RWE Aktiengesellschaft (RWE) Earnings Call Transcript & Summary

Welcome to the RWE Conference Call. Markus Krebber, CEO of RWE AG; and Michael Muller, CFO of RWE AG, will inform you about the developments in the first half of fiscal 2023. I will now hand over to Thomas Denny.

Thank you, Elisa. Good afternoon, ladies and gentlemen. Thank you for joining RWE's conference call on the first half of 2023. Our CEO, Markus Krebber; and our CFO, Michael Muller, will guide you through our presentation, after which we'll start our Q&A session. And with this, I'll hand over to you, Markus.

Yes. Thank you, Thomas, and also a warm welcome to everyone from my side. We have continued with our strong performance also in 2023. Our earnings in the first 6 months developed well across all core segments, especially driven by strong contributions from the Hydro/Biomass/Gas segment and from Supply & Trading. Given the strong H1 results, we have increased our earnings guidance for the full year. We are also on track with our Green Growth program. In the first 6 months, we recorded a marked green capacity growth of 5.1 gigawatts. This includes the 3 gigawatts of mostly solar capacity in the U.S. that we acquired from Con Edison. And today, we have an additional 7.2 gigawatts of green generation capacity under construction, a record high for RWE. Let me now comment on the recent developments in the Offshore Wind industry. We are currently experiencing challenging times. Inflation and supply chain constraints have resulted in rising costs. For the first time in our industry, developers are pulling the plug on secured projects, projects without any or only little lease payments. On the other hand, we saw a record high negative bid prices in the recent German offshore auction. We participated in that auction, and we would have loved to win. However, bid prices reached levels where our return expectations would not be met even in very optimistic scenarios. And so we pulled out. We will not compromise on our return requirements nor on our stringent risk management approach. At RWE, we are continuing to develop our profitable Offshore Wind projects. We have taken the final investment decision for our project to the largest offshore wind farm in Denmark. And we were also successful in securing an attractive CfD for our first Irish project, Dublin Array, with a total capacity of 800 megawatts. In addition, we are continuing to develop our offshore projects in Germany, the North Sea cluster in the Netherlands, in Poland, in the U.K. and the U.S. where seabeds have already been awarded to us. CO2 reduction is also a key element in our Growing Green strategy. We have set ourselves stricter CO2 reduction targets. In May, we submitted CO2 reduction targets in line with the 1.5-degree reduction path for validation to the international renowned science-based target initiative. We expect confirmation later this year. The more ambitious targets cover all corporate activities and all greenhouse gases and go up to 2040. You can expect a full update on our Growing Green strategy at our Capital Markets Day on November 28, and we are very much looking forward to meeting you all in person in London. Let's now move on to Page 5. Our profitable green investments and capacity growth have contributed to our positive earnings development, in offshore with the commissioning of 2 large projects in 2022, in onshore solar with the acquisition of CEB and numerous new projects across Europe and North America, and in Hydro/Biomass/Gas with the commissioning of the Biblis plant in Germany and the addition of the Magnum gas power station in the Netherlands. The better-than-expected earnings development is driven by the strong performance of the entire core business. In particular, the Hydro/Biomass/Gas division and Supply & Trading have delivered outstanding performance, yet more proof of the robustness of our integrated business model. On the one hand, renewables, offshore as well as onshore wind and solar and on the other hand, firm and flexible generation capacity, batteries, hydropower, biomass as well as gas with a clear path to decarbonization and our strong commercial platform. Earnings of the Coal Nuclear division, however, have decreased as a result of maintenance costs and less favorable prices. Let's now take a closer look at our earnings in the Hydro/Biomass/Gas segment and its respective outlook for the coming years. Over the past 18 months, we have seen a significant improvement in the performance in our portfolio of flexible and firm generation assets. And we see a substantially higher earnings level in the coming years as well. The gross margin of our flexible and firm generation fleet can be broken down into 3 areas. First, System services include stable and regulated revenues, such as capacity payments in the U.K. and Germany and green certificates for hydro and biomass plants. This revenue stream increases with higher scarcity as evidenced in the most recent U.K. capacity auctions. Second, in intraday and day ahead optimization, we earn margins from the short-term dispatch and optimization of our plans in the day ahead and intraday markets. This is not correlated to the absolute clean spread level. The value here increases with higher intermittency and volatility in the market. And third, margins from running the asset fleet where we capture the clean spreads and the option value of the assets. Here, the level of earnings is driven by the clean spreads in the forward markets and also volatility. The significant increase in '23 versus '22 was also partly driven by higher margins we locked in, in the prior year. Although we assume normalized price levels in the coming years, we are confident that we will continue to deliver higher EBITDA for longer. For the period '24 to '26, EBITDA is expected to exceed on average EUR 1.5 billion per annum with even higher contributions in 2024. Let's move on to Page 7 and an overview of the capacity development in our core business. In the first half of the year, the core generation portfolio grew 5.1 gigawatts. Capacity additions were mainly driven by our strategic acquisition of Con Edison Clean Energy Businesses with 3 gigawatts and the Magnum gas power plant with 1.4 gigawatts. And we have also commissioned the Biblis asset for the grid operator with 300 megawatts and our Fifth Standard battery project in the U.S. with 117 megawatts along with further smaller projects. As we speak, we have 7.2 gigawatts under construction across different technology, a record high for RWE. Most notably, within offshore, we have taken FID [indiscernible] with a capacity of 1 gigawatt of the Danish Coast. A large share of capacity growth is currently taking place in the U.S. where we have almost 3.5 gigawatts under construction, including 1 gigawatt of batteries and more than 2 gigawatts of solar. Given all the positive developments, we increased our earnings guidance for 2023. We have updated group EBITDA guidance to EUR 7.1 billion to EUR 7.7 billion, and for adjusted net income, we have increased our guidance to EUR 3.3 billion to EUR 3.8 billion. And with that, let me hand over to Michael, who will guide you through the financials of H1 in more detail.

Yes. Thank you, Markus, and also good afternoon from my side. In the first half of 2023, we have performed very well, driven by the strong operational performance of our core business especially in flexible generation and Supply & Trading. In Offshore Wind, adjusted EBITDA increased to EUR 762 million, mainly due to capacity additions of Triton Knoll, 506 megawatts and Kaskasi, 342 megawatts. Higher hedge prices in the offshore segment has partially been offset by lower wind conditions in the first half of 2023. Onshore Wind and Solar recorded an EBITDA of EUR 519 million. The increase is driven by capacity additions mainly as a result of the acquisition of Con Edison Clean Energy Businesses. Lower realized power prices and poor wind conditions had a negative effect on the results. Adjusted EBITDA of the Hydro/Biomass/Gas business was EUR 1.939 billion. The exceptional result was driven by short-term asset optimization and hedges conducted at attractive price levels. On the back of the strong performance, the Supply & Trading segment reported an adjusted EBITDA of EUR 799 million. Last year's results were negatively affected by a one-off due to sanctions on coal deliveries from Russia. Overall, the group's adjusted EBITDA stood at EUR 4.5 billion, including the coal and nuclear operations. Year-on-year, coal and nuclear is down due to lower realized margins from unhedged positions and higher maintenance costs. On the back of the strong operational performance, adjusted net income amounted to EUR 2.6 billion. Depreciation increased in line with our green growth investments. The year-on-year adjusted financial results was stable due to offsetting interest rate effects. For adjusted tax, we applied the general tax rate of 20% for the RWE Group. And finally, adjusted minority interest reflects lower earnings contributions from minority shares. The adjusted operating cash flow was EUR 5.5 billion at the end of H1 and reflects the impact from operating activities on net debt. Changes in operating working capital were mainly marked by the decrease of inventories of gas and storage and decrease in trade receivables. Net debt increased substantially due to the significant investment in our Green Growth. In Q1, we closed a EUR 6.3 billion acquisition of Con Edison Clean Energy Businesses. And we invested a further EUR 2.7 billion net in our Green Growth program, including the Magnum and JBM Solar acquisitions. Other changes in net financial debt increased by EUR 3.1 billion. This includes timing effects from hedging and trading activities. Our net position from variation margins for power generation hedging stood at EUR 1.8 billion. This includes net variation margins from the sale of electricity as well as the purchase of the respective fuels and CO2. As Markus mentioned, we've increased our full year guidance. Adjusted EBITDA for RWE's core business is now expected to be between EUR 6.3 billion and EUR 6.9 billion, the range for the group is now EUR 7.1 billion to EUR 7.7 billion. This is mainly driven by the strong performance of our Hydro/Biomass/Gas segment where we have increased our guidance from EUR 2.6 billion to EUR 3 billion and our Supply & Trading segment. Here, we are confident that we'll achieve a result significantly above EUR 600 million. Adjusted depreciation is expected to be EUR 2.1 billion based on lower depreciations in the Coal and Nuclear segment. Adjusted EBIT is now assumed to be between EUR 5 billion and EUR 5.6 billion with adjusted net income ranging from EUR 3.3 billion to EUR 3.8 billion. The dividend target remains EUR 1 per share for this year. And with that, let me hand back to Thomas.

Thank you, Michael. We'll now start the Q&A session. Operator, please kick it off.

[Operator Instructions] We'll take now our first question from Alberto Gandolfi from Goldman Sachs.

Operator, thank you, and thank you, everyone, Thomas, Markus and Michael for taking my 2 questions, sticking to the rule. The first question is -- I mean, first, thank you for providing visibility and guidance on the value and the outlook for flexible generation. I wanted to go back to something that is happening here. I mean, versus your '21 CMD, it seems to me that whatever is not wind or solar could potentially deliver EUR 7 billion, EUR 8 billion incremental EBITDA versus what you expected at the '21 CMD. And considering that buying back your stock today would potentially imply an IRR, double-digit IRR, way bigger than what you would get by investing organically, why not using a small portion of your releveraging potential to return some capital to shareholders and support the stock nearer term because it's not been really responding to all of the great news we have seen on earnings. The second question is you have 7 gigawatts under construction, right now. Would you be able to comment on the recent development in the PPAs? And would you be able to tell us what is the IRR just on the 70 gigawatts under construction? Where do you see the IRR of -- walk on those 70 block or maybe you can help us understand an EBITDA over CapEx ratio so we can understand a, how much is coming and b, the profitability. So if you can't give IRR, maybe EBITDA over CapEx and CapEx, that would be sufficient for us to try and gauge if these investments are not very profitable, profitable or extremely profitable. Than you so much for your patience.

Yes. Alberto, let me take the question. I mean -- let's first talk about the share buybacks. I mean, as you can imagine, that has been also a discussion we had internally in the Board. And I mean the way how we look at it, in the end, you can either take the short-term perspective, which you lined out is assuming the low -- or the undervaluation of our share investing into our share. Some portions could be an attractive business case. And the other direction to take is taking more the medium and long-term perspective, looking at our portfolio, looking at our pipeline and also looking at the attractiveness and the returns we expect from our pipeline. And I mean, if you look at the second one, we do see that we have an attractive pipeline that we can spend excessive cash on and we also see attractive returns on that pipeline. So when we took the -- had the discussion, we clearly took the decision that we don't want to engage into share buybacks but really use the additional headroom to accelerate our growth. And we strongly believe that there definitely is value in the growth and that this also will ultimately then contribute to an increased share price. And for that reason, I mean, you know we have the Capital Market Day in November. And for sure, we'll use the Capital Market to update you on the accelerated growth plan. On your second question, I mean I think there are different elements. I think the first one is around PPA markets. We have mentioned that in previous calls, PPA markets have improved. So we see now attractive prices in Germany and also in Europe. And I mean we have communicated that, for example, for our German offshore assets that would fall into the compression model. We use that to also offload some of the income into PPAs at attractive prices, and we'll continue to leverage that. The second question you kind of raised was on the 7 gigawatts, what is the profitability? I mean, we don't communicate profitabilities on individual projects. But I can assure you that when we took the investment decisions on the 7 gigawatts, we obviously applied a very strict investment criteria. So therefore, all those projects are profitable and clearly meet our return expectations. Now our return expectations are in the range of 100 to 300 basis points above WACC. WACC clearly has gone up lately, so that's also reflected. But I have to ask you to wait until November. And I mean, in November, we'll give you an update on the IRRs, we are expecting, and we will also give you an update on earnings. And then you'll also see how those projects will translate and also the additional projects translate into earnings.

Thank you, Alberto. Next question, please.

We'll take now our next question from Peter Bisztyga from Bank of America.

It's Peter Bisztyga here. So 2 from me, please. Firstly, thank you for the guidance on the Hydro/Biomass/Gas division. I think that's very useful for the first step in terms of helping people understanding the earnings power of that business. I'm just wondering, in terms of -- the biggest chunk of it, which you sort of described quite simply is running the asset fleet. Could you give us a little bit of insight into how you go about sort of forecasting that? So for example, how much has already maybe locked in through hedging for 2024? And what sort of parameters -- market parameters are you sort of thinking about, I guess, just in broad terms when you're looking out to 2025 and '26? So that would be my first question. And then secondly, I heard what you were sort of saying about the decision to accelerate growth. But I'm just wondering, how do you feel about accelerating growth in Offshore Wind, given that, that industry is facing some significant challenges at the moment. Maybe linked to that question, could you also address -- do you foresee any problems to your upcoming projects will be future plans from the delays that Siemens Gamesa is having ramping up its 1,114 megawatt turbine production?

Yes. Peter, I'll take the first one on the Hydro/Biomass/Gas division. I mean, obviously, we won't go now into more details like hedge quarter and the FX price assumptions. But in general, what you can assume is that how we model that is we have our kind of forecasted models on expected spreads, but it's also what we expect to realize as time value on those assets. And we obviously also compare that with historic development. So therefore, we are very confident with the numbers we have put forward. How much of that is already hedged? I mean, as you know, most of the assets are in the U.K. and in the Netherlands where liquidity in market is fairly poor. So therefore, hedging typically only happened, say, a year ahead. And therefore, large chunk of that, especially in later years isn't hedged yet. But as I said, we are confident with the numbers we put forward.

Good, Peter. Then I continue with offshore. So first of all, we don't see any imminent problems with our suppliers on the projects where we have already signed turbine supply agreements. But we are in constant dialogue, but my expectation is currently we don't see any issues on our project. Then also with our pipeline, we are actually pretty happy. So other than some of our peers, we do not have any problems with our projects, which are either under construction or where FID has been taken. And also, when it comes especially to the profitability, let's maybe briefly go through our portfolio. We have 2 projects under construction. So at the moment, we have taken FID, we know profitability levels. That is especially the one in the U.K., Sofia with the good CfD and CapEx long term locked in. And the Danish project Thor, where we plan to sell the power via PPAs and the PPA market here is very deep and locked in long enough. Then we have projects under development, also 2 CfD assets, 1 in Poland, 1 in Ireland, with both very good profitabilities. And we have those projects where we have not paid any or only very, very little lease payments. Our German North Sea cluster and the [ Nordseecluster ] West, which is a market integration project where the plan is also to sell the power via PPAs. And then we have our U.K. around 400 extension projects. Of course, no CfD secured yet. And the U.S. projects also, we are in the auction or in the RfP for offtake, but no decision taken yet. So when I look at the existing portfolio, it's much bigger than what we think we could invest in offshore when we presented our targets at the last Capital Market Day. So we are already far beyond that, profitability looks good. Looking into the future, I mean, that is, of course, a crystal ball question. I mean I don't know, it depends on what our competitors will do. I mean if we see behaviors like in the German auction, probably our pipeline will, over time, dry out. But I don't expect it. I expect really a normalization. What we have seen in the German auction, which is the equivalent of 25-megawatt -- EUR 25 per megawatt hour for the full lifetime of the project being the lease payment alone, I think that is not sustainable. So we expect a clear normalization and then we can also sustain the time where we probably have a year or so. No new offshore projects added to the pipeline. Our entire investment universe, including especially solar battery onshore wind project in the U.S. here in Europe and now also additional investments in flexible generation is so broad that we will not have any problems to spend all the headroom we have at good projects.

Thank you, Peter. Next question, please.

We'll take now our next question from Deepa Venkateswaran from Bernstein.

Deepa Venkateswaran form Bernstein. So I have 2 questions. First on [indiscernible] segment. If I go back to your '21 CMD for 2027, the implied guidance was around EUR 900 million. And now basically, I know it's not exactly the same year, but [indiscernible] is well above EUR 1.5 billion, say by '26. Just wonder if you can kind of say, what has changed? Is it that [Technical Difficulty] on the tightness in the market, the volatility because of intermittency or -- what's given you even more confidence? So that's my first question. And the second one on Thor, which is obviously your latest project to take FID and under construction. I mean you've not secured the PPAs yet for it. I was just wondering what you can say to give us a bit more confidence that actually the project will be able to meet your hurdle rate of 100 to 300 bps over back given that is the visibility of the PPA yet, but you started constructing?

I can start with the first one, Deepa, but it was difficult to understand you. I don't know whether Thomas or Michael got the second question. Thomas, is nodding. So all good. So we start with the first one. So on Hydro/Biomass/Gas, what has changed in the last, let's say, 36 months -- yes where we prepared the last Capital Market Day and today. So I mean, sounds very a bit odd, but we always expected market tightening and it probably came a bit earlier than we expected it. And what is driving the higher returns here are actually 2 things. One is scarcity in the market. So we see much tighter power markets. That is reflected in much higher capacity payments in the auctions. Also now other countries introducing capacity markets. I mean, Germany will probably also have to do it at least for new ones. And the second one is volatility. And volatility is driven by intermittency from renewables, but also how steep the merit order is. And that has, of course, also changed significantly with significant higher carbon prices. and also some supply disruption here and there. So we are very confident -- I mean -- but when you look at the chart on Page 6, I think what we call system services can be predicted very good. That goes even further up in '27 because we see much higher capacity payments in the U.K., you know the last auction. On the volatility side, which is in the end a function of intermittent renewables and the steepest of the merit order, it's also very clear how that looks like. And then the probably most difficult to predict part is the spread part. But please keep in mind that these assets do not run baseload. So it is not the base load, for example, clean spark spread you need to look at because these assets run in times where renewables are not sufficient to meet market demand. So it's in the end about the capture spread. And here, we have the beauty of the portfolio diversification because if you have a good renewables here, we make the money on the renewable side. If we don't have a good renewables here, we have higher capture prices for these flexible assets because they are needed to compensate for the missing renewable power. And that gives us high certainty about the overall guidance we give because we expect a normalized year. And if we don't make it on the renewable side, we make it here or vice versa. So if you combine renewables guidance with this one here, we have the very high confidence of the significant higher earnings.

And Deepa, the second question we understand is on the project Thor, given that the PPA is still open, how confident are we on the returns. I mean, let me take the following perspective. I mean, first of all, the project seems for us attractive. That's why we have taken the decision. I mean, we have the general idea to reduce the quarter of merchant income in our projects, and that's why we want to move, if possible, merchant offtakes into PPA if the timing is right. And that is something we will also follow up on Thor. But to be clear, the profitability of the project is not depending on concluding the PPA now. But if there's an attractive PPA out there that also obviously would net into our strategy, and we would go for it.

Does that answer your question Deepa?

Yes.

Thank you, Deepa. Maybe 1 additional comment on what Markus just said. For those who are interested to understand more on the development of the capacity payments, you may have seen that today, we also published our latest version of the factbook. And the factbook on Page 70, you can actually see that we have what capacity payments we have secured in the meantime. Next question, please.

We'll take our next question from Vincent Ayral from JPMorgan.

Yes. I will -- we retreated quite a few topics here. So I'll come back to, I would say, medium-term topics we've been looking at in the past to take some perspective. So the first 1 is the coal foundation. No question being asked this time around. And the Green in the government since it's been there, we had a material increase in CO2 emissions. So I believe that the coalition could be keen to restart discussions on the coal foundation fairly soon. So as soon as they feel secured regarding the energy crisis. So what is your view regarding the energy crisis, the situation we saw some disruption on LNG or potential disruption with strikes in Australia reviving a bit the gas market right now. But we're still far from the winter, we don't know the weather, whether it would be cold or not. What's your take there in terms of the risk/reward into the winter regarding supply/demand situation and commodity prices? So if you're comfortable with that, could we indeed start taking the discussions on the coal foundation restarting soon? So I think that's the first question. The second is regarding the timing of the CMD. We've heard that this is the package visibility on it would come like probably by early 2024. There are plenty of things to iron out, like investment frameworks. Germany, notably need some support for CCGT new build. I think you made a comment regarding capacity payments yet you will -- do you see indeed before that? So do you expect to get visibility on the investment framework on the generation side of the energy system by then? Or what could we expect regarding German investment? How do you see [ CMD ] more specifically?

Yes, so thanks for the question. Let me start with the easier one, the second one. Can't expect -- I mean you probably have seen that the German government has pre-aligned on potential auction design for H2 ready CCGT with the European Commission because it is always a state aid approval topic because it's a capacity support. So there is basic alignment. What we expect now that we -- I mean currently, the German government is working on the details of this auction framework for H2 ready gas plants, and that will be published after the summer break, so we can expect it early September, and that is when the consultation process started. So by the time of our CMD the consultation process is probably through. We are a relevant part of that. So before we come out with CMD numbers and investment plans, we have very high visibility about the framework, and this gives us enough confidence to make an assessment how much investment we are willing to do as part of our overall portfolio mix. On the coal foundation, this is now pure speculation. I mean you know that it's still on the agenda. It's clearly agreed with the German government as part of the contract to bring coal exit forward to early 2030. And it will be addressed 1 day, but I also said that I don't [ go ] on these politically sensitive topics. I don't want to give a public state of the union update in every call. So you will only hear from us in case we have relevant news, but no intermediate updates.

Okay. In terms of the winter, then what's your view of the [indiscernible] which should direct way?

Yes, I forgot that question. Sorry. So we all have observed the nervousness of the gas market, especially yesterday. And I think that is probably a good point to discuss it. Overall, we shouldn't be too concerned about the next winter and gas storages across Europe are very good, very well filled. We don't have the problem with the generation capacity in France that we had last time and there are no issues around pipeline supplies. But we also all know that you need not only the gas in storage, you also need a constant gas flow. And then you have the big question mark, how does this -- does the demand side look like? So in case we get a very cold winter, some problems on the generation side, only a small hiccup might result into a very severe situation. And this time, it was potentially missing bits and pieces in the global LNG market. It could be an outage of a pipeline, supply, could be anything. So I think overall, base case is we should get to the winter okay and well. But if there is an issue, there is no headroom, there is no buffer in the system. So the moment something goes wrong, it can go wrong very significantly. And I think that is how the situation looks like. What is missing is we -- more import capacity for LNG, especially in Germany. We have not built the project in Germany, which were originally planned and probably also some more -- some minor upgrades missing to have a better west east flow of gas. And hopefully, we are there when we speak in 1 year's time.

Thank you. Our next question, please.

Yes, we'll take now the next question from Wanda Serwinowska from Credit Suisse.

Wanda Serwinowska, Credit Suisse, 2 questions from me. The first one is on the U.K. on the Ofgem consultation on balancing mechanism reform. I mean, is it relevant for you guys? Or -- is there any potential impact given the profitability of the UK CCGT fleet? And the second question is, can you please tell us -- have you seen any improvement on the permitting in Europe? Is there an improvement because, I mean, there's a bit of push from all the politicians, but have you seen any tangible signs that it's getting where it should be?

I start with the last question, and then Thomas takes the first one. On permitting, we clearly see a significant improvement. I would probably even turn it around and say nobody, be it a politician, be it somebody in bureaucracies or even working on lawsuits want to be responsible for delaying renewable investments. But the issue is currently moving from the permitting side to the grid connection side. So the current problem is that the major delays are happening because connection to the grid is delayed here and there. And that also covers all European countries. So permitting is going better. We also see definitely an acceleration of build-outs. But now the discussion starts moving to the next bottleneck, which is grid.

And on Ofgem you're referring to the inquiry on generators in the short-term market?

Yes, exactly when basically Ofgem was saying that some generators got GBP 6,000 per megawatt hour, and Ofgem is looking at.

Yes. And I think they also named the 2 operators who probably misbehaved. We were not among that. I think what we do is in case we are needed for immediate dispatch decisions that we apply reasonable pricing. So also any potential change in the market rules, we think would not affect us.

And would you be able to basically disclose how much money you made on balancing as a ball park or otherwise?

No.

Thank you, Wanda. Next question, please.

We'll take our next question from Harry Wyburd from Exane.

I appreciate. We covered a lot of ground already, so I'll try maybe quickly. So first on offshore, I just wanted to get your views on the U.S. versus Europe. In Europe, we've had a few auctions like in Ireland carrying it sort of okay headline prices in the U.S., we have had 1 auction canceled and 1 delayed because it seems like the states are bulking at the prices that have been offered. And obviously, Offshore Wind is more competitive relative to fossil fuel prices in Europe than it is in the U.S. So I wonder whether you see that as a potentially emerging trend that it might be easier for offshore in Europe? And is that something that would play into your capital allocation decisions? And then the second one, on flexible generation and your new guidance. What are your assumptions for competition here? I guess we kind of usually assume that these assets are sort of as they are and rather limited scope to add new ones in the short term. But if you look at say Centrica, for instance, has come back to life and started investing in small [ peakers ] and batteries. I just wondered whether there's a risk that actually battery capacity and maybe even some peaking capacity might get built a bit quicker than people expect and that might dilute some of the margins that you're seeing in your guidance in the long run?

Yes, Harry, thanks for the question. On offshore, you're absolutely right. I think in terms of what it currently costs to build offshore wind, let's exclude crazy lease payments, just the LCOE from technology and compare that to the existing power price level is competitive in Europe. And it is challenging in the U.S. and in the end, depends on the willingness to pay from the offtakers. And I mean NYSER, the New York regulator has now come back the second time and asked for a revised bids. So the question is whether the U.S. is willing to pay for Offshore Wind, given where the costs are. And last comment on that, I think also in terms of learning curve, the U.S. is not where Europe currently is. So the LCOE, the same technology, everything being the same, I would say, probably 20% higher in the U.S. than they are in Europe, given that you haven't had the learning curve on anything there. But in the end, it's not a question for us, it depends on what is the willingness to pay. And if you look at the East Coast, if you want to decarbonize, I think, especially the U.S. East Coast, has no way around Offshore Wind. So it's a question how fast you actually invest in the technology. I mean we have, as I said before, enough flexibility to channel our investment where we think they are best. So let's see what the outcome of the U.S. is, but I'm not -- I'm definitely not pessimistic about offshore U.S. Flexible generation, yes, I mean the moment you see significant investments in flexible firm generation capacity, of course, the current high earnings level, which is driven by scarcity and volatility might come down over time. But this will not happen within 2, 3, 4 years. It will probably take half a decade of investments, and we ensure that we also invest there. So over time, with our investments, we can probably keep the earnings level because what we lose on the existing fleet you gain on the new investments.

Thank you, Harry. Next question, please.

We'll take our next question from Ahmed Farman from Jefferies.

Actually 2 follow-up questions. I think, Markus, you made a comment earlier about grid issues or delays because of availability of British. Could you please expand on that? I mean I'm just trying to understand what are the underlying causes there? Is it sort of lack of physical infrastructure, or is there more technical reasons associated with your intermittency and grid's ability to incorporate the intermittent form of renewable generation at the required pace? That's my first question. My second question is actually on Slide 6. Specifically on the 2024 chart that you sort of got [indiscernible]. So the running of the -- running the assets lead, I take it from your previous comment that even for 2024, most of that is sort of unhedged or not really sort of contracted at this stage. Could you then maybe talk just qualitatively a little bit about the sensitivities as to what can make that green bar much higher or lower? And how does this sort of earnings probably accrue within the year? Is it mostly sort of a winter sort of element here, sort of quite high seasonality?

Yes, Ahmed, thanks for the questions. I mean on grid, let's start with the big items. It's offshore. Of course, we have constant discussion about offshore grid connection. So of -- the offshore wind farms in Germany, we have now an auction design where your grid connection is promised and you get compensated if it's not there. But let's move to the U.K. where currently there is an intensive discussion how fast our U.K. round 4 projects and those of others can be connected to the grid. And that is simply the question when is that being built. And it's probably not so much a problem of the capital. It's more of the question of permitting, consultation processes. And we all know how difficult it is to get a permit for a grid landfall in the U.K. But the same problem is for all onshore staff and onshore, I mean, wind as well as PV because with the grid operator who operates that grid, and that's typically not the TSO, you need to apply for a grid connection date. And then sometimes you have it, but then they have delays in their investments, in their physical investment, and they push it down and you have no means to do something against it. And we currently see that, I would say, in almost all European countries that, that becomes the current bottleneck. It's not on onshore and PV. It's not the equipment. It's not the bottleneck and it's not the permitting anymore. It is grid. On Page 6, '24 is, of course, higher hedged than '25 and '26. But let me explain it again why we are confident. So what could drive it significantly down? One is surprisingly more supply and that you can rule it out. They will not, by surprise, be higher supply on the power side in '24,'25. The other, which could drive it significantly down is significant lower demand because that would also especially compress the spreads of those assets which are needed to balance the market. We have factored in the normal -- I mean, demand development. And I think currently, more or less demand expectation is more on the low end because we see a downturn in the economy. And the third key driver could be if we see a very, very favorable renewable year. So significant production from wind and solar because then you need less from that. But as I said before, then we would benefit on our other segments. And that is why when you put both guidances together, we are very confident of achieving that.

Thank you, Ahmed. Yes, go ahead.

We'll take our next question from Robert Pulleyn from Morgan Stanley.

I had 1 question building on prior one, please. As we consider these RWE bids into the U.S., New York and New Jersey capacity auctions. And your prior comment, Markus, that it depends on offtakers' willingness to sign at these current prices. But do you see a risk that off-takers just delay awards like they did in Rhode Island and ask developers to come back in 12, 18 months' time when costs maybe have come down? And secondly and related, do you expect current costs to trend lower again at these levels in offshore wind?

Good question, Rob, what would you recommend the regulator? I struggle to give a clear recommendation. Of course, that could happen. I mean, you cannot rule it out. But I think the Rhode Island one was a special one because there was no competition. So you had no reference prices. I mean as everybody is in the ballpark, you probably see are being a bit more comfortable. Do I see a clear trend that equipment costs for offshore and also installation of offshore will come down in the next years? Clearly, no. Because if you look at the projects which are in the pipeline and the build-out targets of the western world, and then the manufacturing capacity and everything you need to do that. There is still a very tight market supply. So I don't expect it. And also, if you look at the recent results of the western suppliers, they are definitely not in a state where they could easily reduce prices in the next 2, 3, 4 years. So if you want -- it's more of the question whether you want to decarbonize, if you want to decarbonize it comes at these costs and don't expect these costs to come down.

Next question.

We'll take our next question from Olly Jeffery from Deutsche Bank.

Thank you for the CMD on Hydro/Biomass/Gas today. A few questions. Firstly, can we consider the EUR 1.5 billion average that you've given? Could we consider that as an average price to spend that for the rest of the decade. Do you have visibility on that far out? And of that EUR 1.5 billion, I mean, I presume the majority comes from the U.K., but you're able to give an approximate split for how much comes from the U.K. in total. Just looking at the Lignite business. I mean the guidance that you gave, the Lignite business, EUR 800 million to EUR 1.2 billion, but implied coming in at the lower end of that guide. I wonder, would your visibility on lignite spreads the next year, are you seeing spreads at a similar level for next year than [indiscernible]?

Olly, let me take the first one, and Michael will answer the second one. I mean, we don't want now -- I mean, we have given now 3-year guidance or 4-year guidance, please don't force us to try to give you longer-term guidance. We think about how confident we are and then we give it at the CMD. But please keep in mind that we should not expect that scarcity stays where it is, I mean, as we discussed also the gas market and that also feeds into the power market. So I expect long term, I mean now talking about the next decade that volatility will come down and also scarcity comes down because I mean, these high price levels now also incentivize of course, investment in flexible generation capacity. And now we need to figure out exactly how much of our capital we would like to invest in that part of the business to give you a long-term guidance, so including new earnings from new investments for that segment until 2030. We do not give a split by a country, but also the continent. So the Dutch and German fleet contributes significantly to the earnings. It's not the U.K. only.

Yes. On the lignite spread, I mean, what you have seen in spot market is clearly that spreads have come down, therefore, on the unhedged positions we are not -- we're getting lower returns than they might have seen earlier. I think the key driver for the lignite fleet is really what we have already hedged and at which volumes we have hedged. And I mean, on lignite, you know that this is the segment where we clearly hedge out for longer. So therefore, we also see going forward at least attractive earnings in the next years to come in the front years.

Thank you, Olly.

We'll take our next question from Piotr Dzieciolowski from Citi.

Two questions, please. So firstly, I wanted to ask about the German transmission sector. Do you have a view what is likely to happen? It seems that some of the operators are struggling on the balance sheet to finance required development. So do you think the consolidation is likely, and how do you see this playing out? And also given your stake in them, what would you want to do with it? And the second question I wanted to ask you on the German bidding price. Does this change your view on the possible PPA levels and how much these industrial players are willing to lock in and for how long? And -- because you can look at it as a half full or half empty situation, and you're actually developing some of the assets which you're about to lock in via the PPAs?

Yes. Thank you, Piotr. On the TSO, on the transmission side, I expect dynamics in the next coming quarters. But the trigger for that is -- and that is outstanding, an agreement between the German and Dutch government on the German part of TenneT. The moment the German government has a solution for the German TenneT part, I would expect that we see some discussions and dynamics. But I don't know where the government stands whether they want to consolidate into one TSO or want to have stakes in everything. But I expect that you're going to probably see after the TenneT solution, some rumors. And -- but so far, no discussions have taken place. So we are expecting that for later this year or early next year. On the offshore side, yes, that's an interesting question. So I have 2 perspectives. One is that of the industry. We have a very good understanding how much the industry is willing to pay. So I would expect if you try to pass through all the cost, including the negative bid component, you will probably struggle to find long-term PPA offtakers. But what is positive for us is that these volumes, these 7 gigawatts will now not show off in the PPA market. And that, of course, might give us good opportunities to sell from our projects. I mean, Michael discussed already. We have the Dutch one, and we have the German ones to lock in good prices for longer.

Thank you, Piotr. Next one, please.

We'll take our next question from Louis Boujard from ODDO BHF.

Maybe a follow-up still on HPG on the Slide #6. You mentioned that you don't want to provide any view on the hedging for '24, '25, '26 at this point in time, which is understandable. But you mentioned as well that you base your assumption on normalized pricing. So my question would be, what is your view regarding normalized pricing? Are we talking about levels that would convert towards historic prices that we had for instance, back in '21? Or are we talking about current prices which are supposed to be normalizing for the '24 to '26? And also as a follow-up on the first one, if HPG is expected to do EUR 1.5 billion of EBITDA on average per year, does that mean as well that we should forecast Supply & Trading to be maybe a bit better than what it used to be in the past on a return basis. My second question would be with regards to the German offshore lease payment that you mentioned. You said that it was supposed to be a conjunctional situation or at least that you don't expect it to repeat in the future in the offshore lease. Why do you think that this was just an exceptional factor and you will have further option going forward where you would be able to bid at a reasonable level in terms of returns?

Okay. So let's start with Page 6 again. So normalized prices are current market prices. I mean, the markets are liquid. And you see that the prices have more or less already normalized when you look at clean spark spreads in '25 and '26. So -- but let me say again, this is not the big driver. And let's talk about hedging again. If you sit on a nuclear position or a lignite position, which is far in the money, far, far, far in the money, you hedge it. These assets -- most of them are not far in the money. And I give you now an example. You have a current price consolidation where the capacity is, let's say, 20% in the money and you hedge it. And then you have price movements that moves it out of the money, you unwind the hedges and make profits. But if you look at the hedge ratio at that point in time, it is zero, but you have already locked in profit. So it's very difficult to translate hedge ratios into secured profitability that doesn't make sense for these flexible assets. So it's more the question is how confident are you with what you have already done historically to give guidance. And we now, for the first time, feel very confident to give guidance for the next 3.5 years in this segment. But for the moment, we have to leave it here. There's no direct correlation between Hydro/Biomass/Gas and Supply & Trading. So the environment is the same. But of course, the traders can also be on the wrong side of history. But generally, the environment to make good returns in trading is currently, and we also expect that for the next -- for the near future, better than normal. But it doesn't mean that you also see higher earnings here that first need the good performance of the gas. Sorry, in the offshore question. What was it again?

The question was -- go ahead.

No. Go ahead, Thomas.

I got it again. So yes, why are we -- I mean, you can never be confident what your competitors are doing, right? But let's -- I expect that everybody will realize what has been done and where real prices are, and I don't understand the story, to be honest, that you need the power internally. I mean, if I'm today willing to sell the power for the same guys for lower prices and it cost them to build the assets while building the assets. And that is, of course, now discussion the entire industry having where do we see costs, we actually offtake prices and so on and so forth. And that, I think, will normalize over time. I mean I was actually surprised to see these high prices because I thought before the German auction, we have seen the normalization with LCOEs, around EUR 80 in Ireland inflation linked, so a new base. We have seen these auctions with very low lease payments. So this came really as a surprise. And hopefully, it is a onetime outlier and then we go back to normal again. If not, I mean, if people have a totally different view about the future, then the market has, then it might continue. But my expectation is also and that is why I would never go or we would never go to these bid levels. If it continues another round, I expect action by the government because then they say that the PPA market is drying out and then we probably change the routes and go to CfDs, which will be then handed through to the industry that they can benefit from the real cost of the technology. And that is, of course, also a risk if you have signed very high lease payment if the auction design is then changed. Maybe let me take also the opportunity to give you an update about the recent news because the German regulator has just announced where the second German offshore auction to whom it was awarded. You still know about these sites where we have step-in-rights. And interestingly, the 900 megawatts where we have step-in-rights were directly awarded to us. And that can only be the case because we bid zero lease. So we have now 900 additional megawatts without any lease payment. On top to the 600 we already have. So we have 1.6 gigawatts in Germany without any lease payments. We have also been awarded the site where [ Nordseecluster ] has a step-in-right, but now we have to wait what [ Nordseecluster ] does with that step-in-right.

Thank you. Next question, please.

We'll take our next question from Anna Webb from UBS.

You've clearly had a lot of success with the Hydro/Biomass/Gas division. And it seems there is extra value for the portfolio in markets where you have renewables and conventional assets together. We noticed the Magnum acquisition you made in the Netherlands recently seems to have been very well timed. But if we look at your U.S. assets, you don't have the same balanced portfolio of renewable and conventional flexible assets. So my question is, would you like to have more conventional assets in the U.S.? And would you be happy to acquire or build new conventional plants over there? Would you consider new gas in the U.S., too?

I think everybody agrees that, that is a very good question. Let me slightly rephrase it because we don't like the discussion about conventional, which I mean, it's for us, a [indiscernible] of CO2 or fossil and renewables. So whatever we do, and that was also the case for the Magnum plant, it needs to be -- it needs to have a clear decarbonization path because in the end, we want to sit on a position where we have renewables, wind and sun. And we have firm and flexible generation, which is also green, so green baseload. And that is the position we want to be in. And whether -- and when and how we're going to do that for the U.S. market or whether we do it at all is a strategic discussion we are having, and we will update you the moment we have come to a conclusion on that strategic debate.

Thank you, Anna. Next question, please.

We'll take now our last question from Martin Tessier from Stifel.

Two questions from me. The first one on lignite, especially in Q2, where the volumes dropped from [indiscernible] in Q2 this year. You mentioned some maintenance issues, but also unfavorable market conditions. Could you please provide us with more clarity on the specific reasons for the decline in production, which is really massive? And more specifically, would you be -- is it possible to get a breakdown of the lower volumes, i.e., what percentage of decline is due to maintenance and what percentage of decline is related to unfavorable market conditions? And maybe as a small follow-up on this one, you recorded an impairment of EUR 1.1 billion in Q2 because of lower electricity prices. Given current forwards, what's your view on potential further impairments in H2 in lignite? So that's my first question. And second question on cost inflation and CapEx allocation. So definitely, we see cost inflation in solar PV versus pursuing cost inflation in offshore and onshore wind. So a very simple question. In the medium term, do you expect a shift of CapEx from wind to solar PV?

I think I'll take the first one on lignite. So first on Q2, I mean what happened in Q2, we simply had planned for revisions on units. I mean given that prices are low, typically in Q1, that's the time where you go for plant maintenance and that also caused the lower availability of our fleet. So nothing extraordinary, it was all planned. And secondly, we mentioned that especially those units that were brought back to 600 and 300 megawatts units, we didn't hedge given that at the time when they were brought back, price levels were still significantly high, and we wanted to also mitigate the risk that the availability of those older units that had been brought back was not as high. So therefore, those positions were not hedged. And now with power prices coming down, obviously, there were also a few hours where they were not in the money and therefore, not operating. So that's the reason for the lower Q1 results. The impairment on lignite, I mean maybe some more information. I mean, first of all, it brings back the -- or reverse what we did at year-end. But this is for pure accounting purposes. Because what happens if prices come down, as I mentioned, we have hedged lignite far longer. The hedges that are reported in the OCI gets positive. And since the impairment has been done purely on spot prices, then the asset value goes down. So that's why for accounting purpose, we had to impair the lignite net given that we have hedged quite a portion of those assets in the next years to come, it doesn't have a material impact. Lastly, economically, it doesn't have a material impact. Last comment, allowed further impairments, they are now fully impaired. So the remainder is just the value of the land. So there is no further impairment possible on the lignite phase.

Yes. And Martin, your last question on capital allocation and mix. Let me put it that way. You can expect, of course, higher CapEx, higher growth compared to the old CMD and from the additional one, a much higher proportion goes to solar than wind. But all details in November.

Thank you, Martin. Thank you, everyone, for dialing in to the call today. This concludes today's call. Yes, as Markus just said, we provide you, of course, with much more details on our growth plans at our Capital Markets Day in London at the end of November. So we are very much looking forward to seeing you then. Having said that, I wish you a great summer. Enjoy your well-deserved break. [indiscernible] location and speak to you soon. Have a great day. Bye-bye.

Thank you for joining today's call. You may now disconnect. Thank you.