Dear ladies and gentlemen, welcome to the conference call of the VERBUND AG. At our customer's request, this conference will be recorded. As a reminder, all participants will be in a listen-only mode. After the presentation, there will be an opportunity to ask questions. If any participant has difficulties hearing the conference, please press star key followed by zero on your telephone for operator assistance. May I now hand you over to Peter Kollmann, who will lead you through this conference. Please go ahead.
Ladies and gentlemen, welcome to our presentation for the full year 2021, and let me thank you for joining today's conference call. Before we move into the presentation, let me make a few general comments about the business year 2021. 2021 was characterized by a huge increase in volatility in European wholesale electricity prices and a key value driver for VERBUND's business development. This development is due to two main factors. One, the strong commitment of the EU member states to a comprehensive decarbonization of the energy system, which led to an increase in the prices for European CO2 certificates. Two, there was a massive increase in the prices for primary energy sources such as natural gas and coal in 2021.
The reasons for these price increases were the global hunger for energy, especially in Asian countries, above all China, the low average gas storage inventories in Europe, unfavorable weather conditions, the delay in the commissioning of the Nord Stream 2 gas pipeline, and above all, geopolitical uncertainties. In this environment, VERBUND is optimally positioned with its business model that is consistently geared towards decarbonization. Key success factors are green, cost-effective electricity production from reliable constant run-of-river power generation, flexible peak power generation from our storage power plants, regulated electricity and gas grids, which are required for the decarbonization of the energy system, strong focus on the expansion of new renewable electricity generation from wind and PV.
Against this more strategic background, the business development, as well as the share price development of VERBUND, was very positive in the past fiscal year 2021, and I would like to move now into the specific details. At the beginning, let me highlight the most important influencing factors for the results development in 2021. Following the prices at the electricity exchange and based on our hedging strategy for our own electricity generation from hydropower, the average achieved subject price increased by EUR 10.2 to EUR 64.8 per MWh. The hydro coefficient determining the generation from run-of-river hydropower plants was 5 percentage points below the long-term average and 6 percentage points below 2020. Production from our hydro reservoirs was also lower compared to last year.
On the other hand, contributions from flexibility products in all categories, but especially control energy and intraday trading, strongly increased in total by 49% compared to last year. Finally, we had a positive contribution from the full consolidation of Gas Connect Austria. The impact of these key factors on our figures is as follows: EBITDA strongly increased by 22.1% to EUR 1.579 billion, and the group results increased by 38.3% to EUR 873 million. The adjusted group results increased by 30.8% to EUR 799 million. The operating cash flow strongly declines to a level of EUR 98 million, which is -90% due to higher margining payments for the energy trading business.
The free cash flow after dividends as a result of margining, again, was negative at a level of -EUR 1.329 billion due to the lower operating cash flow, higher investments into tangible assets and fully consolidated subsidiaries, as well as higher dividends compared to last year. Net had increased by 86.6% to a level of EUR 3.5 billion. VERBUND expects for 2022 reported and adjusted EBITDA between approximately EUR 2.6 billion and EUR 3.5 billion, a reported earnings range of between EUR 1.4 billion to EUR 2 billion, and adjusted earnings of EUR 1.34 billion to EUR 1.94 billion. Our guidance for APG is approximately EUR 85 million for 2022. For Gas Connect Austria, approximately EUR 90 million for 2022, and the flexibility products, EUR 130 million.
Based on our strong results, we will propose an increased dividend of EUR 1.05 per share in our AGM on April 25. That would reflect a payout ratio of 45.7% on the adjusted group results. On the next page, before I talk about the segments of our company, I will give you an overview of the hedging volumes. For 2021, we achieved an average contract price for hydro generation of EUR 54.8, EUR 79 for 2022, and EUR 66.7 for 2023. Please note that we had already hedged approximately 69% of the volumes for 2022, approximately 23% of the volumes for 2023, as of December 31, 2021.
On a mark-to-market basis as of the 23rd of February, we calculate with a price of EUR 120 for 2022 and EUR 128.9 for 2023. As you know, 1 euro plus or minus has a sensitivity of approximately EUR 25 million in our EBITDA line. Now we come to the hydro segment. At 0.95, the hydro coefficients, as you know, an index quantifying the hydropower generation of the run-of-river power plants was 5 percentage points below the long-term average and 6 percentage points below the level of 2020. The production from annual storage power plants decreased by 6.9%. Lower inflows and increasing storage levels overcompensated higher turbining. Higher average achieved prices and an increase in the contribution from flexibility products had a higher impact than reduced volumes.
Therefore, EBITDA in the hydro segment increased by 19.3% to EUR 1.1 billion. Our main hydro projects, the 480 MW Limberg III pumped storage power plant project and the 45 MW Reißeck II pumped storage power plant project, are both on time. Now let me continue with the analysis of the own generation from new renewables. The new renewables coefficients, here it is an index quantifying the generation from wind power and PV, amounted to 0.91 in 2021, compared to 1 in 2020. Generation from wind power decreased by 9.1% or 84 GWh and amounted to 839 GWh in 2021. Less favorable wind conditions in all markets, i.e., in Austria, Germany, and Romania, were the reasons for this development.
Generation from PV amounted to 2.1 GW hours in the reporting period. Taking a look at the EBITDA development in the new renewable segment, we see that the EBITDA decreased by 9.5% to EUR 53.3 million. Next page on the sales segment. Taking a look at the EBITDA development here, we see that EBITDA decreased by 21% to EUR 60 million. The deterioration in EBITDA results from the measurement of derivatives for electricity and gas, as well as our gas procurement costs for delivery to end customers. Higher contributions from flexibility products could not fully compensate this development. VERBUND delivered electricity and gas to approximately 527,000 end customers in 2021. That represented increase of approximately 2%.
When we move to the next page to the all other segments, we see that the generation from thermal power plants was up by 8.8% or 91 GWh due to the market-driven use of CCGT Mellach for district heating production in the fourth quarter. Higher volumes and higher prices contributed positively to the EBITDA development. The contribution from flexibility products, on the other hand, decreased by EUR 5.5 million. The contribution from Kelag, the provincial utility from Carinthia, to the financial results increased by 27.8% to approximately EUR 36 million due to a better hydro situation and higher achieved sales prices compared to last year. Finally, let me inform you that CCGT Mellach was contracted from APG again for future congestion management starting with October 1, 2021.
In addition, Mellach is providing district heating for the city of Graz. The district heating part of Mellach was not contracted by APG and is therefore not bought as of the first of October 2021. On the next page, we'll talk about the grid segments. First, the contribution from APG, our subsidiary responsible for the Austrian high voltage grid with a system length of approximately 7,000 kilometers and interconnected capacities into seven neighboring countries. As you know, there is a difference between local GAAP and IFRS. Under IFRS, in contrast to local GAAP, volatilities into result contribution cannot be avoided because the so-called regulatory account cannot be applied. The EBITDA for 2021 from the electricity grid business according to IFRS was EUR 254 million.
EBITDA guidance for the grid is only approximately EUR 85 million, which is a strong decrease as the regulator will reduce the regulatory account in 2022. What does it mean? It means that the regulator is skimming off the surplus profits from the past. We expect the regulatory account to decrease by approximately EUR 130 million to a level of approximately EUR 220 million. Gas Connect Austria operates and constructs natural gas high-pressure pipelines in Austria. The company is also responsible for the marketing and provision of transport capacity at border points, so-called entry and exit capacities, and the transport capacity required for domestic natural gas demand. Gas Connect Austria operates an approximately 900-kilometer-long natural gas high-pressure pipeline grid. Five compressor stations positioned along the pipelines guarantee the relevant pressure.
In addition to operation, maintenance and repairs, those are also important tasks. The company plays a pivotal role in the supply of natural gas in Europe, and of course, in Austria. The natural gas is transported to the Austrian federal states, but also to Germany, France, Slovenia, Croatia and Hungary. With regard to the results contribution of Gas Connect Austria, we only report June to December 2021 on an isolated basis amounting to approximately EUR 77 million. Please also note that we do not provide values from last year as we did not own the asset by then. The guidance for 2022 with regard to Gas Connect Austria is approximately EUR 90 million under IFRS. This guidance relates to the full year 2022. Now we come to the non-recurring effects on our P&L in 2021.
There were no one-off effects in the EBITDA, neither in 2020 nor in 2021. The impairments of EUR 9.9 million mainly related to the goodwill of Gas Connect Austria. The reversal of impairments due to higher power price assumptions related to Mellach, various hydropower plants and our wind power plants in Romania amounting to EUR 115 million in total. Overall, the operating results showed non-recurring effects of EUR 105 million. The transition consolidation of Smatrics caused a positive non-recurring effect of EUR 11.9 million in the other results from equity interest. We also had a negative non-recurring effect in the other financial results related to the measurement of an obligation to return an interest in the hydropower plant Jochenstein amounting to EUR 23.3 million.
There was also an impairment related to Trans Austria Gas Pipeline, TAG, amounting to EUR 18.3 million, as well as a reversal of impairment for our hydropower plant Ashta in Albania amounting to EUR 16.8 million. In total, the financial results showed non-recurring effects of -EUR 16.4 million. The aforementioned one-offs caused an effect of -EUR 13.8 million on taxes. Now, after considering the impact from the non-recurring effects of minorities, the non-recurring effects in the group result level amounted to EUR 75 million. We also show you the amount of the non-recurring effects in 2020 in comparison. Now, I'll hand over to Andreas for the development of our key figures. Cheers, Andreas.
Thank you, Peter. Now let me present how the effects described before influenced VERBUND's financial performance in 2021. The reported EBT increased by 22% to EUR 1.579 billion. The reported group result increased by 38% to EUR 873 million. The group result developments in 2020 and 2021 were influenced by one-off effects. Adjusted for this effect, the adjusted group result increased by around 31% to EUR 799 million. I think the reasons for this development were already explained by Peter. I'll proceed with the relevant key figures. The EBITDA margin slightly decreased from 37.5% to 33.1%. The EBIT margin decreased from 26.7% to 26.5%.
We will propose to the shareholders in our annual general meeting on April 25 dividend per share of EUR 1.05, which corresponds to a payout ratio of 41.8% on the reported group result and a payout ratio of 45.7% on the adjusted group results. The dividend will increase by around 40%. Moving on to the next slide, page 12. I will start first with the operating cash flow. The operating cash flow 2021 strongly decreased, as mentioned, to a level of EUR 98 million.
The main reasons for this extraordinary decrease were higher margining payments for key derivatives in the electricity business, which have to be paid for open positions at the clearinghouse of the electricity exchange. Please note that once the contracts are closed, the payments will be reversed. The additions to tangible assets of EUR 843 million were much higher than in 2020 and were caused by CapEx for grid projects and maintenance CapEx related to the hydropower plants. Main projects are the 380 kV line in Austria and the hydropower plant turbine in Germany. The free cash flow before dividends was negative at minus EUR 1.010 billion. The free cash flow after dividends show the level of EUR 1.3 billion.
In addition to the lower operating cash flows from higher investment into tangible assets and fully consolidated subsidiaries, as well as higher dividend payments compared to 2020. Net debt increased to EUR 3.5 billion, mainly due to higher short-term borrowings from banks in connection with the margining costs, the issuance of the green and sustainability-linked bond, and higher financial liabilities in connection with the acquisition of Gas Connect Austria. Net debt/EBITDA increased to 2.2 after 1.5 at the end of 2020. Moving on to slide 13, shows the financial liabilities. Y ou see the debt maturity profile shows a repayment of a very low amount of EUR 25 million in 2022.
You can also see a peak in 2024 with repayments of EUR 672 million, mainly consisting of a fixed interest bond in the amount of EUR 500 million, and another peak after 2029, consisting of a fixed interest bond in the amount of EUR 500 million as well, with due date 2041. As liquidity backup, VERBUND has access to a EUR 500 million syndicated loan facility, which is undrawn, has no make clause, and is available until 2023, with two extension options. VERBUND has also access to committed and uncommitted lines with a large number of banks up to an amount of approximately EUR 2.3 billion. The total amount of our financial liabilities is approximately EUR 2.8 billion.
The increase is mainly caused by the issuance of the green bond, the acquisition of Gas Connect Austria, and the higher amount of short-term money market liabilities due to higher margining requirements. The average interest rate on our debt is approximately 1.68%. 44% of our debt are subject to fixed interest. In 2021, the development of the external ratings of VERBUND AG was stable. Standard & Poor's rating of VERBUND AG remained unchanged at A, stable outlook, and Moody's rating remained unchanged as well at A3 stable outlook. Now I would like to hand over to Peter again for the CapEx plan and the guidance.
Thank you, Andreas. Before we move to the outlook for 2022, let me comment on our updated CapEx plans. The volume of our plan has again increased compared to the previous years. The total CapEx for the three-year period from 2022 to 2024 is more than EUR 3 billion, split into growth CapEx of EUR 2 billion and maintenance CapEx of EUR 1 billion. The main part of the growth CapEx, approximately EUR 831 million, will be invested into the regulated grid business, especially into the so-called Salzburg Line, in order to increase the capacity to integrate new renewables and better address the volatility and congestion in the grid system. In addition, VERBUND is also investing into new renewable projects and selected hydropower plants. Investments relate to Austria and Germany.
In the year 2022, VERBUND is planning to invest around EUR 877 million, thereof EUR 507 million into growth projects and EUR 370 million into maintenance. Now we're coming to the page which is probably the most interesting one for you. The outlook for 2022. As always, at this point, we want to highlight sensitivities. A deviation of ±1% in the generation from hydropower has an impact of ±EUR 24.5 million in the group results. A deviation of ±1% in the generation from wind power has an impact of ±EUR 1 million, and a deviation of ±EUR 1 in the wholesale price has an impact of EUR 5.1 million in the group results.
On the basis of the aforementioned developments, our guidance for 2022 is as follows. We expect the reported and adjusted EBITDA of approximately between EUR 2.6 billion and EUR 3.5 billion, and the reported group results of approximately between EUR 1.4 billion and EUR 2 billion. This on the assumption of average hydro and wind generation. For 2022, VERBUND plans to pay out between 45% and 55% of group results after adjusting for non-recurring effects of approximately between EUR 1.34 billion and EUR 1.94 billion. With that, I would like to hand over to you for Q&A. I'm sure that you have many questions, and I look forward to our discussion.
Ladies and gentlemen, we will now begin our question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad now to enter the queue. Once your name has been announced, you can ask a question. If you find your question has answered before it is your turn to speak, you can dial zero and two to cancel your question. If you are using speaker equipment today, please lift the handset before making your selection. One moment please for the first question. The first question is from Wanda Serwinowska, Credit Suisse. Your line is now open. Please go ahead.
Good morning. Wanda Serwinowska, Credit Suisse. Congratulations all on a good result and the outlook. Three questions from me, if I may. The first one is, can you please share your thoughts on the windfall of profit taxes? Have you had any discussions with the Austrian government? Do you see any risk of the adverse political intervention in Austria? Second question is, the European Commission is reviewing the power market design. Can you please comment on that? Any thought would be much appreciated. The last question is on the margining payments, and can you please quantify the impact on the net debt in 2021, and when do you expect it to reverse? Thanks a lot.
Yeah. Thank you, Wanda. I'll start with the so-called windfall profit tax. We have no indication from the Austrian government that a windfall tax is being planned. The Austrian government is currently focused on other measures that includes a recycling of higher tax income because of higher power prices, higher energy prices. Everything that has been considered and discussed so far would basically come out of the budget. Please don't forget that we are 51% owned by the Republic of Austria. The Republic of Austria directly profits from our dividend payments that plays a role as well. The second point that's a very interesting and important one. You know, how is the power market design going to change over the next few years?
I think that the dramatic increase in power prices, combined with geopolitical effects, has been a catalyst for a complete rethinking along the lines how power pricing in the system should work in the future. We're basically talking about the merit order and the fact that, you know, a relatively small number of power plants can actually determine the price for the entire energy production within a given country within a given system. You're right. There is a discussion on a lot of different levels. There is a discussion on the EU level. There's a discussion on national level in Spain, for example. I think the Spanish have already started quite early in fall to think about changes to the merit order.
They were one of the first ones to also ask the European Union to really focus on that point. It is our understanding that in the Ministry of the Economy in Germany, there is also a discussion on potential effects of higher power prices on the effectiveness and the efficiency of pricing of the energy system in the future. Yes, medium-term, we could see a change there. Short-term, we don't think so. In terms of margin payments, maybe I should take a step back because I know this is a very important point to many of you, because it is something that is a focal point for all the utilities across Europe.
Most of us have been suffering from a dramatic increase in margin payments, which we had to make, within a short period of time. Some of us were not expecting such a dramatic move. What we have done in fall of last year, we have run several simulations where we looked at realistic case scenarios. We looked at worst-case scenarios. One of our worst-case scenarios in December was actually a war in the Ukraine. We never expected it, but it's something we included in our simulation. As a result of that, we have started, let me say, relatively early, to make sure that we have all the required liquidity in place and more.
Yes, you can see that we have an impact in our cash flow, in our free cash flow, obviously in our operating cash flow. We have an impact in terms of our debt levels, which have gone up dramatically. However, this is all short-term debt, and when the contracts expire, all that money will come back. It is not what I would consider our core debt level, but it is an extraordinary debt level as a result of extraordinary developments.
The next question is from Olly Jeffery, Deutsche Bank. Your line is now open. Please go ahead.
Hi, morning. Two questions from me, please. One is just carry on with the conversation on the potential for the windfall tax. I understand that you're saying that, you know, the Austrian state is looking at taking other measures in the short term to relieve billing pressure. If I could push you a bit further just to think about if the Austrian state were to take further steps, and you mentioned the dividend, do you think perhaps, you know, the special dividend might be a first port of call ahead of a windfall tax? Is that? Are we interested to get your thoughts on that? S econdly, just on the margining, can you please just clarify what the cash flow impact was in 2021? Because you stated that I missed it.
Sorry, last question is, the guidance range that you gave for 2022, is that based on market forwards from the 23rd of February? Because if it is, just to note that, you know, power prices have moved up another 50 EUR/MWh or so since then, which could potentially add EUR 200 million onto the range that you've given. If you could clarify, please, when that guidance was cut and what market forward you used to make those projections. Thank you very much.
Yeah, all very good points. Again, on the windfall tax, obviously, we can only assess current discussions. What I've said before is the status quo. This is where we are per today. It is possible that when Germany, for example, introduces a windfall tax, you know, being a neighbor, which, you know, which is often looked at in terms of coordination of measures, et cetera, et cetera, that could theoretically have an impact on decision-making in Austria. I cannot exclude that there will be a windfall tax in Austria. Per our information today, it's a relatively low probability. Would other measures be possible? The answer is yes. I mean, we have a dramatic increase in our earnings in 2022.
That could lead to a special dividend. I cannot exclude it. At this point in time, you know, because that dramatic increase is reflected in the payment anyway, because of the payout ratio, there will be an increase in dividends, per se. Could there be an extra special dividend because of a very difficult situation for energy consumers? I cannot exclude it. It's very much a political decision. At this point in time, again, I think there's a low probability, because high earnings, as I said before, reflected in high dividends. But it is a possibility. Now, the margining has been in a region of around EUR 1 billion, in the case of VERBUND. Could it be more?
Yes, it could be more. That is all we have included in our simulation. I can assure you that we are perfectly prepared. Even if we had an additional dramatic move in power prices, we would be covered on the basis of our committed and uncommitted lines, and in terms of our preparation for those situations. The point which you have made about forward prices. You're absolutely right. That is why we have given a very, very broad range. As you can imagine, we have been discussing this range for quite some time.
It is by far the broadest range which we have ever given, and we try to be, you know, to be as precise as we can, but this year it is simply impossible. It is impossible to predict gas prices. It's impossible to predict power prices, even with flexibility products, and t he grid, there is high volatility. Please see the very broad range which we currently have as a reflection of that new dimension of volatility which we have seen. However, what we will do, the more information we have, the more data points we have over the course of the year, we will narrow the range as we have done last year, to give you the best possible guidance we can.
Coming to the point of deviation in forward prices. Yeah, that has a huge impact. You know, if we take, for example, the beginning of March, where we were for 2022 76% hedged, there we had a price of, you know, at that specific point, on that specific day of EUR 280. Now, if you took that price of EUR 280 and you combine it with the hedged level of EUR 92, which we had at that point in time, excuse me, you come up with EUR 140. The increase would be, you know, from the EUR 54.8, which we had in 2021 to EUR 140.
However, you know, when for the open amount you take, you take a lower figure, which can be totally rational because we have such a huge swing in power prices, then that number would be completely different. The one thing which I can tell you, sort of like as an important data point for your own calculations. You know, more or less as of today, we are 76% hedged. That hedged level is at EUR 92. This is for 2022. For 2023, we are 42% hedged at a level of EUR 86. For 2024 we are 28% hedged with a level of 88.5. The unhedged levels, I hate to say it, but pretty unpredictable at this point in time.
You know, given how geopolitics is currently influencing price in addition to all the other influencing factors.
Thanks. A lot of detail there.
The next question is from Louis Boujard , ODDO BHF. Your line is now open. Please go ahead.
Yes, thank you very much for taking my question. Just if possible, as a follow-up, could you repeat the hedge that you just pronounced because I did not have the opportunity to take them if you don't mind, and I think it's more closer to the actual rate here and so it would be nice. My actual question was the following. The first one on your development strategy, notably in terms of growth. We know that you want to invest in renewables, and you have made two nice operation in Spain recently. I'm a bit surprised to see that you are reserve for the time being, purchasing assets rather than actual independent power producers on which you could eventually benefit from additional pipeline going forward.
Could you explain why for the time being, you prefer to focus specifically on assets rather than an independent power producer? Is there any reason behind it? Do you feel more comfortable after acquiring a specific asset rather than the company globally in order to enable more growth in the future? My second question would be also a detailed one, I would say, to have a bit more in terms of granularity, notably in the squeeze that you are mentioning in the margins for your sales business, notably on the gas procurement side. Could you elaborate where does it come from?
Is it because you have a difficulty to pass through the increasing gas prices to your final customers, or is there any other reason which is related to a non-hedged position into your volumes business that were eventually above expectations, which would mean that it's not necessarily recurring going forward? Of course, I leave other questions for geopolitical environment. I think you already provided some nice and interesting elements on it. Thank you very much.
Yeah. Thank you very much. Yes, I'm happy to repeat the hedging levels. Now for 2022, we are 76% hedged, and the average price which we have locked in through those hedges is EUR 92.1 . For 2023, we are hedged 42% and the locked in prices were EUR 86 . For 2024, we are hedged 28% at a price of EUR 88.5 . That is the detail on the hedges. Again, you see that for 2023 and 2024, there is still a lot of open volume as in line with our hedging strategy. There is obviously ample opportunity for you know, for positive developments in terms of power prices for the forward years 2023, 2024.
Now your question on growth in Spain. Yes, I can explain that very well. No, I should say I hope I can explain it very well. We have acquired two assets which have an existing business. We have done that because we wanted to establish a position in Spain. We wanted to learn more about the market, not just by observing it, but by really being there and selling electricity and generating electricity. The next step will be that we are going to make acquisitions which have both existing businesses, including regulated businesses, and where we have pipeline.
At the same time, we will have people in Spain, we will have a subsidiary in Spain, and through that subsidiary, we will also be able to do more on the pipeline side. That is the reason why we have made our first, I should say, relatively small acquisitions in terms of existing businesses. Now the gas point, I have not fully understood. Was it related to Gas Connect Austria, our regulated gas business, our transport and distribution business? Or was it more related to our Mellach power plant, CCGT, which is basically active in the grid reserve, but also has the opportunity to be in the market, you know, at least for one of the lines.
It's for the sales segment. In fact, you mentioned in your information that you had a negative impact on EBITDA due to higher gas procurement costs for your end customer base.
Yeah. Maybe I should take a step back in terms of, sort of like to let you know how it's done. The gas which we require for the CCGT in Mellach is not bought via the spot market. There we try to estimate how much we need for the grid reserve and how much we need for market operation. What we need for the grid reserve is obviously, you know, fully compensated through, you know, the regulatory component. What we need for the market side is basically the clean spark spread.
If you are referring to the fact that we have values in our books, Mellach higher than in the previous year, sort of like the reversal of an impairment that we have done as a result of higher clean spark spreads which we're anticipating in the future. I hand over to Andreas with an additional point.
Yeah. I think you're referring to the sales segment and the development there. As we pointed out, there is a reduction in the sales segment overall. We have positive and negative effects here. The positive effect is the additional income from flexibility products. The positive effect is also coming to a certain extent from prices, but there are also negative effects. Two negative effects. One is the measurement of the derivatives for electricity and gas, which is, I think, logical, if you look at the current market prices. The second negative impact is the higher gas procurement cost for end customers. I think that's what you're referring to.
There is a margin squeeze in our end customer business. I think this is also no surprise.
I mean, we have done some price increases a couple of days ago in a significant amount. Nevertheless, given that the prices have increased so much and we have to buy, also to a certain extent, gas in the market in order to supply our end customer bases, there is a margin squeeze. I mean, given the fact that our end customer base is rather limited or is relatively small, I think the negative impact is not that dramatic. It's a small thing. It's a single digit negative contribution amount currently, yeah.
Okay. Thank you very much.
The next question is from [uncertain] Your line is now open. Please, go ahead.
Good morning. Thank you. Three questions. The first one is on the REPowerEU plan, which foresees a sharp cut of gas volumes imported from Russia already this year and a phase out by 2027. Given that, TAG pipelines are fed by Russian gas, could you tell us about your risk perception there? The second one, I did backtesting. The implied hedging prices in the fourth quarter seem to have been significantly below the market averages. Could you give us an explanation on that? The third one is on your renewable strategy and the CapEx outlook. Given your recent acquisitions, the renewables CapEx does not seem to be excessive.
Is it based on what we know right now, plus whatever comes from the German joint venture? Could you tell a bit more about that?
Yeah. I'll start with your point with regards to Gas Connect Austria. There are two components. The first one is short term, the second one is medium-term to long term. I will start actually with medium to long term one, because that is a geopolitical one, that concerns first of all all of Europe, but particularly Austria and Germany. If we assume that Europe, as has been announced, will reduce its dependency on Russian gas, that would mean that medium-term gas flows into Gas Connect Austria will decrease. I can tell you why, because one of the very, very large pipelines coming from Russia into Europe is called Brotherhood.
Brotherhood pipeline is coming from Siberia, from the gas fields there through the Ukraine, then Slovakia into the hub of Gas Connect Austria, which is called Baumgarten. That is all Russian gas. If that gas were reduced, let's just say by 50%, that of course would reduce the transport capacity and the tariff income from Gas Connect Austria. One needs to see the Italian side as well, because a lot of the gas that comes from Brotherhood via Baumgarten goes into TAG. That is the direct connection, gas connection into Italy. Italy has already announced that it wants to again reduce gas even short term, i.e., by the end of the year by 50%.
I don't know if it's even possible, but that is the plan. That would, of course, again mean that there would be much lower gas flows going through there as well. What does it mean? Again, from a perspective of compensating for the gas that is not coming from Russia, what are the potential sources and how much can we increase those sources? What is possible and what is feasible? Now, obviously, particularly as far as Italy is concerned, it is North Africa. I should say Spain and Italy because they have pipelines from Algeria and from Libya. There is one pipeline that goes from Algeria via Morocco, but also directly to Spain, that is important gas provision for the Spanish market.
You have Algeria and Libya with gas going through TransMed to Italy. Italy will most likely need, if they really want to reduce by as much as they have said, they will need all that additional gas coming from North Africa. Same is true for Spain. That basically leaves us with LNG. We think that you know LNG can be increased by around 10%-15%. It's not the ships, it's not the you know the source of the LNG at this point in time. The limiting factor is the terminals, the LNG terminals. This is why the European Union and the different countries have decided to build more LNG terminals, but that will take time.
Short term is probably another 10% LNG increase, maybe 15% that can be achieved at a later stage, maybe more. Then of course, you have Norway, and there we estimate approximately, you know, anything between 3, maximum 5%. When you see all those flows, they don't necessarily go through Gas Connect Austria. That obviously, you know, lower flows mean lower tariffs, but it is a regulated business and the regulated system needs to be adjusted to provide the appropriate return to Gas Connect Austria. I'll jump to the third question, the renewable CapEx. What you see in the numbers which we have given, you see organic growth. That organic growth in the numbers is particularly Austria and Germany.
If there were inorganic transactions, i.e. M&A transactions, that would come on top of what we've shown you here. There is no inorganic included in here. Organic growth, I have to add, is cumbersome. I think in the last conference call we have discussed that point, because you know, when you do organic growth, you need the entire process from grid connection to environmental approval. You know, you can get resistance on a local level, and you usually have very long permission processes. Now that you know, the European Union and many of the countries want to accelerate the permission processes, however, you know, we have not seen it specifically at work. That is something we are observing.
If all that works quicker, then of course, you know, we would like to, we would love to increase our organic growth. That would be an objective which we have. Now in the fourth quarter, I can give you an explanation. We had very, very low hydro levels, unexpected low hydro levels in the fourth quarter. That shows you that, you know, the weather is something you can never control and you can never forecast. We had 0.83% hydro level, hydro coefficients. As a result of that, we basically, because it was already the fourth quarter, we had to buy back in the market at relatively high prices.
As a result of that, we had a negative impact in the fourth quarter as a result of that.
Thank you very much.
Thank you.
We have a follow-up question from Wanda Serwinowska, Credit Suisse. Your line is now open again.
Hello there. Can you hear me?
Yes. Thank you.
Hi. Sorry. It's Ray [uncertain] from Credit Suisse. I work with Wanda. Just a quick follow-up to the question Wanda just asked earlier. Do you see a better power market design than, I guess, the current merit order system? Probably otherwise, if dropping the system in your wheel is possible, and if it's possible at all. Thank you very much.
Yeah. I give you my personal opinion that I think that we are going to move into some sort of a capacity market. We are going to have more and more renewables coming on stream over the next few years, actually over the next decade. At the same time, we are getting out of fossil fuels. We're getting out of coal. We're getting out of, you know, we want to reduce gas. In some countries, we're getting out of nuclear. The economy is not going to change a lot on that. As a result, what we're losing is baseload. Baseload is an absolute necessity for the stability of the system.
It's a conditio sine qua non. The only way how we can provide baseload is through. You can call it many ways. You can call it a capacity market. You can call it reserves, strategic reserves, whatever it is. That capacity market would have a different pricing from the classic merit order. Why would that make sense?
It would basically make sense, because people ask themselves, if we have more and more cheaper production of electricity coming from wind, coming from sun, coming from hydro and other sources, and we have more volatility in the system, you know, why should we have that very expensive gas power station in the merit order determining the entire price for the chain of renewable energy. I think that could lead to a rethinking of the merit order. The merit order is an old system coming from a centralized energy system where you would know exactly how much you would use and how much demand you have.
That centralized system worked very well as a centralized system, and the merit order was foreseeable because you knew that you had a large proportion of generation in that merit order. You could say the system was predictable, the system was considered to be fair.
Now, what is currently being discussed and possibly introduced medium to long term would be exactly what I've said before, that you take out the top part of the merit order and that you put that into, you know, I call it, but they will probably find different names for that, I call it capacity market, into the capacity market, that serves the stability and serves the, you know, the blackout avoidance through specific payments, which and that could be, you know, that could be the regulated business, you know, that could be other players, but that would be a predictable payment which they get for providing that service to the market.
Thank you. That is very clear. Thank you.
The next question is from Piotr Dzięciołowski , Citibank. Y Our line is now open. Please go ahead.
Hi, good morning, everybody. It's Piotr Dzięciołowski from Citi. I have two questions, please. Firstly, I wanted to ask you about the Gas Connect Austria. When is the do you know, maybe you can give us details on until when you have a valid contract for the transit? W hat is the structure of the profitability of a transit versus domestic gas, domestic pipe usage? I just wanted to understand a little bit of, you know, if we were to diversify away from the Russian gas and through LNG, how much of the business would go away and when, in terms of the profitability of this asset? T he second question, I wanted to ask you about your renewable M&A.
Do you have in your mind some kind of a target of capacity contribution, where you want to develop your renewable assets through M&A?
I will share the second one will be covered by Andreas, and I will, you know, quickly talk about Gas Connect Austria. First of all, the stability of the pipelines of Gas Connect Austria is very high possible quality. Some of the pipelines are able to transport hydrogen, so Gas Connect Austria has already anticipated potential future developments. Then of course, yes, a lot of the gas comes from Russia, and the long-term contract from Russia has been very reliable over many decades. The first long-term contract Russia has ever made is actually done with OMV, which is the original owner of Gas Connect Austria.
If I remember correctly, I think it's like, you know, 67 or 68. That was one of the first long-term contracts between Russia and Europe. Russia has been very focused on those long-term contracts and delivering on those long-term contracts with Europe for geopolitical reasons, trying to alter the dependency on the Russian gas, that would obviously have an impact on the long-term contracts. Long-term contracts that are in place, you know, when they run out in the future, they would be replaced with short-term bookings. Overall, the transport capacity would go down.
The transport capacity of the pipelines coming from Siberia, this is the Yamal pipeline, which is going through Belarus, Poland, into Germany. That's a pipeline that was constructed in the early 1980s. Already at the time, a huge discussion because the Americans claimed, and they were obviously right in that case, that this is the start of a dependency of Russian gas, and, you know, that could bear a lot of risk. Then, you know, then Brotherhood, again, huge pipeline, also coming from Siberia, but coming into Baumgarten, i.e. into Gas Connect Austria directly. I cannot tell you know, what the value impact would be. That is something we need to simulate.
We need to simulate European gas flows. That is highly complex, as you can imagine. There are lots of different parameters which need to be taken into consideration. Those are very complex mathematical models, but that is something we will do. If we come to the conclusion that, you know, there are much lower capacities coming through Gas Connect Austria, that is certainly something we need to discuss with the regulator. Because it's, as I said, the private business is a regulated business with a regulated return, and that regulated return needs to be provided, you know, through the system by the regulator.
Have I given you enough response to your questions with weak gas flows, or are there any additional open questions which you have?
Oh, no. I just thought that, you know, potentially Italy builds LNG and the gas flow drops. You may be supposed to take an impairment on this asset because, understanding all of their long-term relationship, the equation has changed to the extent that maybe this pipe will not be utilized as much. I thought this is more kind of a, there could be simply a cutoff as this gas flow stops. I thought there is a contract with Italy, which I think runs until the end of a decade, but I just wasn't sure whether that's the case because, you know, it's probably unlikely looking at the current market environment that this contract will be extended. You know, you gave enough answer. I just thank you for this. No problem.
Okay. You're welcome. Now to the second question. Go ahead.
Yeah. Piotr, I think you know our strategic target, which we have published in the past. We want to reach around 25% of our total generation in new renewables until 2030. This target follows the strategic movement that we want to diversify our generation business with on a regional and on a technological basis. We have not provided, and I think this we will not do that. We have not provided any split. What we will do organic and inorganic. Inorganic is always opportunistic. I think it will be a mix. Yeah.
The key criteria for us is always value, and how much value we can achieve, independent if it's organic or inorganic. I think it's realistic that we will realize a mix between these two. Yeah. This is the answer to the question. Is that clear?
Yes. We're talking 25% of the volumes, right? Not the result.
Yes. 25%-
Okay.
-of volumes. Yeah. Yeah.
Understood. Thank you very much . That's helpful.
Yeah. You're welcome.
The next question is from Ingo Becker, Deutsche Bank. Your line is now open. Please go ahead.
Yes. Thank you. Good morning. Pieter, on your elaboration on long-term system prices and the possibility of a capacity market equivalent kind of design, can you shed a light how you are baking this view into your renewables pitches when you go for new projects? Apparently the long-term assumption is very important to the lifetime return assessment. If you can, what you experienced so far is how competitors are handling that. That what you're seeing there. My second question would be on your flexibility products, which I think last year were EUR 180 million. I think you didn't detail out the figure you expect for this year. I was just wondering what it might be and what is the trend there particularly in this volatile market environment. Thanks.
Yeah. Thank you, Ingo. Yeah. I will start with the flexibility products. What we have seen in 2021, we have seen an increase in control energy, which we have not expected. Control energy has been very stable for a long time. It's a very predictable market. However, with the dramatic increase in power prices, control energy prices have gone up as well. There has been also more demand for control energy. As a result of that, we had an increase, you know, from a number that was in the 20s to a number that was in the 50s, between 2020 and 2021.
Now we think that it's going to be high in 2022 as well, but not as high as 2021. On the congestion management, again, we had an increase. But we think that congestion management might be lower in 2022. On the pumping and turbining, we think that there will be an increase. Intraday, we think that it will be slightly lower. When you take all that together, we have basically come up with EUR 130 million in terms of flexibility products, which is very much sort of like in line with the previous years. I agree with you. There is a lot of volatility.
It could well be that, you know, that number is going to be higher if indeed we see more demand for congestion management and more demand for control energy, and continued high prices in those areas. Now, as far as the merit order is concerned, I would be very surprised if anyone is taking that into long-term power projections. I don't think so. I'm not really seeing it. Why? Because for many people, it's a very theoretical subject, yeah?
I think it is more like, you know, people that, you know, try to really understand future developments of energy transformation, energy systems, that really go into the detail, you know, of how a new merit order would work, what the pricing would be, you know, what the regulatory impact would be. There are many aspects which need to be considered. I think that is almost like at this point in time, in terms of power price developments, too complex. However, when you look at new renewables, you're looking at capture prices anyway. You're not looking at baseload, you're looking at capture prices.
Many of the curves, I mean, definitely our internal curves, take into consideration, you know, the very large increase in renewable generation in specific countries. I mean, it's still, you know, kind of in terms of the expectations which we have under 2030, it is still relatively slow. We think that it will accelerate over the next few years. That is certainly the target of many countries, particularly now, with our aim to create more independence from Russia. You know, renewables help us there. Capture prices are going to be very important because when you have more renewables, obviously you have cannibalization, and that needs to be taken into consideration in capture prices.
I hope, you know, that gives you sort of like a perspective in terms of is that what we have discussed, capacity markets, merit order, is that already in the market. The short answer is I don't think so.
Great. Thank you.
We haven't received any further questions at this point, so I hand back to the speakers for closing remarks.
Yeah. Thank you very much. That was one of the conference calls with a very broad discussion on many different subjects. It's dramatic times for many reasons and I fully understand that companies in their numbers and the forecasts reflect in part those dramatic events and particularly the volatility. Would like to thank you for your interest. I would like to thank you for your questions, and I look forward to our next conference call. Thank you very much. Bye-bye.
Ladies and gentlemen, thank you for your attendance. This call has been concluded. You may disconnect.