Drax Group (LON: DRX) (OTCPK: DRXGF) is down 5% on the announcement that Ofgem is having a look at Drax's compliance with renewables certificates and obligations. As Drax points out this shouldn't really be much of an issue: “Ofgem's announcement states that the opening of an investigation does not imply any finding of non-compliance. It has separately confirmed that it has not established any non-compliance that would affect the issuance of Renewable Obligation Certificates (ROCs) to Drax, and therefore the associated financial benefit. Like all energy generators, Drax receives regular requests from Ofgem and continues to cooperate fully throughout this process.” It's the bureaucrats checking the paperwork has been filled out properly.
Just to note, no one does think, not seriously, that there is anything wrong with the way this paperwork has been filled out. Drax is far too canny a company to have got that wrong at anything more than the finest margin. So the investigation shouldn't, in fact, really move the Drax share price by that 5%. At which point we might think that the contrarian trade makes sense - buy now while prices are lowered by that worry that isn't worth worrying about. And, well, yes. Except there's the one further issue that might happen. We'd not say it's likely, but it is possible, what of Ofgem really reports on Drax and renewables certificates and obligations?
Drax Group share price from London Stock Exchange
The essential offering at Drax is that coal burning is bad. So, turn the coal burning plant into something that burns biomass. That's a renewable fuel and Gaia will be happy. Except what this then leads to is the harvesting of trees (and Drax insists it is only offcuts that would be wasted otherwise) in the US and the drying of the wood chips which are then shipped 3,000 miles to be burnt in the now ex-coal plant. The claim is that this process is carbon neutral - therefore this meets renewables obligations and renewables certificates can be sold and so on.
This is also, from an actual environmental or carbon emissions viewpoint, entirely mad. It's purely a product of the insane EU rules - which we have carried over post-Brexit - over what is counted as a renewable. At some point - maybe - someone's going to do something about this. It could be - we could hope perhaps - that Ofgem is going to say so in any report on Drax. It's most, most, unlikely we agree, but as we say we can live in hope.
A slightly more possible outcome would be that Ofgem looks into those claims of it only being offcuts used instead of whole trees being harvested.