Good morning, and welcome to the 1st Capital Markets Day of the new E. ON, live from our headquarters here in Essen. Thanks for joining us today. We would have loved to meet everybody in person in London today. But due to the current situation that restricts us from personal interaction, we decided that it is more sensible to host both this event and upcoming roaches in a virtual format.
We are delighted to present to you today our strategic direction and a new financial framework that will form the cornerstone of our operations in the next 3 years. Our CEO, Johannes Teyssen, will show you why E. ON is well positioned to significantly benefit from the energy transition and what our contribution to this transformation is. Afterwards, our CFO, Marc Spieker, will elaborate on our new financial framework and investment priorities targeting sustainable long term dividend growth. Obviously, given the current situation, everybody wants to understand the potential impact of the coronavirus on our business.
Given that this is currently one of the most important topics for everybody's agenda, we will start our presentation with 3 charts on the potential business and financial impact. After the presentation, which is expected to last for about an hour, we will have about an hour for your questions. With that, let me hand over to Johannes.
Yes. Good morning, investors and analysts. Feels a bit lonely. I think this house typically has 1500 to 2000 people. Presently, I estimate we have roughly 50 on board and the remainder is in home office and doing other jobs.
So we can keep social distance quite easily here. Many thanks for those taking the time to listen to us in this particular situation. I also understand the potential challenges you all have with taking investment decisions in such a market environment. We intend to be crisp and to the point in our presentation. You can imagine that our preparation for today was far advanced before the current crisis fully accelerated in Europe.
However, given the severe reaction of the capital markets and the uncertainty of the impact on the economy, we felt the responsibility to adapt our presentation to be as transparent as we can from today's point of view. In this situation, we, of course, feel highly responsible for more than 75,000 employees and their families. We have enacted protection measures such as travel bans, flexible working arrangements early on. Our people are the most important component of our success. Taking care of them and their families is thus our most responsibility.
We have today actually 37 cases where it was identified that the victims have the virus and roughly 1500 peoples are in precautionary quarantine. It shows that we are taking intensive measures rather to early send people into quarantine and therefore shield ourselves from many two cases. In this difficult situation, business continuity is our key priority. And with that, we live up to our obligation as a or maybe better said as the most relevant system energy infrastructure provider. E.
ON is the largest operator of the most critical infrastructure in Europe, and therefore, we are well aware of our responsibility towards our customers and society. Never before security of energy supply What's as important as today is the backbone of our economy of the safety of the people. More than 40,000,000 customers in 7 European countries are connected to our networks. Those people rely on us delivering energy without any interruption, especially in times of growing instability and uncertainty. We are responsible for keeping the homes warm, their lights on and the business where possible running.
Without our power, no hospital would be able to help the people that currently need medical treatments. There would be no information technology accessible for public servants and private citizens helping the elderly and the vulnerable, and public transport would be unavailable. Given the necessary social distance at the moment, electricity, we also would not be able to communicate with our families, friends and the outside world. And this assigns to us a very special role no more than ever and that is understood by governments and us. I'm committed to all affected governments across Europe that we will do everything in our power to ensure security of supply under all circumstances.
The governments likewise committed to us support wherever necessary, and we experienced that as well in practical terms. Our network operators by now are supporting crisis teams in all jurisdictions, and we internally prioritize our efforts according to public needs. Due to this, it's also obvious that we will likely not be able to deliver all planned investments and projects as scheduled this crisis year. We have, however, taken all necessary precautionary measures to ensure our vital operations. We have established crisis management processes on group and business level that we can rely upon even if the situation should get much worse.
We have isolated small teams to be able to run critical operations on-site because many things in energy can still not be run off-site. Let me be also clear. I do not believe, I do not believe that any sector nor any single business in Europe will be able to shield itself fully and totally from any impact from the spread of such a virus. Daily life has changed dramatically wherever we are in Europe. Many small and big businesses constrain or close their services.
It impacts entire branches. Whilst it's also for us too early to calculate any financial impact in detail, one still can already today assess the vulnerability at large of different business models to such a crisis. In the given legal framework, we believe that only a few businesses are by good reasons so soundly protective of operational and financial deterioration as E. ON, still things can and will happen. This is, however, the reason why our strategic promise to you, our investors, has not changed.
E. ON will be a resilient company now and in the future. Before I pass on to Mark on this issue, let me highlight one important thing. We are confident. We are very confident to master the challenges ahead and hand this year, independent of the duration and impact of the crisis.
E. ON is robust. E. ON is resilient. We stand for security of supply even in demanding times.
We will be a reliable partner for our customers, for our investors and for society as our people. Over to you, Marc.
Thank you, Johannes, and welcome to everyone. I will, in a moment, elaborate on how resilient E. ON is positioned in an economic downturn. I would like to stress from the beginning that we have seen assumptions regarding the possible severity of the economic impact of the current crisis changing almost daily. Therefore, at this stage, it is more important for you to understand the sensitivities than relying on us to get it right or wrong at giving a point guidance for any financial metric for 2020 beyond.
Our business model in general is characterized by high stability and reliability. Let me remind you that in the new portfolio, almost 80% of our earnings stem from regulated or quasi regulated activities. For Energy Networks, total allowed revenues are generally calculated irrespective of a specific volume consumption. Those revenues are thus agnostic to short term volume volatility. Of course, any unutilized allowed revenue can and will be recovered in subsequent years.
Over the midterm and within a regulatory cycle, we thus do not expect any material impact on earnings in our network business. These stable financial frameworks do not come as a surprise as they do exist for a clear reason and are in the interest of customers and society. Johannes has already pointed out that we are running one of the most critical infrastructures in Europe. Financially, we are thus rightfully shielded from vulnerability. Regarding our customer comprises the other 20% of our core business portfolio, let me point out that only approximately 10% to 15% of our earnings in this segment or in other words, below 2% of total group earnings, are linked to recession exposed business clients in commodity retail.
In terms of volumes sold, the share of energy served to business clients amounts to approximately 40% of our total sold electricity and gas volumes, and only for half of those clients, revenues are actually linked to volumes. At the same point in time, we would expect that residential demand will go up during this specific crisis. As a reference, margins on a euro per megawatt hour basis in our residential portfolio across Europe are higher than the margins for business clients by a factor of 6. Despite the stability of our business, it is of utmost importance for us to be best prepared for different possible outcomes to act flexibly and as much as possible with anticipation. Against this background, we conducted already 3 weeks ago a group wide impact assessment to examine potential effects from a severe recession for our new portfolio.
The purpose of this stress test has not been to come up with a precise financial impact number, but to make sure that we truly understand the dynamics of our new portfolio, including our energy. For our financial stress test, we have modeled a U shaped economic scenario with several months of strict containment measures. Absence any specific insights how the crisis will unfold, we defined our assumptions of the possible impact on financials to be similar to the size and length of the financial crisis experienced in 2,008 and 2,009. In order to put things clearly into context, during the 2,008, 2009 financial crisis, demand from business clients in commodity retail dropped by roughly 6% on an annual basis. Please let me clearly state again that I'm not suggesting that this is the probable outcome, but it shall give you an indication for sensitivities.
On the earnings side, our assessment confirmed that the Networks segment will not be significantly impacted over the midterm. Likely lower Networks earnings in 2020 would be fully recovered in subsequent years. In Customer Solutions, a drop in business commodity volumes due to a recession can result in a low three digit €1,000,000 impact as we would have to sell back over hedged volumes to the market at potentially lower prices. Finally, the power output at Prousn Electra, our non core nuclear operations, is more than 80% hedged for 2020 and largely hedged for 2021. So short term price effects from lower wholesale prices are limited.
Over the midterm, our nuclear operations are expected to fade out anyway so that we do not see a material midterm risk from lower commodity prices here once hedges run off. On the cash flow side, we would expect a temporary buildup of working capital as a result of delayed payments. However, we cannot reasonably model a sensitivity in this respect. We see that in all our markets, governments are taking decisive measures to ensure the liquidity of the industrial and commercial sector. We can only urge governments to strengthen the private sector, but specifically those industries and services who contribute to critical infrastructure and adjacent services to our fellow citizens.
Therefore, from today's point of view, we expect any short term working capital effect to largely reverse in subsequent years as well. With regard to CapEx, it can be reasonably expected that the CapEx plan for 2020 will get delayed, mainly due to the non availability of labor in the light of existing travel restrictions. From today's point of view, the overall net cash impact, including profit, working capital and CapEx, may actually be limited. But again, I'm not I do not want to make any point guidance today in that respect. Volatility in assumption remains large.
This is why I would also like to point your attention to our comfortable liquidity situation. From today's point of view, there is absolutely no risk that we will fall short of serving our financial obligations. With our €2,250,000,000 bond issuance in January, we have not only pre funded all of our 2020 bond maturities, but also a part of the squeeze out settlement already. Furthermore, we do not only hold a sizable amount of cash and securities, but also have the undrawn €3,500,000,000 revolving credit facility at our disposal. On top of that, a 1.7 €5,000,000,000 acquisition facility, which is also undrawn.
Even with prolonged stress in financial markets, we will be able to serve our financial obligations. Of course, we have also started to evaluate potential countermeasures that could limit the financial impact for E. ON even further. Those measures include OpEx cuts, CapEx cuts or delays and or postponement of non business critical projects. We have set up next to our operational crisis organization a commercial task force as an additional management lever to increase timeliness of critical decision making.
To sum it up at this point in time, we cannot reliably estimate what the true impact of this crisis is going to be, especially in the crisis year 2020. As a result of our stress test assessment, we, however, see our portfolio largely resilient by nature of the chosen business model. We will invest this resilience in making sure that we will keep the lights on for our customers. With that, we would like to conclude our specific introduction and would now like to draw your attention to our long term capital market story. Johannes, please.
Thank you, Marc. I hope that helped you to understand the situation. I think you're confronted with many statements in that respect, some people claiming nothing happens, some people claiming Armageddon is around the corner. I think we have shown you the resilience of our business model and the specifics of this year that could evolve. Dear analysts and investors, we do understand a lot of attention We are convinced that it makes even more sense now to share the long term benefits of our strategy and the underlying midterm financial targets with you.
With that being said, let's go into the core of our new capital market story. After more than 5 years, we have finalized the strategic transformation of E. ON. We started with a Uniper spin off decision in 2014 when we initiated the spin off of our commodity exposed activities, like, for example, the fossil fuel power generation or the global commodity trading. Then with the takeover of energy starting in 2018, we swapped our renewable generation for energy networks and customer solutions.
This has now transformed E. ON into a, if not the infrastructure powerhouse in Europe. We are the leading company in energy networks and decentral energy infrastructure on this continent. Of course, there will be plenty of additional daily work on the energy integration in the next 2 years, but all foundations have been laid, all major decisions have been taken, and I'm very proud of the outcome and what we have achieved already. Marc and I will focus on answering a few simple questions today and the most important, why should you invest in E.
ON? Turning to Page 7. What we want you to take away are 4 simple messages. 1st and most important, we are committed to annual dividend growth. And that is based on the second, sustainability is deeply rooted within E.
ON's business model. Actually, our complete business model is centered around sustainability. With our portfolio of networks and solutions, we will enable this energy transition in Europe. And this is why sustainability for us is not a fashion or a constraint. It's a fundament of our strategy and thus full of opportunities.
3rd, customer centric energy infrastructure is our core. It enables us not only to seek long term reliable investment opportunities, It also transforms our stock in a long term reliable investment opportunity for investors. And last but not least, E. ON's distinct and proven performance culture will enable us to achieve our environmental, social and financial targets in the most effective way. I will now dive into each of these four aspects to share arguments that will help you to understand what we are doing and how this contributes to our investment rationale.
Let's start with the overarching subject of sustainability. And let me repeat, it's not just tick the box. For me, it's the essential foundation for E. ON's future's long term success, and I'll explain you why. In the context of sustainability, I want to send one important message to you today.
Climate protection is a huge challenge for society at large. But for us at E. ON, it's predominantly a major business opportunity and it's an obligation to support. I will not spend a lot of time on our own climate targets. Why?
Because our own annual carbon emissions currently amount to an absolute level of below 12,000,000 tonnes of CO2. If you compare our specific carbon footprint with pretty much all other energy utilities, we are already walking on the tip of our toes to spare society and nature from carbon emissions that we stand for. And although we are already far advanced, we have set ourselves additional ambitious goals to prioritize emissions that we can directly influence. We target to steeply reduce our own carbon footprint by 2,030 and to become carbon neutral by 2,040. Our ability to reduce the so called Scope 3 emissions on our own is obviously very much limited.
Scope 3 is all about the carbon in power natural gas we purchase at the market or from producers and we then supply to our customers. What is more important is that we are the partner of choice for customers, municipalities and societies to deliver solutions for the energy transition and to thus reduce their own carbon footprint. Together with our partners and customers, successfully avoided roughly 100,000,000 tonnes of carbon emissions in last year alone. So our annual avoidance is 8x higher than our own carbon emissions. The avoided emissions stem from connecting effectively renewable assets from cogeneration plants and energy efficiency projects.
For us, it is about connecting as many green assets to the grid as possible, as fast and as efficient. Rather owning a few, we connect them all. It is about enabling cleaner energy production and the acceleration of electric mobility, greener heating and cooling and enabling green industries. As of today, an impressive 20% of all renewable assets across Europe have been and are connected to the distribution grids of E. ON.
And keep in mind, we are only distributing 7 European countries, so our relative share in our core homes where we operate is much higher. In a nutshell, we pledge E. ON is the green investment opportunity in the energy sector, and there will be no energy transition nor near an oil green deal without our necessary energy infrastructure and our cleaner customer solutions. Sustainability is more than just carbon reduction. We also stand for the highest standards in corporate governance, and we stand up for human rights, health and safety and diversity as key priorities for us.
E. ON's strong ESG profile is consequently being recognized in superior ESG ratings and rankings, and we have formed about that in the chart set. We have implemented for quite some time a sustainability council to consult the Board on ESG matters. And furthermore, last year, our Supervisory Board established its own sustainability committee to be on top of it as well and to push the management ahead. Incorporating a sustainable mindset in all our decision making processes is what creates value for E.
ON and our shareholders. Our investment decisions and actions are driven by 3 megatrends that impact the energy transition, enable the energy transition and with that, our long term business outlook. These megatrends are green electrification, decentralization and digitization. For many years to come, decarbonization will mean deep electrification. While overall energy consumption must be reduced, power supply and use will grow substantially and become the dominating source of energy.
And this creates a multitude of long term business opportunities for us at A. ON. On the one hand, massive investments into our grids will be needed to manage increasing electricity demand and increasing renewable infeed. On the other hand, new electricity enabled solutions will be in high demand for decades to come by private citizens, businesses, municipalities. As example, we engage with companies such as Tesla for the European Gigafactory, which is planned to be connected to our grid, which we pledge to connect within only 18 months.
Another example is new hyperscale data centers for Amazons and many others in the Frankfurt area in Germany, one of the hotspots of data connectivity in our continent. Our network operators have customer requests for the next 7 years already at hand that easily underpin our asset growth targets, which I will lay out in a moment. These trends, electrification and energy efficiency, will stimulate our business. I'm convinced that one day, everything that can be electrified will be electrified, and digitally enabled efficiency will be embedded in all solutions. Only competent partners like E.
ON with a proven and reliable relationship to customers. And I repeat that, based on a proven and reliable broad relationship to customers, will and can then manage the complexity of the new energy world for and with customers in society. With that, the energy world will also become much more decentralized and more connected. The only way for a successful transition to that new system is a combination of reliable power network infrastructure and local innovative solutions. Such decentral evolution is already visible.
90% of all European renewable assets are feeding electricity into the distribution network and not on the overlaying transmission. Overlay transmission is predominantly for offshore. Pretty much everything else is connected to guys like us. Just one example, our German network operator in Schleswig Holstein, the most northern German state, has already a green electricity quota of over 2 50%. So 2.5x the total consumption in the region is delivered by local renewable production.
This reflects the ratio of the feed in of renewable energies versus the supply of customers. In Germany, E. ON currently across all our 9 regional service operations has an average green electricity quota that is already higher than 80%. It also shows the strength of our rural base. Furthermore, 100% obviously of all charging stations for electric vehicles are connected to our networks.
Same applies to all electrical heating installations that happen locally. Decentralization will also likewise drive the empowerment of customers and the need and the ability of local optimization within local systems. Let's see if at some point we don't even have nodal pricing. Therefore, customers will require also digital projects products and services to handle the embedded complexity. E.
ON is well positioned for that. We have not only a century long experience in operating complex networks. We have also by now implemented state of the art products that set benchmarks in the digitization of decentralized infrastructure and we named a few of them. One of those new digitally enabled products is called the Energy Monitor. It is analyzing and addressing, by the minute, the energy management and carbon footprint of total individual cities and municipalities and gives those customers advice how to tackle and improve their local consumption and their carbon emissions.
And we then offer obviously our services to close the gap. Decarbonization, decentralization and digitization will be long term trends, heavily supporting our business model focused on decentral energy infrastructure and solutions for the decades to come. This brings me to the core of our business in terms of capital allocation and the 2nd cornerstone of our investment proposition. It is the very customer centric energy infrastructure, the main driver of our stability and resilient long term growth rates. With the energy transaction, E.
ON has transformed into Europe's energy infrastructure powerhouse. We have significantly derisked our profile by swapping increasingly volatile renewable generation assets for stable energy infrastructure assets. I firmly believe that the biggest economic upside will come from connecting and optimizing as many renewable assets as possible rather than developing and owning just a few of them. With that deal, we have also set up our business model in much more resilient way. We're absolutely convinced that this has been the right way of transforming your company in the interest of our investors and customers.
The benefits become particularly clear in the current market environment. Our high share of regulated earnings significantly reduces exposure to the volatility of natural resources, commodity prices and the ups and downs of markets. Furthermore, this allows us to be much more focused in our capital allocation, as I will now explain. Going forward, we will allocate around 90% of our group wide investments to the asset class of infrastructure, that is regulated energy networks and long term contracted decentralized energy infrastructures. Such decentralized energy infrastructures include local assets like heating and cooling plants and associated local heating and cooling networks.
Also, our on-site generation for industrial partners or municipalities based on renewables or efficient gas technologies, all that would enable higher energy efficiency and local optimization potentials again. When it comes to these activities, our most important markets are currently Germany, Sweden, but we see growth potentials also in CEE, especially Poland, Italy and the U. K. Typically, we have long term offtake in service contracts with cities, communities or businesses for these assets, delivering long term stable and resilient returns. Approximately 10% of our capital is earmarked for non regulated energy retail activities and the remainder.
Keyhole focus in the midterm will be on carrying out the foundational investments needed in order to renew our IT in architecture in order to improve operational efficiency and support the total business. With the following charts, I will provide you with our business rationale behind our capital allocation in each of the three areas. To help you better navigate, you will find an icon in the upper right corner of each of the subsequent charts. This will highlight which of the respective areas of the business we will be talking about. We start with our power networks.
As the most sizable part of our portfolio, there are plenty of different drivers that trigger investments in local power networks. In the past, investments have been mainly driven by asset renewals, followed by renewable connections. The increasingly decentralized energy systems that are the basis of the new energy world will, however, require additional investments, also mainly due to the projected local electrification and smartification. Based on the recent and comprehensive study by the German energy agency, DENA, the yearly investments will continue to grow steadily and far beyond 2,030. The energy transition thus represents a massive opportunity with multi decade investment needs into our local energy networks.
This enables us to further strengthen our position as a leading network operator and as a most important local partner. The implementation of the Green Day shall further accelerate the developments. All these investments will continuously feed the growth of our regulated asset base. As a starting point, I show you a snapshot of our current portfolio of regulated network assets on the next chart. Today, we are already the largest power distribution network operator in Northern and Central Europe, with the most sizable region being Germany.
At roughly 700,000 kilometers, we operate the longest power grid in Germany, transporting 240 terawatt hours energy per year. This is almost 50% of annual consumption in our home nation. In total, we operate a regulated asset base of around €33,000,000,000 with Germany representing around 2 thirds of it. The remainder is composed of a diversified portfolio of economically robust and attractive regions and in stable regulatory regimes. We have created the relevance that is necessary to be perceived in all our markets as the trusted partner for politicians, regulated municipalities, industries and private citizens.
With our current investment targets, our RAP will grow in steady and sustainable way for decades to come. We expect 3% to 5% annual power up growth until 2022 and further growth beyond. We have a clear capital discipline for our network investments and want to invest responsibly. That's why we consciously grow the asset base on that named level of 3% to 5% annually. In that respect, we are also aligned with regulators to ensure reasonable price determination for our customers.
It is thus wise to escalate RAP growth not too fast in the near future. E. ON's focus is on power networks, and we see strong potential for decade long growth build on the previously highlighted trends. Focusing on midterm growth on power networks does not mean that our gas networks are becoming redundant. Our RAP regarding guest networks amount to about €5,000,000,000 which reflects roughly 70% of our RAP base.
This part of the asset base is expected to remain broadly stable, thus not growing. We see a clear benefit in capitalizing on our gas asset base with limited investments, resulting in very decent net cash contributions. In Germany, most of our gas concessions are coupled with electricity concessions. Therefore, owning and managing gas infrastructure is an important and highly synergistic part of our product portfolio and is the base of our partnership with hundreds of thousands of municipalities. Guess will play also a pivotal role as a transition technology for years to come.
Many societies expedite the retirement of coal assets. On top, our networks are already distributing biogas today, bringing the 1st green gas to end customers. Beyond this, we see long term growth from the emergence of greener gas or later even green hydrogen. From an economical standpoint, green hydrogen has a long way to go in order to be competitive, but we are preparing to help facilitate this. For example, we are currently conducting various field trials to increase the level of green hydrogen feed in into our networks.
Moving on the next slide, the PowerUp growth is embedded in an exceptionally long phase of regulatory stability in our most important regions. This means for the next 4 years, we have high visibility 70% of our regulated earnings. On top, E. ON's diversification among different strong and stable regulatory regimes is unique. This results in a robust portfolio even beyond 2024.
Next, I would like to emphasize that beyond 2024, we are confident that we will achieve a continuously attractive earnings trajectory, benefiting from RAB growth, performance leadership and operational excellence. Keep in mind, allowed returns are only one element of the total regulatory package. Outperformance opportunities vary from market to market, but can be very substantial. In Germany, for example, E. ON managed to grow earnings from 2018 to 2019 despite a reduction in the allowed return of more than 200 basis points.
I would like to highlight that an integral part of our way to manage networks businesses is to contribute to innovative and fair regulatory solutions. Over the years, we have achieved that regulators and politicians trust us and regard us as a go to partner for ideas to design supportive regulatory frameworks to realize the new energy world on behalf of customers and society. One example, I would like to point out the recently introduced solution in Germany to eliminate the time lag for additional investments to become revenue effective immediately. Another is the solution for the so called carryover in Sweden. The latter is a very good example for an effective collaboration with regulator, accepting also public needs and acting in the interest of customer society and our investors.
By making realistic and reliable agreements on future investment levels, by supporting bottleneck release, by supporting security of supply in local hotspots and by allowing new connections to constrained local grids, we achieved a beneficial outcome that grants us regulatory earnings of previous periods to be transferred to the current period, the so called carryover. The responsible minister explains the solution together with our local manager on the side of an important customer in Malmo. For the future, it is paramount for regulatory schemes to ensure an adequate level of allowed returns. This is especially true for the allowed returns in Germany. Due to the low interest rate environment, it is to some extent justified to adjust for the allowed cost of debt.
However, this does not apply to the allowed cost of equity. Here, we see empirically that lower risk free rates go hand in hand with higher market risk premiums, and whoever doubted that can presently experience on a daily basis in the markets. Furthermore, regulators need to recognize that the physical growth of the energy networks and the permanently increasing complexities of the network operations will need a different approach to OpEx allowances. It cannot be assumed that costs can be reduced to the same extent than in the past. We need to invest rather than to save.
Maybe sometimes even increased costs are unavoidable. Yearly 2 ups of OpEx allowances would be an adequate solution if efficiency can be demonstrated, and we argue on that and we have years to settle the case. Turning to the next page, reliability, operational excellence and focus on customer needs are also the basis on which we full and long lasting relationship with German municipalities. Today, we have more than 9,000 network concessions in Germany, and we leverage this platform with our competences to generate additional businesses, such as broadband infrastructure, smart meters, technical network services for local operators and water businesses. One point that is often missed, The non concession based RUP in Germany is made up of the high voltage grid, the so called 110 kilowatt level kilowatt level.
This high voltage level is predominantly used to connect larger assets, such industrial sites, but also all wind parks and all other local generation facilities. Here we see a further potential for additional connections in the coming years and higher growth of the RAB. I earlier already referred to the examples like Tesla plant close to Berlin. I also refer to new battery production sites planned in Lower Saxony. All the steep growth of the hyperscale data centers I referred to in the Frankfurt region.
All of these are connected to the 110 kilowatt layer. Once again, this voltage level is not subject to concession renewal, not even in Germany. So this is part of a stable RAB base for the future to stay. Going forward, Energy Networks will focus increasingly on leveraging the proximity to the customers, like, for example, our activities also in City Energy Solutions. E.
ON can cover all of a customer's energy related matters: heatingcooling, power gas supply, e mobility infrastructure, efficiency management, renewable connections. In our City Energy and B2B Solutions segment that we together refer to as our decentralized energy infrastructure, E. ON offers clean electricity and greener heating and cooling solutions for customers and municipalities. The goal is to bring down energy costs for our clients as well, while at the same time reducing their carbon footprint. We also invest in the expansion of our existing as well as new heating networks.
In this business, we already have achieved leading market shares in Germany, Poland and Sweden as well as starting positions in Italy and the U. K. We see further potential to grow our activities to support carbon emission reduction in urban areas. You can find more details on some of our lighthouse projects in the back up. We do not only hold market leading positions in decentralized energy infrastructure, but are also a leading player in our energy retail business.
With the energy takeover, we have strengthened our position as one of the leading energy retailers in Europe. In Continental Europe, we have managed to gain customers again over the last 2 years. Especially in our home market Germany, we have been able to secure a strong market position with a growing customer base. 2019 has been a year of further regulatory market intervention in the United Kingdom that caused a decline in customer numbers due to increasing churn, and we accepted that. We currently supply around 50,000,000 residential customers with electricity or gas.
This puts us in the pole position to cross sell innovative solutions to our existing and new customers with comparatively small additional investment needs. Our midterm focus lies on increasing the responsiveness of our business model to changing market environments. On top, we have implemented measures access for selling additional products. Just to highlight the growing potential, our PV and Home business has installed more than 20,000 units to homes across Europe last year, and we have also achieved positive earnings in this segment for the first time in the last quarter of 2019. This segment is offering significant growth options for many years to come.
I believe most homes over time will have their own PV on roof. We have been able to secure a market leading position in Europe by partnering with local and regional installation businesses that sometimes exclusively sell our solutions. This is only one example of generating leads via our existing commodity retail businesses. Those offerings also help us to maintain or even grow our customer portfolio in Continental Europe. Let me conclude with our 4th investment highlight, which is an integral part of our DNA and will be a key commitment going forward, Performance.
With all our actions, we are striving to be more efficient and more effective every day. This was also one of the motivations for the innogy transaction, bringing our performance to a new to a much higher level. Only the combination of the two businesses enables us to achieve the targeted synergies of around €240,000,000 by 2022. And please let me explain once again the difference between real synergies and additional efficiency potentials. Only the additional efficiency, which stem from the combination of both companies, we identify as real synergies.
Examples for that are cost savings because we no longer have 2 headquarters, we no longer need the same headcount, for example, in support functions, we can consolidate IT. Efficiencies is then everything in the business that comes beyond synergies. Being part of our DNA, this is a continuous process. We have the ambition to drive operational excellence in all our businesses time and time again. We continuously engage in lowering our cost base to digitization and innovation.
Let me now touch upon our promise to the targeted synergies. Here, we are fully on track to deliver what we have indicated. We have validated measures and therefore significantly derisks successful delivery. Synergies are now an integral part of our midterm planning. We will even increase the targeted €740,000,000 by 2022 to €780,000,000 by 2020 4, reaching the high end of the initially targeted range of €600,000,000 to €800,000,000 annually.
We just started the voluntary leave program in February and will achieve further cost synergies in the remainder of the year. The achievement of the synergies will be rather back end loaded year by year. We will provide further transparency on achievement levels as we progress on a quarterly basis. As already mentioned, our retail activities are one important element of our operational excellence efforts. Here, success will be determined by customer access and service quality.
For this, we are moving quickly to cloud based and easy to accommodate dedicated platform. We decided to empower this platform not only as a digital attacker, but as a digital reality for all to be the future home for our German B2C activities. We already serve more than 500,000 customers through this new platform, and we aim to move the remainder of E. ON Industry's retail customers onto that platform. This initially digital attack up platform allows us for significantly improved customer experience.
It brings along the agility to quickly adjust, adapt new products and offers a meaningful reduction of cost to serve. And this is true for retail, but also for additional products like the referred 2 PV products. According to the current planning, around 8,000,000 German customers should be migrated onto the platform by the end of 2021. Our strategy in the U. K.
Is quite similar. But here, we couldn't wait for adjusting our own dedicated platform to the U. K. Needs. We needed to do something immediately with Npower at hand.
Just 2 days ago, we announced that we have also now a future Pew Proof state of the art solutions for our customers in the United Kingdom. Based upon our agreement with Kraken Technology, we now have already a sustainable long term solution at hand delivered on the plan that we presented in November last year. As informed on Monday, first all Npower and then all E. ON clients will be moved on the new technology and operating model. We still confirm our commitment to be an EBIT to deliver an EBIT of at least £100,000,000 in 2022 and also an improvement of more than £100,000,000 compared to the previous plan in the years beyond 2023.
The strategic focus described above will allow us both cost leadership and superior customer experience. On top of that, we will continuously roll out cross selling opportunities. The new energy world will rely on more enabled and more active customers who drive sustainable investment in the decades to come, and E. ON will follow a prudent development of these businesses. This will give us an additional push for performance over time.
Last but not least, we are also a performance leader in our networks business to the benefits of our customers and our earnings and recognized by regulators. In our most important markets, Germany and Sweden, we have leading efficiency scores in the regulatory cost benchmarking exercises for the running regulatory periods. Out of our 9 German network companies, 8 achieved an efficiency score of 100%, significantly above industry average. Besides being in the interest of our customers and regulators, it implies tangible financial benefits for us. Over the whole 5 year regulatory period, we are allowed to collect more than €600,000,000 of additional revenues compared to a situation in which our companies would achieve only industry average efficiency scores.
Adding the innogy expertise, we can integrate the best of both worlds and identify further efficiency levers that will secure long term and sustainable profitability. Dear analysts and investors, this brings me to the most important investment highlight again, but that is built upon the things I talked upon, is our commitments to dividend growth. This chart is of utmost important for our investors. Even more important for investors, though, should be the fact that this chart is of utmost important to us in management, but also in our Supervisory Board. We, the management team of E.
ON, our Chairman and all our Board members are fully committed to delivering a year over year annual dividend increase of up to 5% over the next 3 years. Clearly, the current situation of 2020 will have an impact on every business, including E. ON. However, even considering all reasonable scenarios, we can foresee from today's point of view and given the strong legal and regulatory frameworks under which we presently operate, that we can be very confident that our business is resilient enough to ensure that we will be able to pay dividends for 2020 through 2022 that are for each year at least equal to the previous year's dividend. In addition, we commit to an annual growth in dividend per share even beyond 2022 already today.
Sustainably growing the dividend is ingrained in our thinking and management decisions. I will now hand over to Mark, who will explain how this dividend policy is backed by our financial plans. So Marc, over to you.
Thank you, Johannes, dear analysts and investors. In line with our business ambitions, we adopt a growth based dividend policy. That dividend policy shall provide you with a high degree of transparency, reliability and comfort on future dividends. Let me be very transparent that the specific growth target of up to 5% is also a result of the current economic environment. In the given form, it provides for flexibility, which we predominantly would foresee in the near term.
Once the crisis is over and we have better visibility on the way forward, you should expect that we will narrow the growth range target. We have combined our main financial targets for the upcoming 3 years into a comprehensive financial framework. You, our investors, can rely on that this framework will be the compass for our decision making as a management team. The most important and overarching element of this framework is the dividend and the commitment to an annual dividend growth of up to 5%. This dividend pledge is very solidly backed up on the earnings side by a 7% to 9% EBIT compound average growth rate, translating into 10% to 15% earnings per share CAGR for 2020 to 'twenty 2.
Next to profitability, we will also closely manage our cash balance and capital structure. Based on an average cash conversion rate of roughly 95%, we will focus on organic deleveraging over the midterm. With a midterm debt factor target of around 5x, we reiterate our capital structure commitment of a strong BBBBA rating. These targets do not factor in any impact from a potential recession resulting from the further spread of the coronavirus and requirement containment actions in this respect. Depending on the developments, in the next few weeks months, our 2020 earnings might come somewhat under pressure.
Keep in mind the sensitivities and exposures which I elaborated on in the beginning. Thanks to the midterm resilience of our business. As of today, we do not see a significant impact on our midterm targets. For that reason, we have a high confidence in our financial plans, specifically for 2022. This is why from today's point of view, the uncertainty around the financial performance in the near term does not put our medium term plan into question.
It is only the path that may be altered. Let me therefore draw your attention to how our capital allocation framework leads to sustainable business and earnings growth over the midterm. Our long term earnings are fed by the investments we conduct in line with our capital allocation framework. All our investment proposals need to pass a 2 step filter approach. First, we apply sustainability criteria.
Based on specific go and no go criteria, we assess whether investment opportunities contribute to the energy transition and are in line with our governance framework. Clear no go criteria are, for example, violations of human rights but also carbon intensive projects. Once projects have passed the first filter, we apply strict financial return criteria. Based on our hurdle rate framework, we expect each project to deliver an attractive return in relation to its individual risk. Overall, we allocate about 90% of our investment funds to customer centric energy infrastructure, with the majority of that being regulated networks.
Only around 10% of the funds will be invested in energy retail, including our commodity sales business and new solutions. As our indicative further rates show, we have a clear preference for regulated low risk investments. This is why project specific risk premia and group excess return requirements over proportionately increase with a level of embedded investment risk. CapEx spend into innovation has been reduced to a minimum, namely an amount in the low double digit €1,000,000 area per year. Return requirement for these investments are even significantly higher than the rates shown in our capital allocation framework and are excluded here for materiality reasons.
Overall, these strict criteria strongly support an allocation of funds towards low risk sustainable investments. I will now take a closer look at our CapEx plan until 2022 and move on to the next page. In total, we plan to invest around €13,000,000,000 over the 3 year horizon with €4,500,000,000 earmarked for 2020. Roughly 3 quarters of our investments will be allocated to our Energy Networks business and about 20% to Customer Solutions. These figures relate to gross investments before divestments.
Besides the remedy related disposals, we do not plan for further divestments. Only in German networks, we typically assume minor disposal proceeds from concession recycling. Let's have a closer look now on the details. In Energy Networks, we will invest almost €10,000,000,000 over the next 3 years. Three quarters will be invested into our power networks and drive the regulated asset base growth that Johannes already mentioned.
Another 10% to 15% is earmarked for additional businesses where we can monetize on the close linkage with our municipal partners and leverage our strong regional footprint. Only a small portion per year is dedicated to gas grids. The remaining about 20% of overall group investment is allocated to our Customer Solutions segment. The main share of this CapEx is reserved for highly efficient decentral energy projects as part of our B2B Solutions portfolio as well as district heating and cooling solutions as part of our City Energy Solutions business. Also included is the temporary CapEx for the smart meter rollout in the U.
K, which shows a stable rental like revenue model. These investments provide for stable and predictable long term cash flows with attractive returns. CapEx in Energy Retail is mainly targeted towards renewing our core IT platforms. With this, we carry out investments to deliver a step change in cost to serve while simultaneously improving customer experience. The remaining fraction of Customer Solutions Investments is allocated to new solutions and e mobility.
We are continually examining the progress and risk return profile of such projects. If businesses prove scalability but need a significant amount of additional capital, we will carefully examine to team up with financial or strategic partners. We are also prepared to abandon such projects if results do not reconfirm the initial business case. So let's move on to how our investment strategy translates into earnings. For 2020, we are guiding for an EBITDA on group level of between €7,100,000,000 to €7,300,000,000 and for an EBIT of between €3,900,000,000 to €4,100,000,000 Please be reminded that an economic cycle effect is not yet included in these numbers.
Compared to 2019 pro form a figures, we expect a slightly weaker development in Energy Networks, resulting from the lower return of the new regulatory period in Sweden. Earnings in the Customer Solutions segment are expected to grow mainly driven by organic earnings growth in Decentral Energy Infrastructure and the improvements in the U. K. Non core earnings will remain stable on the back of higher hedge prices that are largely offset by the purchase of nuclear production rights. For the Corporate Functions segment, be reminded that the transfer of the Nord Stream 1 stake into our CTA will lower earnings going forward by €60,000,000 to €70,000,000 on an annual basis.
From 2020 to 2022, earnings will grow while noncore will decrease with the shutdown of our nuclear fleet by the while non core will decrease with the shutdown of our nuclear fleet by the end of 2022. Synergies will start to ramp up in 2020 and accelerate until 2022, as Johannes has elaborated upon. I move on to the next page. For 2020, we expect Energy Networks earnings to be slightly down compared to the 2019 pro form a figures, and we guide for an EBITDA between €5,200,000,000 €5,400,000,000 and an EBIT between €3,300,000,000 3,500,000,000 We expect slight organic growth in our German Networks business as well as in Central Eastern Europe and Turkey lower earnings in Sweden with a significantly lower WEC of 2.16% in the new regulatory period compared to the previous 5.85% will have a negative earnings effect of €150,000,000 to €200,000,000 For the 3 year period between 2020 2022, based on regulated asset based growth and synergies, we expect sustainable organic growth in the whole segment. With regards to 2021, be reminded that this is the base year for German power networks for the regulatory period starting in 2024.
Moving from our Networks segment on to our Customer Solutions segment. For 2020, we expect a fair earnings growth in Customer Solutions, leading to an EBITDA of between €1,100,000,000 and €1,300,000,000 and EBIT of between €500,000,000 and €700,000,000 This compares to an EBIT contribution of €500,000,000 for 2019. In this respect, I would like to highlight that in 2019, roughly 30% of total segmental earnings stem from the businesses that we call the Central Energy Infrastructure. This business has long term contracts with stable margins and cash flows. We expect that part of the business to grow steadily and significantly over time.
The improvements in the U. K. Will complement organic growth in Solutions, backed by progress in Decentral Energy Infrastructure as well as constant cost saving efforts. For the U. K, the development of the new business plan, including the migration of NPower's and E.
ON's customers onto a single platform, will have an impact also beyond 2020. In 2022, we still expect an EBIT of at least GBP 100,000,000 and beyond a further increase of earnings. For German sales, earnings growth will be driven by the realization of synergies, while we strive for net customer account growth in each single year. So that's it for EBITDA and EBIT. Let's move on to the bottom line.
Besides EBIT growth, we are benefiting from our potential of cheaper refinancing. This allows us to grow earnings per share significantly above the rates that we see for our EBIT. For adjusted net income, we guide for a range of €1,700,000,000 to €1,900,000,000 in 2020, implying a decent increase compared to 2019 pro form a. On the earnings per share level, this translates into €0.63 for 2019 pro form a, increasing to €0.65 to €0.73 in 2020. We again confirm our dividend of 0.46 per share proposal for the fiscal year 2019, which translates into a payout ratio of 73%.
Let me remind you that according to our new dividend policy, €0.46 is the floor to expect for 2020 with up to 5% upside that will be concretized over the course of the year. The strong outlook for 2020 to 'twenty two EBIT continues to be amplified on the bottom line by lower refinancing costs. Assuming a constant tax rate of 25%, we expect adjusted net income as well as earnings per share to grow significantly over the next 3 years and guide for a CAGR of 10% to 15%. Let's now elaborate on how refinancing is driving earnings per share growth. Over the next 3 years, we have bond maturities of roughly €8,000,000,000 many of them bearing high coupons of more than 5%.
Given the current interest rate environment, we will be able to refinance at lower rates. In January, we have already issued bonds with a volume of €2,250,000,000 with coupons from 0 for a 3.5 year tranche to 0.75 percent for a 10 year tranche. This continues our issuance activity since August last year. Since then, we have issued 9 different bond tranches, and 4 of them bear a 0% coupon. Assuming future issuance at low levels over the 3 year horizon, the annual benefit can add up to about €200,000,000 This will lead to a significant relief for our financial expenses.
Depending on the interest rate development going forward, there might be further refinancing benefits of up to a mid double digit million amount until 2024. I would like to take the opportunity to elaborate on the future of Innogy's bonds in this context. As announced previously, E. ON will be the only active bond issuer going forward. For that reason, we will offer innogy bondholders to move to E.
ON issuer level once the squeeze out is effective. We will provide more information once we start the procedure. In January, we have issued a green bond for the 2nd time after the inaugural bond in August last year. This brings me to a further important element of our financing strategy. Sustainability is at the heart of our business.
For that reason, it will also play an essential role in our financing strategy. As of today, E. ON and Innogy successfully issued green bonds with a volume of almost €3,500,000,000 This makes us number 1 corporate green bond issuer in Germany. On top of this, our €3,500,000,000 syndicated credit facility that we signed in October last year is linked to ESG criteria. The credit margin depends on the performance of ESG ratings by 3 well established rating agencies, namely ISS, MSCI and Sustainalytics.
Green Financing will also remain an integral part of our financing strategy in the future. Given the crucial role we play for the energy transition, it is no surprise that 95% of our investments in the operational core segments are dedicated to the energy transition. Applying the very rigorous green bond framework, roughly €1,000,000,000 investments per year will qualify for green bond financing. We will issue more green bonds in the future. Let's now tackle our net debt composition and how we at E.
ON think about it and will manage it. At 2019 year end, our net debt totaled €39,400,000,000 Our net debt includes €9,000,000,000 in provisions related to the dismantling of our nuclear plants. For these provisions, there is a real discount rate floor of 0%. This means that at this stage, lower discount rates will not lead to a further increase in our economic net debt.
To put
it in another way, from an interest rate point of view, there is only improvement potential regarding our asset retirement obligations. Operationally, there is the additional potential that further efficiency gains can lower these provisions. Against this background, we have already booked a €200,000,000 decrease in the provisions as per year end 2019, and there is more to follow in the midterm. Our €7,000,000,000 pension provisions represent another roughly 20% of our economic net debt. These provisions are sensitive to discount rate changes.
A 50 basis point cut in the pension discount rate results in an approximately €1,600,000,000 increase in the pension provision. Bear in mind that the discount rate for our pension provisions is conceptually a combination of the risk free rate and corporate spreads. The numbers shown in this chart represent the status as of December 31, 2019. If we used discount rate estimates as of 19th March, I. E, end of last week and also included a mark to market of our asset portfolio as of the same date.
Pension provisions would stand at approximately 7.6 €1,000,000,000 hence only a slight increase versus year end figures. Rising discount rates currently partly compensate for losses in the investment portfolio. I would also like to stress that almost the entire amount of pension provisions stems from Germany, where we have pretty much no requirement to fund. Short to midterm, this means no impact at all on our cash flows, which becomes even more apparent when we are looking at the 18 years weighted average duration of our pension obligations. Finally, for the net financial position, let me point out again, while the low interest rate environment increases our long term pension provisions without short to midterm cash impact, we benefit from lower interest rates on our cost of debt, especially short to midterm.
Let me now turn to the development of economic net debt going forward. Let me start with the outlook for 2020. 2020 will still be affected by some extraordinary effects linked to the completion of the innogy transaction, amongst others, the squeeze out of innogy minorities, which will only be partially offset by other counter effects such as the remedy disposals. In addition, the transfer of Nord Stream 1 to our pension fund has been executed and will lead to debt relief of €1,000,000,000 as of the Q1 of 2020. All in all, you should assume a temporary increase in our economic net debt for 20 20.
Until 2022, economic net debt will be supported by strong operational cash flows based on a cash conversion rate of about 95 percent. Please note that our new definition of cash conversion rate no longer includes the utilization of nuclear decommission provisions as this is an economic net debt neutral cash flow. Please take into account that the conversion target represents an average across several years. Any individual year can be affected by cash phasing effects, so that in any year, the conversion can be above or below the average. Over the midterm, the average then should be 95%.
The strong underlying cash conversion will be supported by a dedicated working capital optimization program that we have already launched. On the nuclear provisions, we are following the principle of beat the provisions. On top of the reduction in the provisions of €200,000,000 in 2019, we are confident in achieving further tangible savings within the next 2 years. On the negative side, in terms of economic net debt, we will record extraordinary cash effects from the synergy implementation of up to €1,000,000,000 To be clear, this is the maximum amount. We have a clear ambition to beat this level.
If it turns out to be more, it needs to go hand in hand with higher synergies. Let me remind you, managing our leverage in line with the metrics for a strong BBB, BAA rating is important to us. Our rating provides an easy and cheap access to bond markets, but it also underpins the reliability of an equity investment in our stock. Our financial framework balances dividends, investments and organic deleveraging in a way that we are confident in achieving a debt factor target of around 5x over the midterm, especially since our portfolio is characterized by high resilience, coupled with attractive organic growth opportunities, which will unfold over many years. Our midterm and long term dividend growth commitment is fully embedded in this thinking.
Our strong earnings per share growth will allow us to grow the dividend at an attractive growth of up to 5% until 2022. The higher growth of earnings per share above dividend per share implies that the payout ratio will decrease over time. This will allow us to bolster long term earnings potential via investments to grow our power regulated asset base by 3% to 5%, while at the same point in time, decreasing our leverage. It is also a strong backing for the sustainability of our dividend related pledge also beyond 2022. With this, let's now wrap it up.
We are committed to delivering on our 3 year plan, and you can expect us to execute on the plan even if we might face a slower start than anticipated due to the current economic environment. Your new E. ON stands for an attractive annual dividend growth of up to 5%, backed by an attractive earnings growth in EBIT and even more so on earnings per share level. That is supported by a stable financial profile with high cash conversion and to deliver on our strong BBBBA rating target that we will organically achieve over the midterm. Now I would like to thank you very much for your attention and hand back to Johannes.
Just a last remark before it's up to you. I hope we could answer you the question why you should invest in E. ON and why you should sleep reasonably well at night even in stormy times when you think about A. Payment for fiscal year 2019. As you might have already heard, there is an initiative of the German legislator to allow for a pure online shareholders meeting.
The current limitations imposed by authorities would otherwise make a shareholders' meeting extremely difficult, if not impossible. Assuming that this legislation enters into force in due time in the next weeks, We feel very optimistic that E. ON's AGM can take place now within the 1st 6 months of 2020, thus likely early in June. And dividend will flow to you. Verena, over to you.
Many thanks, Johannes and Marc. And I would now like to open the floor for questions. Just be reminded of the 2 questions per person rule so that everybody has the chance to ask questions. With that, I would like to hand over to the operator, Angela Kish. Many thanks.
Thank you. We will now begin our question and answer And we received the first question from Alberto Gandolfi from Goldman Sachs. Your line is now open.
Thank you. Good morning. Thanks for taking my question, taking the time to go through it. I think the vision opportunities are very clear here. So I really I wanted to focus on a couple of risks perhaps to the plan.
The first one is, the guidance on dividends is clear. You commit to pay at least as much as the year before and up to 5%. But did I understand right that you might see a hedging, a trading loss in the low triple digit €1,000,000 if demand behaves the way it did in 2000 and 8 and 2009? And would this be one of the potential reasons not to grow the dividend or grow less than 5% this year? And what other reasons could you have not to grow the dividend as much as 5% this year?
I don't know, for instance, is there any debate about the tariff suspension for vulnerable clients or a social tariff? We're not discussing. There are some countries in Europe talking about that. The second question is very brief and very much about detail. Can you please say how much is your nuclear EBIT you expect in 2022?
Or if you can disclose your underlying net income excluding Prusen Lecture in 2022? There is a 2 question rule. Just a yes or no, if possible, from Johan Het, given we have you on the line. You made a comment about the Green Deal. My impression is that once the crisis is we're getting out of it, the Green Deal could be a major fiscal stimulus supporting even more investments in networks and renewables.
If possible, just a yes or no answer. Would you agree with that? Thank you.
My part is yes. And now over to Marc.
Yes, Humberto. I would start with the dividend question and related to that, the sensitivity of risk exposure to a likely economic downturn. Yes, if we would encounter a similar demand contraction as we saw in the years 2,008 2009, then this would approximate to a low 3 digit €1,000,000 impact on our retail commodity portfolio. And if it was only that, there wouldn't be any reason for us to use flexibility in our dividend policy, to be clear. And if it was only that, you would see us clearly moving up to 5% growth already in 2020.
The crisis we are in, and then we just need to be realistic now, is unprecedented. And this is why I think you should not overweight now the flexibility which we keep, but you should also be realistic that in these times, you should expect and must expect that a corporate provides for certain flexibility. From today's point of view, we cannot assess what the likely impact may be or not on bad debt. I said that normally in a crisis, you would expect some impact on bad debt. Also that, to give a reference, in 2008, 2009 for E.
ON back then was a low two digit €1,000,000 amount. Now once the crisis was over, it was a minimum fraction of receivables, which actually went default. This time, governments are supporting the economy with massive liquidity programs. So we may not even see that, but we may also see something completely different. And I think you just should keep that in mind.
With regard to nuclear EBIT in 2022, the EBIT contribution on a mark to market basis, if you take current commodity prices, would not even be €150,000,000 of EBIT. And I assume where your question comes from, and with it maybe I may be anticipating already subsequent questions from you or some of your colleagues. We feel from today's point of view very comfortable that for 2023, for example, the shortfall if those €150,000,000 in EBIT fall away for good, that we were through a combination of additional synergies, of additional growth in our networks business backed up by our investments into the regulated asset base, also refinancing benefits and also further efficiencies and growth investments in customer solutions, that this shortfall in earnings due to phasing out of nuclear can be compensated. So we are comfortable in that respect.
The next question is from Deepa Venkateswaran from Bernstein. Your line is now open.
Thank you so much for taking my questions. My two questions. The first one is on the balance sheet. Would you be able to share any commentary that you've already got from the agencies on your plan and whether they see anything changed because of the liquidity because of the COVID crisis? And what might be some other flexibility that you have on the balance sheet?
Should they get more stringent or should liquidity somehow dry up? And also how do they look at pensions in the context? And I think on the second question, I think you've partially answered it, is the impact on retail, the low triple digit million, which was based on your experience in the previous crisis. I was just wondering, is there a reasonable when you've done your stress test, how much worse could it get in your scenario analysis?
Not something for us
to put in the model, but just to be sort of aware, how bad could it get based on
your stress tests? Thank you.
Yes. Deepa, let me tackle the 2 questions. With regard to the second one, I can't give you an answer because we will not be giving you any point guidance. And to say now how worse can it become would be meaning I have the crystal ball, which tells us what the world will look like in 1 or 6 months. And we can't.
Overall, I can only stress that our portfolio is very resilient, that on the network side, any short term earnings reduction will be recovered over the midterm. And in customer solutions, again, we talk about a minor fraction of our business. Overall, yes, 60% is non B2B. That means also relative to the average split of business versus residential, you see ourselves much better positioned. And what will happen to residential demand in this crisis, I think it's impossible to speculate about that.
So this is all I can say in that respect. On balance sheet, you can expect that we have had conversations with rating agencies already. But of course, I can't now anticipate what their judgment will be. I would expect that they will come out with their reviews in due course. What you see and hear from us is that we feel very comfortable with regard to our financial targets, especially for the midterm 2022.
And on that basis, we are very confident to rely upon what we call an organic deleveraging. And this is why we will also stick to our portfolio, about which we are very happy in the current composition.
Okay. And any flexibility should things get more tricky?
Look, flexibilities are always there in terms of further OpEx efficiency. I also said that we do expect simply due to the shortage of labor because a lot of labor for civil works, for example, can't travel right now, so that we will see CapEx, for example, to also be reduced during this year. Why I say, all in all, from a cash flow point of view, it may not even be a negative impact. But how the crisis then will really unfold, we will see. Overall, at this stage, we feel resilient and well positioned to it.
Thank you.
The next question we received is from Wanda Zevinovska from Credit Suisse.
Good afternoon, Wanda Zevinovska, Credit Suisse. One question on your CapEx. Mentioned that you intend to invest €6,600,000,000 over 20 20, 2022 in Germany. Do you see some delay in this year? Are you still comfortable with investing EUR 6,600,000,000?
I mean, what I'm trying to understand, can you spend the CapEx that will be not spent this year in 2021 or 2022? And can you tell us what exactly are you investing in, in your German grid? How big is the renewables connection? And the second question, if I may, very quick one. Can you help me to understand the balance between dividend, leverage and CapEx?
Does the dividend need to be covered by the free cash flow? Thank you very much.
Yes. For on the second question, generally, if you look at our plan, our strategy is to increase our ongoing cash flow generation on a yearly basis during the next 3 years. And in order with that to carry then more or less the amount of debt which we currently have. That said, you should assume that our cash balance for the next 3 years should be roughly neutral. On an ongoing basis, I would not expect us as a heavily regulated portfolio to always run free cash flow neutral, so after having paid the dividend.
I can well imagine that for a sustained period of time, as long as the majority and we are investing 90% into regulated or quasi regulated businesses that you, even for a sustained period of time, could live with negative free cash flows at least to a certain degree. On the first question, CapEx, I'm not sure whether I acoustically got it precisely. So if I give now the wrong answer, please correct me. Overall, with regard to 2020 or 2021 CapEx and even beyond, we are looking at a significant backlog. So even if connection investments now should come down, there are many opportunities then to fill that up.
Johannes has talked about additional almost every week we're getting additional customer requests for connections related to data centers, battery factories and so on and so forth. So I don't see any shortage honestly in investment opportunities. And the only shortage which I would see this year is availability of labor, as I said, as a temporary crisis effect. And otherwise, we are very confident about our investment opportunities regardless now of any renewables connections. Does that meet your question?
Partially, I would say.
So even if you
spend below €2,000,000,000 this year, you can spend €3,000,000,000 next year. Would you be able to give the breakdown of the CapEx? What you are investing in? And how big is the renewables connection instead of the in euro, in €1,000,000? And how much do you invest or how much do you plan to invest?
So renewable connections are roughly €500,000,000 per year. But bear in mind that renewable connection is not only about connecting now a renewable asset, this is also related to reinforcing, for example, the networks. When you connect first a lot of renewables asset, you then have a backlog of reinforcement investments in the neighboring network areas. So these kind of reinforcement investments related to new connections are also included in that number.
The next question we received is from Rob Pulley, Morgan Stanley. Your line is now open.
Hi, good morning and thank you. May I ask firstly for an update on the disposal remedies and apologies if I missed that in the volume of information earlier, But is there any impact on timing or valuations from current market conditions? And secondly, I think it's worth a try. If you could provide an approximate quantification on the near term impact on grids for 2020, I appreciate that over the medium term that there'll be no impact and there should be no impact on DCFs or anything else, but it'd be just interesting to understand the sensitivity in the near term from what's going on. Thank you very much.
First one, we have pretty much concluded all the remedy disposals in for the German business. Very important building block is the Czech ones. We are still in the midst of the process. There are heavy travel restrictions in the Czech Republic implemented by government. And that may lead to some delay in the process because if management meetings cannot be scheduled presently or visits to assets, But it's premature to say how long or meaningful that will be.
So we don't have any new insight there. That's the only thing I can share with you at this point.
That's helpful. Thank you.
With regard to your questions on the near term impact in our power networks, I can only provide you with a very high level sensitivity in the sense that I we took a look at the 2,008, 2009 financial crisis concluding from that pattern. We could expect a low mid double digit €1,000,000 amount up to mid double digit for every 1% reduction in energy demand. Now the caveat I need to give is that it very much depends on the pattern. And this also makes this year very specific. Not all networks network revenues are tied to volumes.
A significant amount is tied to load. We actually have seen already the peak loads up until February, March for quite a lot of customers. And so it very much depends on where that crisis will actually hit the economy and which customers will then actually be affected to what degree, whether it's rather a volume effect or if it's more a load effect, then maybe it wouldn't even have such an impact at all. And this is why I need to give a very strong caveat on that and would stress again, focus on the fact that over the midterm, the impact will be largely neutral.
The next question is from Peter Bisztyga, Bank of America. Your line is now open.
Good afternoon. Can I just check if you can hear me okay, first of all?
Go ahead.
Yes. Okay. Excellent. Thank you. So I was just wondering following on from these recent questions, do you have any initial data on what's happened to as a result of Vanda's lockdowns, for example, in the U.
K. As of this week and people working from home more frequently. And could you see potentially actually a short term benefit to your retail business from basically higher margin B2C volumes offsetting lower margin B2B? Explain any question. Thank you.
I think that is clearly premature. I think we are now experiences in many countries a growing part of working at home. But as we have more than 14,000 people that continue to work in the field and in offices, and it's possible to substitute that all. How the specific development in the U. K.
Is also for us too early and too premature to assess if customer behavior has changed. We are observing that. We are watching that, but I cannot give you any insight as early as it is.
The next question is from James Brand, Deutsche Bank.
I have two questions. The first is both of which is trying to get a bit more granularity around the guidance. The first question is just when you say that the guidance doesn't take into account the economic cycle, I was wondering whether you could just give us a bit more detail in terms of when you struck your assumptions for things like power prices. Obviously, FX is a big impact on you potentially in some areas, inflation. Should we we're trying to work out what the sensitivities might be.
Should we be looking to pull power prices, inflation expectations, FX at the end of last year as a basis? Or is it updated more recently than that is the first question? And then the second question is just trying to get a bit more granularity on things that are changing in 2020 below EBIT in terms of the bridge between EBIT and adjusted net income? Because if I look at your kind of 2020 guidance versus your 2019 pro form a, you're guiding for, at the midpoint, a reduction in adjusted EBIT of about €130,000,000 and you're guiding for an increase in adjusted net income of about CHF 160,000,000 So it's quite a big delta year on year, a very big delta below EBIT on the bridge to net income. And I was wondering whether you could just help us maybe understand that a little bit more.
Thank
you.
Okay. Let me start with, James, with the assumptions. Our guidance is based on our midterm plan, which you can imagine is being compiled towards the end of last year. But then we run a comprehensive update about that in early February. And so that view is literally a pre crisis view, which I think is as most up to date as you can imagine.
But again, any impact now of it was assuming a normal course of the year, but I think as up to date, as you should expect it. With regard to the bottom line effect looking at 2020 going forward, first of all, what we can confirm, and I think that should, on the one side, help your calculations because there is one deviation if you look at 2019. We expect the group effective tax rate to level in again at around 25% next year. On top of that, our forecast for 2020 includes additional benefits from refinancing. But also then let's say the true full year impact of the purchase price allocation, which has then its impact on the depreciation line.
I think overall, you should not now read too much then into the 2019 pro form a, but work from the guidance which we give for 2020 as then being the basis for future years as well.
The next question is
from Ben Airy from UBS. Good afternoon, And thank you for, I think, excellent presentations today, very helpful on lots of topics. I think the 2 questions I wanted to ask were just, firstly, on to pick up on your comments, Johannes, in the presentation about the cost of equity. Do
you know anymore? Operator?
Yes, please go ahead.
Yes, we can't hear Sam anymore.
The participant hung up. I would say we continue with the next questionnaire. Okay. The next question is from Vincent Ayral from JPMorgan. Your line is now open.
Yes. Good morning, everyone. Just a couple of questions here. And the first one, we've been talking a bit about the CapEx and the fact that the human capital is at home and there are some restrictions, therefore, on how much investment can be achieved or project can be finished this year. But you say you got plenty of basically investment opportunity afterwards and catch up.
Do you have any bottlenecks potentially on a human point of view in order to deliver the ramp up you're presenting today. We see 2020 maybe underinvested versus your neutral trajectory. Just want to understand if there is any risk of this basically through so to the following years. So that's question number 1. Question number 2, basically regarding the supply activity.
We have here a risk more than the retail, more on the B2B. However, it's much lower margin in period. So could you give us roughly your EBIT margin for both businesses so we can try to compute something and do it ourselves? Thank you very much.
Well, the first one, we have not many bottlenecks yet in other supply chains. So we are very little dependent, for example, on China or other places. Less than 4% of our goods come from there. But obviously, our RUP growth could therefore be slightly delayed and starting a bit later. If we, for example, couldn't deliver a couple of 100 of 1,000,000 projects that would not translate then early on into a RAP growth.
But those are not things like in the consumer industry where things will not happen. They just will happen later. So this is not a growth that then disappears from the plan. It is just implemented slightly later. And we would try to catch up then in 2021 and make sure that the overall plan still gets implemented.
So that's my answer to the first one. And the second one is over to you.
Yes. Vincent, on the EBIT margins, of course, that varies very much from market to market, segment to segment and so on and so forth. This is why we can only give you now very rough guidance. For B2B generally, we see EBIT margins below 1%. And for B2C, we see margins across markets varying from 3% to 5%.
What I said in my speech that we see on average B2C margins being higher than B2B margins by a factor of 6. And that fits more or less now to the average percentages which I've given you.
Thank you. Just a follow-up on the RAB. To be sure I get it right, the answer right, so try to catch up in 2021, but we're talking about the RAB growth being delayed. So when you had your plan pre COVID, you had the RAB at the end of 2021 2022 in your plan. 2020, we think you have to we understand that there is potentially some delay, but is your rabbit in 2021 2022 unchanged changed when you
come to Vincent, in that respect, from today's point of view, it's impossible to make an assessment of that because that critically depends really on the magnitude, what would happen this year, minor deviations. If you talk about low 3 digit €1,000,000 amounts, they can be recovered in a subsequent year. If we talk about larger amounts of CapEx, there, of course, then would be a shortage that you can't recover that easily than in just the subsequent year or even the 2 subsequent years. As labor markets, as you know, laid out, are in a way that we also want to manage for efficiency, so it doesn't make sense then to just recover if it means that the cost for that harms your efficiency. So it will depend at the end on the magnitude.
Overall, we do not expect from that a significant or material lasting economic impact.
Thank you.
So Sam Eiry is in the line again. We'll try it now again with the question. Sam Eiry, your line is now open.
Hi, everybody. Thank you. Let me have another try with my question. And I'm not going to ask you when you plan to take over the mobile networks here in the U. K, but you can tell that some of us are having high quality issues today.
So sorry for that. The questions I wanted to ask was, firstly, on the cost of equity for the German network. You made some interesting comments about that. And I just wondered if you could talk us through the time line for the next price control period. And my memory is that in 2015, there were already some discussions going on about the previous proposed cut.
And so is it fair to think in 2020, we will start to hear initial proposals from regulators already? And my second question is, well, I suppose the other big development I see recently is in the shareholder register. Our friends and your friends at RW now have a 15% stake, and there are some other large stakes in the register that everybody can see as well. I wondered if you could just comment on your interactions with your new large shareholders and if that has shaped in any way how you think about the strategy going forward or the general discussion that we're having today. So those are my 2 questions and thanks for waiting for me to come back on.
So I will take the cost of equity question first and then Johannes will take the second question. On the cost of equity, according to the normal regulatory schedule, we would expect a decision of the or a proposal of the German regulator in 2021. Before that, of course, you should expect that there are then ongoing consultations and so on and so forth. But an outcome on that should not be expected before
2021. And that is assuming normal activity at offices. So also there, one should not be surprised if some ordinary processes see some delays and governments have different priorities presently, well understood by us. So we use the time to engage heavily based on science, based on investors' feedback, based on our own insights with governments. And I would argue, as I did in my little speech, if you look on risk premiums you presently experience and CDS levels, good arguments to see that cost of equity is definitely not decreasing in the present circumstances.
But it's a long a lengthy process and one should not jump on every news there. These processes have a tendency of swinging around until they materialize. And so interaction with shareholders, it's a different thing. We were preparing the Capital Market Day and thus we were almost in a quiet period and could not fully engage with some shareholders. We will definitely do now in the aftermath.
We only picked up from the Capital Market Day of RWE. They just repeated the news that they are not actively doing much presently, have defined the quality of the stake, which is no news. And from other shareholders, there is no immediate news that we have can share with you. But we definitely we will now engage in our virtual roadshow with all major investors. And let's see what we learn and what they tell the markets.
Obviously, we cannot then share with you what individuals say. But if we get news, we make sure that we're allowed to share, we share with you.
Okay. Very helpful. Thank you very much.
Welcome. And obviously, the power line is better than the mobile line usually, which good, sir. If we would have the same stability in our power lines and mobile shows, then we wouldn't have an Investors Day today.
The next question is from John Musk from Bank of Canada. Your line is now open.
Yes. Hi, guys. I wanted to come back to the dividend over the longer term. You've obviously mentioned that the payout ratio will decline as the earnings grow and the dividend grows by less. And you'll get to the level based on the midpoint of your guidance, of about 60%.
Now as an infrastructure powerhouse, as you call yourselves, if I compare that to other regulated networks in Europe, most of those companies will be paying out 75% or 80%. So is there something structurally in your business that prevents you from paying out more in dividends? Is it just the fact that the leverage may be a bit higher than you would like? Or is there something else in the numbers that we need to consider? And then secondly, and partly linked, can we just go back to Slide 57 on the net debt and the guidance that net debt could go up in 2020?
I just wasn't clear on those bullet points on the right how much of that falls into 2020 and how much of those various points will be over the extended period of 2022?
Yes. John, let me start. On the dividend policy question relative to earnings per share. You have seen us being very explicit about that. And the fact that the growth rates are spreading in the beginning is just a reflection of our organic deleveraging approach.
We are very happy about our portfolio and think it's better to fix that during the next 3 years than not to jump to any short term measure. Once that thing is fixed and we are confident to fix it by 2022, ultimately that means that there's a lot of potential further dividend growth, while we commit to that already from today's point of view also beyond 2022. I think nothing more to say on that. On the economic net debt, what you should factor in for when you look at the economic net debt for this year is that on average, we will see a cash conversion rate of 95%. You should expect the Nord Stream part to be effective already with the Q1 results in 2020.
You should expect the transaction effects to happen in 2020. And you should also expect a large part of integration costs already to be effective in this year. While the net balance with our CapEx and dividend proposal for this year would call for a slight reduction or a slight increase in our economic net debt.
We currently have no further questions on the lines.
All right. So if no further questions are around, I would like to thank you very much for your interest today. And as we pointed out, both Investor Relations as well as the management is available for virtual roadshows, both via video conference and conference calls. So just get in touch to IR, and we are happy to organize everything you need as follow ups. Many thanks.
Thank you very much.
Take care. Stay healthy. Stay healthy. Bye bye.
Bye.