
with each valuation.

Level 3 fair values
The fair value of the UK CPI inflation swaps comprises an RPI and CPI component. Whilst the RPI component is based on observable
market rates, CPI is based on unobservable rates and therefore deemed to be Level 3 in the fair value hierarchy. However, this
component is not material to the overall valuation and therefore the instruments as a whole have been classified as Level 2.

The valuation technique used for non-listed equity investments comprises unobservable inputs and these are therefore classified as
Level 3. However, given the valuation as a whole for Level 3 equity investments are immaterial, it is not deemed necessary to include
all Level 3 disclosures in these Consolidated financial statements.

The consideration receivable by the Group for the sale of the CCGT generation portfolio in 2021 includes £29.0 million that is
contingent on certain triggers in respect of the option to develop the Damhead Creek 2 land disposed of as part of the sale of these
assets. The fair value measurement for the contingent consideration has been categorised as Level 3 based on the inputs to the
valuation techniques used.

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7.1 Financial instruments and their fair values continued

Contingent
consideration

Valuation approach

Significant unobservable inputs and range
of inputs (probability weighted)

Relationship between significant unobservable input
and fair value measurement

The fair value of the contingent
consideration is determined using a
discounted cash flow model. The
valuation approach is based on a
calculation of the probability of the
option to develop the Damhead Creek
land being exercised. This probability is
calculated using a range of forecasts
for future Capacity Market auctions
and the assumption that the option to
develop the land would be exercised
if the Capacity Market price were to
clear above a certain level, providing
sufficient certainty on the economics
of the development.

Forecasted future Capacity Market
clearing prices:

The fair value measurement would
increase/(decrease) with:

£7.00/kW – £64.64/kW
(£35.91/kW)

(2021: £4.81/kW – £64.13/kW)
(2021: (£18.70/kW))

Estimated bid price at which Damhead
Creek 2 is to be entered into the
Capacity Market auction:

£40.00/kW

(2021: £20.00/kW)

– higher/(lower) forecasted Capacity

Market clearing prices causing
a higher/(lower) probability of the
option over the Damhead Creek 2
land being exercised.

– higher/(lower) estimated bid price
required for the Damhead Creek 2
development to proceed causing
a higher/(lower) probability of the
option over the Damhead Creek 2
land being exercised.

A reconciliation of the contingent consideration is detailed below:

Balance at 1 January
Contingent consideration receivable recognised on the sale of the CCGT generation portfolio
Net change in fair value (unrealised)
Balance at 31 December

Year ended 31 December

2022
£m

27.7
–
(0.3)
27.4

2021
£m

–
27.7
–
27.7

Sensitivities are disclosed below for reasonably possible changes to the unobservable inputs that would have a significant impact
on the fair value measurement:

As at 31 December 2022
Forecasted future Capacity Market clearing prices (25%)
Estimated bid price (25%)

As at 31 December 2021
Forecasted future Capacity Market clearing prices (25%)
Estimated bid price (25%)

Impact on profit before tax

Decrease
£m

Increase
£m

(3.7)
1.0

0.7
(3.2)

Impact on profit before tax

Decrease
£m

Increase
£m

(2.9)
1.1

1.1
(2.2)

Accounting for derivatives
Derivatives (subject to certain exemptions described below) must be measured at fair value, which represents the difference between
the price the Group has secured in the contract, and the price the Group could achieve in the market at the reporting date.

Changes in fair value are recognised either within the Consolidated income statement or the hedge reserve and cost of hedging
reserve, dependent upon whether the contract in question qualifies as an effective hedge under IFRS 9 (see note 7.2).

Where applicable the Group applies the own-use exemption which allows qualifying contracts to be excluded from fair value mark-to-
market accounting. This applies to certain contracts for physical commodities entered into and held for the Group’s own purchase,
sale or usage requirements.

Contracts for non-financial assets which do not qualify for the own-use exemption (principally power, gas, financial oil and carbon
emissions allowances) are accounted for as derivatives in accordance with IFRS 9 and are recorded in the Consolidated balance sheet
at fair value. Changes in fair value are reflected through the hedge reserve (note 7.3) to the extent that the contracts are designated as
effective hedges in accordance with IFRS 9, or the Consolidated income statement where the hedge accounting requirements are not
met, or the hedges are ineffective. To ensure these derivatives are not reflected in the underlying performance of the Group, they are
excluded from the Adjusted results in the Consolidated income statement until the contract matures (see note 2.7 for further details).

Drax Group plc Annual report and accounts 2022 255

Financial statements

Section 7: Risk management continued

7.1 Financial instruments and their fair values continued
The Group’s biomass risk management policy permits some flexibility in trading activity to optimise the overall portfolio position and
potentially release value in certain, limited circumstances. As such, the own-use exemption would likely not apply to these biomass
contracts. However, the nature of these contracts means they cannot be readily net settled in cash or other financial instruments and,
as a result, they remain outside of the scope of IFRS 9 and are excluded from fair value mark-to-market accounting.

The derivative financial instruments recognised in the Consolidated balance sheet at the reporting date are:

Non-current derivative financial instrument assets
Current derivative financial instrument assets
Total derivative financial instrument assets

Non-current derivative financial instrument liabilities
Current derivative financial instrument liabilities
Total derivative financial instrument liabilities

Total net derivative financial instruments

As at 31 December

2022
£m

421.7
796.3
1,218.0

2021
£m

357.5
888.6
1,246.1

(735.4)
(989.4)
(1,724.8)

(541.8)
(962.7)
(1,504.5)

(506.8)

(258.4)

The gains and losses recognised in the period relating to derivative financial instruments mandatorily measured at FVTPL are detailed
below. The Group had no financial assets or financial liabilities voluntarily designated at FVTPL. In addition to the amounts disclosed
below, gains and losses relating to derivatives qualifying for hedge accounting are disclosed in notes 7.2 to 7.4.

Losses on derivative financial instruments not qualifying for hedge accounting – recognised in revenue
Gains on derivative financial instruments not qualifying for hedge accounting –
recognised in cost of sales
Losses on derivative financial instruments not qualifying for hedge accounting – recognised in interest
payable and similar charges
Losses on derivative financial instruments not qualifying for hedge accounting – recognised in foreign
exchange gains/(losses)
Total losses on derivative financial instruments not qualifying for hedge accounting

Gains or losses recognised

2022
£m

(441.4)

32.6

(0.4)

(3.8)
(413.0)

2021
£m

(77.0)

36.6

(0.3)

(5.1)
(45.8)

Rebasing is explained in the glossary. When the Group rebases derivative contracts, the Group retains the contractual rights to the
cash flows, the risks and rewards, and control of the derivative asset. The Group does not assume any obligation to pay the cash flows
to another recipient. Accordingly, the derivative asset is not derecognised.

The cash flows received at the point of rebasing reduce the cash flows to be received on maturity of the trade, and as such the
cash flows over the life of the instrument are the same whether a trade is rebased or not, minus fees.

At the point of rebasing, the Group recognises a reduction in the fair value of the derivative asset, equivalent to the fair value
difference between the original rate per the contract and the rebased rate. The Group also recognises the cash received, or due,
as a result of the rebasing. Any difference between the reduction in the fair value of the derivative asset, and the cash received,
is recognised as a fee charged for rebasing and is recognised within operating and administrative expenses.

The total gain or loss recognised in the period on the derivative contract, including rebased amounts, is included within Total results.
No amounts are recognised in Adjusted results at the point of rebasing. The total gain or loss on the derivative contract,
including the amount rebased, is recognised in Adjusted results on the contractual maturity date of the contract. If a rebased trade
is hedge accounted, the rebased amount is deferred or released from the hedge reserve in line with the hedge accounting
requirements of IFRS 9.

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7.2 Financial risk management
The Group’s activities expose it to a variety of financial risks, including commodity price risk, foreign currency risk, interest rate risk,
inflation risk, liquidity risk, counterparty risk and credit risk. The Group’s overall risk management programme focuses on the
unpredictability of commodity and financial markets and seeks to manage potential adverse effects on the Group’s financial performance.

The Group uses derivative financial instruments to hedge certain risk exposures. Risk management is overseen by the Risk
management committees as explained in the Principal Risks and uncertainties section (page 77) which identify, evaluate and hedge
financial risks in close co-ordination with the Group’s trading and treasury functions under policies approved by the Board of directors.

7.2.1 Commodity price risk
The Group is exposed to the effect of fluctuations in commodity prices, particularly the price of power, gas, biomass pellets and fibre,
other fuels and the price of carbon emissions allowances. Price variations and market cycles have historically influenced the financial
results of the Group and are expected to continue to do so.

Commodity price sensitivity
The sensitivity analysis below has been determined based on the exposure to commodity prices and the impact on profit after tax and
other components of equity of reasonably possible increases or decreases in commodity prices. The analysis assumes all other
variables were held constant.

Financial and commodity markets have become increasingly volatile in 2022, in part due to the conflict in Ukraine. This volatility has
impacted economies and markets around the world, including the UK energy market, which has in part contributed to rising inflation.
The geopolitical environment and concerns over the macro-economic outlook have also contributed to a weakening in sterling during
2022. See the Principal risks and uncertainties section on page 77 for further details on both the conflict in Ukraine and energy
market conditions. As a result of these factors, the valuation of the Group’s derivative financial instruments, in particular power, gas,
foreign currency contracts, inflation and oil, were subject to significant fluctuations during 2022.

Sensitivities for a 10% change in prices have been included in the current year. The impact of smaller and larger price changes can be
interpolated and extrapolated from the below table as changes in prices have a relatively linear relationship with the impact on profit
after tax and on the hedge reserve.

As at 31 December 2022
Power
Carbon
Gas
Oil

As at 31 December 2021
Power
Carbon
Gas
Oil

Impact on profit after tax

Impact on other components
of equity, net of tax

10% decrease
£m

10% increase
£m

10% decrease
£m

10% increase
£m

–
2.5
0.8
(10.6)

–
(2.5)
(0.8)
10.6

33.8

(0.8)
–
–

(33.8)
0.8
–
–

Impact on profit after tax

Impact on other components
of equity, net of tax

10% decrease
£m

10% increase
£m

10% decrease
£m

10% increase
£m

–
–
(7.4)
(9.8)

–
–
7.4
9.8

27.8
(0.2)
–
–

(27.8)
0.2
–
–

Profit after tax is sensitive to increases or decreases in commodity prices as a result of the impact on the fair value of derivative
financial instruments not designated as hedging instruments under cash flow hedge accounting. The Group designates certain
derivatives as hedging instruments under cash flow hedge accounting. As such other components of equity are sensitive to increases
or decreases in commodity price risk and the impact on the hedge reserve resulting from these movements.

Commodity risk management
The Group has a policy of securing forward power sales and purchases of fuel when it is profitable to do so and is in line with specified
limits under approved policies. Forward power sales can be secured up to 100% of forecast availability two years ahead.
All commitments to sell power under fixed price contracts are designated as cash flow hedges as they reduce the Group’s cash flow
exposure resulting from fluctuations in the price of power.

The Group purchases biomass pellets and other fuels under either a fixed or variable priced contract with different maturities
principally from a number of international sources. The Group considers all such contracts to be economic hedges. If these contracts
are within the scope of IFRS 9, the Group, where possible, either applies the own-use exemption or hedge accounting in accordance
with IFRS 9. If the own-use exemption or hedge accounting are not applicable then the contracts are recognised at FVTPL.

Drax Group plc Annual report and accounts 2022 257

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued
Where forward power curves are less liquid, the Group uses financially settled gas sales as a proxy for power to mitigate the risk of
power price fluctuations. The Group also purchases gas under fixed-price contracts to meet the demand of the Customers business
and for its Daldowie fuel plant. To support the Group’s ambition to be carbon negative by 2030, a decision was made in January 2023
to phase out the Group’s gas supply contracts in the Opus Energy part of the Group, within the Customers business.

The Group purchases carbon emissions allowances under fixed price contracts to cover the Group’s purchase requirements under the
UK Emissions Trading Scheme (UK ETS) in relation to the Group’s carbon emissions. These are designated as cash flow hedges as they
reduce the Group’s cash flow exposure resulting from fluctuations in the price of carbon emissions allowances. Carbon emissions
allowances are also purchased as part of proxy power hedges in the same way as financial gas described above. These proxy hedges
are not designated as cash flow hedges.

Hedge accounting
The Group has cash flow hedges relating to commodity contracts, principally commitments to sell power and purchase carbon.
Amounts are recognised in the hedge reserve as the designated contracts are marked-to-market at each reporting date for the
effective portion of the hedge, which is generally 100% of the relevant contract. Amounts held within the hedge reserve are then
released to the Consolidated income statement as the related contract matures. For power sales contracts, this is at the point that
the underlying power is delivered.

Included in amounts released from equity are gains and losses on financial instruments that matured in a previous period, released
to the Consolidated income statement in the period the hedged transaction has occurred. No ineffectiveness was recognised in the
Consolidated income statement on continuing commodity or financial hedges in the year (2021: £nil). Due to the use of ‘all-in-one’
hedges, this results in the movement in fair value for the hedged items and hedging instruments being identical.

The only source of ineffectiveness regarding the ‘all-in-one’ hedges would be if delivery of the commodities was no longer expected
to occur, which would result in hedge accounting being discontinued. The main sources of ineffectiveness regarding financial
contracts would be as a result of timing differences and credit risk.

The Group had a number of forward sale contracts for power relating to forecast generation from the CCGT assets that were
designated as cash flow hedges. All subsequent fair value movements on hedges that had been discontinued were recognised in the
Consolidated income statement. By January 2021 the Group had closed out all derivative positions in relation to the CCGT assets.
As such, from this point, no further gains or losses occurred in relation to these trades. The remaining CCGT trades matured in the
first half of 2022. Prior year amounts relating to these trades are included within discontinued operations, and no further gains
or losses were recognised in the current period.

The reconciliation of the reserves and time period when the hedge will affect the Consolidated income statement are disclosed
in note 7.3.

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7.2 Financial risk management continued
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented
in the table below.

The average forward rates quoted below only reflect the rates applicable to the portion of the Group’s commodity and financial
contracts that qualify for hedge accounting in accordance with IFRS 9. The rates do not reflect the overall average rate of the Group’s
total portfolio of commodity and financial contracts that are used to protect the value of future cash flows.

31 December 2022

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)
£m

Fair value
recognised in
balance sheet
(liabilities)
£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

Notional
value of
contracts
(MWh, allowances)

Average
fixed price
£

2,135,909

218.00

(534.4)

549.9

(803.3)

(190.1)

–

148,000

77.5

(4.2)

–

(1.0)

(0.8)

(1.9)

31 December 2022

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
losses
recognised in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item
in the income
statement
that includes
hedge
ineffectiveness

Amount
transferred to
the cost or
carrying value of
a non-financial
asset/liability
£m

Amount
reclassified due
to the hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the
hedged future
cash flows
being no longer
expected
to occur
£m

Line item
in the income
statement/
balance sheet
affected by the
transfer/
reclassification

534.4

(534.4)

4.2

( 4.2)

–

Revenue
Cost of
sales

–

459.8

0.1

–

Revenue
Cost of
sales

31 December 2021

Notional
value of
contracts
(MWh, allowances)

Average
fixed price
£

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)
£m

Fair value
recognised in
balance sheet
(liabilities)
£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

2,585,113

72.83

(181.0)

874.1

(1,052.0)

(138.6)

161,000

57.79

17.7

3.4

(2.8)

0.4

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

–

31 December 2021

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
(losses)/gains
recognised in
OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income
statement
that includes
hedge
ineffectiveness

Amount
transferred to
the cost or
carrying value
of a non-
financial
asset/liability
£m

Amount
reclassified
due to the
hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the
hedged
future cash
flows being no
longer expected
to occur
£m

Line item in the
income
statement/
balance sheet
affected by the
reclassification/
transfer

181.0

(181.0)

(17.7)

17.7

–

Revenue
Cost of
sales

–

6.3

(17.2)

–

Revenue
Cost of
sales

Exposure

Commodity contracts
Sale of power

Purchase of carbon
emissions allowances

Exposure

Commodity contracts
Sale of power

Purchase of carbon
emissions allowances

Exposure

Commodity contracts
Sale of power

Purchase of carbon
emissions allowances

Exposure

Commodity contracts
Sale of power

Purchase of carbon
emissions allowances

Drax Group plc Annual report and accounts 2022 259

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued
7.2.2 Foreign currency risk
The Group is exposed to fluctuations in foreign currency rates as a result of committed and forecast transactions in foreign currencies,
principally in relation to purchases of fuel for use in the Generation business and principal and interest payments relating to foreign
currency denominated debt. These fuel purchases are typically denominated in US dollars (USD), Canadian dollars (CAD) or euros
(EUR), and the foreign currency debt is denominated in USD, CAD and EUR (see note 4.2 for further details on the Group’s borrowings).

The Group also has an exposure to translation risk in relation to its net investment in its US and Canadian subsidiaries within the
Pellet Production business.

Foreign currency sensitivity
The analysis below shows the impact on profit after tax and other components of equity of reasonably possible strengthening
or weakening of currencies against GBP. The analysis assumes all other variables were held constant.

As at 31 December 2022
USD
EUR
CAD

As at 31 December 2021
USD
EUR
CAD

Impact on profit after tax

Impact on other components
of equity, net of tax

10%
strengthening
£m

10%
weakening
£m

10%
strengthening
£m

10%
weakening
£m

41.7
12.2
24.4

(59.0)
(20.5)
(15.1)

137.1
23.6
7.8

(112.2)
(14.6)
(13.0)

Impact on profit after tax

Impact on other components
of equity, net of tax

10%
strengthening
£m

10%
weakening
£m

10%
strengthening
£m

10%
weakening
£m

104.2
19.24
63.7

(140.8)
(47.7)
(11.3)

173.4
26.9
22.9

(141.9)
(1.5)
(24.7)

Profit after tax is sensitive to the strengthening or weakening of other currencies as a result of the impact on the fair value of foreign
currency derivatives not designated as hedging instruments under cash flow hedge accounting. The Group designates certain foreign
currency derivatives as hedging instruments under cash flow hedge accounting. As such, other components of equity are sensitive
to the strengthening or weakening of other currencies in relation to the impact on the hedge reserve of these movements. Prior year
foreign currency sensitivities have been restated to fully reflect the impact of option contracts and relevant strike prices, which limit
the impact of fluctuations in underlying exchange rates.

Foreign currency risk management
It is the Group’s policy to hedge material transactional exposures using a variety of derivatives to protect the sterling values of foreign
currency cash flows, except where there is an economic hedge inherent in the transaction. The Group enters into derivative contracts
in line with the currency risk management policy, including forwards and options, to manage the risks associated with its anticipated
foreign currency requirements over a rolling five-year period, covering contracted exposures and a proportion of highly probable
forecast transactions.

In addition, in order to optimise the cost of funding, the Group has issued foreign currency denominated debt in USD, CAD and EUR
(see note 4.2). The Group utilises derivative contracts, including cross-currency interest rate swaps, to manage exchange risk on
foreign currency debt with the exception of CAD denominated debt.

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7.2 Financial risk management continued
Hedge accounting
The Group designates certain foreign currency exchange contracts as hedging instruments, predominantly forwards and swaps.
Foreign currency exchange contracts that are designated as hedges are transferred from equity to inventories for hedges of fuel
purchases when the Group takes ownership of the fuel.

Cross-currency interest rate swap gains and losses that are effective at hedging the foreign exchange risk on the interest payments
are released to interest payable and similar charges. Gains and losses that are effective at hedging the foreign exchange risk on the
USD or EUR principal are released to foreign exchange gains/(losses) to offset gains and losses on retranslating the USD and EUR
denominated hedged borrowings.

The Group has taken out fixed-to-fixed cross-currency interest rate swaps to hedge the future cash flows associated with the
$500 million and €250 million 2025 fixed rate loan notes, effectively converting them to sterling fixed rate cash flows. The Group
has taken out a combination of fixed-to-fixed and floating-to-fixed cross-currency interest rate swaps in order to fix the sterling
cash flows payable on the €126.5 million facilities agreed as part of the 2020 Infrastructure private placement facilities (see note 4.2
for further details on borrowings).

The main sources of ineffectiveness relating to foreign currency exchange contracts are timing differences and credit risk. The main
sources of ineffectiveness relating to cross-currency interest rate swaps are differences in the critical terms, differences in repricing
dates and credit risk.

A reconciliation of reserves and the time period when the hedge will affect the Consolidated income statement or will be removed
from equity and included in the initial cost of the non-financial item, are disclosed in notes 7.3 and 7.4.

A summary of amounts relating to the hedging instruments, and any related ineffectiveness in the period, is presented in the table
below. Ineffectiveness on foreign currency exchange contracts is recognised in cost of sales if it relates to hedges of fuel purchases.
Ineffectiveness on cross-currency interest rate swaps that are hedging principal and interest payments is recognised in foreign
exchange gains/(losses) if it relates to the principal repayment, and interest payable and similar charges if the ineffectiveness relates
to interest payments.

There are €95 million of floating-to-fixed cross-currency interest rate swaps that are hedging both foreign currency risk and interest
rate risk. These swaps have been separated into synthetic floating-to-floating cross-currency interest rate swaps, that are hedging
foreign currency risk, and synthetic floating-to-fixed GBP interest rate swaps, that are hedging interest rate risk. The synthetic
floating-to floating cross-currency interest rate swaps are disclosed in this section, and the synthetic floating-to-fixed GBP interest
rate swaps are disclosed in note 7.2.3 relating to interest rate risk.

The average forward rates quoted below only reflect the rates applicable to the portion of the Group’s foreign currency hedging
instruments that qualify for hedge accounting in accordance with IFRS 9. The rates do not reflect the overall average rate of the
Group’s total portfolio of derivatives that are used to protect the sterling value of future cash flows.

Drax Group plc Annual report and accounts 2022 261

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued

31 December 2022

Notional
value of
contracts
($m €m, C$m)

Average
fixed/variable rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)

£m

Fair value
recognised in
balance sheet

(liabilities)

£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

1,586.4

$1.38

187.2

149.3

–

75.6

135.0

€1.16

17.9

3.3

406.1

C$1.73

0.4

13.9

(0.3)

(0.1)

3.3

5.6

500.0

376.5

4.9%
4.55%/
3M SONIA +
137.2bps

47.5

12.3

(6.2)

0.8

(3.1)

4.2

(8.1)

(1.6)

–

Exposure

Foreign currency purchase
contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
Interest and principal
repayments – USD

Interest and principal
repayments – EUR

31 December 2022

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
gains recognised
in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income
statement
that includes
hedge
ineffectiveness

Amount
transferred to
the
cost or
carrying value
of a non-
financial
asset/liability
£m

Amount
reclassified
due to the
hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the
hedged
future cash
flows
being no longer
expected to
occur
£m

Line item in the
income
statement/
balance sheet
affected by the
transfer/
reclassification

Exposure

Foreign currency
purchase contracts
Purchases in foreign
currency – USD

Purchases in foreign
currency – EUR

Purchases in foreign
currency – CAD
Foreign currency
denominated debt

(187.2)

187.2

(17.9)

17.9

(0.4)

0.4

Interest and principal
repayments – USD

(47.5)

47.5

Interest and principal
repayments – EUR

3.1

(3.1)

262

Drax Group plc Annual report and accounts 2022

Cost
of sales
Cost
of sales
Cost
of sales

Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)
Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)

–

(34.2)

5.9

9.2

–

– Inventories

Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)
Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)

–

(9.2)

(44.7)

2.6

(17.3)

Exposure

Foreign currency
purchase contracts
Purchases in foreign
currency – USD
Purchases in foreign
currency – EUR
Purchases in foreign
currency – CAD
Foreign currency
denominated debt
Interest and principal
repayments – USD

Interest and principal
repayments – EUR

Exposure

Foreign currency
purchase contracts
Purchases in foreign
currency – USD

Purchases in foreign
currency – EUR

Purchases in foreign
currency – CAD
Foreign currency
denominated debt

7.2 Financial risk management continued

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31 December 2021

Notional
value of
contracts
($m, €m, C$m)

Average
fixed/variable rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)
£m

Fair value
recognised in
balance sheet
(liabilities)
£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

2,231.4

$1.38

16.3

50.9

320.0

€1.11

(19.4)

447.6

C$1.76

4.2

500.0

376.5

4.9%
3.32%/
3M LIBOR +
125.3bps

7.6

(10.4)

–

6.0

–

(11.7)

(17.0)

(0.6)

(40.5)

(15.0)

(1.6)

(39.0)

5.8

(9.4)

12.0

–

31 December 2021

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
gains/(losses)
recognised in
OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income
statement
that includes
hedge
ineffectiveness

Amount
transferred to
the
cost or
carrying value
of a non-
financial
asset/liability
£m

Amount
reclassified
due to the
hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the
hedged
future cash
flows
being no longer
expected to
occur
£m

Line item in the
income
statement/
balance sheet
affected by the
transfer/
reclassification

(16.3)

16.3

19.4

(19.4)

(4.2)

4.2

Interest and principal
repayments – USD

(7.6)

7.6

Interest and principal
repayments – EUR

10.4

(10.4)

Cost
of sales
Cost
of sales
Cost
of sales

Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)
Interest
payable
and
similar
charges
Foreign
exchange
gains/
(losses)

–

32.9

0.3

–

(6.2)

1.7

2.6

24.3

– Inventories

Interest
payable
and similar
charges
Foreign
exchange
gains/
(losses)

–

Drax Group plc Annual report and accounts 2022 263

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued
7.2.3 Interest rate risk
The Group has exposure to interest rate risk, principally in relation to variable rate debt, cash and cash equivalents and the RCF, should
it be drawn. The Group has Sterling Overnight Index Average (SONIA) floating-to-fixed interest rate swaps to fix the interest payments
on the £375 million private placement issued in 2019. For the 2020 Infrastructure private placement facilities, the Group has fixed the
interest rate payable on the £98 million of GBP denominated facilities through floating-to-fixed SONIA interest rate swaps. The Group
had a number of GBP London Interbank Offered Rate (LIBOR)-linked derivative and non-derivative financial instruments with maturity
dates beyond 31 December 2021, the date LIBOR ceased publication. As such, during the prior year the Group’s IBOR programme
transitioned these financial instruments away from GBP LIBOR to SONIA.

The Group has also fixed the interest rate payable on the variable rate EUR denominated 2020 Infrastructure private placement debt
through Euro Interbank Offered Rate (EURIBOR) floating-to-fixed cross-currency interest rate swaps. As detailed in section 7.2.2
above, the floating-to-fixed cross-currency interest rate swaps are hedging both interest rate risk and foreign currency risk, and as
such the disclosures relating to interest rate risk are included in this section. See note 7.2.2 for the foreign currency risk disclosures
relating to the floating-to-fixed cross-currency interest rate swaps.

At 31 December 2022, the Group has fixed interest rate payments in GBP on all of its debt instruments through the use of swaps,
with the exception of the Group’s CAD denominated debt, which is the only outstanding debt that remains variable and does not have
fixed interest rate payments.

The returns generated on the Group’s cash balance, or payable on amounts drawn on the RCF, are exposed to movements
in short-term interest rates. The Group actively manages cash balances to protect against adverse changes in interest rates
whilst retaining liquidity.

Further information about the Group’s instruments that are exposed to interest rate risk and their repayment schedules is provided
in note 4.2.

Interest rate sensitivity
The sensitivity analysis below has been determined based on the exposure to interest rates for both derivative and non-derivative
financial instruments at the reporting date. For floating rate liabilities, the analysis is prepared assuming the amount of the liability
outstanding at the reporting date was outstanding for the whole year.

The analysis below shows the impact on profit after tax and other components of equity of a reasonably possible increase or decrease
in interest rates. The analysis assumes all other variables are held constant.

As at 31 December 2022
Variable rate debt – unhedged
Variable rate debt – hedged
Interest rate swaps
Net impact

As at 31 December 2021
Variable rate debt – unhedged
Variable rate debt – hedged
Interest rate swaps
Net impact

Impact on profit after tax

Impact on other components
of equity, net of tax

100 basis points
increase
£m

100 basis points
decrease
£m

100 basis points
increase
£m

100 basis points
decrease
£m

(1.4)
(4.2)
4.2
(1.4)

(1.4)
(4.0)
4.0
(1.4)

1.4
4.2
(4.2)
1.4

1.4
0.7
(0.7)
1.4

–
–
10.1
10.1

–
–
14.6
14.6

–
–
(10.1)
(10.1)

–
–
(11.3)
(11.3)

An increase or decrease in interest rates would affect profit after tax as a result of the impact on the interest payable in the period on
any variable rate debt. The Group has reduced its exposure to interest rate risk on variable rate debt through the use of floating-to-fixed
interest rate swaps and therefore a change in interest rates would not have a significant effect on profit after tax. The Group designates
certain floating-to-fixed interest rate swaps as hedging instruments under cash flow hedge accounting. As such, other components of
equity are sensitive to an increase or decrease in interest rates in relation to the impact on the hedge reserve of these movements.

Certain amounts of the Group’s variable rate debt and interest rate swaps have a floor of 0% for the benchmark interest rate. As a
result of very low or negative benchmark interest rates in 2021, a 100 basis point increase had a larger impact on profit after tax and
other components of equity, than a 100 basis points decrease. Given the increase in interest rates during the year a larger decrease in
interest rates would be needed to reach the 0% floor and therefore in the sensitivities above for the current year an increase and a
decrease in interest rates have a more comparable impact. The Group also has CAD denominated debt that has a variable rate based
on Canadian Dollar Offered Rate (CDOR). At 31 December 2022 no swaps were in place to hedge the CAD denominated debt.
Therefore in relation to this debt a change in interest rates has an impact on profit after tax but not on other components of equity.

Interest rate risk management
The Group has a risk management policy in place relating to interest rate risk. The Group policy permits, but does not require,
the use of hedging instruments in order to hedge up to 100% of the Group’s current and forecast interest rate exposure.

264

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7.2 Financial risk management continued
Hedge accounting
The Group designates its floating-to-fixed SONIA interest rate swaps and the floating-to-fixed cross-currency interest rate swaps
as hedging instruments against interest rate risk. The SONIA interest rate swaps are hedges of the interest payments relating to the
£375 million private placement (2019) and the £98 million GBP facility part of the 2020 Infrastructure private placement. The cross-
currency interest rate swaps are hedges of both interest rate risk and foreign currency risk relating to the variable rate €95 million
facility part of the 2020 Infrastructure private placement. As such this has been separated into synthetic floating-to-floating cross-
currency interest rate swaps and synthetic floating-to-fixed GBP interest rate swaps. The synthetic floating-to-floating cross-currency
interest rate swaps swap the €95 million variable rate EURIBOR linked debt to variable rate SONIA linked GBP debt with a principal
of £85.8 million. The synthetic floating-to-fixed GBP interest rate then swaps the variable interest rate for a fixed GBP interest rate.
Details of the floating-to-fixed SONIA interest rate swaps are included in the disclosures below.

Gains and losses on the interest payments on interest rate swaps are released to interest payable and similar charges at the same time
as the interest is expensed on the hedged borrowings.

The main sources of ineffectiveness relating to interest rate risk hedges are differences in the critical terms, differences in repricing
dates and credit risk.

A summary of the amounts relating to the sterling interest rate hedging instruments and any related ineffectiveness in the period
is presented in the table below.

31 December 2022

Notional
value of
contracts
£m

Average
% fixed rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)

£m

Fair value
recognised in
balance sheet

(liabilities)

£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

558.8

1.06%

39.9

37.5

–

31.7

–

31 December 2022

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
gains
recognised in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income statement
that includes
hedge
ineffectiveness

Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m

Amount
reclassified
due to the hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur

£m

Variable rate GBP debt

(39.9)

39.9

–

Interest
payable
and similar
charges

31 December 2021

–

(3.1)

–

Notional
value of
contracts
£m

Average
% fixed rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

Fair value
recognised in
balance sheet
(assets)
£m

Fair value
recognised in
balance sheet
(liabilities)
£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

558.8

1.06%

19.3

4.6

–

4.2

–

31 December 2021

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
gains
recognised in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income statement
that includes
hedge
ineffectiveness

Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m

Amount
reclassified
due to the hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur

£m

Variable rate GBP debt

(21.0)

19.3

–

Interest
payable
and similar
charges

–

3.3

–

Drax Group plc Annual report and accounts 2022 265

Line item in the
income
statement/
balance sheet
affected by the
transfer/
reclassification

Interest
payable
and similar
charges

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

Line item
in the
income
statement/
balance sheet
affected by the
transfer/
reclassification

Interest
payable
and similar
charges

Exposure

Interest rate
Variable rate GBP debt

Exposure

Interest rate

Exposure

Interest rate
Variable rate GBP debt

Exposure

Interest rate

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued
7.2.4 Inflation risk
The Group is exposed to inflation risk on elements of its revenues and cost base. The Group’s ROC revenue is linked to UK RPI and its
CfD income is linked to UK CPI (see note 2.2 for further information on ROC and CfD income). In addition, a proportion of the Group’s
fuel costs are linked to either US or Canadian CPI. The Group has UK CPI and RPI swaps to hedge certain revenues linked to inflation.

Inflation risk sensitivity
The sensitivity analysis below has been determined based on the exposure to inflation rates on inflation linked derivatives at the
reporting date.

The analysis below shows the impact on profit after tax and other components of equity of a reasonably possible increase/decrease
in inflation rates. The analysis assumes all other variables are held constant.

As at 31 December 2022
UK CPI inflation swaps
UK RPI inflation swaps

As at 31 December 2021
UK CPI inflation swaps
UK RPI inflation swaps and swaptions

Impact on profit after tax

Impact on other components
of equity, net of tax

200 basis points
increase
£m

200 basis points
decrease
£m

200 basis points
increase
£m

200 basis points
decrease
£m

–
(0.7)

–
1.1

(34.8)
(52.8)

29.2
50.9

Impact on profit after tax

Impact on other components
of equity, net of tax

200 basis points
increase
£m

200 basis points
decrease
£m

200 basis points
increase
£m

200 basis points
decrease
£m

–
(38.9)

–
37.2

(6.0)
(48.5)

6.0
46.6

The Group designates the UK CPI and RPI inflation swaps as hedging instruments under cash flow hedge accounting. As such, other
components of equity are sensitive to the impact on inflation linked derivatives recognised in the hedge reserve of an increase or
decrease in UK inflation rates. Profit after tax is sensitive to an increase or decrease in UK inflation rates due to the impact these rate
changes would have on the over-hedged portion of the inflation swaps, with this impact being recognised directly in the Consolidated
income statement. Profit after tax in 2021 was sensitive to the impact on inflation linked derivatives of an increase or decrease
in UK inflation rates due to the impact this would have on the fair value of the unhedged UK RPI inflation swaptions.

Inflation risk management
The Group has a risk management policy in place relating to inflation risk. The Group policy permits, but does not require,
the use of hedging instruments in order to hedge up to 100% of the Group’s current and forecast inflation exposure.

Hedge accounting
The Group has contracts for which the revenue is contractually linked to UK CPI inflation. The Group has designated this risk
component as a hedged item. UK CPI and UK RPI inflation swaps are utilised as the hedging instruments for these inflation risks.

Gains and losses on the inflation swaps are held in the hedge reserve and reclassified to revenue in the Consolidated income
statement at the same time the revenue with inflation linked contracts impacts on the Consolidated income statement or if the
hedged item is on longer expected to occur.

The main sources of ineffectiveness relating to the inflation swaps are the basis point difference between the RPI swaps and the
CPI-linked revenues they are hedging, calculation differences, and the hedged item no longer being expected to occur. Calculation
differences occur due to differences between the reference months used to calculate the inflationary increase per the swaps and the
reference months used to calculate the inflationary increase for the CPI-linked revenues.

During the current year, as a result of a decrease in the forecast CfD generation, the Group has recycled £39.5 million of losses on
hedge accounted inflation linked derivative contracts to the Consolidated income statement, due to the hedged item no longer being
expected to occur. The Group has also recognised £18.5 million of ineffectiveness due to the basis difference between the RPI hedging
instruments and the CPI exposure.

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7.2 Financial risk management continued
The summary of the amounts relating to the hedging instruments and any related ineffectiveness in the period is presented
in the table below.

Notional
value of
contracts
£m

Average
fixed rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

30.3 CPI – 2.72%
440.0 RPI – 3.45%

(13.3)
(144.0)

31 December 2022

Fair value
recognised in
balance sheet
(assets)

£m

–
–

Fair value
recognised in
balance sheet

(liabilities)

£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

(23.8)
(283.5)

(18.1)
(71.1)

14.6
–

31 December 2022

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
gains
recognised in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income statement
that includes
hedge
ineffectiveness

Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m

Amount
reclassified
due to the hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur

£m

Line item in
the income
statement/
balance sheet
affected by the
transfer/
reclassification

Exposure

Inflation

Inflation linked sales
contracts – CPI

Exposure

Inflation

Inflation linked sales
contracts – CPI

13.3
125.5

(13.3)
(125.5)

–
(18.5)

Revenue
Revenue

–
–

(2.0)
7.2

(3.5)
43.0

Revenue
Revenue

Notional
value of
contracts
£m

Average
fixed rate

Change in fair
value of hedging
instrument during
the reporting
period used
for measuring
ineffectiveness
£m

30.3 CPI – 2.72%
495.0 RPI – 3.42%

(15.7)
(19.5)

31 December 2021

Fair value
recognised in
balance sheet
(assets)

£m

1.3
–

Fair value
recognised in
balance sheet

(liabilities)

£m

Balance in the
hedge reserve
for continuing
hedges
net of deferred tax
£m

Balance in the
hedge reserve
for hedging
relationships for
which hedge
accounting is
no longer applied
net of deferred tax
£m

(11.5)
(82.2)

(10.9)
(15.2)

22.0
–

Exposure

Inflation

Inflation linked sales
contracts – CPI

Exposure

Inflation

31 December 2021

Change in fair
value of hedged
item during
the reporting
period used
for measuring
ineffectiveness
£m

Hedging
losses
recognised in OCI
in the period
£m

Hedge
ineffectiveness
recognised in
the income
statement
in the period
£m

Line item in the
income statement
that includes
hedge
ineffectiveness

Amount
transferred to the
cost or
carrying value
of a non-financial
asset/liability
£m

Amount
reclassified
due to the hedged
item affecting
profit or loss
£m

Amount
reclassified
due to the hedged
future cash flows
being no longer
expected to occur

Line item in
the income
statement/
balance sheet
affected by the
transfer/
reclassification

£m

–
–

Revenue
Revenue

Inflation linked sales
contracts – CPI

15.7
21.7

(15.7)
(19.5)

–
–

Revenue
Revenue

–
–

(2.2)
–

7.2.5 Liquidity risk
The Treasury function is responsible for liquidity, funding and settlement management under policies approved by the Board.
Liquidity needs are monitored using regular forecasting of operational cash flows and financing commitments. The Group maintains
a mixture of cash and cash equivalents, committed facilities and uncommitted facilities in order to ensure sufficient funding
for business requirements.

In managing liquidity risk, the Group has the ability to accelerate the cash flows associated with certain working capital items,
principally those related to ROC sales and Customers’ power sales. In each case this is undertaken on a non-recourse basis and,
accordingly, the ROC assets and other items are derecognised from the Consolidated balance sheet at the point of sale. The Group also
utilises standard purchasing facilities to extend the working capital cycle, whilst still paying suppliers on time. The impact on the
Group’s cash flows is described in note 4.3.

The following tables set out details of the expected contractual maturity of non-derivative financial liabilities. The tables include
both interest and principal cash flows. To the extent that interest payments or receipts are floating rate, the undiscounted amount
is derived from interest rate curves at the reporting date.

Drax Group plc Annual report and accounts 2022 267

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued

Term loans, gross value
Loan notes, gross value
Borrowings, contractual maturity
Trade and other payables
Lease liabilities

Within
3 months
£m

10.5
–
10.5
920.0
8.3
938.8

3 months–
1 year
£m

32.4
33.3
65.7
143.3
22.0
231.0

As at 31 December 2022

1–2 years
£m

353.3
33.3
386.6
2.0
26.7
415.3

2–5 years
£m

338.5
663.6
1,002.1
0.6
64.3
1,067.0

>5 years
£m

144.9
–
144.9
–
72.0
216.9

Total
£m

879.6
730.2
1,609.8
1,065.9
193.3
2,869.0

Trade and other payables of £1,065.9 million (2021: £869.5 million) excludes non-financial liabilities such as the Group’s obligation
to deliver ROCs.

Term loans, gross value
Loan notes, gross value
Borrowings, contractual maturity
Trade and other payables
Lease liabilities

Within
3 months
£m

46.4
–
46.4
826.9
5.5
878.8

3 months–
1 year
£m

14.7
30.0
44.7
40.1
15.7
100.5

As at 31 December 2021

1–2 years
£m

17.5
30.0
47.5
0.6
18.9
67.0

2–5 years
£m

650.9
639.6
1,290.5
0.7
46.4
1,337.6

>5 years
£m

138.7
–
138.7
1.2
78.4
218.3

Total
£m

868.2
699.6
1,567.8
869.5
164.9
2,602.2

Interest payments are calculated based on forward interest rates estimated at the reporting date using publicly available information.

The weighted average interest rate payable at the reporting date on the Group’s borrowings was 4.14% (2021: 3.49%).

The following tables set out details of the expected contractual maturity of derivative financial liabilities which are marked-to-market.
Where the amount payable is not fixed, the amount disclosed has been determined by reference to projected commodity prices,
foreign currency exchange rates, inflation rates or interest rates, as illustrated by the yield or other forward curves existing at the
reporting date. Where derivatives are expected to be gross settled, the gross cash flows have been presented. Commodity contracts
and vanilla foreign currency exchange contracts are expected to be gross settled. Where derivatives are expected to be net settled,
the undiscounted net cash flows expected to occur based on the current fair value have been disclosed. Financial contracts and other
foreign exchange contracts (excluding forwards and swaps) are expected to be net settled. Interest rate contracts and inflation rate
contracts are presented based on net settlement of the interest rate and inflation rate differentials. Gross settlement of both the
interest and principal on cross-currency interest rate swaps is expected and as such this element of the swap is presented gross.

Commodity contracts
Financial contracts
Foreign currency exchange contracts
Interest rate and cross-currency contracts
Inflation contracts

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Drax Group plc Annual report and accounts 2022

Within
1 year
£m

1,006.0
322.8
921.4
8.2
67.3
2,325.7

Within
1 year
£m

175.9
45.1
2,306.9
3.1
52.0
2,583.0

As at 31 December 2022

1–2 years
£m

12.1
161.7
45.4
0.1
83.1
302.4

>2 years
£m

3.6
1.0
47.8
0.2
203.8
256.4

As at 31 December 2021

1–2 years
£m

27.4
55.8
148.7
43.9
10.1
285.9

>2 years
£m

2.1
1.5
705.3
1.0
78.2
788.1

Total
£m

1,021.7
485.5
1,014.6
8.5
354.2
2,884.5

Total
£m

205.4
102.4
3,160.9
48.0
140.3
3,657.0

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7.2 Financial risk management continued
7.2.6 Credit risk
The Group’s gross exposure to credit risk for financial instruments is limited to the carrying amount of financial assets recognised
at the reporting date, as summarised below:

Financial assets:
Cash and cash equivalents (note 4.1)
Trade and other receivables (note 3.5)
Derivative financial instruments (note 7.1)

As at 31 December

2022
£m

2021
£m

238.0
1,167.8
1,218.0
2,623.8

317.4
599.7
1,246.1
2,163.2

Trade and other receivables are stated gross of the provision for expected credit losses on trade receivables of £60.9 million
(2021: £46.6 million), expected credit losses on accrued income of £7.6 million (2021: £8.6 million) and contingent consideration
of £27.4 million (2021: £27.7 million). The balance excludes non-financial receivables such as prepayments.

The Group‘s three reportable segments (Pellet Production, Generation and Customers) are exposed to different levels and
concentrations of credit risk, largely reflecting the number, size and nature of their respective customers.

The Pellet Production segment sells biomass pellets both intra-group and to external parties. Credit risk for the Group relates to the
sales made to external parties. The majority of the Pellet Production segment’s external sales are with large utility customers in Europe
and Asia. The Pellet Production segment manages its credit risk by reviewing individual sales contracts, considering the length of the
contract and assessing the credit quality of counterparties prior to signing contracts and throughout the duration of contracts.

For the Generation segment, the risk arises from treasury, trading and energy procurement activities, as well as the sale of by-products
from generation activities. Wholesale counterparty credit exposures are monitored by individual counterparty and by category
of credit rating. Counterparty credit exposures are subject to approved limits. The Group uses master netting agreements to reduce
credit risk and net settles payments with counterparties where net settlement provisions exist. In addition, the Group employs
a variety of other methods to mitigate credit risk: margining, various forms of Parent Company guarantee, deeds of charge, cash
collateral, letters of credit and surety bonds. The majority of the Generation business’s credit risk is with counterparties in related
energy industries or with financial institutions. In addition, where deemed appropriate, the Group has historically purchased credit
default swaps.

The highest credit risk exposure is in the Customers segment, with a large number of customers of varying sizes operating in a variety
of markets. In particular, its SME customers carry lower concentrations but higher levels of credit risk, owing to a customer base
comprised of smaller retail and commercial entities. Credit risk is managed by checking a company’s creditworthiness and financial
strength both before commencing trade and during the business relationship. Credit risk is monitored and managed by business sector.

Further details on the impact of credit risk on trade and other receivables is disclosed in note 3.5.

The investment of surplus cash is undertaken with the objective of ensuring that there is sufficient liquidity at all times, so that funds
are available to meet liabilities as they fall due, whilst securing a return from invested funds and preserving the capital value of those
funds within Board-approved policies. These policies manage credit risk exposure by setting out minimum rating requirements and
maximum investments with any one counterparty based on their rating and the maturity profile.

Whilst cash and cash equivalents are also subject to the impairment requirements of IFRS 9, the identified impairment loss
was immaterial.

The Group is exposed to credit risk on derivative contracts, to which the impairment requirements of IFRS 9 are not applied as the
fair value requirements of IFRS 13 are applicable. The carrying amount of these financial assets, disclosed above, represents the
Group’s maximum credit risk exposure.

Drax Group plc Annual report and accounts 2022 269

Financial statements

Section 7: Risk management continued

7.2 Financial risk management continued
Counterparty risk
As the Group relies on third-party suppliers and counterparties for the delivery of currency, biomass pellets and other goods
and services, it is exposed to the risk of non-performance by these third-party suppliers. For financial instruments this risk is limited
to the credit risk, as discussed above. The Group is also exposed to counterparty risk on non-financial instruments, such as the
purchases of biomass and capital expenditure. If a large supplier were to fall into financial difficulty and/or fail to deliver against its
contract with the Group, there would be additional costs associated with securing the lost goods or services from other suppliers.

The Group enters into purchase and sale contracts for a wider variety of goods and services, for example the sale of power
to a number of counterparties. The failure of one or more of these counterparties to perform under their contractual obligations may
cause the Group financial distress or increase the risk profile of the Group. The Group has acceptance procedures in place to ensure
the counterparties the Group contracts with are appropriate. The Group also has limits in place, and actively monitors its exposures
to individual counterparties to minimise this risk.

Capital management
The Group is disciplined in its management of capital to ensure it is able to continue as a going concern; maintain a strong credit rating
underpinned by robust financial metrics; invest in its core business and pay a sustainable and growing dividend whilst maximising
the return to shareholders through the optimisation of the debt and equity balance. The capital structure of the Group consists
of shareholders’ equity (excluding the hedge and cost of hedging reserves), plus Net debt. Net debt is comprised of borrowings,
cash and cash equivalents attributable to owners of the Parent Company and is inclusive of the impact of associated hedging
instruments as disclosed in note 2.7.

See note 4.2 for details of loan covenants, and the Viability statement on page 75 for details of scenario analysis performed
on covenant restrictions of the Group’s financing facilities.

Borrowings (note 4.2)
Cash and cash equivalents (note 4.1)
Non-controlling interests share of cash and cash equivalents in non-wholly owned subsidiaries
Impact of hedging instruments
Net debt (note 2.7)

As at 31 December

2022
£m

1,440.9
(238.0)
0.7
2.4
1,206.0

2021
£m

1,361.0
(317.4)
–
64.4
1,108.0

Total shareholders’ equity attributable to the owners of the Parent Company, excluding hedge and
cost of hedging reserves

1,422.7

1,384.2

In 2022, the Group has updated its definition of Net debt. The above table has been re-presented to reflect this updated definition.
See the Net debt section in the Basis of preparation for further details on this change in definition.

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7.3 Hedge reserve
The Group designates certain hedging instruments that are used to address commodity price risk, foreign exchange risk, interest rate
risk and inflation rate risk as cash flow hedges. At the inception of the hedge, the relationship between the hedging instrument and
hedged item is documented, along with its risk management objectives. Furthermore, at the inception of the hedge and on an ongoing
basis, the Group documents whether the hedging instruments used in hedging transactions are effective in offsetting changes in cash
flows of the hedged items. Changes in fair value of contracts designated into such hedging relationships are recognised within the
hedge reserve to the extent they are effective.

The table below details the gains and (losses) recognised in the current and prior year on hedging instruments, the amounts
reclassified from equity due to the hedged item affecting the Consolidated income statement, and the amounts reclassified due to the
hedged future cash flows no longer being expected to occur. See section 7.2 for further details on these amounts.

At 1 January 2021
Gains/(losses) recognised:
– Change in fair value of hedging instrument recognised in OCI
Reclassified from equity as the hedged item has affected
profit or loss:
– Reclassified to cost of inventory
– Reclassified to the Consolidated income statement – included
in cost of sales
– Reclassified to the Consolidated income statement – included
in revenue
– Reclassified to the Consolidated income statement – included

in interest payable and similar charges

– Reclassified to the Consolidated income statement – included

in foreign exchange gains/(losses)
Related deferred tax, net (note 2.6)
At 1 January 2022
Gains/(losses) recognised:
– Change in fair value of hedging instrument recognised in OCI
Reclassified from equity as the hedged item has affected
profit or loss:
– Reclassified to cost of inventories
– Reclassified to the Consolidated income statement – included
in cost of sales
– Reclassified to the Consolidated income statement – included
in revenue
– Reclassified to the Consolidated income statement – included

in interest payable and similar charges

– Reclassified to the Consolidated income statement – included

in foreign exchange gains/(losses)

– Reclassified to Revenue as hedged item no longer expected
to occur
Related deferred tax, net (note 2.6)
At 31 December 2022

Hedge reserve

Commodity
price risk
£m

Foreign
currency
exchange risk
£m

(3.4)

(84.8)

Interest
rate risk
£m

(13.8)

Inflation
rate risk
£m

26.0

Total
£m

(76.0)

(163.3)

(1.7)

19.3

(35.2)

(180.9)

–

33.2

(17.2)

6.3

–

–
39.4
(138.2)

–

(3.6)

26.0
(8.4)
(39.3)

–

3.3

–
(4.6)
4.2

–

33.2

(17.2)

(2.2)

4.1

–

(0.3)

–
7.3
(4.1)

26.0
33.7
(177.4)

(538.6)

249.9

39.9

(138.8)

(387.6)

–

(19.1)

–

(6.6)

(3.1)

(62.0)

–
(39.2)
83.7

–

–
(9.3)
31.7

0.1

459.8

–

–
24.1
(192.8)

–

(19.1 )

0.1

5.2

465.0

–

39.5
23.6
(74.6)

(9.7)

(62.0)

39.5
(0.8)
(152.0)

Drax Group plc Annual report and accounts 2022 271

Financial statements

Section 7: Risk management continued

7.3 Hedge reserve continued
The expected release profile from equity of post-tax hedging gains and (losses) is as follows:

As at 31 December 2022

Within 1 year
£m

1–2 years
£m

Commodity risk
Foreign currency exchange risk
Interest rate risk
Inflation risk

(167.4)
49.6
11.2
(3.3)
(109.9)

Within 1 year
£m

(20.9)
(28.0)
(0.6)
(0.5)
(50.0)

(22.3)
23.3
11.9
(17.1)
(4.2)

>2 years
£m

(3.1)
10.8
8.6
(54.2)
(37.9)

As at 31 December 2021

1–2 years
£m

(110.2)
(9.0)
1.2
(0.4)
(118.4)

>2 years
£m

(7.1)
(2.3)
3.6
(3.2)
(9.0)

Total
£m

(192.8)
83.7
31.7
(74.6)
(152.0)

Total
£m

(138.2)
(39.3)
4.2
(4.1)
(177.4)

7.4 Cost of hedging reserve
The Group allocates unrealised gains and losses on the forward rate of hedge accounted foreign currency derivative contracts
to a cost of hedging reserve in accordance with IFRS 9.

A large proportion of the derivative contracts held relate to foreign currency exchange contracts, including forward contracts,
options and swaps. Consistent with prior periods, for foreign currency exchange contracts to which the Group has applied hedge
accounting, the Group has continued to designate the change in the spot rate as the hedged risk in the Group’s cash flow hedge
relationships. The Group designates the cost of hedging – being the change in fair value associated with forward points including
currency basis – to equity. All amounts within the cost of hedging reserve relate to foreign currency exchange risk.

The table below details the cost of hedging gains or (losses) recognised in the year on hedging instruments and the amounts
reclassified from equity due to the hedged item affecting the Consolidated income statement:

At 1 January
(Losses)/gains recognised:
– Change in fair value of hedging instrument recognised in the Consolidated statement
of comprehensive income
Reclassified from equity as the hedged item has affected profit or loss:
– Reclassified to cost of inventories
Related deferred tax, net (note 2.6)
At 31 December

The expected release profile from equity of post-tax cost of hedging gains and (losses) is as follows:

Cost of hedging

2022
£m

78.5

2021
£m

87.2

(19.0)

17.3

(28.8)
9.4
40.1

(23.7)
(2.3)
78.5

As at 31 December 2022

Within 1 year
£m

21.7

1–2 years
£m

13.0

>2 years
£m

5.4

As at 31 December 2021

Within 1 year
£m

25.5

1–2 years
£m

28.3

>2 years
£m

24.7

Total
£m

40.1

Total
£m

78.5

Foreign currency exchange risk

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7.5 Offsetting financial assets and financial liabilities
Financial assets and liabilities are offset and the net amount is reported in the Consolidated balance sheet where the Group has a
legally enforceable right to offset the recognised amounts, and there is an intention to settle on a net basis or realise the asset and
settle the liability simultaneously. The Group also has financial assets and liabilities with certain counterparties that are subject to
master netting agreements. Some financial assets and liabilities do not meet the criteria for offsetting at the reporting date but are
subject to an enforceable master netting agreement that in certain circumstances, such as a bankruptcy, would allow for the amounts
to be offset and a single net amount payable.

The table below shows the impact if the carrying amounts that are subject to these master netting agreements were offset:

As at 31 December 2022

As at 31 December 2021

Gross amounts
of financial
instruments
in the
balance sheet
£m

Related
financial
instruments
that are
not offset
£m

Cash collateral
assets/(liabilities)
£m

Net amount
£m

Gross amounts
of financial
instruments
in the
balance sheet
£m

Related
financial
instruments
that are
not offset
£m

Cash collateral
assets/(liabilities)
£m

Net amount
£m

Financial assets

Derivative financial
instruments

Financial liabilities
Derivative financial
instruments

1,218.0

(1,278.6)

234.0

173.4

1,246.1

(1,008.3)

(183.0)

54.8

(1,724.8)

1,278.6

–

(446.2)

(1,504.5)

1,008.3

10.2

(486.0)

The aforementioned collateral assets and liabilities are recorded in other receivables and other payables respectively, see note 4.3.

7.6 Contingent assets and liabilities
Contingent assets are potential future inflows of cash that are dependent on a future event that is outside of the control of the Group.
The amount or timing of any receipt is uncertain and cannot be measured reliably.

Contingent liabilities are potential future outflows of cash that are dependent on a future event that is outside of the control of the
Group. The amount or timing of any payment is uncertain and cannot be measured reliably.

Guarantees
In addition to the amounts drawn down against the bank loans, certain members of the Group guarantee the obligations of a number
of banks in respect of letters of credit issued by those banks to counterparties of the Group. As at 31 December 2022, the Group’s
contingent liability in respect of letters of credit issued amounted to £85.9 million (2021: £74.4 million), of which £46.0 million
(2021: £74.4 million) was issued under the RCF.

The Group also guarantees obligations in the form of surety bonds with a number of insurers amounting to £202.0 million
(2021: £142.1 million).

Collateral is sometimes required to be provided in relation to the Group’s commodity and treasury trading activities. When derivative
positions are out of the money for the Group, collateral may be required to be provided to the counterparty. These positions reverse
when contracts are settled, and the collateral is returned. The Group has access to certain facilities to enable it to cover collateral
requirements to counterparties through letters of credit or surety bonds.

The letters of credit and surety bond figures above include amounts utilised to cover commodity trading collateral requirements
of £54.5 million (2021: £42.5 million) and £165.0 million (2021: £107.1 million) respectively. See note 4.1 for details on net cash collateral
the Group has paid to or received from counterparties.

Contingent liabilities
Smart meter targets
In late February 2023, the Group received notice from Ofgem that its failure to fully achieve installation targets for Smart Meter
installations in the Opus Energy business during 2022 had been referred to Ofgem’s Enforcement team. They will consider this matter
in due course and make a decision on any future action. No amount has been provided in respect of this matter in the Consolidated
financial statements, given the early stage of the process and the uncertainty in future outcome.

Contingent assets
Billing system
Drax Energy Solutions Limited has lodged a claim against a supplier for damages caused by the supplier’s misrepresentation and failure
to perform under a contract for delivery of a new billing system. The directors have considered the potential legal outcomes of the
claim with external professional advisors and believe that a favourable outcome is probable. However, a contingent asset is disclosed
rather than a receivable recognised at 31 December 2022, as receipt of the amount is dependent on the outcome of the claim and
therefore it is not virtually certain to be received.

Drax Group plc Annual report and accounts 2022 273

Financial statements

Section 7: Risk management continued

7.7 Commitments
The Group has a number of financial commitments (i.e. a contractual requirement to make a cash payment in the future) that are not
recorded in the Consolidated balance sheet as the contract is not yet due for delivery. Such commitments include contracts for the
future purchase of sustainable biomass, contracts for the construction of assets and contracts for the provision of services.

Contracts placed for future capital expenditure not provided in the Consolidated financial statements
– Property, plant and equipment
Contracts placed for future capital expenditure not provided in the Consolidated financial statements
– Intangible assets
Future support and service contracts not provided in the Consolidated financial statements
Future commitments to purchase ROCs
Future commitments to purchase biomass under fixed and variable priced contracts
Future commitments to purchase fibre under fixed and variable priced contracts

As at 31 December

2022
£m

267.9

0.2
60.1
331.9
3,250.0
242.5

2021
£m

28.6

–
51.2
200.5
3,466.9
356.8

Commitments for future capital expenditure of property, plant and equipment have increased predominantly due to the construction
of the OCGT plants.

The contractual maturities of the future commitments to purchase biomass are as follows:

Within one year
Within one to five years
After five years

As at 31 December

2022
£m

829.5
1,123.4
1,297.1
3,250.0

2021
£m

828.4
2,623.7
14.8
3,466.9

Commitments to purchase fuel reflect long-term forward purchase contracts with a variety of international suppliers, primarily
for the delivery of sustainable biomass pellets for use in electricity generation at Drax Power Station. To the extent these contracts
relate to the purchase of biomass pellets, they are not reflected elsewhere in the financial statements owing as they are not within the
scope of IFRS 9, and are therefore not required to be measured at fair value. See the Critical accounting judgements section in the
Basis of preparation for further details on this judgement.

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Section 8: Reference information

This section details reference information relevant to the compiling of the Consolidated financial statements and provides general
information about the Group (e.g. operations and registered office). This section also sets out the basis of preparation of the accounts
and general accounting policies that are not specific to any one note.

8.1 General information
Drax Group plc (the Company) is incorporated in England and Wales under the Companies Act 2006. The Company and its subsidiaries
(together, the Group) have three principal activities:

• Production and subsequent sale of biomass pellets for use in electricity production;
• Electricity generation; and
• Electricity and gas supply to business customers.

The Group’s activities are principally based within the UK and North America.

The address of the Company’s registered office and principal establishment is Drax Power Station, Selby, North Yorkshire, YO8 8PH,
United Kingdom. A full list of operating companies of the Group is disclosed in note 5 to the Company’s separate financial statements,
which follow these Consolidated financial statements.

8.2 Adoption of new and revised accounting standards
The following amendments became effective for the first time in 2022. The Group adopted the following from 1 January 2022:

• Annual Improvements 2018-2020 Cycle – effective from 1 January 2022.
• IAS 37 (amended) – Onerous Contracts: Cost of Fulfilling a Contract – effective from 1 January 2022.
• IAS 16 (amended) – Property, Plant and Equipment – Proceeds before Intended Use – effective from 1 January 2022.
• IFRS 3 (amended) – Reference to the Conceptual Framework – effective from 1 January 2022.

The adoption of these amendments in the current year has not had a material impact on the Consolidated financial statements.

At the date of approval of this report, the following new or amended standards and relevant interpretations, which have not been
applied in these Consolidated financial statements, were in issue but not yet effective.

• IFRS 10 (amended) – Consolidated Financial Statements – effective date deferred indefinitely.*
• IAS 28 (amended) – Investments in Associates and Joint Ventures (2011) – effective date deferred indefinitely.*
• IFRS 16 (amended) – Lease Liability in a Sale and Leaseback – effective from 1 January 2024.*
• IFRS 17 Insurance Contracts – effective from 1 January 2023.
• IAS 1 (amended) – Classification of Liabilities as Current or Non-Current – effective from 1 January 2024.*
• IAS 1 (amended) – Non-current Liabilities with Covenants – effective from 1 January 2024.*
• IAS 1 (amended) – Disclosure of Accounting Policies – effective from 1 January 2023.
• IAS 8 (amended) – Definition of Accounting Estimates – effective from 1 January 2023.
• IAS 12 (amended) – Deferred Tax related to Assets and Liabilities arising from a single Transaction – effective from 1 January 2023.

* Pending endorsement by the UK Endorsement Board (UKEB).

Adoption of the new or amended standards and relevant interpretations in future periods is not expected to have a material impact on
the Consolidated financial statements of the Group. The Group will continue to monitor the developments of these new or amended
standards as and when they are endorsed for use in the United Kingdom.

Drax Group plc Annual report and accounts 2022 275

Financial statements

Section 8: Reference information continued

8.3 Related party transactions
A related party is either an individual or entity with control or significant influence over the Group, or a company that is linked
to the Group by investment (such as an associated company or joint venture). The Group’s related parties are primarily its associate
and its key management personnel. Amounts below are the total amount of transactions that have been entered into with any
related parties in the year.

Houston Pellet Limited Partnership (HPLP)
HPLP is owned 30% by the Group and 70% by non-related third parties. The Group purchases biomass pellets from HPLP. The Group
manages and administers the business affairs of HPLP and charges a management fee. These transactions are at negotiated amounts
between the Group and the non-related third parties.

The transactions in the period and the balances at the reporting date with the related party are summarised below:

Houston Pellet Limited Partnership

HPLP

Houston Pellet Limited Partnership

HPLP

Transactions in the period
to 31 December 2022

Drax
Ownership

30%

Management
fee income
£m

Purchases
£m

0.1

18.2

Balances as at 31 December 2022(1)

Payable
£m

1.7

Receivable
£m

0.4

Transactions in the period
to 31 December 2021(2)

Drax
Ownership

30%

Management
fee income
£m

Purchases
£m

0.2

10.3

Balances as at 31 December 2021(1)

Payable
£m

1.4

Receivable
£m

0.6

(1) The amounts payable to and receivable from HPLP are unsecured and non-interest bearing.
(2) The transactions in the period to 31 December 2021 represent the transactions from the acquisition date of 13 April 2021 to the reporting date.

Remuneration of key management personnel
The remuneration of the Directors and Executive management, who are considered to be the key management personnel of the
Group, is set out below in aggregate for each of the categories specified in IAS 24. Further information about the remuneration
of individual directors, together with the directors’ interests in the share capital of the Company, is provided in the audited part
of the Remuneration Committee report.

Short-term employee benefits
Share-based payments
Post-employment benefits
Total remuneration

Year ended 31 December

2022
£000

7,531
3,964
489
11,984

2021
£000

6,755
2,826
635
10,216

Compensation of the Group’s key management personnel includes short-term employee benefits, which includes salaries,
other short-term benefits, and contributions to post-employment money purchase pension schemes.

Share-based payments compensation represents the amounts receivable under share-based incentive schemes as disclosed
in note 6.2.

Amounts included in the table above reflect the remuneration of the 17 (2021: 17) members of the Board and Executive management.

There were no other transactions with directors for the periods covered by these Consolidated financial statements.

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Company financial statements

Company balance sheet

Non-current assets
Investment in subsidiaries
Deferred tax assets

Current assets
Other receivables
Amounts due from other Group companies
Cash and cash equivalents

Current liabilities
Amounts due to other Group companies

Net current assets
Net assets
Shareholders’ equity
Issued equity
Share premium
Treasury shares
Capital redemption reserve
Retained profits
Total shareholders’ equity

Notes

As at 31 December

2022
£000

2021
£000

742,016
–
742,016

100
110,801
2,056
112,957

732,400
1
732,401

114
3,638
3,939
7,691

(719)

(4,248)

112,238
854,254

3,443
735,844

47,925
433,281
(50,440)
1,502
421,986
854,254

47,716
432,191
(50,440)
1,502
304,875
735,844

The Company reported a profit for the financial year ended 31 December 2022 of £186.5 million (2021: £78.1 million).

These financial statements were approved and authorised for issue by the Board of directors on 22 February 2023.

Signed on behalf of the Board of directors:

Andy Skelton
CFO

Drax Group plc Annual report and accounts 2022 277

Financial statements

Company financial statements continued

Company statement of changes in equity

At 1 January 2021
Issue of share capital (note 6)
Profit and total comprehensive income for the year
Movement in equity associated with share-based
payments
Equity dividends paid (note 7)
At 1 January 2022
Issue of share capital (note 6)
Profit and total comprehensive income for the year
Movement in equity associated with share-based
payments
Equity dividends paid (note 7)
At 31 December 2022

Issued
equity
£000

47,460
256
–

–
–
47,716
209
–

–
–
47,925

Share
premium
£000

429,974
2,217
–

–
–
432,191
1,090
–

–
–
433,281

Treasury
shares (1)
£000

(50,440)
–
–

–
–
(50,440)
–
–

–
–
(50,440)

Capital
redemption
reserve
£000

1,502
–
–

–
–
1,502
–
–

Retained
profits
£000

290,283
–
78,103

7,388
(70,899)
304,875
–
186,533

Total
£000

718,779
2,473
78,103

7,388
(70,899)
735,844
1,299
186,533

–
–
1,502

9,479
(78,901)
421,986

9,479
(78,901)
854,254

(1) The 13.8 million shares held in this reserve have no voting rights attached to them.

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Notes to the Company financial statements

1. Basis of preparation
The separate financial statements of the Company are presented as required by the Companies Act 2006.

The Company meets the definition of a qualifying entity under Financial Reporting Standard 100 (FRS 100) issued by the
Financial Reporting Council (FRC).

The principal activity of the Company is being the ultimate Parent Company of the Drax Group plc group of companies.

The financial statements have been prepared in accordance with FRS 101, ‘Reduced Disclosure Framework’.

The Company applied certain new and amended standards for the first time in 2022. The full list of standards adopted is set out
in the Consolidated financial statements in note 8.2. These updates and amendments have not had a material impact on the
financial statements of the Company.

As permitted by FRS 101, the Company has taken advantage of the disclosure exemptions available under that standard in relation
to presentation of a cash flow statement, financial instruments, share-based payments, capital risk management, standards not
yet effective and certain related party transactions. Where required, equivalent disclosures are given in the Consolidated financial
statements.

The Company financial statements have been prepared under the historical cost convention. The principal accounting policies
adopted are summarised below and have been consistently applied to both years presented.

2. Summary of significant accounting policies
Investments in subsidiaries
Investments in subsidiaries are stated at cost less, where relevant, provision for impairment.

Financial instruments
Issued equity – Ordinary shares are classified as equity as evidenced by their residual interest in the assets of the Company after
deducting all of its liabilities. Incremental costs directly attributable to the issue of new shares or options are shown in equity as a
deduction, net of tax, from the proceeds. The share premium account records amounts by which the proceeds from issuing shares
exceeds the nominal value of the shares issued unless merger relief criteria within the Companies Act 2006 are met, in which case
the difference is recorded in retained profits.

Cash and cash equivalents – Cash and cash equivalents includes cash in hand, deposits held with banks, other short-term highly liquid
investments with original maturities of three months or less, and bank overdrafts.

Impairment of financial assets
The Company applies the impairment model in IFRS 9 to provide for expected credit losses on its financial assets including amounts
due from other Group companies and other financial assets. The provision for impairment of amounts owed by Group companies is
measured at an amount equal to the lifetime expected credit loss when there has been a significant increase in credit risk since initial
recognition. If there has not been a significant increase in credit risk since initial recognition, a 12-month expected credit loss provision
is recognised.

3. Critical accounting judgements and key sources of estimation uncertainty
Critical judgements in applying the Company’s accounting policies
There were no critical accounting judgements made in preparation of the Company’s financial statements.

Key sources of estimation uncertainty
There were no areas of significant estimation uncertainty within the Company’s financial statements.

4. Profit and loss account
As permitted by Section 408 of the Companies Act 2006, the Company has elected not to present its own profit and loss account
for the years ended 31 December 2022 and 31 December 2021. The Company’s financial statements were approved by the Board
on 22 February 2023. The net profit attributable to the Company is £186.5 million (2021: £78.1 million).

The Company received dividend income from its subsidiary undertakings totalling £185.0 million in 2022 (2021: £80.0 million).

The Company has no employees other than the Directors, whose remuneration was paid by a subsidiary undertaking and a proportion
was recharged to the Company.

The auditor’s remuneration for audit services provided to the Company for the year ended 31 December 2022 was £26,078
(2021: £23,774).

Drax Group plc Annual report and accounts 2022 279

Financial statements

Notes to the Company financial statements continued

5. Fixed asset investments

Carrying amount:
At 1 January
Capital contribution
At 31 December

Year ended 31 December

2022
£000

2021
£000

732,400
9,616
742,016

724,911
7,489
732,400

Investments in subsidiary undertakings
The capital contribution in 2022 and 2021 relates to the share-based payment charges associated with the employee share schemes,
which arise because the beneficiaries of the schemes are employed by subsidiary companies. For more information see note 6.2 to the
Consolidated financial statements.

Full list of related undertakings
The table below lists the Company’s direct and indirect related undertakings as at 31 December 2022:

Name and nature of business
Abergelli Power Limited***
Abbott Debt Recovery Limited***
Alabama Pellets LLC*
Amite BioEnergy LLC*
Arkansas Bioenergy LLC*
Baton Rouge Transit LLC*
DBI O&M Company LLC*
Demopolis Pellets LLC*
Donnington Energy Limited

Principal activity
Power generation
Non-trading company
Fuel supply
Fuel supply
Fuel supply
Fuel supply
Non-trading company
Fuel supply
Dormant

Country of incorporation
and registration
Type of share
England and Wales Ordinary
England and Wales Ordinary
Common
Delaware, USA
Common
Delaware, USA
Common
Delaware, USA
Common
Delaware, USA
Common
Delaware, USA
Delaware, USA
Common
England and Wales Ordinary

Drax Asia (Japan) K.K.>
Drax Biomass Acquisitions LLC*
Drax Biomass Inc.*
Drax Biomass Holdings Limited***
Drax Biomass Holdings LLC*
Drax Biomass International Holdings LLC*
Drax Biomass Transit LLC*
Drax CCS Limited
Drax Corporate Limited
Drax Cruachan Expansion Limited***
Drax Energy Solutions Limited
Drax Finco plc
Drax Fuel Supply Limited***
Drax Netherlands B.V.~
Drax Generation Developments Limited***
Drax Group Holdings Limited
Drax Holdings Limited+
Drax Hydro Limited
Drax Innovation Limited***
Drax Pension Trustees Limited
Drax Power Limited
Drax Pumped Storage Limited
Drax Retail Developments Limited
Drax Research and Innovation Holdco
Limited***
Drax River Hydro Limited
Drax Smart Generation Holdco Limited
Drax Smart Sourcing Holdco Limited
Drax Smart Supply Holdco Limited

Common
Provision of corporate services Japan
Common
Delaware, USA
Non-trading company
Common
Delaware, USA
Wood pellet manufacturing
England and Wales Ordinary
Holding company
Common
Delaware, USA
Dormant
Common
Delaware, USA
Holding company
Common
Delaware, USA
Holding company
Dormant
England and Wales Ordinary
Group-wide corporate services England and Wales Ordinary
England and Wales Ordinary
Non-trading company
England and Wales Ordinary
Power retail
England and Wales Ordinary
Finance company
England and Wales Ordinary
Non-trading company
Netherlands
Dormant
Ordinary
England and Wales Ordinary
Development company
England and Wales Ordinary
Holding company
Cayman Islands
Holding company
Ordinary
England and Wales Ordinary
Holding company
England and Wales Ordinary
Development company
England and Wales Ordinary
Dormant
England and Wales Ordinary
Power generation
England and Wales Ordinary
Power generation
England and Wales Ordinary
Dormant

Holding company
Power generation
Holding company
Holding company
Holding company

England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary

280

Drax Group plc Annual report and accounts 2022

Registered
number
08190497
05355799
7064679
5128116
7881707
5128759
5305470
6314280
07109298
0100-01-
227551
7897331
5068290
08322715
5128115
5250168
5128118
07885329
05562058
06657393
05893966
10664639
05299523
81848455
07821368
09887429
92144
08654218
10664715
09824989
04883589
06657336
10711130

06657454
05956747
07821911
07821375
10664625

Ownership
& voting %

100
100
100
100
100
100
100
100
100

100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100
100

100
100
100
100
100

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5. Fixed asset investments continued

Name and nature of business

Principal activity

Country of incorporation
and registration

Type of share

Registered
number

Ownership
& voting %

Farmoor Energy Limited***
Haven Heat Limited
Haven Power Nominees Limited
Hirwaun Power Limited***
Houston Pellet Inc.**
Houston Pellet Limited Partnership**
Iberia Bioenergy LLC*
Jefferson Transit LLC*
LaSalle Bioenergy LLC*
Lavington Pellet Inc.**
Lavington Pellet Limited Partnership**
Millbrook Power Limited***
Morehouse BioEnergy LLC*
Northern Pellet Inc.**

Northern Pellet Limited Partnership**
Opus Energy (Corporate) Limited
Opus Energy Limited
Opus Energy Group Limited
Opus Energy Marketing Limited***
Opus Energy Renewables Limited
Opus Gas Limited***
Opus Gas Supply Limited
Opus Water Limited
Pinnacle Renewable Energy Inc.**
Pinnacle Renewable Holdings (USA) Inc.*
Pirranello Energy Supply Limited
Progress Power Limited***
Smithers Pellet Inc.**
Smithers Pellet Limited Partnership**
SMW Limited^
Sunflower Energy Supply Limited
Tyler Bioenergy LLC*

Registered Office

Power retail
Dormant
Non-trading company
Power generation
General partner
Fuel supply
Non-trading company
Dormant
Fuel supply
General partner
Fuel supply
Power generation
Fuel supply
General partner

Fuel supply
Power retail
Power retail
Power retail
Non-trading company
Power retail
Non-trading company
Power retail
Dormant
Fuel supply
Holding company
Dormant
Power generation
General partner
Fuel supply
Fuel supply
Dormant
Dormant

07111074
06657428
07352734
08190283

England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
Richmond, Canada Common BC0730544
LP0428310
Richmond, Canada Units
7881704
Delaware, USA
6297176
Delaware, USA
Delaware, USA
6297174
Richmond, Canada Common BC1022038
LP0649393
Richmond, Canada Units
08920458
England and Wales Ordinary
Delaware, USA
5128117
Common
Richmond, Canada Common BC1213828

Common
Common
Common

Class A and
Class C

LP781774
05199937
04382246
04409377
05030694
07126582
05680956
06874709
09425319

Richmond, Canada
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
England and Wales Ordinary
Richmond, Canada Common BC1300366
Delaware, USA
Common
England and Wales Ordinary
England and Wales Ordinary
Richmond, Canada Common BC1135983
Richmond, Canada Units
Ordinary
Scotland
England and Wales Ordinary
Common
Delaware, USA

LP730047
SC165988
09735929
6297175

7043656
10769036
08421833

100
100
100
100
33
30
100
100
100
75
75
100
100
50

50
100
100
100
100
100
100
100
100
100
100
100
100
70
70
100
100
100

Incorporated in England and Wales
The registered address of all the companies incorporated in England and Wales is Drax Power Station, Selby, North Yorkshire, YO8 8PH.

*Incorporated in the USA
The registered address of all related undertakings incorporated in the USA is 850 New Burton Road, Suite 201, Dover DE 19904.

**Incorporated in Canada
The registered address of all related undertakings incorporated in Canada is 2800 Park Place, 666 Burrard Street, Vancouver, BC V6C 2Z7

^Incorporated in Scotland
The registered address of all related undertakings incorporated in Scotland is 13 Queen’s Road, Aberdeen, Scotland, AB15 4YL.

+Registered in Cayman Islands
The registered address of Drax Holdings Limited is c/o Intertrust Corporate Services (Cayman) Limited, One Nexus Way, Camana Bay,
George Town, Grand Cayman KY1 9005, Cayman Islands.

~Registered in Netherlands
The address of Drax Netherlands B.V. registered in Netherlands is Barbara Strozzilaan 101, Amsterdam, 1083HN.

Drax Group plc Annual report and accounts 2022 281

Financial statements

Notes to the Company financial statements continued

5. Fixed asset investments continued
>Registered in Japan
The address of Drax Asia (Japan) K.K. registered in Japan is Level 2, Marunouchi Nijubashi Building, 3-2-2 Marunouchi,
Chiyoda-ku, Tokyo.

***Exempt from audit
These subsidiaries have taken advantage of the exemption from audit available under section 479A of the Companies Act 2006
for the 2022 statutory accounts. These companies are all incorporated in England and Wales.

Abbott Debt Recovery Limited, Opus Energy Marketing Limited and all undertakings incorporated in Canada have 30 December
2022 year ends. All other related undertakings have 31 December 2022 year ends.

The Group consolidates all of the related undertakings disclosed above apart from:

• Northern Pellet Inc. and Northern Pellet Limited Partnership which are proportionately consolidated; and
• Houston Pellet Inc. and Houston Pellet Limited Partnership which are equity accounted.

6. Issued equity

Issued and fully paid:
2022: 414,872,491 (2021: 413,068,027) ordinary shares of 11 16⁄29 pence each

The movement in allotted and fully paid share capital of the Company during the year was as follows:

At 1 January
Issued under employee share schemes
At 31 December

As at 31 December

2022
£000

2021
£000

47,925

47,716

Year ended 31 December

2022
(number)

2021
(number)

413,068,027 410,848,934
2,219,093
414,872,491 413,068,027

1,804,464

The Company has only one class of shares, which are ordinary shares of 11 16⁄29 pence each, carrying no right to fixed income.
No shareholders have waived their rights to dividends. From January to December 2022, shares were issued in satisfaction of options
vesting in accordance with the rules of the Company’s employee share schemes.

The total cash received, split between nominal value and share premium, is shown in the Company statement of changes in equity
on page 278.

Full details of share options outstanding are included in note 6.2 to the Consolidated financial statements.

7. Dividends

Amounts recognised as distributions to equity holders in the year (based on the number of shares in
issue at the record date):
Interim dividend for the year ended 31 December 2022 of 8.4 pence per share paid on 7 October 2022
(2021: 7.5 pence per share paid on 8 October 2021)

Final dividend for the year ended 31 December 2021 of 11.3 pence per share paid on 13 May 2022
(2020: 10.3 pence per share paid on 14 May 2021)

Year ended 31 December

2022
£m

2021
£m

33.7

45.2
78.9

29.9

41.0
70.9

At the forthcoming Annual General Meeting the Board will recommend to shareholders that a resolution is passed to approve payment
of a final dividend for the year ended 31 December 2022 of 12.6 pence per share (equivalent to approximately £50 million) payable
on or before 19 May 2023. The final dividend has not been included as a liability as at 31 December 2022.

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8. Distributable reserves

The Company considers its distributable reserves to be comprised of the retained profits, less credits in respect of share schemes,
less treasury shares, with a total value of £306.3 million (2021: £198.7 million). Accordingly, the Company considers itself to have
sufficient distributable profits from which to pay the current proposed final dividend for 2022 of approximately £50 million. Based
on a total dividend for 2022 of approximately £84 million, the Company has sufficient distributable reserves to pay three years of
dividend at the current level without generating further distributable profits. In addition to its own reserves, the Company has access
to the distributable reserves of its subsidiary undertakings with which future dividend payments can be funded (see note 2.10 to the
Consolidated financial statements for additional information).

The Company is dependent upon its subsidiaries for the provision of cash with which to make dividend payments. The Group has
sufficient cash resources with which to meet the proposed dividend (see note 4.1 to the Consolidated financial statements for
additional information).

9. Contingent liabilities

The Company has provided unsecured guarantees to third parties in respect of contracts held by subsidiary companies.
The guarantees have been issued for £nil consideration and the Company has not charged the subsidiaries for the guarantees.

The Company has provided guarantees over the liabilities of its subsidiaries that have taken advantage of the audit exemption
available in section 479A of the Companies Act 2006. The list of subsidiaries who have taken this exemption can be found in note 5.

The possibility of an economic outflow in relation to the above guarantees is considered remote.

The Company has granted a charge over the assets of certain subsidiaries, in respect of the Group’s borrowings (detailed in note 4.2
to the Consolidated financial statements), which is guaranteed and secured directly by each of the subsidiary undertakings of the
Company that is party to the security arrangement. The Company itself is not a guarantor of the Group’s borrowings.

Drax Group plc Annual report and accounts 2022 283

Shareholder information

Key dates for 2023
At the date of publication of this document, the following are the proposed key dates in the 2023 financial calendar:
Ordinary shares marked ex-dividend
Record date for entitlement to the final dividend
Annual General Meeting
Payment of final dividend
Financial half year end
Announcement of half year results
Financial year end

20 April
21 April
26 April
19 May
30 June
27 July
31 December

Other significant dates, or amendments to the proposed dates above, will be posted on the Group’s website www.drax.com
as and when they become available.

Results announcements
Results announcements are issued to the London Stock Exchange and are available on its news service. Shortly afterwards,
they are available under Regulatory News within the Investors section on the Group’s website.

Share price
Shareholders can access the current share price of Drax Group plc ordinary shares on the Company’s website. During London Stock
Exchange trading hours the price shown on the website is subject to a delay of approximately 15 minutes and outside trading hours
it is the last available price.

The table below provides an indication of the fluctuations in the Drax Group plc share price during the course of 2022, and the graph
provides an indication of the trend of the share price throughout the year.

Low during the year
21 October 2022

473.4 pence

High during the year
6 April 2022

831.5 pence

Closing price on
31 December 2022

703.0 pence

Trade Volume

Closing price on
31 December 2021

605.0 pence

Share price chart
Share price (GBX)

900

800

700

600

500

400

300

200

100

20m

16m

12m

0m
December
2022

January
2022

February
2022

March
2022

April
2022

May
2022

June
2022

July
2022

August
2022

September
2022

October
2022

November
2022

Note:
The share prices given are the middle market closing prices as derived from the London Stock Exchange Daily Official List.

Market capitalisation
The market capitalisation, based on the number of shares in issue and the closing price at 31 December 2022 was approximately
£2,916 million (2021: £2,499 million).

Financial reports
Copies of all financial reports published by the Group are available from the date of publication and can be downloaded from the
Company’s website. Printed copies of reports can be requested by writing to the Company Secretary at the registered office,
by clicking on Contact Us on the website, or direct by e-mail to Drax.Enq@drax.com.

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Drax shareholder queries
The Company’s share register is maintained by Equiniti Limited (Equiniti), who are primarily responsible for updating the share register
and for dividend payments.

Shareholders should contact Equiniti directly if they have a query relating to their Drax shareholding, in particular queries regarding:

• transfer of shares;
• change of name or address;
• lost share certificates;
• lost or out-of-date dividend cheques;
• payment of dividends direct to a bank or building society account; and
• death of a registered shareholder.

Equiniti can be contacted as follows:

• Call Equiniti on 0371 384 2030 from within the UK. Lines are open from 8.30am to 5.30pm, Monday to Friday,

(excluding Bank Holidays) or +44 121 415 7047 from outside the UK.

• Write to Equiniti at Equiniti Limited, Aspect House, Spencer Road, Lancing, West Sussex BN99 6DA.

When contacting Equiniti by telephone or in writing it is advisable to have your shareholder reference to hand and quote Drax Group
plc, as well as the name and address in which the shares are held.

Online communications
Registering for online communications allows you to have more control over the administration of your shareholding.
The registration process is easy via Equiniti’s secure website www.shareview.co.uk.

Once registered with Shareview you are able to:

• elect how Drax communicates with you;
• amend some of your personal details;
• amend the way you receive dividends; and
• buy or sell shares online.

Registering for electronic communications does not mean that you can no longer receive paper copies of documents. Equiniti are able
to offer a range of services and tailor the communications to meet your needs.

A range of frequently asked shareholder questions can also be found on the Company’s website at www.drax.com/investors/investor-
resources/equity-investors-faq/.

Tax on dividends
Below is a brief summary of the guidance provided by HMRC as it relates to the current tax year. If you are in any doubt as to the
impact on your personal circumstances, you are recommended to seek your own financial advice from a professional adviser
authorised under the Financial Services and Markets Act 2000.

There is a tax-free Dividend Allowance of £2,000 per annum in the 2022-2023 tax year (2021-2022: £2,000) This means that there
is no tax to pay on the first £2,000 of dividend income, no matter what non-dividend income a shareholder may have. Dividends paid
on shares held within pensions and ISAs are tax-free.

Non-taxpayers and basic rate taxpayers who receive dividend income of more than £2,001 but less than £10,000 are required to notify
HMRC that they have this source of income.

Non-taxpayers and basic rate taxpayers who receive dividend income of more than £10,001 are required to file a self-assessment
return with HMRC.

The above requirements apply to Share Incentive Plan participants receiving cash dividends on their plan shares.

Further information and updates on tax on dividends can be found on the Gov.UK website at www.gov.uk/tax-on-dividends

Beneficial owners and information rights
If your shares are registered in the name of a third party (i.e. an ISA provider or other nominee company) you may, if you wish, receive
information rights under Section 146 of the Companies Act 2006. In order for this to happen, you must contact the third-party
registered holder, who will then nominate you. All communications by beneficial owners of shares where the shares are held by
third-party registered holders must be directed to that registered holder and not to Drax or Equiniti.

ShareGift
ShareGift (registered charity No. 1052686) is an independent charity which provides a free service for shareholders wishing
to dispose charitably of small parcels of shares, which would most likely cost more to sell than they are worth. There are no capital
gains tax implications (i.e. no gain or loss) on gifts of shares to charity and it is possible to obtain income tax relief. Further information
can be obtained directly from the charity at www.sharegift.org.

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Shareholder information

Shareholder information continued

Share frauds (boiler room scams)
In recent years, many companies have become aware that their shareholders have received unsolicited phone calls or correspondence
offering to purchase their shares at apparently inflated prices. It is often the case that the caller, or message in the correspondence,
claims that they represent a majority shareholder who is looking to take over the Company. At the time of this report, the Company
was not the subject of a take-over attempt, hostile or otherwise, and approaches such as those outlined are usually made
by unauthorised companies and individuals. Shareholders should be very wary of any unsolicited advice, offers to buy shares
at a premium or offers of free reports into the Company. Below is the advice from the Financial Conduct Authority (FCA).

Beware of share fraud
Fraudsters use persuasive and high-pressure tactics to lure investors into scams. They may offer to sell shares that turn out
to be worthless or non-existent, or to buy shares at an inflated price in return for upfront payment. While high profits are promised,
if you buy or sell shares in this way you will probably lose your money.

How to avoid share fraud:

• Keep in mind that firms authorised by the FCA are unlikely to contact you out of the blue with an offer to buy or sell shares.
• Do not get into a conversation, note the name of the person and firm contacting you and then end the call.
• Check the Financial Services Register from www.fca.org.uk to see if the person and firm contacting you is authorised by the FCA.
• Beware of fraudsters claiming to be from an authorised firm, copying its website or giving you false contact details.
• Use the firm’s contact details listed on the Register if you want to call them back.
• Call the FCA on 0800 111 6768 if the firm does not have contact details on the Register or you are told they are out of date.
• Search the list of unauthorised firms to avoid at www.fca.org.uk/scams.
• Consider that if you buy or sell shares from an unauthorised firm you will not have access to the Financial Ombudsman Service

or Financial Services Compensation Scheme.

• Think about getting independent financial and professional advice before you hand over any money.

Remember, if it sounds too good to be true, it probably is!

Report a scam
If you are approached by fraudsters please tell the FCA using the share fraud reporting form at www.fca.org.uk/scams,
where you can find out more about investment scams.

You can also call the FCA Consumer Helpline on 0800 111 6768.

If you have already paid money to share fraudsters you should contact Action Fraud on 0300 123 2040.

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Alternative performance measures (APMs) glossary table

The measures described below are used throughout the Annual report and accounts and are measures that are not defined within
IFRS but provide additional information about financial performance and position that is used by the Board to evaluate the Group’s
trading performance. These measures have been defined internally and may therefore not be comparable to APMs presented by other
companies. Additionally, certain information presented is derived from amounts calculated in accordance with IFRS but is not itself
a measure defined under IFRS. Such measures should not be viewed in isolation or as an alternative to the equivalent IFRS measure.

APM

Closest IFRS
equivalent measure

Purpose

Adjusted results

Total results

Adjusted EBITDA

Operating profit(1)

The Group’s Adjusted results are consistent
with the way Executive management and
the Board assess the performance of the
Group. Adjusted results are intended to
reflect the underlying trading performance
of the Group’s businesses and are
presented to assist users of the financial
statements in evaluating the Group’s
trading performance and performance
against strategic objectives
on a consistent basis.

Adjusted results excludes exceptional items
and certain remeasurements.

Exceptional items are those transactions
that, by their nature, do not reflect the
trading performance of the Group in
the period.

Certain remeasurements comprise fair
value gains and losses that do not qualify
for hedge accounting. The Group regards
all of its forward contracting activity to
represent economic hedges and therefore
by excluding the volatility caused by
recognising fair value gains and losses prior
to maturity of the contracts, the Group can
reflect these contracts at the contracted
prices on maturity, reflecting the intended
purpose of entering these contracts and
the Group’s underlying performance.

Adjusted results are the metrics used
in the calculation of Adjusted basic and
Adjusted diluted EPS.
Adjusted EBITDA is the primary measure
used by Executive management and the
Board to assess the financial performance
of the Group as it provides a more
comparable assessment of the Group’s
year-on-year trading performance.
It is also a key metric used by the investor
community to assess the performance
of the Group’s operations.

Adjusted basic EPS

Basic EPS

Adjusted basic EPS represents the
amount of Adjusted earnings
(Adjusted post-tax earnings) attributable
to each ordinary share.

Definition

Total results measured in accordance with
IFRS excluding the impact of exceptional
items and certain remeasurements
(defined in note 2.7).

Earnings before interest, tax, depreciation
and amortisation, gains or losses on
disposal of assets, fair value adjustments
on contingent consideration, and
impairment of non-current assets,
excluding the impact of exceptional items
and certain remeasurements (defined
in note 2.7). Adjusted EBITDA excludes
any earnings from associates and
Adjusted EBITDA attributable to
non-controlling interests.

Adjusted EBITDA is stated from both
continuing operations and discontinued
operations, where appropriate.
Adjusted basic EPS is calculated by
dividing the Group’s Adjusted earnings
attributable to the owners of the Parent
Company (Adjusted profit after tax) by the
weighted average number of ordinary
shares in issue during the period.

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Shareholder information

Alternative performance measures (APMs) glossary table continued

APM

Adjusted diluted
EPS

Closest IFRS
equivalent measure

Diluted EPS

Purpose

Definition

Adjusted diluted EPS demonstrates the
impact upon the Adjusted basic EPS if all
outstanding share options, that are
expected to vest on their future maturity
dates and where the shares are considered
to be dilutive, were exercised and treated
as ordinary shares as at the reporting date.

Net debt

Borrowings less cash
and cash equivalents

Net debt is a key measure of the Group’s
liquidity and its ability to manage
current obligations.

Net debt is used as a basis by debt rating
agencies and in the calculation of the
Group’s financial covenant requirements.

The impact of hedging instruments
included within Net debt shows the
economic substance of the Net debt
position, in terms of actual expected
future cash flows to settle that debt.

Net debt to
Adjusted EBITDA
ratio

Borrowings less cash
and cash equivalents
divided by operating
profit

The Net debt to Adjusted EBITDA ratio is
a debt ratio that gives an indication of how
many years it would take the Group to pay
back its debt if Net debt and Adjusted
EBITDA are held constant.

Adjusted diluted EPS is calculated by
dividing the Group’s Adjusted earnings
attributable to the owners of the Parent
Company (Adjusted profit after tax) by
the weighted average number of ordinary
shares in issue during the period and
dilutive potential ordinary shares under
share plans.
Total borrowings including the impact of
hedging instruments less cash and cash
equivalents. Total borrowings include
external financial debt, such as loan notes,
term loans and amounts drawn in cash
under revolving credit facilities but
excludes other financial liabilities such as
lease liabilities calculated in accordance
with IFRS 16 (see note 3.2), pension
obligations (see note 6.3) and trade and
other payables (see note 3.7). Net debt
excludes the proportion of cash and
borrowings in non-wholly owned entities
that would be attributable to the non-
controlling interests.

Net debt includes the impact of hedging
instruments meaning that any borrowings
that have hedging instruments in place
are adjusted to reflect those borrowings
at the hedged rate.
Net debt divided by Adjusted EBITDA.
Expressed as a multiple.

The Group has a long-term target for
Net debt to Adjusted EBITDA of around
2.0 times.
This is a key measure of the Group’s
available liquidity and the Group’s ability
to manage its current obligations.

It shows the value of cash available
to the Group in a short period of time.
A key metric showing the cost of
produced biomass.

Also, a key metric in monitoring the
Group’s strategy to reduce biomass costs.

Used to show the Group’s total spend
on PPE and intangible assets in a year.

Total cash and cash equivalents plus
the value of the Group’s committed but
undrawn facilities (including the Group’s
RCFs, loan facilities and the Customers
trade receivable factoring facility).

Costs of sales attributable to biomass
production plus an allocation of operating
expenses not directly attributable to
biomass production, divided by tonnes
of biomass produced.

Expressed as a cost per tonne produced.
PPE additions plus intangible
asset additions.

Cash and
committed facilities

Cash and cash
equivalents

Cost of production

Cost of sales

Capital expenditure

Property, plant and
equipment (PPE)
additions and
intangible asset
additions

(1) Operating profit is presented on the Group’s Consolidated income statement; however, it is not defined per IFRS. It is a generally accepted measure of profit.

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Glossary

Ancillary services
Services provided to National Grid used for balancing supply
and demand or maintaining secure electricity supplies within
acceptable limits, for example Black start contracts. They are
described in Connection Condition 8 of the Grid Code.

Availability
Average percentage of time the units were available
for generation.

BECCS
Bioenergy with carbon capture and storage, with carbon
resulting from power generation captured and stored.

BEIS
The UK Government Department for Business, Energy
and Industrial Strategy, bringing together the responsibilities
for business, industrial strategy science, innovation, energy
and climate change.

In February 2023, BEIS was split into three new departments:
the Department for Business and Trade, the Department for
Energy Security and Net Zero, and the Department for Science,
Innovation and Technology.

Black start
Procedure used to restore power in the event of a total or partial
shutdown of the national electricity transmission system.

Biogenic carbon cycle
Biogenic refers to something that is produced by, or originates
from, a living organism. The biogenic carbon cycle is the natural
process of plants and animals releasing CO2 into the atmosphere
through respiration and decomposition, and plants absorbing CO2
via photosynthesis.

Biomass
Organic material of non-fossil origin, including organic waste, that
can be converted into bioenergy through combustion. The Group
uses low-grade roundwood, sawmill residues and forest residues
in the form of compressed wood pellets, to generate electricity
at Drax Power station or sell the pellets to third-parties.

Capacity Market
Part of the UK Government’s Electricity Market Reform, the
Capacity Market is intended to ensure security of electricity
supply by providing a payment for reliable sources of capacity.

Carbon capture and storage (CCS)
The process of trapping or collecting carbon emissions from
a large-scale source and then permanently storing them.

CCC
The UK’s Climate Change Committee.

Clear-cutting
An important forest regeneration technique that supports
sustainable forest management. It happens when most (or all)
trees in an area are harvested simultaneously. It is a
well-established forestry practice in many regions, including
the UK, Europe and North America.

Contracts for Difference (CfD)
A mechanism to support investment in low-carbon electricity
generation. The CfD works by stabilising revenues for generators
at a fixed price level known as the ‘strike price’. Generators will
receive revenue from selling their electricity into the market as
usual, however, when the market reference price is below the
strike price, they also receive a top-up payment for the additional
amount. Conversely, if the reference price is above the strike
price, the generator must pay back the difference.

Combined Cycle Gas Turbines (CCGT)
A form of highly efficient energy generation technology that
combines a gas-fired turbine with a steam turbine.

Dispatchable power
An electricity generator produces dispatchable power when
the power can be ramped up and down, or switched on or off,
at short notice to provide a flexible response to changes
in electricity demand. Biomass, pumped storage, coal, oil, and
gas electricity generation can meet these criteria and hence
can be dispatchable power sources. Nuclear can be dispatched
against an agreed schedule but is not flexible. Wind and solar
electricity cannot be scheduled and hence are not Dispatchable.
An electricity system requires sufficient dispatchable power
to operate and remain safe.

EBRS
The UK Government’s Energy Bill Relief Scheme.

ESG
Environmental, Social and Governance.

First Nations
Any of the groups of indigenous peoples in Canada.

Forced outage/Unplanned outage
Any reduction in plant availability, excluding planned outages.

FSC®
Forest Stewardship Council: an international non-governmental
organisation which promotes responsible management of the
world’s forests.

Frequency response
The automatic change in generation output, or in demand,
to maintain a system frequency of 50Hz.

GHG
Greenhouse Gas.

Grid charges
Includes transmission network use of system charges (TNUoS),
balancing services use of system charges (BSUoS) and
distribution use of system charges (DUoS).

Headroom and footroom
Positive ‘reserve’ (see below) may be termed headroom
and negative reserve as footroom.

Drax Group plc Annual report and accounts 2022 289

Sawlog
A felled tree trunk suitable for being processed at a sawmill
for cutting up into lumber.

SBP
Sustainable Biomass Program: a certification system designed
for woody biomass used in industrial energy production.

Summer
The calendar months April to September.

Sustainable biomass
Biomass which complies with the definition of “sustainable
source”, Schedule 3, Land Criteria, UK Renewables Obligation
Order 2015.

System operator
National Grid Electricity Transmission. Responsible for the
co-ordination of electricity flows onto and over the transmission
system, balancing generation supply and user demand.

TCFD
Taskforce on Climate-related Financial Disclosures.

Thinning
Thinning operations correct overcrowding, and improve the
health and vigour of those trees which remain. Thinning targets
small, malformed, and diseased trees for removal, allowing the
healthier trees the space, light, and soil to reach maturity sooner.
Thinning also mitigates the risk of pest infestation and wildfire,
while speeding the development of a more mature forest with
increased plant diversity.

Total recordable incident rate (TRIR)
The frequency rate is calculated on the following basis:
(fatalities, lost time injuries and worse than first aid injuries)/hours
worked x 100,000.

Total results
Financial performance measures prefixed with ‘Total’
are calculated in accordance with IFRS.

UK ETS
The UK Emissions Trading Scheme is a mechanism introduced
across the UK to reduce carbon emissions; the scheme is capable
of being extended to cover all greenhouse gas emissions.

Voltage control/reactive power
Maintenance of voltage within specified limits in order to ‘push’
power around the system to maintain safety and stability.

Winter
The calendar months October to March.

Shareholder information

Glossary continued

IAB
Independent Advisory Board, comprising scientists, academics,
and forestry experts who provide independent challenge, insight
and advice into the Group’s activities.

IFRS
International Financial Reporting Standards.

Inertia
The stored energy in the large rotating mass of a generator,
which assists in maintaining system stability. Wind and solar
power sources have no inertia.

Lost Time Incident Rate (LTIR)
The frequency rate is calculated on the following basis:
(fatalities and lost time injuries)/hours worked x 100,000.
Lost time injuries are defined as occurrences where the injured
party is absent from work for more than 24 hours.

NGO
Non-governmental organisation.

Open Cycle Gas Turbine (OCGT)
A free-standing gas turbine, using compressed air,
to generate electricity.

Planned outage
A period during which scheduled maintenance is executed
according to the plan set at the outset of the year.

PEFC
Programme for the Endorsement of Forest Certifications: an
independent, non-profit, non-governmental organisation that
promotes sustainable forest management through independent
third-party certification.

Pulp wood
A low value and bulky product, generally produced from
the top of trees or from production thinnings, with the principal
use of making wood pulp for paper production.

Rebasing
Rebasing is when the Group releases cash from an open
derivative contract that is in a mark-to-market asset position by
modifying the rate per the contract. A cash payment equivalent
to the reduction in the mark-to-market asset is received by the
Group from the counterparty, less any applicable fees.

Reserve
Generation or demand available to be dispatched by the
System Operator to correct a generation/demand imbalance,
normally at two or more minutes’ notice.

Response
Automatic change in generator output aimed at maintaining
a system frequency of 50Hz. Frequency response is required
in every second of the day.

RIDDOR
Reporting of Injuries, Diseases and Dangerous
Occurrences Regulations.

ROC
A Renewable Obligation Certificate (ROC) is a certificate issued
to an accredited generator for electricity generated from eligible
renewable sources.

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