Chief Financial Officer (Member of the Executive Board), RWE
RWE’s Michael Muller on Europe’s power crunch
German energy giant, RWE, is faced with the challenge of helping to power a continent in the midst of a power crunch, while at the same time working towards ambitious decarbonisation targets.
In this episode, Alison Savas, talks to RWE's Chief Financial Officer, Michael Muller on the energy crisis, decarbonisation and RWE's operations.
Transcript (27 segments)
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Interviewer0:00
Welcome to another episode of Good Value by Antipodes. We've been talking about a looming energy crisis in Europe, and now it's here. One of our portfolio holdings, German energy giant RWE, is right in the thick of it. On this episode, I speak to RWE's CFO Dr. Michael Müller. Welcome Dr. Müller and thank you for joining.
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Michael Müller1:12
Yeah, thank you and welcome also from my side.
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Interviewer1:15
Europe is in the middle of an unprecedented energy crisis. RWE is right in the middle. The wheels were set in motion in late 2021 with a gas shortage due to post-COVID rebound, exacerbated by the Russia-Ukraine conflict. The next few months are a key pinch point as Europe needs to build gas stores for winter. Are you worried about what's to come?
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Michael Müller1:58
Very good question. I am worried, but let me broaden the topic. It's not just the next three months. We need gas storages filled, and we're on a good track, but we also need additional gas supply from Russia. It depends on flows and weather. Looking at balances, we need demand reduction in private and industry sectors. It will be critical not only this winter but potentially for the next winters because import capacities may take until 2025-2026 to fully replace Russian flows.
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Interviewer3:39
That ties in with our views at Antipodes. We think Europe can muddle through but at a cost of 2-3% of GDP. We're already seeing demand destruction. What I'm interested in is what this situation means for RWE.
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Michael Müller4:07
The situation is very important for us. The only way out of the crisis is to build out renewables. That's a long-term task and aligns with our strategy. The push for greening the portfolio has accelerated. In the short term, we are supporting governments by bringing back coal capacity, but we haven't changed our strategy to exit coal as quickly as possible and be carbon neutral by 2040. It's a corporate responsibility to help society. We'll see more emissions in early years but acceleration later. We are also supporting the German government in getting additional LNG, arranging two floating regasification units, close to FID on a land-based LNG terminal, and increased LNG imports.
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Interviewer6:31
Decarbonization and Europe's targets are accelerating. Many energy companies have chosen to shut down coal capacity. RWE still generates electricity from lignite and aims for carbon neutral by 2040. Can you take us through how you will transition to that goal?
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Michael Müller7:16
Of course. The end goal is carbon neutral. In Germany, we are exiting both nuclear and coal, so a significant chunk of generation is going away. We need to build out renewables faster and cater for backup capacity. We need sufficient renewable capacity, grid infrastructure, and backup. Germany has an agreement to exit coal by 2038, but we want to bring that forward if we can accelerate renewables, grid, and backup. We are in close ties with the government.
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Interviewer9:23
Can you give us a sense of your energy mix today and how it may look in three or four years?
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Michael Müller9:41
The energy mix will evolve. Currently we have about 10 GW of lignite capacity, by 2030 it will be 4 GW, and by 2038 zero. Our aspiration is that more than 95% of our EBITDA comes from renewable generation by 2030, with only a minor residual from coal for security of supply.
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Interviewer10:42
That's an interesting overview. We agree with that approach. We think power utilities investing in renewables should not be screened out. Do you think an exclusionary approach to ESG is flawed?
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Michael Müller11:27
I have a clear view. The energy transition requires large investments. Companies that are willing to invest and transform should not be penalized for current high CO2 emissions. Investors appreciate commitment, ambition, and delivery.
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Interviewer12:25
Energy prices are much higher. How has that impacted the profitability of your renewable assets?
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Michael Müller12:49
We hedge our positions. Typically 70% of income from renewables is secured via contracts or subsidies, 30% is merchant. We hedge a few years ahead, so most of this year's generation is already hedged. Going forward, we can benefit from higher prices, but current prices are not sustainable. There is upside, but we shouldn't extrapolate. The situation is definitely helping us, and higher cash flow will be used to invest more in renewables.
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Interviewer14:49
With 70% secured, demand is growing. 12-18 months ago, PPAs were at €50 per MWh, now much higher. Profitability should be higher. Do you agree?
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Michael Müller15:12
Yes and no. Historically, there were excessive profits, but now we have healthy competition and margins have come down. Higher PPA prices help, but inflation also increases costs. What matters is our competitiveness relative to peers. Higher prices help the industry, but in the long run, being competitive is key.
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Interviewer17:50
Europe needs to quadruple renewable additions by mid-decade. What does Europe need to do, and what are the bottlenecks?
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Michael Müller18:15
The main issue is 'not in my backyard'. Capital and returns are attractive. The bottleneck is sufficient sites. The German government is assigning 2% of land for renewables by 2032. Permitting is another issue; it needs to be faster and standardized. Also, once a permit is obtained, it can be challenged in court. We need compromises between private interest, climate protection, and natural protection. Standardization of approvals and adding resources would help. These issues are not just German; they apply in France, Poland, and even the US.
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Interviewer20:55
What about supply chains? How quickly can they adapt?
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Michael Müller21:06
Supply chain is an issue. For solar, geopolitical tensions between US and China are a concern, but short-term pressures are manageable. For onshore and offshore wind, the supplier industry faces severe issues, partly homemade from managing complex projects. We need a healthy industry that invests in innovation. We are engaging with suppliers and thinking about strategic partnerships to prepare for potential scarcity in the next 2-3 years.
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Interviewer23:38
When do you think Europe can reach those targets for annual renewable additions?
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Michael Müller23:51
The numbers are extremely ambitious, but we need ambitious goals. I wouldn't bet a bottle of champagne on them, but I'm happy with the targets because they point in the right direction. We need to adjust along the way, but it's important to get moving now.
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Interviewer24:21
Are there any other challenges within your business to achieve your goals?
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Michael Müller24:34
Supply chain is relevant. People is a topic. We are in a good position because RWE is seen as an important player, and people in the renewable industry look for purpose. But markets are tight, and we need the right people for our big investment programs.
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Interviewer25:30
Thank you for your time today, Michael. You have a front row seat to what's unfolding in Europe. RWE is leading the way in developing Europe's green economy. We're tracking it closely. Thank you so much for your time today.
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Michael Müller25:30
You're welcome.
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Interviewer25:55
That was Dr. Michael Müller, RWE's CFO. At Antipodes, we think Europe can muddle through this energy crisis via more LNG and pipe gas from Norway, but we will see demand destruction. European equities are priced for a more severe outcome. The situation remains critical over the next few years. Europe's desire to decouple from Russia will accelerate renewables investment, but we need grid and backup capacity. RWE is using higher energy prices to accelerate its investment in renewables and expects almost all EBITDA from renewables by 2030. The bottom line: the market has flocked to concept stocks while ignoring companies like RWE that are well placed for the energy transition. Please subscribe and follow us.