Ofgem can’t see the wood for the trees

Not what you’d call a chainsaw massacre. Rewind to May last year, when Ofgem began its investigation into the sort of wood Drax was burning in its biomass plants, and the market reaction was to lop £150 million off the company’s value.
Investors’ big fear? That once the regulator’s boss, Jonathan Brearley, had got lost in the thickets of Drax’s “profiling data”, something nasty could turn up. And, namely, that the stuff it was sourcing wasn’t 70 per cent “sustainable”: the prerequisite for all those Drax subsidies, via the renewables obligations certificates regime, worth £548 million in the latest 12-month period.
In fact, there was also a risk that Ofgem could end up providing more ammo for environmental campaigners, such as Biofuelwatch. It already brands Drax’s tree-burning business model, built on importing wood pellets via diesel-powered ships, a “greenwash scam”.
So, given all that, the outcome has proved quite a bit more sustainable for Drax. Ofgem has discovered “technical” failures on the reporting front between April 2021 and March 2022, has forced it into a £25 million “voluntary” payment and ordered a third-party audit of its international supply chain. Brearley also banged on about Drax’s “weak procedures, controls and governance which resulted in inaccurate reporting of data about the forestry type and sawlog content being used”.
Yet, crucially, as Drax boss Will Gardiner noted, Ofgem “found no evidence that our biomass failed to meet the sustainability criteria of the renewable obligation scheme”. As such, Drax remains in line for a subsidy extension when the present regime expires in 2027 — en route to combining the biomass plant that last year produced 4 per cent of UK electricity with new carbon capture tech. And the shares slipped just 0.4 per cent to 651p, with Jefferies’ analysts saying Ofgem had removed “an overhang from the stock”.
Even so, there’s still something a bit off about all this. How can Ofgem know that Drax meets all sustainability criteria when it admits it was “unable to provide” reliable data on “forestry type and sawlogs for Canadian consignments”?
Both the regulator and Drax make a cute distinction between the sustainability issue and the group’s lax reporting of “additional biomass characteristics”, covering such things as whether its pellets came from fallen branches, say, or sawn logs — data that’s not used to issue ROCs. Yet here it can be tricky to see the wood for the trees.
Which is important when more than 40 green campaigners from pellet-exporting countries — the US, Canada, Portugal, Estonia and Latvia — are “urging” energy secretary Ed Miliband to end subsidies for “wood-burning power stations”, concerned over the climate and deforestation. And the National Audit Office was criticising the government in January for being “unable to demonstrate” that the biomass industry was “meeting high sustainability standards”. Questions have long been asked over whether Drax deserves a subsidised role in the energy mix alongside greener wind and solar. This sort of caper doesn’t help its case. The least Drax must be is transparent over where its fruits of the forest are coming from.
Apparently, bands getting back together are this week’s thing. So no surprise to see a duo from the famous beat combo Hipgnosis Songs Fund getting in on the act: a swift reunion of drummer Rob “Scrappy Doo” Naylor and vocalist Christopher “Megaphone” Mills, whose favourite ditty “All The Things I Know About Funds” does tend to go on for half an hour.
Having sold Hipgnosis to Blackstone for £1.27 billion, they’ve turned their attention to PRS Reit — the listed investor in “high-quality, new-build, family homes” for rent and nothing to do, it seems, with the Performing Right Society.
Indeed, underperformance seems to be the duo’s key theme. Hence them clubbing together with 17.3 per cent of PRS’s investors to requisition an EGM to try to boot out chairman Stephen Smith and non-exec Steffan Francis, both aboard since 2017’s float. In a repeat of their Hipgnosis roles, Naylor sees himself chairman and Mills the feistiest non-exec, already flexing his “black belt in judo” despite being 71.
They say investors are fed up with PRS’s average 35 per cent discount over the past year to its 123.6p-a-share net asset value, even if they’ve already narrowed it a bit, after a 5 per cent rise in the shares to 94¼p. And that, given the discount, PRS cannot raise more equity than the £560 million since the IPO to extend its estate of 5,400 homes.
So there was no justification in last month’s decision to extend the contract with investment manager Sigma to June 2029 when it’s main job, they claim, will be collecting rent. Mills, one of the investors via his Harwood Capital firm, calls it “obscene”, claiming the job could be done for half Sigma’s fees in-house.
Backed by holders of 1.6 per cent of the shares, word is they’ve four more investors lined up behind their plan to sell properties, do buybacks and maybe sell the business, even if it’s not clear if they include Invesco with 13 per cent, Aviva (9 per cent) or Homes England (5 per cent).
PRS is working on its response, though it has spotted that one fund Mills runs, North Atlantic Smaller Companies, trades at 28 per cent discount to NAV. Anyway, a fight is on. Let the cymbal-crashing begin.
Hard yakka at Mineral Resources. Look at this from Chris Ellison, the miner’s founder and boss. Reckoning home working’s for bludgers and larrikins, he wants to hold his staff “captive all day long” in the office. Won’t even middle managers want jobs down the pits, just to get away from him?