Welcome to the RWE conference call. Markus Krebber, CEO of RWE AG, and Michael Müller, CFO of RWE AG, will inform you about the developments in the first half of fiscal 2023. I will now hand over to Thomas Denny.
Thank you, Elisa. Good afternoon, ladies and gentlemen. Thank you for joining RWE's conference call on the first half of 2023. Our CEO, Markus Krebber, and our CFO, Michael Müller, will guide you through our presentation, after which we'll start our Q&A session. With this, I'll hand over to you, Markus.
Yeah. Thank you, Thomas, also a warm welcome to everyone from my side. We have continued with our strong performance also in 2023. Our earnings in the first 6 months developed well across all core segments, especially driven by strong contributions from the hydro biomass gas segment and from supply and trading. Given the strong H1 results, we have increased our earnings guidance for the full year. We are also on track with our green growth program. In the first 6 months, we recorded a marked green capacity growth of 5.1 GW. This includes the 3 GW of mostly solar capacity in the U.S. that we acquired from Con Edison. Today, we have an additional 7.2 GW of green generation capacity under construction, a record high for RWE. Let me now comment on the recent developments in the offshore wind industry.
We are currently experiencing challenging times. Inflation and supply chain constraints have resulted in rising costs. For the first time in our industry, developers are pulling the plug on secured projects, projects without any or only little lease payments. On the other hand, we saw record high negative bid prices in the recent German offshore auction. We participated in that auction, and we would have loved to win. However, bid prices reached levels where our return expectations would not be met, even in very optimistic scenarios, and so we pulled out. We will not compromise on our return requirements, nor on our stringent risk management approach. At RWE, we are continuing to develop our profitable offshore wind projects.
We have taken the final investment decision for our project Thor, the largest offshore wind farm in Denmark, and we were also successful in securing an attractive CFD for our first Irish project, Dublin Array, with a total capacity of 800 MW s. In addition, we are continuing to develop our offshore project in Germany, the Nordseecluster, in the Netherlands, in Poland, in the U.K. and the U.S., where sea beds have already been awarded to us. CO2 reduction is also a key element in our growing green strategy. We have set ourselves stricter CO2 reduction targets. In May, we submitted CO2 reduction targets in line with the 1.5 degree reduction path for validation to the internationally renowned Science Based Targets initiative. We expect confirmation later this year.
The more ambitious targets cover all corporate activities and all greenhouse gases and go up to 2040. You can expect a full update on our growing green strategy at our Capital Markets Day in November 28th. We are very much looking forward to meeting you all in person in London. Let's now move on to page 5. Our profitable green investments and capacity growth have contributed to our positive earnings developments. In offshore, with the commissioning of 2 large projects in 2022, in onshore solar, with the acquisition of CEB and numerous new projects across Europe and North America, and in hydro biomass gas, with the commissioning of the Biblis plant in Germany and the addition of the Magnum gas power station in the Netherlands. The better-than-expected earnings development is driven by the strong performance of the entire core business.
In particular, the hydro biomass gas division and supply and trading have delivered outstanding performance. Yet more proof of the robustness of our integrated business model. On the one hand, renewables, offshore, as well as onshore wind and solar, and on the other hand, firm and flexible generation capacity, batteries, hydropower or biomass, as well as gas, with a clear path to decarbonization and our strong commercial platform. Earnings of the coal nuclear division, however, have decreased as a result of maintenance costs and less favorable prices. Let's now take a closer look at our earnings in the hydro, biomass, and gas segment and its respective outlook for the coming years. Over the past 18 months, we have seen a significant improvement in the performance in our portfolio of flexible and firm generation assets, and we see a substantially higher earnings level in the coming years as well.
The gross margin of our flexible and firm generation fleet can be broken down into three areas. First, system services include stable and regulated revenues, such as capacity payments in the U.K. and Germany and green certificates for hydro and biomass plants. This revenue stream increases with higher scarcity, as evidenced in the most recent U.K. capacity auctions. Second, in intraday and day-ahead optimization, we earn margins from the short-term dispatch and optimization of our plants in the day-ahead and intraday markets. This is not correlated to the absolute clean spread level. The value here increases with higher intermittency and volatility in the market. Third, margins from running the asset fleet, where we capture the clean spreads and the option value of the assets. Here, the level of earnings is driven by the clean spreads in the forward markets and also volatility.
The significant increase in 2023 versus 2022 was also partly driven by higher margins we locked in, in the prior year. Although we assume normalized price levels in the coming years, we are confident that we will continue to deliver higher EBITDA for longer. For the period 2024-2026, EBITDA is expected to exceed on average EUR 1.5 billion per annum, with even higher contributions in 2024. Let's move on to page seven and an overview of the capacity development in our core business. In the first half of the year, the core generation portfolio grew 5.1 GW. Capacity additions were mainly driven by our strategic acquisition of Con Edison Clean Energy Businesses, with 3 GW and the Magnum Gas Power Plant with 1.4 GW.
We have also commissioned the Biblis asset for the grid operator with 300 MW, and our fifth standard battery project in the U.S. with 117 MW, along with further smaller projects. As we speak, we have 7.2 GW under construction across different technology, a record high for RWE. Most notably, within offshore, we have taken FID for Thor with a capacity of 1 GW off the Danish coast. A large share of capacity growth is currently taking place in the U.S., where we have almost 3.5 GW under construction, including 1 GW of batteries and more than 2 GW of solar. Given all the positive developments, we increased our earnings guidance for 2023.
We have updated group EBITDA guidance to EUR 7.1 billion-EUR 7.7 billion, for adjusted net income, we have increased our guides to EUR 3.3 billion-EUR 3.8 billion. With that, let me hand over to Michael, who will guide you through the financials of H1 in more detail.
Yeah. Thank you, Markus, and also good afternoon from my side. In the first half of 2023, we have performed very well, driven by the strong operational performance of our core business, especially in flexible generation and supply and trading. In offshore wind, adjusted EBITDA increased to EUR 762 million, mainly due to capacity additions of Triton Knoll, 506 MW, and Kaskasi, 342 MW. Higher hedge prices in the offshore segment have partially been offset by lower wind conditions in the past first half of 2023. Onshore wind and solar recorded an EBITDA of EUR 519 billion. The increase is driven by capacity additions, mainly as a result of the acquisition of Con Edison Clean Energy Businesses. Lower realized power prices and poor wind conditions had a negative effect on the results.
Adjusted EBITDA of the hydro biomass and gas business was EUR 1.939 billion. The exceptional result was driven by short-term asset optimization and hedges conducted at attractive price levels. On the back of the strong performance, the supply and trading segment reported an adjusted EBITDA of EUR 799 million. Last year's results were negatively affected by a one-off due to sanctions on coal deliveries from Russia. Overall, the group's adjusted EBITDA stood at EUR 4.5 billion, including the coal and nuclear division. Year-on-year, coal and nuclear is down due to lower realized margins from unhedged positions and higher maintenance costs. On the back of the strong operational performance, adjusted net income amounted to EUR 2.6 billion. Depreciation increased in line with our green growth investments. The year-on-year adjusted financial results were stable due to offsetting interest rate effects.
For adjusted tax, we applied the general tax rate of 20% for the RWE Group. Finally, adjusted minority interest reflects lower earnings contributions from minority shares. The adjusted operating cash flow was EUR 5.5 billion at the end of H1, and reflects the impact from operating activities on net debt. Changes in operating working capital were mainly marked by the decrease of inventories of gas and storage and decrease in trade receivables. Net debt increased substantially due to the significant investment in our green growth. In Q1, we closed the EUR 6.3 billion acquisition of Con Edison Clean Energy Businesses, and we invested a further EUR 2.7 billion net in our green growth program, including the Magnum and JBM Solar acquisitions. Other changes in net financial debt increased by EUR 3.1 billion.
This includes timing effects from hedging and trading activities. Our net position from variation margins for power generation hedging stood at EUR 1.8 billion. This includes net variation margins from the sale of electricity, as well as the purchase of the respective fuels and CO2. As Markus mentioned, we've increased our full year guidance. Adjusted EBITDA for RWE's core business is now expected to be between EUR 6.3 billion-EUR 6.9 billion. The range for the group is now EUR 7.1 billion-EUR 7.7 billion. This is mainly driven by the strong performance of our Hydro, Biomass and Gas Segment, where we have increased our guidance from EUR 2.6 billion-EUR 3 billion, and our Supply and Trading Segment. Here, we are confident that we'll achieve a result significantly above EUR 600 million.
Adjusted depreciation is expected to be EUR 2.1 billion, based on lower depreciations in the coal and nuclear segment. Adjusted EBIT is now assumed to be between EUR 5 billion and EUR 5.6 billion, with adjusted net income ranging from EUR 3.3 billion-EUR 3.8 billion. The dividend target remains EUR 1 per share for this year. With that, let me hand back to Thomas.
Thank you, Michael. We now start the Q&A session. Operator, please kick it off.
As a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. To withdraw your question, please press star two. We'll take now our first question from Alberto Gandolfi from Goldman Sachs. You can go ahead now, your line is open. Thank you.
Thank you, everyone, Thomas, Markus, and Michael, for taking my two questions and sticking to the rule. The first question is, I mean, first, a thank you for providing visibility and guidance on the value and the outlook for flexible generation. I, I wanted to go back to, to something that is happening here. I mean, versus your 2021 CMD, it seems to me that whatever is not wind or solar, could potentially deliver EUR 7 billion-EUR 8 billion incremental EBITDA, versus what you expected at the 2021 CMD. And considering that buying back your stock today would potentially imply an IRR, double-digit IRR, way bigger than what you would get by investing organically, why not using a small portion of your releveraging potential to return some capital to shareholders and support the stock in the near term?
Because it's not being really responding to all of the great news we have seen on earnings. The second question is: you have 7 GWs under construction right now. Would you be able to comment on the recent development in the PPAs? Would you be able to tell us what is the IRR just on the 7 GWs under construction? Where do you see the IRR of the watt on those 7 GWs? Or maybe you can help us understand an EBITDA over CapEx ratio, so we can understand, A, how much is coming, and B, the profitability. If you can't give IRR, maybe EBITDA over CapEx and CapEx, that would be sufficient for us to try and gauge if these investments are not very profitable, profitable, or extremely profitable. Thank you so much for your patience.
Yeah. Alberto, let, let me take the question. I mean, let's first talk about the share buybacks. I mean, as you can imagine, that has been also a discussion we had internally in the board. I mean, the way how we look at it, in the end, you can either take the short-term perspective, which you lined out, is assuming the low or the undervaluation of our share, investing into our share, some portions could be an attractive business case. The other direction to take is taking more the medium and long-term perspective, looking at our portfolio, looking at our pipeline, and also looking at the effectiveness and the returns we expect from our pipeline.
I mean, if you look at the second one, we do see that we have an attractive pipeline that we can spend the excessive cash on, and we also see attractive returns on that pipeline. When we had the discussion, we clearly took the decision that we don't want to engage into share buybacks, but really use the additional headroom to accelerate our growth. We strongly believe that there definitely is value in the growth, and that this also will ultimately then contribute to increased share price. For that reason, I mean, you know, we have the Capital Markets Day in November, and for sure we'll use the capital markets to update you on the accelerated growth plan. On your second question, I mean, I think there are different elements in it.
I think the first one is around PPA markets. We have mentioned that in previous calls. PPA markets have improved, so we see now attractive prices in Germany and also in Europe. I mean, we have communicated that, for example, for our German offshore assets, that would fall into the compression model. We use that to also offload some of the income into PPAs at attractive prices, and we'll continue to leverage that. The second question you kind of raised was on the 7 GWs, what is the profitability? I mean, you know, we don't communicate profitabilities on individual projects, but I can reassure you that when we took the investment decisions on the 7 GWs. We obviously applied very strict investment criteria, so therefore all those projects are profitable and clearly meet our return expectations.
Now, you know, our return expectations are in the range of 100 to 300 basis points above WACC. WACC clearly has gone up lately, that's also reflected. I have to ask you to wait until November. I mean, in November, we'll give you an update on the RRRs we are expecting. We'll also give you an update on earnings, and you'll also see how those projects will translate and also the additional projects translate into earnings.
Thank you.
Thank you, Adam. Next question, please.
We'll take now our next question from Peter, from Bank of America. Your line is open now. Thank you.
Hi. Hi, it's Peter here. Thank you for taking my questions. 2 from me, please. Firstly, thank you for that guidance on the hydro biomass gas division. I think that's very useful sort of first step in terms of helping people understand the earnings power of that business. I'm just wondering, in terms of the, you know, the, the, the, the biggest chunk of it, which you sort of describe, quite simply, as running the, the, the asset fleet, can you give us a little bit of insight into how you go about sort of forecasting that?
For example, how, how much is already maybe locked in through hedging for 2024, and what sort of parameters, market parameters, are you sort of thinking about, you know, I guess just in broad terms, you know, when you're looking out to 2025 and 2026? That'd be my first question. And then secondly, you know, I heard what you, you were sort of saying about the decision to, to accelerate growth. I'm just wondering, you know, how do you feel about accelerating growth in, in offshore wind, given that that industry is facing some significant challenges at, at, at the moment?
maybe linked to that question, could you also address, you know, do you foresee any problem to your upcoming projects or indeed future plans from the delays that Siemens Gamesa is having ramping up its 11 and 14 MW turbine production? Thank you very much.
Yeah, Peter, I take the first one on the hydro biomass gas division. I mean, obviously, we won't go now into more details like hedge quarter and the WACC price assumptions. I mean, in general, what you can assume is that how we model that is we have our kind of forecasted models on expected spreads, but it's also what we expect to realize as time value on those assets. We obviously also compare that with historic developments, so therefore, we are very confident with the numbers we have put forward. How much of that is already hedged? I mean, as you know, most of the assets are in the U.K. and in the Netherlands, where liquidity in markets is fairly poor, so therefore, hedging typically only happens, say, a year ahead.
Therefore, a large chunk of that, especially in later years, isn't hedged yet. As I said, we're confident with the numbers we have put forward.
Good, Peter, I continue with offshore. First of all, we don't see any imminent problems with our suppliers on the projects where we have already signed turbine supply agreements. We are in constant dialogue, but my expectation is currently we don't see any issues on our projects. Also with our pipeline, we are actually pretty happy. Other than some of our peers, we do not have any problems with our projects, which are either under construction or, or where FID has been taken. Also, when it comes especially to the profitability, let's maybe briefly go through our portfolio.
We have two projects under construction, so the moment we have taken FID, we know profitability levels, that is, especially the one in the U.K., Sofia, with a good CFD, and CapEx long-term locked in. The Danish project, Thor, where we plan to sell the power via PPAs, and the PPA market here is very deep and long enough. We have projects under development, also two CFD assets, one in Poland, one in Ireland, with both very good profitabilities. We have those projects where we have not paid any or only very, very little lease payments.
Our Nordseecluster and the Hollandse Kust West, which is a market integration project, where the plan is also to sell the power via PPAs. We have our U.K. Round Four and extension projects. Of course, no, no CFD secured yet. The U.S. projects also, we are in the auction or in the RFP for offtake, but no decision taken yet. When I look at the existing portfolio, it's big. It's much bigger than what we think we could invest in offshore when we presented our target at the last Capital Markets Day, we are already far beyond that. Profitability looks good. Looking into the future, I mean, that is, of course, a crystal ball question. I mean, I don't know.
It depends on what our competitors will do. I mean, if we see behaviors like in the German auction, probably our, our pipeline will dry out, but I don't expect it. I expect really a normalization. What we have seen in the German auction, which is the equivalent of 25 MW , EUR 25 per MW hour, for the full lifetime of the project being the lease payment alone, I think that is not sustainable. We expect a clear normalization, and then we can also sustain the time where we probably have a year or so, no new offshore projects added to the pipeline.
Our entire investment universe, including, especially, solar battery, onshore wind project in the U.S., here in Europe, and now also additional investments into in flexible generation, is, is so broad, that we will not have any problems to spend all the headroom we have at good projects.
Okay. Thanks very much both of you, detailed answers.
Thank you, Peter. Next question, please.
We'll take now our next question from Deepa Venkateswaran from Bernstein. You can go ahead now, your line is open. Thank you.
Thank you. That's Deepa Venkateswaran from Bernstein. I have two questions. First, on our segment. If I go back to your 2021 CMD, for 2027, the implied guidance was around EUR 900 million. Now, basically, I know it's not exactly the same year, but purely it's well above EUR 1.5 billion, say by 2026. Just wonder, if you can kind of say, you know, what has changed? Is it that now you have more conviction on the tightness in the market, the volatility because of intermittency? Or, or what's given you even more confidence? Then, that's my first question. The second one on Thor, which is obviously your latest project to take FID under construction. I mean, you've not secured the PPAs yet for it.
I was just wondering what you can say to give us a bit more confidence that actually, the project will be able to meet your hurdle rates of 100-300 basis over WACC, given that we don't have visibility on the PPA yet, but you've started construction. Thank you.
I, I can start with the first one, Deepa, but it was difficult to understand you. I don't know whether Thomas or Michael got the second question. Thomas is nodding, all good. We start with the first one. On hydro biomass gas, what has changed in the last, let's say, 36 months, or, yeah, when we, when we prepared the last Capital Markets Day and today? I mean sounds maybe a bit odd, but we always expected market tightening, and it probably came a bit earlier than we expected it. What is driving the higher returns here are actually 2 things. 1 is scarcity in the market, we see much tighter power markets. That is reflected in much higher capacity payments in the auctions.
Also now other countries introducing capacity markets, Germany will probably also have to do it, at least for new ones. The second one is volatility. Volatility is driven by intermittency from renewables, but also how how steep the merit order is. That has, of course, also changed significantly with significant higher carbon prices, and also some supply disruption here and there. We are very confident. When you look at the chart on page 6, what we call system services can be predicted very good. That year goes even further up in 2027 because we see much higher capacity payments in the U.K., the last auction.
On the volatility side, which is in the end, a function of intermittent renewables, and the steepest of the merit order, it's also very clear how that looks like. The probably most difficult to predict part is the spread part. Please keep in mind that these assets do not run base load. It is not the base load, for example, clean spark spread you need to look at, because these assets run in times where renewables are not sufficient to meet market demand. It's in the end about the captured spread. Here we have the beauty of the portfolio diversification, because if you have a good renewables year, we make the money on the renewable side.
If we don't have a good renewables year, we have higher capture prices for these flexible assets, because they are needed to compensate for the missing renewable power. That gives us a high certainty about the overall guidance we give, because we expect a normalized year. If we don't make it on the renewable side, we make it here or vice versa. If you combine renewables guidance with this one here, we have the very high confidence of these significant higher earnings.
Deepa, the second question we understand is on the project Thor. Given that the PPA is still open, how confident are we on the returns? I mean, let me take the following perspective. I mean, first of all, the project seems for us attractive. That's why we have taken the decision. I mean, we have the general idea to reduce the quarter of merchant income in our projects, and that's why we want to move, if possible, merchant offtakes into PPA if the timing is right. That is something we will also follow up on Thor. To be clear, the profitability of the project is not depending on concluding a PPA now, but if there's an attractive PPA out there, that also obviously would match into our strategy, and we would go for it.
Does that answer your question, Deepa Venkateswaran?
Yeah. Thank you.
Great. Thank you, Deepa. Maybe one additional comment on what Markus just said. For those who are interested to understand more on the development of the capacity payments, you may have seen that today we also published our latest version of the fact book. In the fact book on page 70, you can actually see that we have capacity payments we have secured in the meantime. Next question, please.
We'll take our next question from Vincent Ayral from JP Morgan. Your line is open now. Thank you.
Yes, thank you very much for taking my question. Good afternoon, everyone. I will, we treated quite a few topics here, so I'll come back to, I would say, medium-term topics we've been looking at in the past to take some perspective. The first one is the Coal Commission. No question been asked this time around. The Greens in the government, since we've been there, we had a material increase in CO2 emissions, so I believe that the coalition could be keen to restart discussions on the Coal Commission fairly soon, as soon as they feel secured regarding the energy crisis. What, what is your view regarding the energy crisis of the situation?
We saw some disruption on LNG or potential disruption with strikes in, in Australia, reviving a bit the gas market right now. We're still far from the winter. We don't know the weather, whether it be cold or not. What's your take there in terms of the risk reward into the winter regarding supply/demand situation and commodity prices? If you're comfortable with that, could we indeed start to get discussions on the Coal Commission restarting soon? I think that's the first question. The second is regarding the timing of the CMD. We've heard that this is the package, visibility on it will come, like, probably by early 2024. There are plenty of things to iron out, like investment frameworks.
Germany, notably, needs some support for CCGT new build. I think you made a comment regarding capacity payments. Yet you, you will do CMD before that. Do you expect to get visibility on the investment framework on the generation side of the energy system by then? Or what could we expect regarding German investment at the CMD more specifically? Thank you.
Yeah, well, thanks for the question. Let me start with the easier one, the second one. Can't expect... I mean, you probably have seen that the German government has pre-aligned on a potential auction design for H2-ready CCGT with the European Commission, because it is always a state aid approval topic, because it's a capacity support. There is basic alignment. What we expect now, currently, the German government is working on the details of this auction framework for H2-ready gas plants. That will be published after the summer break, we can expect it early September, and that is when the consultation process started. By the time of our CMD, the consultation process is probably through.
We are a relevant part of that. Before we come out with CMD numbers and investment plans, we have very high visibility about the framework, and this gives us enough confidence to make an assessment how much investment we are willing to do as part of our overall portfolio mix. On the Coal Commission, it is now pure speculation. I mean, you know that it's still on the agenda. It's clearly agreed with the German government as part of the contract to bring coal exit forward to early 2030. It will be addressed one day. I also said that I don't wanna, on these politically sensitive topics, don't wanna give a public state of the union update in every call.
You will only hear from us, in case we have relevant news, but no intermediate, updates.
Okay, thank you very much. In terms of the winter, then, what's your view of the?
I'm sorry.
winter then?
I mean
In a direct way.
Yeah, I, I, I forgot that question. Sorry. We all have observed the nervousness of the gas market, especially yesterday, and I think that is probably a good point to discuss it. Overall, we shouldn't be too concerned about the next winter. Gas storages across Europe are very good, very well filled. We don't have the problem with the generation capacity in France that we had last time, and there are no issues around pipeline supplies. We also all know that you need not only the gas in storage, you also need a constant gas flow. Then you have the big question mark: How does the demand side look like?
In case we get a very cold winter, some problems on the generation side, only a small hiccup, might result into a very severe situation. This time it was potentially missing bits and pieces in the global energy market. It could be an outage of a pipeline supply, it could be anything. I think overall, base case is we should get through the winter okay-ish and well, if there is an issue, there is no...... headroom, there is no buffer in the system. The moment something goes wrong, it can go wrong very significantly, and I think that is, that is how the situation looks like. What is missing is we more import capacity for LNG, especially in Germany. We have not built the projects in Germany which were originally planned.
Probably also some more, some minor upgrades are missing to have a better west-east flow of gas. Yeah, hopefully we are there when we speak in 1 year's time.
Thank you very much.
Thank you. Our next question, please.
Yeah, we'll take now the next question from Wanda Serwinowska from Credit Suisse. Your line is open now. Thank you.
Hi, good afternoon, Wanda Serwinowska, Credit Suisse. Two questions from me. The first one is on the U.K., on the Ofgem consultation on balancing mechanism reform. I mean, is it relevant for you guys, or is there any potential impact, given the profitability of the U.K. CCGT fleet? The second question is: can you please tell us if, have you seen any improvement on the permitting in Europe? Is there an improvement? Because, I mean, there's a bit of push from, from all the politicians, but have you seen any tangible signs that it's getting where it should be? Thanks.
I'll start with the, with the last question, then Thomas take the first one. On permitting, we clearly see a significant improvement. I would probably even turn it around and say, nobody, be it a politician, be it somebody in bureaucracies or even working on lawsuits, wanna be responsible for delaying renewable investments. The issue is currently moving from the permitting side to the grid connection side. The current problem is that the major delays are happening because connection to the grid is delayed here and there, and that also covers all European, all European countries. Permitting is going better. We also see definitely an acceleration of build-outs, but now, the discussion starts moving to the next bottleneck, which is grid.
On, referring to the inquiry on, on generators in the, in the short-term market?
Yeah, exactly. When basically, Ofgem was saying that some generators got 6,000 GBP per MW hour. Ofgem is looking at it.
Yeah, I think they also named the two operators who probably misbehaved. We were not among that. I think what we do is, in case we are needed, for immediate dispatch decisions, that we apply reasonable pricing. Also, any potential change in the market rules, we think would not affect us.
Would you be able to basically disclose how much money you made on, on balancing as a?
No.
Okay.
No.
Okay, thank you.
Thank you, Wanda. Next question, please.
We'll take our next question from Harry Wyburd from Exane. Your line is open now. Thank you.
Hi, everyone. Thanks very much, appreciate we've covered a lot of ground already, so I'll try and make these quick. First on, on offshore, I just wanted to get your, your views on the U.S. versus Europe. In Europe, we've had a few auctions, like, like in Ireland, clearing at sort of okay headline prices. In the U.S., we've had one auction canceled and one delayed, because it seems like the states are, are balking at the prices that are being offered. Obviously, offshore wind is more competitive relative to fossil fuel prices in Europe than it is in the U.S. I wonder whether you see that as a potentially emerging trend, that it might be easier for offshore in Europe, and is that something that would play into your capital allocation decisions?
The second one, on flexible generation and your new guidance, what are your assumptions for competition here? I guess we kind of usually assume that these assets are sort of as they are, and there's relatively limited scope to add new ones in the short term. If you look at, say, Centrica, for instance, it's come back to life and started investing in small peakers and batteries. I just wondered whether there's a risk that actually battery capacity and maybe even some peaking capacity might get built a bit quicker than people expect, and that might dilute some of the margins that you're assuming in your, in your guidance in the longer run. Thank you.
Yeah, Harry, thanks for the question. On offshore, you are absolutely right. I think, in terms of what it currently costs to build offshore wind, let's exclude crazy lease payments, just the SOW from technology, and compare that to the existing power price level, is competitive in Europe. It is challenging in the U.S. In the U.S., in the end, depends on the willingness to pay from the offtakers. I mean, NYSERDA, the New York regulator, has now come back the second time and asked for a revised bid. The question is whether the U.S. is willing to pay for offshore wind, given where the costs are. Last comment on that, I think also in terms of learning curve, the U.S. is not where Europe currently is.
The LCOE, the same technology, everything being the same, I would say probably 20% higher in the U. S. than they are in Europe, given that you haven't had the learning curve on, on, on, on anything there. In the end, it's not a question for us, it depends on what is the willingness to pay. If you look at the East Coast, if you want to decarbonize, I think especially the U.S. East Coast has no way around offshore wind. It's a question how fast you actually invest in the technology. I mean, we have, as I said before, enough flexibility to channel our investment where we think they are best.
Let's see what the outcome of the U.S. is, but I'm not- I'm definitely not pessimistic about offshore U.S. Flexible generation, yes, I mean, the moment you see significant investments in flexible firm generation capacity, of course, the current high earnings level, which is driven by scarcity and volatility, might come down over time, but this will not happen within 2, 3, 4 years. It will probably take half a d- half a decade of investments, and we ensure that we also invest there. Over time, with our investments, we can probably keep the earnings level, because what we lose on the existing fleet, you gain on the new investments.
Got it. That's very clear. Thank you.
Thank you, Harry. Next question for you.
We'll take our next question from Ahmed Farman from Jefferies. Your line is open now. Thank you.
Yes, hi. Thank you for taking my question. Actually, I, I just, actually two follow-up questions. I think, Michael Müller, you made a comment earlier about grid, grid issues, or delays because of availability of grid issue. Could you please expand on that? I mean, I'm just trying to understand what are the underlying causes there. Is it sort of lack of physical infrastructure, or is there more technical reasons associated with the intermittency and grid's ability to incorporate the intermittent form of renewable generation at the required pace? That's my first question. My second question is actually on, on, on slide 6, specifically on, on the 2024 chart that you sort of guided that you saw.
Running the assets data, I take it from your previous comment that even for 2024, most of that is sort of unhedged or not really sort of contracted at this stage. Could you then maybe talk just qualitatively a little bit about the sensitivities as to what can make that green bar much higher or lower? How does this sort of earnings probably accrue within the year? Is it mostly sort of a winter sort of element here, sort of quite high seasonality? Thank you.
Ahmed, thanks for the questions. I mean, on grid, let's start with the big, big items, it's offshore. Of course, you have constant discussion about offshore grid connection. The offshore wind farms in Germany, we have now an auction design where your grid connection is promised, and you get compensated if it's not there. Let's move to the U.K., where currently there's an intensive discussion, how fast our UK Round 4 projects and those of others can be connected to the grid. That is simply the question, when is that being built?
Probably not so much a problem of the capital, it's more the question of permitting consultation processes, and we all know how difficult it is to get a permit for a grid landfall in the U.K. The same problem is for all onshore stuff, and onshore, I mean, wind as well as PV, because with the grid operator who operates that grid, and that's typically not the TSO, you need to apply for a grid connection date. Then sometimes you have it, but then they have delays in their investment, in their physical investment, and they push it down, and you have no means to do something against it.
We currently see that, I would say, in almost all European countries, that that becomes the current bottleneck. It's not, on, on onshore and PV, it's not the equipment, it's not the bottleneck, and it's not the permitting anymore. It is, it is grid. On page 6, 2024 is, of course, higher hedged than 2025 and 2026, but let me explain it again, why we are confident. What could, what could drive it significantly down? One is, surprisingly more supply, and that you can rule it out. There will not, by surprise, be higher supply on the power side in 2024, 2025. The other, which could drive it significantly down, is significant lower demand. Yeah, because that would also especially compress the spread of, of those assets which are needed, to balance the market.
We have factored in the normal demand development, and I think currently, more or less demand expectation is more on the low end, because we see a downturn in the economy. The third key driver could be if we see a very, very favorable renewable year, so significant production from wind and solar, because then you need less from that. As I said before, then we would benefit on our other segments. That is why when you put both guidances together, we are very confident of achieving that.
Thank you. Very clear.
Thank you, Ahmed.
Sorry.
No, go ahead.
Yeah, we'll take our next question from Robert Pulleyn from Morgan Stanley. Your line is open now. Thank you.
Thank you. I have one question building on a, on a, on a prior one, please. As we consider these RWE bids into the U.S., New York, and New Jersey capacity auctions.
and your prior comment, Markus, that it depends on offtakers' willingness to sign at these current prices. Do you see a risk that offtakers' just delay awards like they did in Rhode Island, and ask developers to come back in 12, 18 months' time, when costs maybe have come down? Secondly, and related, do you expect current costs to trend lower again as these levels in, in offshore wind? Thank you.
Good question, Robert. Would you recommend the regulator? I struggle to give a clear recommendation. Of course, that could happen. I mean, you cannot rule it out, but I think the Rhode Island one was a special one because there was no competition, so you had no reference prices. I mean, if everybody is in the ballpark, you probably seem a bit being a bit more comfortable. Do I see clear trends that equipment costs for offshore and also installation of offshore will come down in the next years? Clearly, no. If you look at the projects which are in the pipelines, and the build-out targets of the Western world, and then the manufacturing capacity and, and, and everything you need to do that, there is still a very tight market supply.
I don't expect it. Also, if you look at the recent results of the Western suppliers, they are definitely not in a state where they could easily reduce prices in the next, in the next 2, 3, 4 years. If you want... It's more the question whether you want to decarbonize. If you want to decarbonize, it comes at these costs, and don't expect these costs to come down.
Fair enough. Thank you.
Next question.
We'll take our next question from Olly Jeffery, from Deutsche Bank. Your line is open now. Thank you.
Very much, thank you for the B, C, and D on hydro biomass gas today. A few questions. Firstly, can we consider the EUR 1.5 billion average that you've given, can we consider that as an average price to extend that for the rest of the decade? Do you have visibility on that far out? Of that EUR 1.5 billion, I mean, I presume, you know, the majority comes from the U.K., but are you able to give an approximate split for how much comes from the U.K. in total? Just looking at the lignite business, I mean, the guidance that you gave the lignite business, EUR 800 million-EUR 1.2 billion, but implied coming in at the lower end of that guide.
Wonder, with your visibility on, lignite spreads for next year, are you seeing spreads at a similar level for next year, within the lignite business? Thank you very much.
Olly, let me take the first one, and Michael answer the second one. We have given 3-year guidance or 4-year guidance. Please don't force us to try to give you longer term guidance. We think about how confident we are, and then we give it at the CMD. Please keep in mind that we should not expect that scarcity stays where it is. I mean, as we discussed, also the gas market, and that also feeds into the power market. I expect long term, I mean, now talking about the next decade, that volatility will come down and also scarcity comes down, because, I mean, these high price levels now also incentivize, of course, investment in flexible generation capacity.
Now we need to figure out exactly how much of our capital we would like to invest in that part of the business to give you a long-term guidance, so including new earnings from new investments for that segment until 2030. We do not give a split via country, but also the continent, so the Dutch and German fleet contributes significantly to the earnings. It's not the U.K. only.
Yeah, on the, on the lignite, spread, I mean, what you have seen in spot market is clearly that, that spreads has come come down. Therefore, on the unhedged positions, we're not, we're, we're getting lower returns than, than, there might have been earlier. I think the, the key driver for, for the lignite fleet is really what we have already hedged and at which, volumes we have hedged. I mean, on lignite, you know, that this is the segment where we clearly hedge out for longer. Therefore, we also see going forward, at least attractive earnings in, in the next years to come, in the front years.
Thank you, Olly.
Thank you. We'll take our next question from Piotr Dzieciolowski from Citi. Your line is open now. Thank you.
Hi, yes, good afternoon, everybody. Two questions, please. Firstly, I wanted to ask you about the German transmission sector. Do you have a view what is likely to happen? It seems that some of the operators are struggling on the balance sheet to finance required development. Do you think the consolidation is likely, and how do you see this playing out? Also, given your stake num, what would you want to do with it? The second question I wanted to ask you on the German bidding price. Does this change your view on the possible PPA levels, and how much these industrial players are willing to lock in, and for how long?
Because you can look at it as a half full or half empty situation, and you are, you, you are actually developing some of the assets which you are about to lock in via the PPAs.
Yeah. Thank you, Piotr. On the TSO, on the, on the transmission side, I expect dynamics in the next coming quarters, but the trigger for that is, and that is outstanding, an agreement between the German and Dutch government on the German part of TenneT. The moment the German government has a solution for the German TenneT part, I would expect that we see some, yeah, discussions and dynamics. I don't know where the government stands, whether they want to consolidate into one tier or want to have stakes in everything. I expect that you're gonna probably see after the TenneT solution, some, some rumors. So far, no discussions have taken place. We are expecting that for later this year or early next year.
On the offshore side, yes, that's an interesting question. I have, I have two perspectives. One is that of the industry. We have a very good understanding how much the industry is willing to pay. I would expect if you try to pass through all the costs, including the, the negative bid component, you will probably struggle to find long-term PPA offtakers. What is positive for us is, that these volumes, these 7 GW, will now not show off in the PPA market. That, of course, might give us good opportunities to sell from our projects. I mean, you, Michael, discussed 2 already. We have the Dutch one, and we have the German ones, to lock in good prices for longer.
Thanks. Thank you very much. Thank you, Carter. Next, Frankie.
We'll take our next question from Louis Boujard, from ODDO BHF. Your line is open now, thank you.
Yes, good morning. Thank you for taking my question. Maybe, a follow-up still on HBG. On the slide number 6, you mentioned that you don't want to provide any view on the hedging for 2024, 2025, 2026 at this point in time, which is understandable. You mentioned as well that you base your assumption on normalized pricing. My question would be, what is your view regarding normalized pricing? Are we talking about levels that would converge toward historic prices that we had from, for instance, back in 2021? Are we talking about current prices, which are supposed to be normalizing for the period 2024-2026?
Also, as a follow-up on this first one, if HBG is expected to do EUR 1.5 billion of EBITDA on average per year, does that mean then as well, that we should forecast supply and trading to be maybe a bit better than what it used to be in the past, on a recurring basis? My second question would be with regards to the German offshore lease payment that you mentioned. You said that it was supposed to be a conjunctural situation, or at least that you don't expect it to repeat in the future in the offshore lease.
Why do you think that this was just an exceptional factor, and you will have further option going forward, where you would be able to bid at a reasonable level in terms of returns? Thank you very much.
Okay. Let's start with page six again. Normalized prices are current market prices. I mean, the markets are liquid, and you see that the prices have more or less already normalized when you look at clean spark spreads in 2025 and 2026. Let me say again, this is not the big driver. Let's talk about hedging again. If you sit on a nuclear position or a lignite position, which is far in the money, far, far, far, far, far in the money, you hedge it. These assets most of them are not far in the money. I give you now an example. You have a current price constellation, where the, where the capacity is, let's say, 20% in the money, and you hedge it.
Then you have price movement that moves it out of the money. You unwind the hedges and make profits. If you look at the hedge ratio at that point in time, it is zero, but you have already locked in profits. It's very difficult to translate hedge ratios into secured profitability. That doesn't make sense for these flexible assets. It's more the question is, how confident are you with what you have already done historically to give guidance? We now, for the first time, feel very confident to give guidance for the next 3.5 years in this segment. But for the moment, we have to leave it here. There's no direct correlation between hydro biomass gas and supply and trading.
The environment is the same, but of course, the traders can also be on the wrong side of history. But generally, the environment to make good returns in trading is currently, and we also expect that for the next, for the near future, better than normal. Yeah? But it doesn't mean that you also see higher, higher earnings here. That first need the good performance of the guys. Sorry, and the offshore question... What, what was it again?
Yes, the question was.
Go ahead.
No, go ahead, Thomas, please.
I, I got it again. Yes, why are we-- I mean, you can never be confident what your competitors are doing, right? I expect that everybody will realize what has been done and where real prices are. I don't understand the story, to be honest, that you need to power internally. I mean, if I today willing to sell the power, at the same guys for lower prices than it costs them to build the assets, why building the assets? That is, of course, now a discussion the entire industry having, where do we see costs, where are actually offtake prices, and so on and so forth. That, I think, will, will, will normalize over time. I mean, I was actually surprised to see these high prices because I thought-...
Before the German auction, we have seen the normalization with LCOEs around EUR 80, EUR 80 in Ireland, inflation-linked, a new base. We have seen these auctions with very low lease payments. This came really as a surprise. Hopefully it is a one-time outlier, and then we go back to normal again. If not, I mean, if people have a totally different view about the future than the market has, then it might continue. My expectation is also that is why I would never go, or we would never go to these bid levels.
If it continues another round, I expect action by the government, because then they say that the PPA market is drying out, and then we probably change the rules and go to CFDs, which will be then handed through to the industry, that they can benefit from the real cost of the technology. That is of course, also a risk, if you have signed very high lease payments, if the auction design is then changed. Maybe let me take also the opportunity to give you an update about the recent news, because the German regulator has just announced where the 2nd German offshore auction to whom it was awarded. You still know about these sites where we have step-in rights.
Interestingly, the 900 MW , where we have step-in rights, were directly awarded to us. That can only be the case because we bid 0 lease. We have now 900 additional MW without any lease payment, on top to the 600 we already have. We have 1.6 GW in Germany without any lease payments. We have also been awarded the site where Vattenfall has a step-in right, but now we have to wait what Vattenfall does with that step-in right.
Okay. Thank you for the update. Thank you. Next question, please.
We'll take our next question from Anna Webb, from UBS. Your line is open now. Thank you.
Hi. Thank you for taking my question. You've clearly had a lot of success with the hydro biomass gas division, and it seems there is extra value for the portfolio in markets where you have renewables and conventional assets together. We noticed the Magnum acquisition you made in the Netherlands recently, seems to have been very well timed. If we look at your U.S. assets, you don't have the same balanced portfolio of renewable and conventional flexible assets. My question is: Would you like to have more conventional assets in the U.S.? Would you be happy to acquire or build new conventional plants over there? Would you consider new gas in the U.S., too? Thank you.
I think everybody agrees that that is a very good question. Let me, let me slightly rephrase it, because we don't like the discussion about conventional, which, I mean, is for us, a synonym of CO2 or fossil, and renewables. Whatever we do, and that, that was also the case for the Magnum plant, it needs to be, it needs to have a clear decarbonization path. In the end, we want to sit on a position where we have renewables, wind and sun, and we have firm and flexible generation, which is also green, so green baseload. That is the position we want to be in. Whether and when, and how we're gonna do that, for the U.S. market, or whether we do it at all, is a strategic discussion we are having.
We will update you the moment we have come to a conclusion on that strategic debate.
Thank you, Anna. Next question, please.
I take now our last question from Martin Tessier from Stifel. Your line is open now. Thank you.
Yes, good afternoon. Thank you very much for the presentation. 2 questions from me. The first one on Mitte. Sorry. Especially Q2, where the volumes dropped from 12,000 hours to 7,000 hours, Q2 this year. You mentioned some maintenance issues, but also unfavorable market conditions. Could you please provide us with more clarity on the specific reasons for the decline in production, which is really massive? More specifically, is it possible to get a breakdown of the lower volumes, i.e., what percentage of decline is due to maintenance, and what percentage of decline is related to unfavorable market conditions?
Maybe as a small follow-up on this one, you recorded an impairment of EUR 1.1 billion in Q2 because of lower electricity prices. Given current forwards, what's your view on potential further impairments in H2 in Mitte? That's my first question. Second question on cost inflation and CapEx allocation. Definitely we see cost deflation in solar PV versus a pursuing cost inflation in offshore and onshore wind. Very simple question, in the medium term, do you expect a shift of CapEx from wind to solar PV? Thank you.
I think I take the first one on, on lignite. First on, on Q2, what happened in Q2, we simply had planned for revisions on units. Given that the prices are low, typically in Q1, that's the time where you go for planned maintenance, and that also caused the lower availability of our fleet. Nothing extraordinary, it was all planned. Secondly, we mentioned that, especially those units that were brought back, the 600 and 300 MW units, we didn't hedge-
... given that at the time when they were brought back, price levels were still significantly high, and we wanted to also mitigate the risk that the availability of those older units that had been brought back was not as high. Therefore, those positions were not hedged. Now with all prices coming down, obviously there were also a few hours, where they were not in the money and therefore not operating. That's the reason for the lower Q1 results. The impairment on, on lignite, I mean, maybe some more information. I mean, first of all, it, we, it brings back the, it reversed what we did at the, at year-end. This is for pure accounting purposes, because what happens if prices come down, as I mentioned, we have, hedged lignite, far longer.
The hedges that are reported in the OCI get positive, and since the impairment test is done purely on spot prices, then the asset value goes down. That's why, for accounting purpose, we had to impair the lignite net, given that we have hedged quite a portion of those assets in the next years to come. It doesn't have a material impact. Last, economically, it doesn't have a material impact. Last comment, about further impairments, they are now fully impaired, so the remainder is just the value of the land, so there's no further impairment possible on that, on the lignite fleet.
Yeah, and your, Martin, your last question on, on capital allocation and mix. Let me put it that way. You can expect, of course, higher, higher CapEx, higher growth, compared to the old CMD. From the additional one, a much higher proportion goes to solar than wind. All details in November.
Okay. Very clear. Thank you.
Thank you, Martin. Thank you, everyone, for dialing into the call today. This concludes today's call. Yes, as Markus just said, you know, we'll provide you, of course, with much more details on our growth plan at our Capital Markets Day in London at the end of November. We are very much looking forward to seeing you then. Having said that, you know, wish you a great summer. Enjoy your well-deserved break if you're still going on vacation, and speak to you soon. Have a great day. Bye-bye.
Thank you for joining today's call. You may now disconnect. Thank you.