Hello, and welcome to this Oster Q2 2021 Earnings Call. For the first part of this call, all participants will be in a listen only mode and afterwards, there will be a question and answer session. Today, I'm pleased to present Mats Knibaugh, are CEO and Marjane Wijnhalt, CFO. Speakers, please begin.
Thank you very much, and good morning, good afternoon, everyone, and welcome to the Q2 2021 earnings call. Having now been part of our team for more than 7 months, I'm pleased to say that we've continued to execute on many important strategic milestones in the Q2 of 2021, And I'm constantly impressed by the sheer intensity with which our company manages to progress so many important areas in parallel. During the first half of twenty twenty one, we have been impacted by very low wind speeds across our portfolio, but we do maintain our full year EBITDA guidance of $15,000,000,000 to $16,000,000,000 due to the strong performance from our CHP plants and high earnings from Gas Business as well as additional earnings from finalized construction projects in Offshore. Most recently, We won with a full bid for our 1148 Megawatt Ocean Wind II project in the competitive solicitation in New Jersey, Which grows our firm offshore wind capacity to 18.5 gigawatts and brings us closer to our new 30 gigawatts by 2,030 offshore wind ambition that was launched at our Capital Markets Day. This win is another tangible example demonstrating that we can and will continue to be the undisputed leader within offshore wind while creating value for shareholders.
This quarter, we launched several key strategic partnerships in Japan, Korea, Norway and Scotland, further positioning ourselves to reach our 2,030 aspiration to become the world's leading green energy major. These partnerships included our Japanese consortium established with JWD and Eurus. It included an MoU with Korean POSCO To support the development of 1.6 gigawatt offshore wind projects off the coast of Incheon City and to conduct feasibility studies on potential collaboration on renewable hydrogen in Korea. It also included our consortium established with Fred Olsen Renewables and Hafslorn Eco in Norway and our newest partnership established with Falk Renewables and Blue Float Energy for the Scottwind Lease Round, where seabed bids were submitted in July. I'll also point to the fact that the latter 2 of these partnerships confirm our commitment to floating foundations as a complementary technology to bottom fixed offshore wind.
As an example of our view that bottom fixed and floating are complementary technologies, We also submitted bids for bottom fixed offshore wind project rights at the Scott Wind Leasing Round as a standalone developer. We also finalized a number of agreements during the quarter as we completed our fifty-fifty joint venture with PGE in Poland for the Baltica II and III projects. We closed the Brookfield Renewable Island acquisition and closed the 50% farm down for Borsella 1 and 2 to Norges Bank. And on the topic of farm downs, we have now launched the structured process regarding the farm down of our Hornsea 2 project in the UK With the aim of closing a deal in 2022 after the asset has been commissioned. We continue to see very strong interest from potential partners for our assets and with recent partnership transactions in mind, we are optimistic about also executing a strong deal for Hornsea 2.
We also progressed our market leading renewable hydrogen and green fuels pipeline with the construction start of our first renewable hydrogen project, This project will have an electrolyzer capacity of 2 megawatts and will use our 2 Evreux Holme wind turbines to investigate how best to combine efficient electrolyzer facilities with fluctuating power supply from offshore wind. Moreover, we entered an agreement with Hofor to source renewable power for the next phases of the Green Fuels for Denmark project. Within our onshore business, we commissioned our 1st large scale combined solar PV and storage facility, Permian Energy Center, As well as our largest onshore wind project to date, the 367 Megawatt Western Trail Wind Farm, both located in Texas. As a top 5 developer in the U. S.
And recent entrant in the EU, we continue to demonstrate our on time and on budget construction capabilities, Our adjustability to cost of demands through hybrid projects and the benefits of having a portfolio approach are now ready to take questions. On the topic of onshore, we recently announced that Declan Flanagan has decided to step down from his position in the company. 12 years after founding Lincoln Clean Energy and 3 years after Erste's acquisition, Deckland felt it was the right time for a change. We have initiated the process for recruiting the next CEO of Onshore, and effective immediately, Neil O'Donovan, our Chief Operating Officer of Onshore, has been appointed interim CEO of Onshore. At our recent Capital Markets Day, we set an ambitious growth target of reaching an installed onshore capacity for 17.5 gigawatts by 2,030.
And we have a very strong set of value creating growth opportunities in our pipeline and remain fully committed of reaching that target. I am confident that the strong team and organization that we have built will continue the impressive work we've seen over the past 3 years. Let's now turn to Slide 4 and look at our New Jersey accomplishment in greater detail. We are thrilled to have been successful in the 2nd competitive offshore wind solicitation in New Jersey. Here, The full amount of our 18 or 1148 Megawatt Ocean Wind 2 project was awarded A 20 year contract starting at US84 dollars per megawatt hour in 20.29 and escalating 2% per annum, which equals a levelized 2017 price of $67 per megawatt hour.
Subject to final investment decision, The project is expected to be commissioned in 2029. We see this project demonstrating our capabilities in creating value in a competitive environment by leveraging our expertise to help our customers achieving their ambitious renewable targets, deliver on strong local content And ultimately execute a very attractive project. With the award, our Ocean Wind lease in this area will be utilized to its maximum capacity of 2.3 gigawatts. Moreover, with our 4.1 gigawatt of awarded capacity, We have the largest U. S.
Offshore wind development pipeline, which unlocks significant synergies in procurement, Construction and Operation. In addition to the awarded capacity, and our partners still have proprietary rights to around 4 gigawatts of remaining seabed leases on the U. S. East Coast, which can be utilized for upcoming solicitations. Turning to Slide 5, where I'll give an update on our offshore and onshore construction projects and renewable pipeline.
Starting with our offshore and onshore projects under construction. The construction work for all projects continues according to schedule. At Hornsea 2, as of today, 128 out of the 165 foundations and 59 of the 165 turbines are installed at sea. When commissioned in the first half of twenty twenty two, Hornsea 2 will become the world's largest offshore wind farm, exceeding our own Hornsea 1. At our Greater Changwa 1 and 2A project, We have started offshore construction work with installation of the export cable and pin piles for the foundations and continue to progress the associated onshore construction.
We expect to commission the project on time in the second half of twenty twenty two, but the continued dynamic COVID-nineteen restrictions in Taiwan could potentially impact the construction time line. In the Q1 of the year, we discovered an array cable are in the protection issue at several of our offshore wind farms across the UK and Continental Europe. We are progressing the technical investigation process and our assessments are unchanged since our last update and still point to a total financial impact of around DKK3 1,000,000,000 across 2021
will be subject to 2023 with approximately
onethree expected to be capitalized. We continue to see good progress on our onshore construction program, And we do expect to commission Maslow Shoals in Q3 of this year as the project is in the final stages of testing and commissioning. By year end, we expect to commission Haystack and our other assets under construction, Kenox Head 1, O3 100 and Helena Energy Center, And they are on track to be commissioned in the first half of twenty twenty two. During Q2, we added a 302 Megawatt Onshore Wind Project Lincoln Land in MISO to our construction program. We entered into an agreement to acquire the project in May, And we expect to both commission the project and close the transaction by the end of the year.
While we continue to have a development focused culture in our onshore business, We also have proven to buy well, and we see this project bringing diversification benefits and solid value to our portfolio. This brings our installed and under construction renewable capacity for the group to 16.5 gigawatts. As for our water projects, we are also seeing strong progress. Starting in the U. S.
With the increased resources at the Bureau of Ocean Energy Management or BOEM and various indications of momentum on both federal and state levels, We do remain confident that 3 of our largest U. S. Projects, Ocean Wind 1, Revolution Wind and Sunrise Wind, are on track to be commissioned before the end of 2025. Both Ocean Wind 1 and Revolution Wind have their notices of intent And Sunrise Wind's notice of intent is expected during the Q3 of this year. As previously communicated, South Fork is still expected to be commissioned by the end of 2023, following its draft environmental impact statement issued in January 2021, and Skipjack Wind 1 is still on track to be commissioned by its previously updated expectation of 2026, Which reflects our updated interconnection landfall plan and our proposed Maryland 2 project bid.
Our awarded projects in Germany, Taiwan and Poland also continue on track. This puts us At 25 gigawatts of firm renewable capacity from projects commissioned under construction or awarded across offshore and onshore. And with this, I'm happy to say that with our 25 gigawatt of firm capacity, 22 gigawatts of substantiated pipeline and more than 35 gigawatts of opportunity pipeline in offshore, we are well on our way to reach the 50 gigawatt by 2,030 ambition. Let's now move to Slide 6 and an update on upcoming offshore wind auctions and market developments. We continue to see numerous auction and tender based opportunities opening and being awarded in the coming 6 to 18 months.
And with our recent awards in Poland and New Jersey, the next results are expected for Maryland and Japan in Q4 of this year. In Maryland, we submitted a bid for 7 60 Megawatts through our Skipjack 2 project in response to the Public Service Commission's call For up to 1.2 gigawatts of offshore wind. Our proposal includes numerous synergies with our already awarded 120 Megawatt Skipjack Wind 1 project pledges to environmental justice initiatives and commitments will be subject to significant manufacturing operations that will enable Maryland to establish itself as a significant player in the offshore wind supply chain. In Japan, we submitted 3 bids with our joint venture partners, 1 with TEPCO in Joshi and 2 with JWD and Eurus in Noshiro and Juri Honjo. The auction comprises a total capacity of 1.5 gigawatts split between 4 zones: 415 Megawatt for Nuciro, 7 30 Megawatts between Yurihanjo North and South And 3 70 Megawatt for Choshi.
This auction is an important first step for Japan to achieve its target of 10 gigawatts of offshore wind by 2,030 And 45 gigawatts by 2,040. And looking at the rest of the auction timeline, we expect are in the range of most auctions and tenders to kick off in 2021 with results expected during 2022. As we work towards our vision of Erste being a catalyst of change towards a world that runs entirely on green energy, I am proud to be part of a team with the talent, ambition and the will to constantly push the agenda, and this quarter was no exception. And with this, I will now hand over the word to Marianne.
Thank you, Mads, and good afternoon from me, too. Let's start on slide 7, where I will go through the EBITDA for Q2 2021. We realized a group EBITDA of €8,200,000,000 an increase of €5,200,000,000 The increase primarily related to the 4.5% farm down gain from the Borselli 1 and 2 divestment to Norges Bank. In addition, Q2 2021 included a positive effect of €150,000,000 from ceasing to report are recorded according to the business performance principle. And finally, Q2 2020 included earnings from our distribution B2C and City Light Businesses, which we have divested.
When we adjust for these effects, earnings in Q2 2021 was in line with last year. Earnings from offshore sites were negatively impacted by wind speeds significantly below the norm. In Q2 2021, the wind speed came in at 7.8 meter per second compared to the normal wind of 8.6 meter per second. This difference in wind speeds compared to a normal wind quarter translates into a negative FDA impact of around €900,000,000 As expected, Q2 2021 was also negatively impacted are subject to higher transmission tariffs following the divestment of the offshore transmission assets at Walney Extension and Hornsea 1 And lower earnings from Horns Reef 2 due to the subsidy period ending in October 2020. These negative effects were partly offset by the full ramp up of generation from Borsello 1 and 2 and from the last 400 megawatt of in the Q1 receiving SEFDs from April 2021.
In Q2 2021, The underlying earnings from partnerships primarily concerned adjustments to finalized construction projects, while Q2 2020 related to the construction of Virginia Coastal Wind and lower CapEx at Hornsea 1. Our onshore business was positively impacted by the ramp up of generation from the wind farms Willow Creek and Plum Creek as well as the solar PV Farm Permian Energy Center. However, the ramp up was more than offset by lower wind speeds, costs relating to the Brookfield Renewable Ireland transaction, a subsequent credit loss relating to in the winter storm period in February 2021 and again from the divestment of Oak Solar in Q2 2020. In Bioenergy and Other, the underlying earnings significantly increased, driven by very strong performance at our CHP plants, where earnings increased due to higher power prices and sale of ancillary services driven by the colder weather. Within our Gas and Markets and Infrastructure, The significant increase in gas prices led to a net positive effect from revaluation of gas at storage and storage hedges.
If we then turn to slide 8, where I will take a quick look at wind speeds across Europe in 2021. In the first half of twenty twenty one, we have, as I said, experienced wind speeds significantly below the norm and the financial impact from these low wind speeds in the offshore portfolio up until end of July is negative €1,400,000,000 With the majority of the negative impact realized in Q2 July. On the slide, the deviations of the wind resource across Europe compared to the historic norm are shown. The light green and dark blue color indicate wind speeds below the norm. And similarly, the yellow and red colors indicate wind speeds From these wind maps, it is evident that while the wind speeds in most of Europe have been are varying above and below the norm, the areas where the majority of our offshore assets are situated, namely in the North Sea and the Irish Sea.
Here we've seen wind speeds significantly below the norm, especially during the Q2 and the low wind speeds continued into July. While fluctuations in wind speeds from month to month are completely normal, we regard this prolonged period during 2021 with these low wind speeds as quite unusual, but don't see any structural changes to
are long term wind
speed projections. In Q1 2020, we had wind speed significantly above the norm and realized an 800 million outperformance compared to a normal wind period. And the reality is that wind speeds will vary from quarter to quarter, but over time revert to the mean and be quite stable. If we then continue to slide 9 and our financial performance and net interest bearing debt. Net profit for the period totaled NOK 5,500,000,000 a significant increase on last year, mainly due to the Borsello I and II farm down gain.
In addition, our net financial income and expenses amounted to a negative €400,000,000 compared to a negative of SEK1 1,000,000,000 in Q2 2020. The lower net expenses were mainly related to lower interest expenses due to the lower net debt, while Q2 last year was adversely impacted by the early termination of the project finance at our U. S. Block Island projects, resulting in a loss on an interest rate swap of 0.4 €1,000,000,000 Finally, our tax on profit for the period was positively impacted by an updated assessment of our uncertain tax position and the increase of the U. K.
Tax rate from 19% to 25% from 2023. This was partly offset by the initial recognition of deferred taxes related to the tax equity at Permian Energy Center, Muscle Shoals and our U. S. Offshore portfolio. Free cash flow totaled €1,600,000,000 in the quarter.
Cash flow from operating activities included the tax equity contribution from our partner at Permian Energy Center. The divestments related to The 50% farm down of Borsello 1 and 2 and the 25% farm down of Ocean Wind 1 as well as the final settlement with GIP relating to the Horned C1 transmission divestments. Our gross investments totaled €12,100,000,000 driven by continued investments into offshore and onshore wind And solar PoE Farms as well as the acquisition of Brookfield Renewables Ireland. Our net debt at the end of second quarter amounted to €12,100,000,000 And the lower net debt during the quarter primarily reflected have the positive free cash flow as I just described. Let's then turn to slide 10, which shows our financial and non financial ratios.
Our key credit metric, FFO to adjusted net debt, stood at 63% for the 12 month period ending in June 2021, which is well ahead of our credit metric target. The metric was positively impacted by the farm down gain of the Borsello I and II wind farm, sorry. Our return on capital employed came in at 12.5 percent, with the increase compared to last have an average return on capital employed of 11% to 12% between 2020 2027 are as guided at our recent CMD. Our greenhouse gas emission intensity decreased are due to additional offshore and onshore capacity. This was partly offset by higher power generation from our coal fueled units, will be subject to the discussion of our Scope 1 and 2 target of less than 10 gram CO2 equivalents per kilowatt hour in 2025.
Turning to safety, where we have seen a reduction of 10% in the number of injuries. And as a result, the total recordable injury rate has decreased from 3.7 in the first half of twenty twenty to 3.1 will be in this first half. Let's then go to slide 11, where I will go through our implementation of the EU taxonomy. As part of the European Green Deal to become the 1st climate neutral continent by 2,050, the EU Commission has established the EU taxonomy as an important enabler are
interested in the development of the taxonomy.
The taxonomy is a catalog of environmentally sustainable economic activities, each with criteria to determine if they sustainably contribute towards a sustainable economy. At Erste, we want to be a catalyst for change, and we have committed to taking a leading role in the global green energy transformation. Will therefore welcome the new reporting framework. And during the year, we have assessed whether our activities can be identified in the taxonomy and thereby be classified as taxonomy eligible. Subject to fulfilling certain criteria on sustainability contributing to at least one environmental objective, not doing significant harm on other environmental objectives and complying with minimum social safeguards, the activities will be classified as taxonomy aligned.
Although the upcoming EU requirements for reporting on taxonomy eligible activities does not come into force until January 2022, We have decided to disclose approximate levels for our taxonomy eligible share of revenue, EBITDA And gross investments today. We plan to complete the criteria screening before year end and also then report on taxonomy aligned shares in our annual reports 1 year ahead of the requirements. It should be noted that the numbers we disclose as part of this quarter's results are approximate rather than exact numbers as some uncertainty related to the final interpretation of the taxonomy still In the first half of twenty twenty one, the taxonomy eligible share of our revenue was above 65%. The non eligible part of our revenue primarily concerned our long term legacy activities related to sourcing and sale of gas, Fossil based power and heat generation at our Danish CHPs and sale of power to end customers. The corresponding share of EBITDA was above 95%, and the share of gross investments was above 99%.
And then finally, let's turn to slide 12 and the outlook for 2021. We reiterate our full year guidance for 2021 EBITDA of €15,000,000,000 to €16,000,000,000 But we currently expect an outcome in the low end of this range, mainly due to the very low wind speeds in June July. The guidance assumes normal wind speeds in the last 5 months of the year. As I mentioned earlier, the adverse effects from the low wind speeds on the entire offshore portfolio up until end of July is a negative SEK 1,400,000,000 compared to a normal win year. This negative impact as well as the warranty provision of €800,000,000 relating to the cable protection system issue are partly offset by the strong performance from our CHP plans and the high earnings in our gas business as well as additional earnings from our finalized construction As in previous years, our EBITDA guidance does not include earnings from new partnerships during the year, which means that the farm down gain from Borsello 1 and 2 is excluded from our full year guidance And so is the gain from the Zhongguo I farm down, which we expect to close later this year.
Looking at the directional guidance for our business units, we changed the offshore guidance to significantly lower from lower due to the very low wind speeds and the warranty provision related to the cable protection system issue. Moreover, we changed the directional guidance for Bioenergy and Other to higher from previously lower, are following the high earnings from CHP Plants and Gas Markets and Infrastructure in the first half of twenty twenty one. We are increasing our gross investment expectations to €39,000,000,000 to €41,000,000,000 from the previous level of €32,000,000,000 to €34,000,000,000 The increase reflects the Brookfield Renewable Ireland acquisition and the associated CapEx spend for the remainder of 2021 as well as the expected acquisition of the fully constructed Lincoln Land And with that, we now open up for questions. Operator, please.
This conclude our presentation. We're now happy to answer your questions. This call will have to end no later than 3:30. Please respect only one question per participate and then you can go back to the queue for a second question. Our first question comes from the line of Deepavikatswaran from Bernstein.
Please go ahead.
Thank you. Is on the Lincoln Land project. Given that this is when you acquired it, it's already constructed by someone else. That seems to be a bit different from the previous acquisitions that you've done. Maybe you can elaborate on the rationale other than just the Diversification on MISO and maybe talk on the value creation.
And secondly, should we expect more of such deals where you will acquire existing projects or is this should we look at this as a one off?
Thanks a lot, Dieter. I can have Some comments to that, and Marianne, feel free to supplement. But I think honestly, I think the two main reasons That this is really an important diversification into MISO, as mentioned, but also that it is a value creating project. We will generally maintain our focus on greenfield development. That's what we do best.
But when we do come across opportunities like this one That we believe we can buy well and therefore also create value from, then this is something that we will opportunistically choose to do, which was the case of this time. And then I'll also mention that this actually did come we have not mentioned that, but this did come with another early stage development opportunity as well, Which is something that adds additional value to this acquisition as well.
Thank you. Did Marianna want to add anything?
No, I think it was covering.
Okay. Thank you.
And the next question comes from the line of Alberto Gandolfi from Goldman Sachs. Please go ahead.
Good afternoon and thank you for taking my question. I wanted to go maybe back to the topic of equipment. And when we look at your Slide 5, there are about you're in the final straight, particularly in offshore on Hornsea 2 and Greater Shangua, but there's about 8.5 gigawatts of awarded projects where you have not begun construction yet. You have already set your top line on those projects. And what I was wondering is, can you give us Please more color on fixed costs procurement strategies, specifically How much of the equipment is per procure or fixed cost?
Do you still need to hire staff to develop Those facilities, have you already fully secured any third party vessels or ships Sure, EPC that you might need and perhaps you can talk about as well, if you've been able Yes, also elaborating extending, sorry, at this point to cables, not just to the turbines. So I'm just trying to figure out How we should think about cost inflation on those awarded projects? Thank you so much.
Yes. Thanks a lot, Alberto. I can try and It's obviously a quite complex issue, but I'll say just as a fly into this, generally, the impact of the cost inflation sort of Midterm, short and midterm is more moderate. And it's obvious that many of these projects are being constructed quite a A few years into the future and therefore, if the current inflation rates either sustain or even worse continue up, then of course, there is an impact of this. As we elaborated in our Capital Markets Day, we are doing a number of things on these projects to ensure that we create Predictability and certainty as to what our cost levels are going to be.
That will never secure the full cost. So there will always be an exposure. But in this case, I mean, yes, we did secure vessels for some of these upcoming projects. We are we have worked with cable manufacturers for a while and have settled prices on some of that also for HVDC cables, and we are locking in Also some of the raw heavier raw material categories such as steel, and I believe we said that up to 70% of the near term U. S.
Construction projects or near term U. S. Construction projects, we actually have that transparency Already. And then, of course, what we try to do is, as early as possible, to lock the agreements with our suppliers to ensure that we create the transparency. There is of course, if you look at projects that are going to be constructed all the way through 2029 as the latest one, there will of course be an exposure.
But we do believe that we are generally in a good place and compared to some of the many industrial companies, but also Some of our partners in the supply chain, we are less exposed with a moderate impact short to midterm, but of course, it's something we are following incredibly closely. I guess this is Maina, unless you want to add something, I think this is as close as we can get because it very much is a project by project approach.
And the next question comes from the line of Raul Pouli from Morgan Stanley. Please go ahead.
Hi, thanks. Good afternoon. I think the cost inflation might be done. So may I just ask on the CapEx guide. Previously, it was 32 to 34, the new ones 39 to 41.
Brookfield, I believe, is about 4.2%. There's Lincoln acquisition. I was just wondering whether you could confirm, is there any other movement in your CapEx guidance that we should be aware of. In particular, is there any sort of inflation to existing CapEx expectations in 2021 captured in that uplift? And that's the one question.
Thank you.
Yes. Yes, I'm happy to answer. No, the increase only reflects the two things that you mentioned there, the Brookfield, the acquisition price, including the CapEx spent for the remainder of the year. So that's approximately EUR 5,000,000,000 and then the last 2 is the Lincoln Land. So it's purely that, no cost inflation in that number.
Marvelous. That's great to hear. I'll turn it over. Thank you.
And the next question comes from the line of Kasdan Johansen from Danske Bank. Please go ahead.
Yes. Thank you. So my question is regarding your earnings in Bioenergy and Other. So just wondering around the dynamics if power prices stay at these levels and the same with gas Should we expect a continued elevated earnings level for this business?
There's 2 different answers to the different areas. Yes, for Bioenergy, we benefit from these prices. And if we continue to see these prices, we will see elevated earnings. On the gas business, that is actually, as I've said many times before, it is a margin business. And these positive fluctuations we see from revaluation of storage and hedging of these storages, that is in a way timing effects that we'll net out over time.
We have positive earnings in the business, but it's not the same volatility as you will see in the CHFPs.
And then, Gardiner, if I can just briefly add, also bear in mind that the Q2 overperformance in Bioenergy was obviously both driven By the power price level, but also driven by the unusually cold spring in Denmark with April and also the first half of May, We did produce and sell a significantly higher share of value creating heat from those plants As well, which contributed to the very strong performance in Q2.
Understood. Thank you.
And the next question comes from the line of Sam Arie from UBS. Please go ahead.
Thank you very much. Thanks for the presentation today. I think you explained very clearly on the quarterly results and the wind speed impact. So I don't have any questions on that. And I'd just like to ask one sort of bigger picture question.
Now coming back again to your very interesting Page 5. And on the right hand side of this, you show us your substantiated pipeline, which you also had in the CMD slides. And I just wanted to ask, can you I mean, my assumption is all of this is going to get built. The question about auctions and so on is just what's the timing, Which assets get built when? But I think if you look at the bigger picture in the world and the IPCC report this week and so on, It's hard to imagine that, that 22 gigawatts isn't going to get built.
So can you talk to us just a little bit about, I suppose, if there's anything in there, Which is kind of competitive, I. E, maybe there's a gigawatt in there, which you could lose to Somebody else somehow or is that all 22 gigawatts of rights that only you can develop? And can you tell us a little bit about What it costs to add a gigawatt to that substantiated pipeline? Or another way of looking at it, How much should we expect that substantiated pipeline to grow going forward?
Thanks a lot.
So a
little bit of Q2, but I'd love your comments on those. Thank you.
Thanks a lot, Sam. Starting from the back, We can't say what it will cost because it really is an impossible question to answer because I mean, we don't know what Future seabed auctions will net out with, whether it's upfront payments or whether it is market development or whether it's simply commitment are doing local development. So it really is it is borderline impossible to give sort of an average number for that. You are right that a large share of the 12 if we speak primarily about the 12 gigawatts Of offshore firm or substantiated pipeline, a majority of that is actually proprietary seabed leases, which will very, very likely materialize or it's unlikely that it won't materialize, but they are also Parts of that, which is something we are developing together. For example, our Japanese bids would also be in there.
And that would mean that we There is, of course, a risk that part of that will not materialize. But the majority of it will, Primarily a matter of time, but there is also some of it where there is a risk that it won't materialize and therefore, that we will continue we'll, of course, work hard to continue To take some from our so called substantiated pipeline and move into the firm pipeline so that, that continues to go up to ensure that we safeguard our ability to deliver the 30 gigawatts in offshore and the 50 gigawatts in total.
And we also strongly believe that most of the onshore pipeline will also be built because there we are not up against competition on any of it. So
So it's a number. It's a pipeline that we will it's a pipeline that we feel very comfortable with. It is likely that a smaller part of that will not be built, but we also know that we are working to constantly increase that pipeline.
Okay, very good. I appreciate I'd love to follow-up, but actually, I think you've said a lot. So I'd just say Thanks very much. I'm sure we continue that discussion next.
Happy to.
And the next question comes from the line of John Musk from Royal Bank of Canada. Please go ahead.
Yes. Good afternoon, everyone. My question is on the taxonomy slide that you provided this time. And I just want to get your sense of what you think investors will be looking for in the future. Is it Do you need to tick all three boxes around revenue, EBITDA and CapEx?
And obviously, the revenue number It's much lower, and I'm perhaps slightly surprised by that. Is there as a consequence of the answer to the first question, is there a need for you to do Anything about that? Is there any way you can influence that other than further disposals of those noncompliant businesses?
Yes. Good question, John. Thanks for that. We will focus on all 3. And all three of them we see as equally important and we think also that the markets see all three as important.
On the revenue side, we are at €65,000,000 which in a way might seem low when you compare to the EBITDA number, but it will be reduced. We have this reduction target for Scope 3 emissions. We have a lot of gas that, in a way, will be taken out as the contracts expire. We have also seen that we are scaling down on the customer business. We made this divestment last year.
So that will the revenue part will significantly increase over time. One of the issues we have is that we cannot always distinguish between what is green power when we sell something and what is black power. And if we can't distinguish in a way we cannot call it are eligible and therefore it goes into the black you can say. But as we mature, we will see this number going significantly up. And as we understand it, being above 50% in a way is, for now in a way, something that many would be striving for, but our target is, of course, significantly higher than that.
And is there a target that you're willing to communicate on that number on the revenue side?
No. We've since in a way the taxonomy is not completely clear yet and there's still details missing, we haven't set a target.
Although not the biggest part of the remaining 35% of the non eligible, bear in mind, we have committed that our last Coal fired combined heat and power plant is decommissioned in 2023. So that is that share will go away relatively short term.
Okay. Thank you very much.
And next question comes from the line of Dominic Nash from Barclays. Please go ahead.
Good afternoon and thank you for coming up the question. Can I ask a question on power prices? It's kind of Similar to the inflation questions from earlier, when you look at the forward curves, you can see that they've shot up quite a lot In Western Markets, what's the potential sensitivity to you and your sort of hedging policy On your assets selling into this and on the medium term, what we're seeing today with the significantly higher power prices, Is that going to impact your view of what you put into your numbers when you bid for These PPA auctions in the shorter term? Or are you currently just sitting on the sort of the long term still the same power price as we were 12 months
Yes. You can say that with the position we are in where we have subsidies and we have PPAs and we have a very, very high hedging percentage. We don't have much merchant exposure. So that means that basically we don't benefit from the current high power prices, which of course is not good in this market, but which we have benefited from in many other situations Because we are more than 90% hedged and from a very small exposure because most of it, as I said, is subsidies. Where we can benefit is that we have our hedging strategy, and we are now able when we roll in quarter by quarter we can hedge at higher levels in year 3 year 4, for example, than we could just half a year ago.
This does not change our view on the long term power prices. So therefore, when we bid into these auctions, we still use in a way the same fundamental models that we have for long term power prices.
Thank you.
And the next question comes from the line of Jakob Andersson from Danske Bank. Please go ahead.
Thank you very much. It's a question on your adjusted net interest bearing debt. You used to include asset retirement obligations, the net value of those in your definition of adjusted debt. But I can see here in your table in Note 13 that you no longer include those, so you get a lower figure for net interest bearing debt on adjusted basis. And thereby, this also improves your FFO to adjusted net debt.
So I was just wondering why you are no longer including these asset Retirement obligations in your definition.
Thanks. Good question. We have 3 rating agencies giving us a rating, as you know. There's only one of them that includes these retirement asset retirement obligations in their definition. And the one that is the strictest one does not.
So therefore, in a way, we try to make something in between these three rating agencies requirements, and we found out that the right thing was to exclude it in a way since 2 of them don't include it. And as I said, the strictest one don't. So that's the reason. We have been punishing ourselves a little bit too hard.
Okay. But you're still hanging on to the 25% Lower boundary target.
Yes, we are. We are.
Yes. Okay. Thanks.
And the next question comes from the line of Louis Beutjour from Bordeaux BHF. Please go ahead.
Yes, good afternoon. Thank you for taking my question. Just regarding the short term guidance to have a bit more color on it. I was wondering if you could give a bit more details on what you mean by higher or significantly higher or lower or significantly lower if it is An absolute number or percentage. More specifically, when I look at the onshore, for instance, you are DKK 100,000,000 below last year.
And in the meantime, you expect higher. But I know that there is some commissioning that are going to begin in the second half. But In the meantime, the consensus, I think, is already at DKK1.65 billion on this figure. So does DKK1.65 billion Is significantly higher or only higher compared to the SEK 1,100,000 that you posted last year?
Yes. I'll try to give some more color first on the guidance because I think it's quite relevant for you to understand in a way why we can stick to our guidance when we have this €2,200,000,000 impact from the Cable Protection And the lower wind. So I'll start there, and then I'll go a little bit more into detail with you all, the part of the question. Yes. So here we say that in a way, when we started with the first guidance, 15% to 16%, we were at the upper end of the range.
So let's say we were at SEK 16,000,000,000 Then you deduct the SEK 2,200,000,000 from these two negative effects I just referred to. And then the question is, what is it that can offset these very big negative impacts? And it is approximately €500,000,000 better result from construction gains, which The major part comes from the Hornsea 1 transmission asset divestment, where we got this final calculation from the authorities, which gave us a higher gain on that, so €500,000,000 from construction gains. Then we are are €600,000,000 higher on our CHPs compared to what we estimated when we started the year. We always use the forward curve when we calculate this, but in a way, prices are significantly higher.
And then the remaining positive to come up to the lower end of the range is effect from revaluation of storage due to the high gas prices. It is the impact from the Brookfield and the Lincoln Land acquisition, and then it is lower cost. So that brings us up to the lower end of the range. And then you ask, in a way, what definition do we have on higher and lower and significantly higher and lower. And we haven't shared that.
And we have some strict internal rules we use, but it's not something we it might be we share it one day, but for now, in a way, we have chosen not to share it. So sorry for that, but I hope you could use my answer on the first part of your question.
Neer, thank you for the first part of the answer.
And the next question comes from the line of Sam Arieghan from UBS. Please go ahead.
Hi. Sorry, I can't remember this coming back in. So just one follow-up on the previous discussion. And I apologize for dragging this again away from Q2 and back to the topic of the future. But if you look at that substantiated pipeline on your Page 5, I'll ask if you could sort of talk about how much it costs to grow, and you said that's very difficult.
Could you tell us how much it has cost to build the 22 gigawatts That you have there. I'm not sure if that's a number you've given before, but it would be very interesting to know. And the reason I ask is people often a question I get a lot of the time on valuation is How much do we think the business will be worth if you never won another project, the sort of ex growth valuation? But I think that Anybody looking at the shares through that lens ought to add the value of the pipeline assets because Even in theory, if you didn't develop them, they would have value and somebody else would. So just wondering if you can tell us kind of how much invested Capital is in the substantiated pipeline, roughly speaking.
I think again, I don't We can give a very specific number, but we but I think the when for example, the seabed leases in the UK for Hornsea 34, But also the North American seabed was acquired. It was actually a very low price. Next to 0, I mean, incredibly low. And today, it represents north of 8 gigawatts of substantiated pipelines. You can say That what's tied up there is very little.
And then for when we buy into a development project As now as for example, in Japan, if somebody has been developing that, we would pay an amount for that, but also a relatively minor amount. So I think it's fair to say that the current again, I'm speaking primarily for offshore here, but that the price tag on the current 12 gigawatt It's actually small. It's a low price
tag. Yes. But if we should sell it today, it's a totally different story. And we haven't paid a lot for the seabed. But of course, we are spending money on getting the EIAs On the whole permitting process, which is something we expense.
But we are talking, of course, many 1,000,000,000 for if you look all together, just on the Hornit 2, Hornit 3, Hornit 4 in a way, it is a significant amount that we are spending that we are taking through the P and L.
Yes. But also that, like Meine says, the value of it today, if divested, which we have no plans to do, That would be totally different because what has happened since then with the not least the recent seabed auctions.
Yes. Thank you for that clarification because I was going to jump in there, Mads, for a minute and tell you ask if you were Talking down the shares for a minute, but I think that you make the point very interestingly now. It's a little bit like the discussion we had on the RWE call earlier today About their carbon hedges, some of which they put on at very low values when the market didn't see the value, but which they now have on the balance sheet and Obviously worth massively more. But I think the value of that substantiated pipeline is a huge topic that we should Keep discussing.
It is an incredibly valuable asset. And I think the ability to bid in, into the upcoming, For example, CFD 4 round in the UK with our Hornsea 3 lease is one that will allow us, which we firmly believe, to both be very competitive and also have a very value creating project. That obviously is a privileged position.
Very good. So fingers crossed for that event, and thanks again for your follow-up answers.
And we have another follow-up from Christian Johansen from Danske Bank. Please go ahead.
Yes. Thank you. Just on your German Series subsidy, but I think that's what you call Borkum Bufekun 3 now. As I recall it from when you got the allocation, you needed to take FID by 2021. Can you just remind me whether that's correct?
And in that case, what the status is of that project?
That is correct, Christian. We expect to take FID in Q4, and we are well on track to do that.
And we can also say that the process of securing PPAs for that project is going very well.
So that was sort of my follow-up. It was more in terms of whether you have secured a sufficient amount of PPAs for that project or whether you need to secure more before taking FID.
We can say that it's a highly attractive asset, so we are well covered.
Understood. Thank you.
And the next question comes from the line of Dominic Nash from Barclays. Please go ahead.
Yes. Thank you for the follow-up.
The question I've got here is the OfTose in the UK, As I understand, you have a sort of 20 year contract with yourselves. I think they're under consultation at the moment with Ofgem as to what happens in year 2021. And I would be interested in hearing what you think the remuneration that you will need to provide to the off hire owners Would be and when do we expect to get the response from the consultation? Thank you.
Are you now talking about Hornsea 2, of Toh, I'm a little bit uncertain around the question. Sorry
for that.
All your wind farms are connected up to Transmission assets, but I believe they're only on 20 year.
Yes, yes. But that's all settled and agreed upon. So we have fixed agreement and fixed The transmission fees we pay. So in a way, the only it's a completely regulated process. And the only thing That for us is the important thing is in a way what is the return requirement by the buyer because the lower the return requirement, the better for us.
And then it is whether we get the allocation price approved, so whether we get some cost that we don't get covered. But that's the only uncertainties. The rest is, from our point of view, completely regulated and are uncertain.
Okay. Maybe I missed it then, but I didn't know that we'd agreed a price yet for Year 21, I thought you were still up to debate
it, Tim.
We actually know the Tannus, as it's called, For the whole period when we make the divestment because that's built into the whole system.
Okay. Thank you.
And we have one more follow-up question from Deepavikatshwaran from Bernstein. Please go ahead.
Thank you. I wanted to ask a follow-up on the cost inflation, particularly because on the turbine contracts, There is an element of cost indexation where it's automatically passed on.
So I just wanted to check with you.
I mean, obviously, you've talked about the hedging on the U. S. Projects. But more broadly, at what point do you lock your costs down? And for the German project for which you've not taken FID and haven't placed a from ODA, I presume the indexation would work against you for now.
So just wanted to talk in terms of the indexation that we see and how that pertains to how you manage your risk.
Yes, Dieter, you are right. In a way, we are sitting on the steel exposure. And we do it case by case. Sometimes in a way we have gone and hedged like we did for the U. S.
Portfolio, but we have not done that for Germany. So yes, you are we have an exposure there. And then it's in a way our choice when we need to lock it in. And but that is already in a way these high prices is built into the business case that we will take FID on in Q4.
Okay. And presumably, the improving power prices means that any PPAs you can sign now can be at a better price. So hopefully that mitigates
that dynamic of that. Yes,
that might be the increase.
Yes, you're right.
Okay. Thank you.
And as there are no further questions, I'll hand it back to the speakers for closing remarks.
Yes. Thank you. And all we have left would be to say thank you very much for great question and insightful questions. And thanks for your trust and support, and have a great day.