Welcome to the RWE conference call. Markus Krebber, CFO of RWE AG, will inform you about the developments in the first three quarters of fiscal 2020. I will now hand over to Thomas Denny.
Thank you, Jess, and good morning, everyone from us here in Essen. Thank you for joining us to discuss RWE's results for the first nine months of the year. COVID-19 is still very much part of our lives, so we hope you are all doing well. I'm joined here by our CFO, Markus Krebber, who will shortly start with a presentation before we continue with the Q&A session. Also, I've got a surprise guest here. A warm welcome to our designated CFO, Michael Müller.
Thank you, Thomas, and hello to everybody on the phone. I'm very pleased to be with you here today, and I'm really looking forward to my new role. After the full-year results, I will take over the role from Markus and will be in the driver's seat for these calls. Between now and then, I will already attend several investors' meetings, and I'm very much looking forward to getting to know you all.
Thanks, Michael. Now, before we get started, please remember our presentation focuses on the pro forma figures for 2019 in order to compare like for like. Assets taken over from E.ON in the third quarter last year are included in Adjusted EBITDA and EBIT for the full year 2019. With this, I now hand over to Markus for the update on the first nine months of 2020.
Yeah, thank you, Thomas, and a warm welcome to everyone. It's good to speak to you, and I really hope you are all safe and sound. The operational and financial performance in the first nine months has been good overall, and we have only seen a minor impact on the business from the COVID-19 pandemic. On a pro forma basis, year on year, Adjusted EBITDA of our core business increased 4% to EUR 1.8 billion. The group's Adjusted EBITDA stands at EUR 2.2 billion. With this, we are all well on track to confirm our full-year guidance and our expectations for Adjusted EBITDA to be at the upper end of the guidance. We reaffirm our dividend target of EUR 0.85 per share for this year. We successfully concluded a EUR 2 billion capital increase via an accelerated book building in August.
The additional financial flexibility enables us to accelerate the mid to long-term renewable growth. Thus, our net debt at the end of Q3 improved and now stands at EUR 5.9 billion. At the beginning of September, we announced that we would exercise the right to redeem the EUR 539 million hybrid bond at its first call date on October 21st. After the redemption, we have two more hybrid bonds with a combined value of approximately EUR 600 million and first call date in the middle of the 2020s outstanding. On the M&A side, we have closed the acquisition of the Nordex 2.7 gigawatt development pipeline in onshore wind and solar. The development team of more than 70 employees, which is mainly based in France, has joined RWE Renewables. This gives us great options for further growth and a broad entry into the French market. The board succession is progressing as planned.
As of November 1st, Michael Müller, our designated CFO, and Nana Zeiger, our new Chief Human Resources Officer, joined the executive board of RWE AG. I am very much looking forward to work with them for a successful future of our great company. Ladies and gentlemen, as you know, ESG is a key part of RWE's strategy, and I am pleased that I have some progress to report on this front. CapEx for property, plant, and equipment eligible for green investments under the proposed EU taxonomy amounted to 85% in the first nine months of this year. Also, the Transition Pathway Initiative has acknowledged our ambitious climate protection plans and confirmed that we are in line with the targets of the 2015 Paris Climate Agreement. Speaking of which, we have submitted our detailed emission reduction targets to the Science-based Target Initiative for assessment.
Together with the , our ambition is to get this done quickly. We will keep you posted. Last but not least, we further increase our engagement with the UN Global Compact. We are a founding member of the UN Global Compact CFO Task Force committed to the Sustainable Development Goals. As such, together with more than 30 companies from around the world, we have developed first principles for sustainable finance backed by the UN principles for integrated SDG finance and investment. Now on to the financials on page five. As I said earlier, in our core business, Adjusted EBITDA increased year on year by 4% to EUR 1.8 billion based on a good performance in all segments. Broadly speaking, the good nine-month result for offshore wind and onshore wind solar was due to the very good weather conditions in the first quarter and capacity additions from onshore and solar.
The hydrobiomass gas division benefited from the resumption of the GB capacity payments. The supply and trading division delivered a strong performance in the first nine months. Ladies and gentlemen, our wind and solar business is scaling up as planned. After capacity additions of a good 300 MW from the US Kernel Onshore Wind Farm and some solar farms in Canada and Spain, installed capacity increased to 9.2 GW. Further, approximately 800 MW of capacity is due to come online by year-end from today's point of view. We are managing the challenging as well as quickly changing environment due to COVID-19 daily. Further progress on our growth targets for 2022 has been made by taking investment decisions relating to approximately 500 MW from our development pipeline mainly for projects in the U.S.
With regard to the period after 2022, actually for CODs towards the end of the decade, we secured lease agreements for our offshore U.K. extension options of about 900 MW per rata. In addition, we will now continue with the development of a 400 MW remaining seabed option at our operational Rampion site. Overall, this is 1.3 GW in the offshore division that will now move forward through the steps of the development cycle. Let's move on to an update of our construction program on page seven. We have made good progress in Q3 apart from some delays that are mostly COVID-related and mainly at U.S. construction sites. As I explained on the H1 call, consequently, due to adjusted commissioning plans, as a result of this, we expect the overall financial impact for this year to be small to medium double-digit million Euro amount at onshore wind and solar.
Now let's take a closer look on an individual project level, starting with offshore. In our Triton Knoll, all 90 foundations and two 50 km long export cables have been installed on schedule. The Cascades site preparations are continuing and going according to plan. The construction work will start in Q3 2021. Moving on to the onshore business. Boiling Springs with a capacity of 148 MW is our first project in the state of Oklahoma and will feed its energy into the Southwest Power Pool. The project is in the commissioning phase and is expected to be fully commissioned by year-end. Our Big Raymond onshore wind project, the commissioning of Raymond East with its 200 MW, has started and is expected to be fully commissioned at the end of this year. The other part, Raymond West, is due to be commissioned at some point in the first quarter next year.
Besides COVID-19, Hurricane Hannah caused some delays to the turbine deliveries for Raymond West. At our Scotia Ridge project in Ohio, almost all the turbines have now been erected, and the pre-commissioning teams are ready to ramp up their efforts. The site mobilization at Hickory Park project located in the southwest of the state of Georgia has recently started. The 196 MW solar project will be coupled with a 40 MW two-hour battery. The Lyman Bay Solar Farm, the grid commissioning testing, has started but delayed, and we expect the full commissioning to happen in Q2 next year. Overall, we will bring another 800 MW online in the current quarter. With that, we can now move on to the details of the individual divisions. Our offshore wind division realized an adjusted EBITDA of EUR 738 million in the first nine months.
Year- on- year, this is an increase of almost 12% thanks to higher wind speeds in the first quarter, even though earnings from wind yield in the third quarter were negative year- on- year. Gross cash investments in the first nine months amounted to approximately EUR 500 million and are mainly driven by Triton Knoll construction work. The fourth quarter typically sees strong wind, and we are assuming normalized weather conditions. Overall, we confirmed the outlook for the offshore division and expect it to be at the upper half of the bandwidth, totaling between EUR 900 million and EUR 1.1 billion. The onshore wind solar division increased 8% year on year and Adjusted EBITDA amounts to EUR 336 million at the end of September.
Value drivers are an increase in capacity of more than 600 MW year- on- year, as well as higher earnings in Europe from above-average weather conditions in the first quarter this year. Overall, we have seen an unfavorable development of power prices in the U.S. and also various European markets during the course of the year. As a result, the earnings of our open-generation position were slightly lower than expected. For the full year, we expect this effect to be a small double-digit million EUR amount. For the full year, we confirmed the outlook of EUR 500 million-EUR 600 million but expect the division to end at the bottom of the guided range, given the aforementioned effects from delays, mostly related to COVID as well as lower power price levels.
Earnings at the Hydrobiomass gas division amounted to EUR 382 million and are higher year on year thanks to the British capacity payments. As already reported in August, the fire at the Ames coal Plant caused an interruption to the biomass coal firing in the middle of May, which we expect to last until the end of November 2020. The financial impact from this for the full year is a small to medium double-digit million Euro amount. Overall, we confirmed the guidance of EUR 550-650 million for the division but expect it to end at the bottom of the range. Moving on to the supply and trading division, which contributed slightly above average earnings in the third quarter. After nine months, Adjusted EBITDA amounted to EUR 399 million on the back of a strong trading performance and a good result from the gas and energy business.
This is in particular due to the very strong performance in the first half of the year. We confirmed the division's outlook for the full year of EUR 150 million-EUR 350 million and expect the results to be at the upper end of the range. This is due to a weaker performance we have seen in the fourth quarter so far. Ladies and gentlemen, having now reported on the core business, let's move on to the coal and nuclear division. Adjusted EBITDA increased to EUR 381 million. Earnings improved due to higher realized wholesale prices and an updated production plan in the Lignite system. Remains that implications from the implementation of the accelerated exit plan need to be considered. To sum this up, we confirmed the outlook for the coal and nuclear division.
Moving on to the earnings drivers down to adjusted net income, which amounts to EUR 762 million at the end of September thanks to the high Adjusted EBITDA of the group. The financial result at the end of September amounted to minus EUR 231 million, including the negative runoff of approximately EUR 150 million from Q1 and the E.ON dividend received in Q2. Adjustments in tax are applied with a general tax rate of 15% in line with the expected midterm tax level for the group. With that, on to the adjusted operating cash flow on Page 14. The adjusted operating cash flow shows the impact on net debt from operating activities. It is adjusted for special items and timing effects that balance out over time. Utilization of nuclear provisions is not included.
As you remember, we consider this as a financial cash flow, as when the nuclear provisions are utilized, they are refinanced via financial debt. After nine months, the adjusted operating cash flow went up to EUR 2.3 billion in view of the high Adjusted EBITDA, as well as the positive effects in working capital. Change in operating working capital of EUR 342 million is mainly driven by the payment from the British capacity market for 2018 and 2019, which we received in Q1, as well as the reduction of gas inventories. For the full year 2020, we expect this line item to remain positive for the same reasons. Turning to the details on the net debt development. Net debt decreased to EUR 5.9 billion. This is due to the high adjusted operating cash flow and the capital increase of roughly EUR 2 billion.
Timing effects from the mainly CO2-related hatching activities are roughly EUR 0.8 billion. Another driver is the change in pension provisions by roughly EUR 400 million compared to year-end, resulting from lower discount rates given the current market environment. With the closing of the acquisition of the 2.7 GW Nordic development pipeline, the purchase price of EUR 400 million will be reflected in Q4 net debt. Also, the redemption of the hybrid bond will have a net debt impact of roughly EUR 270 million. For year-end, we expect the leverage factor to be well below three times net debt to core Adjusted EBITDA. Finally, moving on to the outlook for fiscal year 2020. As I already said, we confirm our outlook for this year. Adjusted EBITDA of the core business will come out between EUR 2.15 billion- EUR 2.45 billion.
Adjusted EBITDA for the RWE group will range between EUR 2.7 billion-EUR 3 billion and Adjusted EBIT between EUR 1.2 billion-EUR 1.5 billion. For both Adjusted EBITDA and Adjusted EBIT, we expect to see results at the upper end of the guidance. Our guidance for adjusted net income is EUR 850 million-EUR 1.15 billion. We expect it to end up in the middle of the range due to the negative runoff in the financial results in Q1. The dividend target is unchanged at EUR 0.85 per share for fiscal year 2020. With this, I conclude my remarks, and I'm happy to take now your questions.
Thank you, Markus. Jess, please start the Q&A session, and in view of time, please stick to two questions each.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. Please ensure your line is unmuted locally, as you will be advised when to ask your question. The first question comes from the line of Alberto Gandolfi from Goldman Sachs. Please go ahead.
Thank you and good morning. I'll stick to two questions, please. The first one is that I've noticed from your bridge to the path towards 13 GW that you only have 700 MW yet to secure, and it's mid-November 2020. I wonder, with construction time for solar six to nine months and construction time for wind about 12, what's the degree of confidence of finding those 700 MW? Could we actually, given the integration of the Nordex pipeline, begin to exceed the 2022 goal? You don't seem to be short of projects nor of capital. I'm going to skip question on full year net income, but I'm going to stick a little bit to bigger picture here because we have discovered not many weeks ago that the offshore auctions expected from now, let's say until Christmas 2021, are 25 GW-30 GW.
I was wondering, you are obviously not exposed to the U.S. East Coast, but of the 25-30, so of all the auctions that are expected to come in the next 12 months, could you maybe disclose with us which regions you're going to be able to bid into? Perhaps if you can give us maybe the seabeds in those regions, trying to figure out, can you be bidding for about 15 GW of projects next year? Considering that most of the CapEx on those will come in 2025, 2024, 2025, 2026, what's the limit? I mean, what stops you from trying to win all of the auctions you're going to? Just trying to see how you think about it. Thank you.
Okay. Good morning, Alberto. Thanks for the question. The first one, how confident are we about the 13 GW? I can confirm that we are very confident to reach that level. As I have said before, it is too early to speculate and now give interim update targets. We stick to the 13 GW plus the Nordics pipeline where we said probably around 100 MW per year, which then brings you to 13.2, but I mean, that is not enough to update the target now, right? Very high confidence that we can achieve that. On the auction side, look, I mean, adding up numbers for auctions is sometimes difficult because you talk about different auctions. Sometimes it is a lease seabed auction, sometimes it is a central tender, sometimes it is a CFD auction.
We will participate in all tenders where we think we're going to be competitive, and it fits to our policy. I mean, you know the regions. It's Europe. It's the U.S. where we are a bit more cautious because we have so far not successfully entered. It's the three Asian markets which we have named being Japan, Korea, and Taiwan. You know that Korea is early days, so the upcoming auctions where we have something to bid in is Japan and Taiwan. I'm a bit reluctant to now add up central tenders, seabed lease auctions, and CFDs. We have nothing for the next CFD auction in the U.K. That's also transparent. Where I agree is that when you think about bidding in these processes, of course, you commit now capital, but financing is actually not a concern at this point in time.
If you get the right projects, these are all, I mean, marketable. You can find partners later or you even bid with a partner into something. That is not a constraint. I think there is no limit other than having projects ready and think you are competitive in the process. You can expect us to participate in many of these auctions.
Thank you.
Thanks, Alberto. Next question, please.
The next question comes from the line of Sam Arie from UBS. Please go ahead.
Hi, good morning. Thank you for the presentation, as always. Just two sort of very straightforward ones from my side. I think the whole presentation is very straightforward, so I'm just keeping it simple. I think in the past you've talked about the size of the renewables pipeline, and some of your competitors have been updating those numbers. I just wonder if you can give us some sort of sense of the size of the pipeline at the minute. Secondly, on the coal contract that we saw a draft of earlier in the summer, have you got any updates on where we are now with the kind of process, the EU approvals, and if you have a sense of when that contract might get signed? I believe it hasn't been signed yet. Thank you.
Thanks for the questions. I mean, on the first one, I have to disappoint you. We are not giving quarterly updates on the pipeline. You will get an update on the pipeline, but maybe a full-fledged update there. On the coal side, yeah, we are expected to close the first unit end of this year. We are preparing for that because we are confident that will happen. The law has passed the German parliament. We are expecting to sign the contract with the German government within the next weeks. On the EU approval, which is a procedural question, I cannot give you an update because we are not part of that. It is a process between the German government and the European Commission.
Yeah. Okay. You will sign the contract first, and then it goes for approval, or you wait for it to be approved, and then you sign it?
Yeah. Let me put it that way. I mean, we expect also after recent interactions with the German government, we expect that we close the first unit. In order to close the first unit, we need to sign the contract first, also because we need to be sure what happens in terms of compensation for the workers, right? My expectation is now that we will sign the contract shortly, and we will close the first unit end of this year.
Okay. Very clear. Okay. Congratulations on that. Good luck with the last stages.
Thank you, Sam. Next question, please.
The next question comes from the line of Ahmed Farman from Jefferies. Please go ahead.
Yes. Hi. Good afternoon. Good morning. Good afternoon, everyone. Two questions from my side. I was hoping if you could help us a little bit with the bridge for net debt to year-end. I think you mentioned earlier that you expect the net debt to EBITDA to be significantly below three times, but I was just hoping if you give us a little bit more granularity there. Then my second question is, I guess, sort of a follow-up to sort of your response to the first question where you mentioned the three Asian markets, South Korea, Taiwan, and Japan.
I'm just hoping if you could just give us a little bit more color on your positioning, what sort of assets do you have, how you plan to sort of enter these markets within partnerships, and just maybe anything so you can sort of talk about the competitive dynamics in those tender auctions. Thank you.
Yeah. Ahmed, thanks for the questions on the net debt side. Nothing has changed. We have said before we did the capital increase that we feel, I mean, considering all COVID uncertainties, but currently it looks much more stable when you look at interest rates and also commodity prices. We expect to stay even without the capital increase at three times net debt to EBITDA. That is roughly also when you want a quantitative guidance. If you exclude the EUR 2 billion, we expect to end at three times net debt plus EBITDA, plus minus a bit, but let's see where we are. I mean, what is driven, I mean, what I mentioned in the presentation is the redemption of the hybrid, the Nordex transaction. Of course, we have further investment in renewables.
We expect a very strong operating cash flow in the quarter, and we also expect some positive effects from other cash items like realization profiles of hedges and trading. That all adding up gives us the high confidence that we end at three times net debt to EBITDA plus EUR 2 billion from the capital increase. On the Asian markets, yeah, I think on the assets, we are very transparent in our renewables presentation, but I can briefly walk you through it. The Japanese market is a central tender market. The government tenders the pre-developed sites, and you can bid in; everybody can bid into that. We have formed partnerships to be very active in the first auction, which we expect now for next year.
The Taiwanese market, and we are preparing already today or we are weighing our options who are the right partners for the next rounds, which will then come in the later years. Very active discussing with every local partner whether we have joint interests. I can tell you I'm very satisfied with the progress we are making there. Taiwan is a different market. Taiwan, you develop the projects yourself, and you know that we bought into one joint venture with Asia Cement, and this is one of the largest conglomerates in Taiwan, where we will now bid our pre-developed project into the route-to-market or it's a grid connection auction. It's a bit similar to the U.K. model where you do your pre-development as you bid into route-to-market or grid connection auction and secure prices.
Here we are looking into doing own development activity and also maybe whether we spend some money and getting additional projects into the pipeline. South Korea is very early days because the framework is not set. We have recently established a presence there. We have hired a country chairman, and we are now in discussions with partners, and we will decide, I would say, over the next couple of months with whom we partner up for the first more specific steps in that market.
Thank you, Ahmed.
Thank you.
Next question, please.
The next question comes from the line of Peter Bisztyga from BofA Securities. Please go ahead.
Yeah. Hi. Thanks for taking my questions. Firstly, E.ON yesterday outlined 200 projects that they're proposing to apply for under the EU Recovery Fund. I was just wondering if RWE has done any sort of analysis and identified any opportunities for grants there, please? That was my first question. Secondly, we've been hearing concerns from some investors about the impact of competition in the wind and solar market from kind of small sort of gung-ho players who are bidding with unrealistic assumptions about what happens to power prices after PPAs and feed-in tariffs roll off. I was just interested to ask if that's something that you've seen, that's something you've experienced in the market, and also perhaps if you could provide us with some reassurances that your teams use more sensible assumptions when they bid.
Yeah. Peter, thanks for the question. I mean, you would be highly disappointed if I tell you that we have not looked into potential programs to get support for our projects. Of course, we have, and especially our hydrogen projects. We have applied for support with our larger hydrogen projects in Germany and the Netherlands for EU grants. We also expect to ask for more or apply for more when the new sources will open. You will also get more on European level. You will also get more on national level. Unfortunately, due to Brexit, our U.K. projects could not be bid into the European process. I think the process is now that they will look into the applications of, I think, around 300 projects have applied for the first round. We are talking about EUR 6 billion-EUR 7 billion on European level.
They will now shortlist them until January, and then you have to do a full application when you're on the shortlist, and we expect the grants to be awarded in the second half of 2021. This is not the only source. This is actually more the smaller one, the European one. I think the national support schemes, which are currently in the making, are the even more relevant one. We are also actively in the discussion of how these programs should be shaped. I do not want to give you a number in terms of how much Euros or how many projects because it is very early days. The moment it gets more specific, we will be transparent about it. Competition, it is always difficult to figure out what are the assumptions in bidding processes, right?
We have not seen so many yet because when you go into CFD bids, you have to have your pre-developed projects. Especially the newcomers whom you are currently referring to, they have no pipeline, so they cannot bid into auctions. What you can observe, and there I partly confirm your assumption, what you can see is what needs to be reasonable assumptions to pay a certain price when you have second market transactions. When somebody is willing to buy part of our onshore or offshore assets where we currently are in the process, or when somebody buys into a U.K. project or a U.S. project, you probably know what I am referring to, you can always do because many assumptions are very close together. I think CapEx and OpEx assumptions are so close together that you have two major drivers.
One is power price assumption, one is cost of capital. What we regularly do is when we see it, you can come up with a two-dimensional grid. What is the combination of cost of capital and power price assumptions to get this done? There I can tell you there are, let's say, interesting assumptions to come to these prices. That does not mean that we see short-term, I mean, deterioration in bidding processes because, I mean, in a CFD process, you need to have a pre-developed project. Let's see. I said it before, I think it will be an interesting observation point is the U.K. lease auction, which is now postponed until early next year because there everybody starts from zero with everything, with his assumptions of his capabilities, but also prices and cost of capital.
Okay. Thank you. Interesting answer.
Thank you, Peter. Next question, please.
The next question comes from the line of Deepa Venkateswaran from Bernstein. Please go ahead.
Thank you. I have two questions. On Japan, maybe a follow-up. Could you maybe give us an idea of what is the size of the site that you might bid for? I think your competitor, Ørsted, has talked about a specific site that they would be using. Maybe if you could just confirm whether you have both centralized and decentralized auction in Japan. Secondly, there's a question on hedging. For 2022 and 2023, your hedged margins have gone down by EUR 2. Could you maybe explain the dynamics, and should we basically assume that that's a downgrade to your outer years guidance for the non-core division? Thank you.
Yeah. Deepa, thanks. I mean, on Japan, of course, we are targeting certain sites because it is a very complex auction process with a many-dimensional criteria catalog, and price is only 20% of that, especially about how you intend to do stakeholder management, local content, and this. You cannot bid on short notice and many sites. The one we are targeting in the first round with our partner is a site which is in the high three-digit megawatt area, so close to a gigawatt. I do not want to be more specific on that because it is, of course, sensitive information. On the second question, hedging, I mean, do not read too much into it because the production volumes are now significantly lower, which we have. I mean, I think they are half of what you used to see at RWE seven, eight years ago.
A movement in hedge prices is much smaller. What is more relevant also is how much more capacity moves in the money. What we have seen due to recent price moves is that we have slightly more capacity in the money now, which then needs to be hedged from zero, which comes, of course, at current market prices and not very favorable. That deteriorates the average. When you do the multiplication of expected volumes times price, I can tell you that we see a slightly negative effect from the development budget. It is mainly driven by lower price setting spreads, which we realized. It is to such a small extent that it will not change our guidance for the segment.
Thank you.
Thank you, Deepa. Next question, please.
The next question comes from the line of Rob Pullin from Morgan Stanley. Please go ahead.
Yeah. Thank you very much. Two questions from me. Firstly, if we could talk about hydrogen, is RWE seeking joint ventures or partnerships with chemicals or oil companies for multiple projects like some others have been doing? Is there merit to such agreements, or will collaboration be sort of on an Ad Hoc Basis? The second question, if I may, is when I look at the auctions available in 2021, I noticed obviously Germany and the Netherlands are part of that, for offshore wind, that is, where we have seen zero subsidy contracts in the past. May we ask whether RWE has appetite for those types of contracts as we look to 2021, and how you would obviously manage that risk? Thank you very much.
Yeah. Rob, thanks for the question. On the first one, the clear answer is yes, and we are already in consortiums. We are currently running the consortium for the largest hydrogen project. Of course, it's still in the project phase, so conceptual. The largest hydrogen project in Germany, which is a consortium led by us, and it's an oil major and two chemical companies, a steel company, and a gas grid company. What we intend to do there is to produce significant green hydrogen in the northern part of Germany from our offshore wind farms, and then also start the establishment of a hydrogen grid to bring it to the Ruhr Valley here to the big off-takers, steel, chemicals, refineries. That is, for example, one project where it's not unreasonable to assume that we are asking for grants. We are not only doing that in Germany.
We are also doing that in the Netherlands. It's a bit smaller, but the same structure, and we are doing it in the U.K. It is not on an Ad Hoc Label. It is a really structured approach to bring together the producers of green electricity, the grid operators, and also the off-takers. I think I do not know whether that is available also in English, but we have a nice summary video of all our hydrogen activities on the net, and we will get it over to you. The other one was on offshore. I mean, I have always made clear that we would prefer a double-sided CFD because we think that is a much better model. Of course, we are also looking in these tenders, but I would always value them differently because we would value them as an option.
You would bid for an option where you know what you have to pay as terms of penalty when you decide in five years not to build it, which is an option premium. You have the right to work five years on a potential alternative offtake. I think it is not a digital decision at the beginning. It is more a process where you need to consider how much option premium you are willing to pay at the beginning to get it. You can think about many scenarios where a merchant offshore wind farm may be very valuable in five years' time because maybe we are too slow with our build-outs. We have significantly higher demands for green hydrogen whatsoever. You can also think about many scenarios where a merchant offshore position is a very bad position to be in in 5- 10 years' time.
Thank you very much. Super interesting. I'll turn it over.
Thank you, Rob. Next question, please.
The next question comes from the line of Lueder Schumacher from Soc Gén. Please go ahead.
Good afternoon. Just coming back on the hedges and why they moved, Markus, you did mention that more volumes moved into the money, but the overall hedge position at 90% or above 90% has not changed. If you locked in the price, does this effectively mean that at least for the short term, the implicit long clean dark spread position has moved against you? I'm just trying to understand the mechanics there because for an unchanged overall volume, a EUR 2 move is quite a sizable move. We do not understand the dynamics there. The second question is on supply and trading. I know you do not like to go to more detail than necessary there, but given that nine months were already above your current guidance, you said the result of Q4 could be weaker, but can they actually get negative?
I mean, going back over time, there have not been too many negative quarters for supply and trading.
Yeah. Lueder, thanks for the question. The mechanics is as follows. When you have two elements, one is let's take the unchanged volume. When you constantly hedge the volume from implicit fuel to full hedging, by that, you also realize the currently implicit price setting spread. That has been lower. We realized lower spreads than from the already hedged position in Q3. That brought the overall hedge margin down. That is one element. The other element is when more capacity moves into the market, you start with this additional capacity at zero hedge volume, right? In order to have an unchanged relative hedge position, you need to hedge that to 90%. You start with current market prices. I can tell you current market prices or margins, outright minus CO2, is significantly low compared to what we have historically hedged. That also brings the average down.
Okay. Yeah. Then the second question on supply and trading, yeah. I mean, we had a very favorable first nine months. Please understand my hint that we expect to end up at the upper end of the range, that you cannot transfer or expect another phenomenal fourth quarter. Maybe even it was a bit weaker. Weaker meaning not so good as an average quarter. It could also be that on average, we come down a bit from the EUR 399. It could also be that we end up at EUR 400. I mean, we still have six weeks to go. Please do not read too much into it. More that so far, quarter to date, Q4 was not an average quarter. I can tell you, whatever happens, we expect that trading will end up the year significantly above average expectations. There's no real negative hit in Q4 so far.
Very clear. Thank you.
Thank you, Luedar. Next question, please.
The next question comes from the line of Martin Tessier from MainFirst, please go ahead.
Martin, are you there?
I think MainFirst recently rebranded, so maybe we have to call the right name.
Just if Martin is not there, then maybe we take the next question and put Martin back in the queue.
Thank you. The next question comes from the line of Piotr Dzieciolowski from Citi. Please go ahead.
Good afternoon, everybody. I have two questions, please. The first one is about the Hydrogen CapEx. Do you have any certain amount of money that you earmark for this investment, like a budget on the three to five-year view, or does that depend on the conditions of subsidies you get? Just thinking about how much of this could be within the total CapEx of RWE. The second question I wanted to ask you is about your thinking about the structure of the auctions into the second half of the decade. I mean, if you think about the power prices and the carbonization process, we could agree that it probably means lower wholesale prices on a long-term basis. Do you think that could change the structures of auctions into longer duration contracts so that more of the project value is captured within the auction? How do you think about this?
Yeah. Piotr, thanks for the questions. On Hydrogen, I mean, it's too early to have CapEx amounts in the next two years' budget, I think. Also, when you look at the capital intensity of the different steps, I think renewable is very capital intensive. The electrolyzers themselves are not very capital intensive. When we talk about a 100-megawatt electrolyzer, you probably talk about CapEx of around EUR 100 million. A 100 MW electrolyzer is large. I think it's maybe one of the largest we have ever seen. Of course, a lot of CapEx needs to go to change the processes at the off-taker. If you imagine you want to run a steel plant on 100% hydrogen instead of coking coal, that is a billion investment. From our side, most of the investments will still go into renewable. I mean, not most.
I mean, almost everything will go into renewables. We are also willing to go into electrolyzers. In terms of CapEx, it's not that big. Also, when you think about the pipelines, that is properly regulated, so also not done by us. On the option design, I think it's a more general question about market design. I think this is a very relevant question because when you think through it intellectually, I mean, a market where you have 80%-90% renewables, you can be sure that the current market, the wholesale market, as we know it, is probably very good for dispatch decision, but it never returns the money for investors.
You probably need to come up with a totally different market design, whether it's fully regulated, whether it's more long-term governmental contracts, or whether it's an obligation of off-takers to secure long-term PPAs and by that paying also for the investment. I don't expect that discussion to happen with the regulators and politicians within the next two, three years. I think their priorities are different. I mean, first, carbon pricing, which is a big debate now. The second one is getting the hydrogen economy up and running. Potentially, when these two topics are solved over the next two, three years, we just start discussing the long-term regulatory framework.
Okay. Thank you very much.
Thanks, Piotr. Next question, please.
The next question comes from the line of Ingo Becker from Kepler. Please go ahead.
Yes. Thank you for taking my questions. Good morning. I got two questions. The first would be on CO2. Could you just reconfirm to us that your hedge is running through 2030, so basically making you immune against any CO2 price? Phrasing it differently, whatever the CO2 price that hedge will hold. That would be my first question. The second, I was interested if you could comment on your own views or expectations about the future trend of cost of capital of your renewable projects. Do you see that changing from current or past levels? Yes. That would be it. Thank you very much.
Okay. Ingo, the first one is pretty easy. Yes, I can confirm it. We are commercially hedged against any change in carbon prices until 2030 for all our expected production. The second one, what we see on cost of capital, maybe give you three aspects. One is we see lower cost of capital because we have now for much longer and even lower interest rate environment. Typically, you do not take, when you calculate your cost of capital, I mean, spot rates, you average them over six, 12, 18 months. With this significantly lower interest rate environment, cost of capital has come down. We also see that reflected into valuations of real assets. I mean, look at equity, look at real estate. Same, of course, also holds true for renewable assets.
The second one is, and I talked about that before, when you compare it to, let's say, five, three years ago, also in some areas, you feel much more comfortable with the risk profile. When you do your fifth or sixth offshore construction project with the same partners, with the same logistics, you feel much more comfortable than in the previous project. Required risk premium is also coming slightly down. What I also see is, at least when we run our calculations, the additional value generation on top of your cost of capital is more or less stable. Of course, I mean, coming back to the question I had before, let's see how that might change in very competitive auction processes and whether you have others who are willing to get a market entry or whatsoever to bid unreasonably.
I do not expect that to last for too long because, I mean, their investors also will ask for decent returns. I am not pessimistic that we run into problems. There is the counter effect, which means from the just described environment that our existing assets and our existing pipeline have definitely gained in valuation.
Thank you.
Thank you, Ingo. Next question, please.
The next question comes from the line of Elchin Mammadov from Bloomberg Intelligence. Please go ahead.
Hi there. I have two questions, please. The first one is on your Brunsbüttel LNG import project in Germany. The last I heard, the binding bids were due by year-end. Is that still the case? The reason why I'm asking is there seems to be insufficient interest in Uniper's projects. I was wondering what yours is doing. The second question is a more broad one. What's your outlook for the evolution of gas and power prices in Europe, as well as load factors for 2021, 2022? Thank you.
Yeah. On the LNG terminal, I mean, you know that we are not the operator, the future operator. We have booked or secured the capacity in the terminal, significant part of the capacity. We are part of the WIDA consortium. Out of that role, I can confirm that we expect the EPC contracts to be submitted by year-end. We have a slight delay, but we expect to take final decision about the terminal in the first half of next year. We are all optimistic that we will get that terminal being built, which would then be the first LNG terminal in Germany and RWE having booked most of the capacity. On gas and power prices, I mean, that is a difficult one. Maybe gas prices are even more difficult than power prices.
The gas prices, I mean, are influenced especially by the COVID situation and overall economic activity around the globe. That is very difficult to call. I mean, if everything is true, what people tell about the WEX side, and we see a more rosy 2021, I expect prices to stay at least at the current forward level or maybe even go a bit up. Power price, the other factor for power price, the most determining factor is what the European Commission decides on the EU ETS and how they implement the increased reduction target 2030. Do they do it front-loaded, so take out more volumes at the beginning? Do they do it back-loaded or linear? That will have a huge impact on power prices for the next years to come.
I think we can expect clarities about some technicalities, how they intend to do it by Q2 next year.
Okay. Thank you.
Thank you, Elchin. Next question, please.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. The next question comes from the line of Peter Bisztyga from BofA Securities. Please go ahead.
Yes. Sorry. Just one follow-up. The court ruling this morning made a constitutional court ruling in favor of [Vattenfall] now regarding if they have phased out compensation. I don't know if your legal or regulatory teams have had a chance to look at this in detail yet, but if they have, I was just wondering if you could give us a view on what it might mean for the, I think, several hundred million Euros of compensation that you're due for nuclear phase-out.
Yeah. Peter, I mean, maybe for everybody the context. I mean, we had a ruling by the Constitutional Court a couple of years ago about the nuclear exit, where the ruling was there needs to be adequate compensation for the lost production right and frustrated investments. That was, I think, in 2018, 2017, or no, it was 2016. And then the government came out with the compensation law, how they intend to compensate the companies. Part of that compensation law was the operators first should try to negotiate whether they can transfer production rights from A to B because some were long, we were long, and others were short production rights, and by that solving it.
Vattenfall then went to the Constitutional Court again and said, "We are not happy with that compensation law by the government." The Constitutional Court today ruled in favor of Vattenfall, saying that what the German government has done as a reaction to the first ruling by the Constitutional Court is not sufficient, which is overall favorable for the industry because it strengthens the right for adequate compensation. I cannot tell you whether we now expect more or less because the ruling was only that the compensation law by the government is not sufficient. They had some procedural questions on it, but also some content-wise questions. I would say, I mean, we currently stick to our expectation that overall, for both lost production rights and frustrated investment, we expect a medium triple-digit million compensation amount. I would say the current ruling has definitely not weakened our position.
Okay. Perfect. Thank you very much.
Maybe one cross-read. I think what is positive for us, also when we think about coal and discussions here and there, but the Constitutional Court has once more strengthened the position of the industry that when you have government interference, that you need to adequately compensate for damages.
Cool. Thank you.
Thank you, Peter. Are there any further questions?
The next question comes from the line of Martin Tessier from MainFirst. Please go ahead.
Yes. Good morning. Apologies for this IT issue. Indeed, Markus, we have moved from MainFirst to Stifel at the beginning of this week, and we have still IT problems to be fixed. Sorry for that. Anyway, thanks for the presentation. Only one question from me regarding your open-generation volumes in renewables. In your Capital Market Day presentation, you indicated that 30% of the gross margin in renewables relied on merchant production. Could you give us an updated figure for the first nine months of the year, or at least some color, and maybe an indication for the full year and beyond from 2021 onwards? Many thanks.
Yeah. Thanks, Martin, for the question. Maybe a bit of background. We have some of our new production has not a unit contingent offtake, so either, I mean, CFD, feed-in tariff, or a unit contingent PPA. Of course, with that volume, you are partly exposed to market prices when you produce. This volume cannot be entirely hedged because you do not want to be in a short squeeze. When you hedge the exact production profile you expect, you always underhedge because you do not want to be in a position where, other than expected, you do not produce. Market prices are very high, and you have to buy back from the market. There is part of the production, I would say, around 3 TWh-4 TWh, which is exposed to spot prices.
That is what, due to the COVID situation, has hit us now, but to a very, very small extent. Nothing to be really concerned about because I think if we would not have seen also the delays in construction, it would not have made the reason to move at the lower end of the guidance. Not only this effect, this is very minor. To your other question of the position, how much is hedged, I mean, for 2021, we have now hedged more than 70%, and for 2022, we have now hedged more than 40% of the, I mean, more or less merchant renewable exposure, which is very small.
Okay. Very clear. Thank you.
Thank you, Martin. Next question, please.
There are no further questions, so I will hand back over to your hosts for closing remarks.
Excellent. Thank you, everyone, for dialing into our Q3 call. I'm looking forward to speaking to you over the coming days and last meet you at the full-year results in mid-March.
Thank you for joining today's call. You may now disconnect your line.