Rwe Ag Ord S/Adr

Welcome to the RWE conference call. You will be forwarded to the call in a few minutes. If you would like to ask a question after the speech of Michael Mueller, please press star one.

Thank you.

Thank you. Thank you.

Welcome to the RWE conference call. Marcus Kriva, CEO of RWE AG, and Michael Miura, 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, Anissa. Good afternoon, ladies and gentlemen. Thank you for joining RDB's conference call on the 1st of 2023. Our CEO, Markus Krever, and our CFO, Michael Müller, will guide you through our presentation, after which we'll start our Q&A session. And with this, I hand over to you, Markus.

Yeah, 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 six months developed well across all core segments, especially driven by strong contributions from the hydro biomass gas segment and from supply and trading. Given the strong H1 results, we have increased our earnings guidance for the full year. We are also on track with our green growth program. In the first six months, we recorded a marked green capacity growth of 5.1 gigawatts. the 3 gigawatts of mostly solar capacity in the U.S. that we acquired from Corn 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 development in the offshore wind industry. We are currently experiencing challenging times. Inflation and supply chain constraints have resulted in rising costs. For the first time in our industry, developers are pulling the plug on secured projects. Projects without any or only little lease payments. On the other hand, we saw record high negative bid prices in the recent German offshore auction. We participated in that auction and we would have loved to win. However, bid prices reached levels where our return expectations would not be met, even in very optimistic scenarios. And so we pulled out. We will not compromise on our return requirements nor on our stringent risk management approach. At RWE, we are continuing to develop our profitable offshore wind projects. We have taken the final investment decision for our project TOR, 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 project in Germany, the North Sea Cluster, in the Netherlands, in Poland, in the UK, and the US, where seabeds have already been awarded to us. CO2 reduction is also a key element in our growing green strategy. We have set our stricter CO2 reduction targets. In May, we submitted CO2 reduction targets in line with the 1.5 degree reduction pass for validation to the internationally known 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 in November 28th, and we are very much looking forward to meeting you all in person in London. Let's now move on to page five. Our profitable green investments and capacity growth have contributed to our positive earnings developments. In offshore, with the commissioning of two large projects in 2022, In onshore solar, we see acquisition of CEB and numerous new projects across Europe and North America. And in hydro biomass gas with the commissioning of the BBLIS plant in Germany and the addition of the Magnum gas power station in the Netherlands. The better than expected earnings development is driven by the strong performance of the entire core business. In particular, the hydro biomass gas division and supply and trading have delivered outstanding performance. Get 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 and gas segment and its respective outlook for the coming years. Over the past 18 months, we have seen a significant improvement in the performance in our portfolio of flexible and firm generation assets. And we see a substantially higher earnings level in the coming years as well. The gross margin of our flexible and firm generation fleet can be broken down into three areas. First, system services include stable and regulated revenues such as capacity payments in the UK and Germany and green certificates for hydro and biomass plants. This revenue stream increases with higher scarcity as evidenced in the most recent UK 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 1.5 billion euros per annum with even higher contributions in 2024. Let's move on to page seven and an overview of the capacity development in our core business. In the first half of the year, the core generation portfolio grew 5.1 gigawatts. Capacity additions were mainly driven by our strategic acquisition of Korn Edison clean energy businesses with 3 gigawatts and the Magnum gas power plant with 1.4. 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 for a tour with a capacity of 1 gigawatt off the Danish coast. A large share of capacity growth is currently taking place in the U.S., where we have almost 3.5 gigawatt under construction, including 1 gigawatt of batteries and more than 2 gigawatt of solar. Given all the positive developments, we increased our earnings guidance for 2023. We have updated group EBTA guidance to 7.1 to 7.7 billion euros. And for adjusted net income, we have increased our guidance to 3.3 to 3.8 billion euros. And with that, let me hand over to Michael, who will guide you through the financials of H1 in more detail.

Yeah, thank you, Markus, and also good afternoon from my side. In the first part of 2023, we have performed very well, driven by the strong operational performance of our core business, especially in flexible generation and supply and trading. In offshore wind, adjusted EBITDA increased to 762 million euros, mainly due to capacity additions of Triton Null, 506 megawatts, and Kaskazi, 342 megawatts. Higher hedged prices in the offshore segment have partially been offset by lower wind conditions in the first half of 2023. Onshore wind and solar recorded an EBITDA of 519 billion euros. 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 1.939 billion euros. The exceptional result was driven by short-term asset optimization and hedges conducted at attractive price levels. On the back of the strong performance, the supply and trading segment reported an adjusted EBITDA of 799 million euros. 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 4.5 billion euros, including the coal and nuclear emissions. 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 2.6 billion euros. Decretion increased in line with our green growth investments. The year-on-year adjusted financial results were stable due to offsetting interest rate effects. For adjusted tax, we applied the general tax rate of 20% for the RWE group. And finally, adjusted minority interest reflects lower earnings contributions from minority shares. The adjusted operating cash flow was 5.5 billion euros 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 in storage and decrease in trade receivables. Net debt increased substantially due to the significant investment in our green growth. In Q1, we closed the €6.3 billion acquisition of Con Edison clean energy businesses. And we invested a further €2.7 billion net in our green growth program, including the Magnum and JDM solar acquisitions. Other changes in net financial debt increased by €3.1 billion. This includes timing effects from hedging and trading activities. Our net position from variation margins for power generation hedging stood at 1.8 billion euros. 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 Adobe's core business is now expected to be between 6.3 and 6.9 billion euros, The range for the group is now 7.1 to 7.7 billion euros. This is mainly driven by the strong performance of our hydro, biomass and gas segment, where we have increased our guidance from 2.6 to 3 billion euros, and our supply and trading segment. Here, we are confident that we'll achieve a result significantly above 600 million euros. Adjusted depreciation is expected to be 2.1 billion euros based on lower depreciations in the coal and nuclear segment. Adjusted EBIT is now assumed to be between 5 and 5.6 billion euros, with adjusted net income ranging from 3.3 to 3.8 billion euros. The dividend target remains 1 euro per share for this year. And with that, let me hand back to Thomas.

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

As a reminder, if you would like to ask a question or make a contribution on today's call, please press star 1 on your telephone keypad. To withdraw your question, please press star 2. We'll take now our first question from Alberto Gandolfi from Goldman Sachs. You can go ahead now. Your line is open. Thank you.

Operator, thank you, and thank you, everyone, Thomas, Marcus, and Michael, for taking my two questions and sticking to the rules. The first question is, I mean, first I thank you for providing visibility and guidance on the value and the outlook of 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 7, 8 billion euros incrementally be done 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 leveraging 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 7 gigawatts under construction? Where do you see the IRR over what on those 7 gigawatts? 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 if you double capex and capex, that would be sufficient for us to try and gauge if these investments are not very profitable or extremely profitable. Thank you so much for your patience.

Yeah. 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 the discussion we had internally in the board. And, I mean, the way how we looked at it, in the end, you can either take the short-term perspective, which you lined out, 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 of 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 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 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 markets to update you on the accelerated growth plan. On your second question, I mean, I think there are different elements in it. I think the first one is around PPA markets. We have mentioned that in previous calls, PPA markets have improved. So we see now attractive prices in Germany and also in Europe. 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 seven gigawatts, what is the profitability? I mean, you know, we don't communicate profitability on individual projects, but I can reassure you that when we took the investment decisions on the seven gigawatts, we obviously applied very strict investment criteria. so therefore all those projects are profitable and clearly meet our return expectations. Now you know our return expectations are in the range of 100 to 300 basis points above WECC. WECC 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 RRIs we're expecting, and we'll 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.

Thank you, Alberto. Next question, please.

We'll take now our next question from Peter from Bank of America. Your line is open now. Thank you.

Hi, it's Peter here. Thank you for taking my questions. So two from me, please. Firstly, thank you for that guidance on the hydro biomass gas division. I think that's very useful for the first step in terms of helping people understand the earnings power of that business. I'm just wondering, in terms of the biggest chunk of it, which you describe quite simply is running the asset fleet. Can you give us a little bit of insight into how you go about sort of forecasting that? So for example, how much is already maybe locked in through hedging for 2024 and what sort of parameters, market parameters are you sort of thinking about, you know, I guess just in broad terms, you know, when you're looking out to 2025 and 26? So that'd be my first question. And then secondly, I heard what you were 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 problem to your upcoming projects or indeed future plans from the delays that Siemens Gamesa is having ramping up its 11 and 14 megawatt turbine production? Thanks very much.

Peter, I'd take the first one on the hydro-biomass gas division. We won't go into more details like hedge quarter and the effect price assumptions. But I mean, in general, what you can assume is that how we model that is we have our kind of forecasted models on expected spreads, but it's also what we expect to realize as time value on those assets. And we obviously also compare that with historic developments. So therefore, we are very confident with the numbers we have put forward. How much of that is already hatched? I mean, as you know, most of the assets are in the UK and in the Netherlands, where liquidity in markets is fairly poor. So therefore, hatching typically only happens, say, a year ahead. And therefore, a large chunk of that, especially in later years, isn't hatched yet. But as I said, we're confident with the numbers we have 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 projects. Then also with our pipeline, we are actually pretty happy. other than some of our peers, we do not have any problems with our projects which are either under construction or where FID has been taken. And also when it comes, especially to the profitability, let's maybe briefly go through our portfolio. We have two projects under construction, so the moment we have taken FID, we know profitability levels, that is especially the one in the UK, Sophia, with a good CFD. and CapEx long-term locked in, and the Danish project TOR, where we plan to sell the power via PPAs. And the PPA market here is very deep and long enough. Then we have projects under development, also two CFD assets, one in Poland, one 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 Hollandseekust West, which is a market integration project where the plan is also to sell the power via PPAs. And then we have our UK round foreign extension project. 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 big. 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 you 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, 25 euros 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 project 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.

Okay. Thanks very much. Thanks for your detailed answers.

Thank you, Peter. Next question, please.

We'll take now our next question from Deepa Bencaster-Warren from Bernstein. You can go ahead now. Your line is open. Thank you.

Thank you. So I have two questions. If I go back to your 21 CMD for 2027, the impact was around $900 million. And now basically, I know it's not exactly the same deal, but it's well above 1.5 billion, saved by 26. Just wonder if you can kind of say, you know, what has changed? Is it that now you have more protection on the tightness in the market, the volatility because of intermittency? What's given you even more confidence? And then, so that's my first question. And the second one on Tor, which is obviously your latest project to take FID under construction. I mean, you've not secured the PPAs yet for it. I was just wondering what you can say to give us a bit more confidence that actually the project will be able to meet your hurdle rates of 100 to 300 bits over back, given that we don't have visibility on the PPA yet for these types of constructions.

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 when we prepared the last Capital Market Day and today? Sounds maybe 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 two 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, We'll 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, when you look at the chart on page six, I think what we call system services can be predicted very good. That gear goes even further up in 27 because we see much higher capacity payments in the UK. You know the last auction. On the volatility side, which is in the end a function of intermittent renewables, and the steepness of the married 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 baseload, 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 captured spread And here we have the beauty of the portfolio diversification because if you have a good renewables year, we make the money on the renewable side. If we don't have a good renewables year, we have higher capture prices for these flexible assets because they are needed to compensate for the missing renewable power. And that gives us a 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 these significant higher earnings.

And the second question we understand is on the project tour, 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 offtake into PPA if the timing is right. And that is something we will also follow-up on tour, 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 mesh into our strategy, and we would go for it.

Does that answer your question, Deepa, more or less?

Yeah, thank you.

Great. Thank you, Deepa. Maybe one additional comment on what markets have said. For those who are interested to understand more on the development of the capacity payments, you may have seen that today we also published our latest version of the fact book. In the fact book on page 70, you can actually see that we have what capacity payments we have secured in the meantime.

Next question, please.

We'll take our next question from Vincent Ariel from JP Morgan. Your line is open now. Thank you.

Yes, thank you very much for taking my question, and good afternoon, everyone. We treated quite a few topics here, so I'll come back to, I would say, medium-term topics we've been looking at in the past to take some perspective. So the first one is the core foundation, no question announced this time around. The Greens and the government, since they've been there, we have 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 with social disruption on energy, 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 will 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 to get discussions on the core 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 needs some support for CCGT new build. I think you made a comment regarding capacity payments. yet you will do UCMD before that. So do you expect to get visibility on the investment framework on the generation side of the energy system? By then, what could we expect regarding a German investment, either UCMD more specifically? Thank you.

Thanks for the question. Let me start with the easier one, the second one. 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. It will be addressed one day, but I also said that I don't want to, on these politically sensitive topics, 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, thank you very much. In terms of the winter, then, what's your view of the winter, then?

Yeah, 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. 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 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 energy market. It could be an outage of a pipeline supply. It could be anything. So I think overall base case is we should get to the winter okay-ish 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 need more import capacity for LNG, especially in Germany. We have not built the projects 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 one year's time. Thank you very much.

Thank you. Next question, please.

Yeah, we'll take now the next question from Wanda Cervinovska from Credit Suisse. Your line is open now. Thank you.

Hi, good afternoon. Wanda Cervinovska, Credit Suisse. Two questions for me. The first one is on the UK, 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? Thanks.

I start with the last question and then Thomas takes the first one. On permitting, we clearly see significant improvements. 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 Good.

And on Opgem, you recall referring to the inquiry on generators in the short-term market?

Yeah, exactly. When basically Opgem was saying that some generators got 6,000 pounds per megawatt hour. And Opgem is looking at it.

Yeah, and I think they also named the two operators who probably misbehaved. We were not among that. I think what we do is in case we are needed for immediate dispatch decisions, that we apply reasonable pricing 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? No. Okay. Okay. Thank you.

Thank you, Wanda. Next question, please.

We'll take our next question from Harry from . Your line is open now. Thank you.

Hi, everyone. Thanks very much. I appreciate we covered a lot of ground already, so I'll try to make this quick. 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 sort of okay headline prices. In the U.S., I've had one auction cancelled and one 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 US. 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 relatively 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 assuming in your guidance in the long run. Thank you.

Yeah, Harry, thanks for the question. On offshore, you are absolutely right. I think in terms of what it currently costs to build offshore wind, let's exclude crazy lease payments, just the LSUE from technology, and compare that to the existing power price level. It is competitive in Europe, and it is challenging in the U.S. In the U.S., in the end, it depends on the willingness to pay from the offtakers. And I mean, NYSERDA, the New York... A regulator has now come back the second time and asked for 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 US 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 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 two, three, four 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. Thank you, Harry. Next question, please.

We'll take our next question from . Your line is open now. Thank you.

Yes. Hi. Thank you for taking my question. So, actually, I have two follow-up questions. I think, Max, you made a comment earlier about grid issues or delays because of availability of grid issues. 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 a more technical reason associated with the intermittency and grids' ability to incorporate the intermittent fall of renewable generation at the required pace? So that's my first question. My second question is actually on slide six, specifically on on the 2024 chart that you sort of guidance that you saw. So the running of the assets data, I take it from your previous comment that even for 2024, most of that is sort of unhatched or not really sort of contracted at this stage. Could you then maybe talk or just qualitatively a little bit about the sensitivities as to what can make that green bar much higher or lower? How does this sort of earnings probably accrue within the year? Is it mostly sort of a winter sort of element here, sort of quite high seasonality? Thank you.

Ahmed, thanks for the questions. I mean, on grid, let's start with the big 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 you're grid connection is promised and you get compensated if it's not there. But let's move to the UK. Currently there's an intensive discussion how fast our UK round four project 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 the question of permitting, consultation processes, and we all know how difficult it is to get a permit for a grid landfall in the UK. But the same problem is for all onshore stuff, and onshore I mean wind as well as PV, because with the grid operator who operates that grid, and that's typically not the TSO, you need to apply for a grid connection date, and then sometimes you have it, but then they have delays in their investment, in their physics 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 MPV, it's not the equipment, it's not the bottleneck, and it's not the permitting anymore. It is grid. On page six, 24 is of course higher hedge 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. There 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 spread 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 very much. Thank you.

Yeah, we'll take our next question from Robert Pulling from Morgan Stanley. Your line is open now. Thank you.

Thank you. One question building on a prior one, please. As we consider these RWE bids into the U.S., New York, and New Jersey capacity auctions, And your prior comment, Marcus, that it depends on off-takers' willingness to sign at these current prices. 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-month time when costs maybe have calmed down? And secondly, and related, do you expect current costs to trend lower again at these levels in offshore wind? Thank you.

Good question, Rob. Would you recommend the regulator? I struggle to give a clear recommendation. Of course, that could happen. I mean, you cannot rule it out. But I think the Rhode Island one was a special one because there was no competition, so you had no reference prices. I mean, if everybody is in the ballpark, you probably are being a bit more comfortable. Do I see clear trends that equipment costs for offshore and also installation of offshore equipment 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 two, three, four years. If you want, it's more the question whether you want to decarbonize. If you want to decarbonize, it comes at these costs, and don't expect these costs to come down.

Fair enough. Thank you. Next question.

We'll take our next question from from . Your line is open now. Thank you.

Very much, and thank you for the on hydro biomass gas today. A few questions. Firstly, can we consider the 1.5 billion average that you've given, can we consider that as an average price to extend that for the rest of the decade? Do you have visibility on that far out? And of that 1.5 billion, I mean, I presume, you know, the majority comes from the UK, but are you able to give an approximate split for how much comes from the UK in total? Just looking at the Lignite business, I mean, the guidance that you gave for the Lignite business, 800 to 1.2 billion, but implied coming in at the lower end of that guide. Wunder, with your visibility on lignite spreads for next year, are you seeing spreads at a similar level for next year within the lignite business? Thank you very much.

Olli, let me take the first one, and Michael answer the second one. I mean, we don't want to now... I mean, we have given now three-year guidance or four-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 you 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 we 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 our country, but also the continent. So the Dutch and German fleet contribute significantly to the earnings. It's not the UK only.

Yeah, on the lignite spread, I mean, what you have seen in spot market is clearly that spread has come down. Therefore, on the unhedged positions, we're getting lower returns than before. there might have been earlier. I think the key driver for the Lignite fleet is really what we have already hatched and at which volumes we have hatched. And I mean, on Lignite, you know that this is the segment where we clearly hatch 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, Olli.

Thank you.

We'll take our next question from Piotr Ciesielowski from Citi. Your line is open now. Thank you.

Hi, yes. Good afternoon, everybody. Two questions, please. So, firstly, I wanted to ask you about the German transmission sector. Do you have a view what is likely to happen? It seems that some of the operators are struggling on the balance sheet to finance required development. So, do you think the consolidation is likely? And how do you see this playing out? And also, given your statement, I'm 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? Because you can look at it as a half full or half empty situation and you are actually developing some of the assets which you are about to lock in via the PPAs.

Yeah, thank you, Piotr. On the TSO, on the 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 Tenet. The moment the German government has a solution for the German Tenet 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 and everything. But I expect that you're going to probably see, after the tenant solution, some rumors. 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. I have two 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 costs, including the negative bid component, you will probably struggle to find long-term PPA off-takers. But what is positive for us is that these volumes, these seven gigawatts, will now not show up in the PPA market. And that, of course, might give us good opportunities to sell from our projects. I mean, Michael discussed TOR already. We have the Dutch one, and we have the German ones to lock in good prices for longer.

Thank you very much. Thank you, Pater. Excellent.

We'll take our next question from Luis Pujar from AutoBHF. Your line is open now, thank you.

Yes, good morning. Thank you for taking my question. Maybe a follow-up still on HBG. On the slide number six, 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 converge toward 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 period 24 to 26? And also as a follow-up on this first one, if HBG is expected to do 125 billion of EBD on average per year, does that mean as well that we should forecast supply and trading to be maybe a bit better than what it used to be in the past on a recurring basis? My second question would be with regards to the German offshore lease payment that you mentioned. You said that it was supposed to be a situation that you don't expect it to repeat in the future in the offshore lease. Why do you think that this was just an exceptional factor and you will have further option going forward where you would be able to bid at a reasonable level in terms of returns. Thank you very much.

Okay.

So let's start with page six again. So normalized prices are current market prices. I mean the markets are liquid. And you see that prices have more or less already normalized when you look at clean spark spreads in 25 and 26. 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, 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 constellation where the capacity is, let's say, 20% in the money, and you hedge it. And then you have price movement 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 profits. So it's very difficult to translate. hedge ratios into secure 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 three and a half years in this segment. But for the moment we have to leave it here. There's no direct correlation between hydro biomass gas and supply and trading. 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 guys.

Sorry, and the offshore question, what was it again?

Yes, the question was – go ahead.

No, go ahead, Thomas, please.

I got it again. 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 today willing to sell the power at the same guys for lower prices, then it costs them to build the assets. Why building the assets? And that is, of course, now a constant discussion the entire industry having. Where do we see costs? We are actually off tech 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 80 euros 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 one-time outlier, and then we go back to normal again. If not, I mean, if people have a totally different view about the future, 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 the PPA market is drying out, and then we probably change the rules and go to CFDs, which will be then handed through to the industry that they can benefit from the real cost of the technology. And that is, of course, also a risk if you have signed very high lease payments if the auction design is then changed. Maybe let me take also the opportunity to give you an update about the recent news because the German regulator has just announced where the 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 megawatt 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 megawatt without any lease payment on top to the 600 we already have. So we have 1.6 gigawatt in Germany without any lease payment. We have also been awarded the site where Vattenfall has a step in right, but now we have to wait what Vattenfall does with that step in right.

Okay. Thank you for the update.

Thank you. Next question, please.

I'll take our next question from Anna Webb from UBS. Your line is open now. Thank you.

Hi. Thank you for taking my question. You've clearly had a lot of success with the Hydro Biomass Gas Division. And it seems there is extra value for the portfolio in markets where you have renewables and conventional assets together. And 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, and would you consider new gas in the U.S. too? Thank you.

I think everybody agrees that that is a very good question. Let me slightly rephrase it, because we don't like the discussion about conventional, which, I mean, is for us a synonym of CO2 or fossil. and renewables. So whatever we do, and that was also the case for the Magnum plant, 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 base load. 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 Marcin Tesier from Stifel. Your line is open now.

Thank you. Good afternoon. Thank you very much for the presentation. Two questions for me. The first one on Lignite. Sorry, especially in Q2, where the volumes dropped from 12,000 hours to 7,000 hours 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 1.1 billion euros in Q2 because of lower electricity prices. Given current forwards, what's your view on potential further impairment in H2 in midnight? So that's my first question. And second question on cost inflation and capex allocation. So definitely we see cost. deflation in solar PV versus pursuing cost inflation in offshore and onshore wind. It's a very simple question. In the medium term, do you expect a shift of capex from wind to solar PV? Thank you.

The first one on lignite. So first on Q2, I mean, what happened in Q2, we simply had plans for revisions on units. I mean, given that prices are low typically in Q1, that's the time where you go for plans 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, the 600 and 300 megawatt 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 all 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 it reversed 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 get positive. And since the impairment test is done purely on spot prices, then the asset value goes down. So that's why for accounting purpose, we have 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. Lots of economically doesn't have a material impact. Last comment about further impairments. They are now fully impaired. So the remainder is just the value of the land. So there's no further impairment possible on the land freeze.

Yeah, 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.

Okay, very clear. Thank you.

Thank you, Martin. Thank you, everyone, for diving into the talk today. This concludes today's call. Yes, as Marcus just said, you know, we provide you, of course, with much more details on our growth plan and our capital market day in London at the end of November. So we are very much looking forward to seeing you then. Having said that, you know, we wish you a great summer. Enjoy your well-deserved break if you're still going on vacation, and speak to you soon. Have a great day. Bye-bye.

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