RWE Aktiengesellschaft (OTCPK:RWEOY) Q3 2022 Results Conference Call November 10, 2022 7:00 AM ET
Company Participants
Michael Muller – CFO
Thomas Denny – Head, IR
Susanne Lange – Manager IR
Conference Call Participants
Robert Pulleyn – Morgan Stanley
Ahmed Farman – Jefferies
John Musk – RBC
Alberto Gandolfi – Global Sachs
Vincent Ayral – JP Morgan
Deepa Venkateswaran – Bernstein
Peter Bisztyga – Bank of America
Piotr Dzieciolowski – Citi
Sam Arie – UBS
Martin Tessier – Stifel
Olly Jeffery – Deutsche Bank
Wanda Serwinowsk – Credit Suisse
Louis Boujard – ODDO BHF
Operator
Welcome to the RWE Conference Call.
Mr. Michael Muller, CFO of RWE AG, will inform you about the developments in the first three quarters of fiscal 2022.
I will now hand over the call to Mr. Thomas Denny. Thank you.
Thomas Denny
Thank you, Caroline, and good afternoon, ladies and gentlemen. Thank you for joining our earnings call on the first 9 months of the year. Our CFO, Michael Muller, will walk you through the key items and conclude this session with Q&A.
And with this, I’ll hand over to Michael.
Michael Muller
Yes. Thanks, Thomas, and good afternoon, also, from my side, and I hope you are doing well. RWE have continued to perform well this year, and after 9 months reached an EBITDA of €3.5 billion in the core business and €4.1 billion in the RWE Group. For fiscal year 2022, we confirm our outlook. We have accelerated our green transformation by agreeing with the government to exit call already in 2030.
This created the basis for a 1.5-degree compliance pathway as we reported early in October. While the year is deeply marked by the war in Ukraine and the resulting European energy crisis, we are doing our utmost to enhance energy security by a higher utilization of our generation portfolio and by extending operations. Following the agreement and decisions taken by the German government, we are extending operation of 2.1 gigawatts of lignite and 1.3-gigawatts of nuclear capacity. In addition, we are helping to diversify the European gas supply by managing and investing into German LNG regasification capacities and importing LNG. As I have reported in earlier calls, we have taken immediate actions to mitigate risks from exposures to Russian counterparties.
And since H1, our financial exposure is down to 0. We’ve also stepped up our Growing Green strategy. The acquisition of Con Edison Clean Energy businesses, a leading U.S. solar player, is a key strategic move. But we have also strengthened our pipeline with the acquisition of a 3-gigawatt solar pipeline in Poland as well as the success in the New York bid auction at the beginning of the year.
Our build-out program is also doing well with almost 5 gigawatts currently under construction. Before I come to the financial performance of the first 9 months of the year, let me talk about the strategic moves we took to step up our Growing Green strategy. Earlier October, we reached agreement with the government to exit lignite power generation already in 2030. This marks a significant step up in our ambition to become carbon neutral. The exit is now 8 years earlier than originally planned. Last week, the cabinet approved the corresponding regulation.
It is the basis for bringing us on to the 1.5-degree CO2 emission path, the ambition we set ourselves at the Capital Market Day last year.
For our employees and the effective regions, the accelerated coal exit has great implications. Therefore, we have a great and a comprehensive set of measures to exit operations in a socially responsible way and to support structural economic changes in the affected regions. The coal exit must go hand-in-hand with significant investment into green and flexible power generation capacity. Both provide great opportunities for RWE to grow its core business.
In the current European energy crisis, we are a strong partner, delivering a reliable performance with our generation fleet. And we are also enhancing short-term energy security by extending existing nuclear and lignite generation capacities. In the middle of October, the German government decided to keep all 3 remaining nuclear power plants operating until the 15th of April 2023. Our 1.3 gigawatt power station lignite [indiscernible] Emsland is included in these plants. At the beginning of October, we brought back 900 megawatts of lignite capacity from the security reserve to the market.
The closure date is shifted to March ’24, and the current ordinance of the German government allows operation until June 2023. A further 1.2 gigawatts of lignite capacity, which was planned to be shut down at the end of the year as part of the previous coal exit — coal phaseout plan will now operate until March 2024. Generation volumes from the extension will be sold in the wholesale market. However, earnings will most likely be subject to price caps. We expect more clarity on this issue in the coming weeks.
We are also helping to diversify gas supply in Europe through investments in LNG infrastructure and LNG imports. Operations of a floating regasification and storage unit in Brunsbüttel, a so-called FSRU, a plan to be online at the end of this year. ADNOC and RWE have signed a supply agreement for the delivery of LNG cargo to Brunsbüttel in late December. The cargo will be 137,000 cubic meters of LNG and will be the first LNG to be supplied to the German gas market via the floating terminal at Brunsbüttel. Besides floating regasification in Brunsbüttel, we have signed a shareholder agreement for land-based terminal in Brunsbüttel with our partner Gasunie and KFW.
Operations are expected for the end of 2026. Moreover, we are planning our own green ammonia terminal next to it. Green ammonia is a liquified hydrogen derivative that can make an important contribution to supply in Germany with green hydrogen. Beyond Brunsbüttel, we are preparing for FSRU operations in Lubmin in the German Baltic Sea. Our aim is to start operations at the end of next year, and we are looking at options to extend the capacities over time.
On the supply side, we are engaging with partners to source and import LNG from the U.S., Middle East and Australia. For example, with the MoU of 3 BCM per annum, with Sempra or the MoU with ADNOC, which we announced in October.
On first of October, we announced the acquisition of Con Edison’s Clean Energy business. This is a massive step-up in our Growing Green strategy in the U.S. The world’s renewable market is growing strongly. With the introduction of the Inflation Reduction Act, the U.S. offered an attractive, stable and long-term investment framework for green projects.
By adding a good 3 gigawatt of mainly solar capacities to our U.S. portfolio, it almost doubled to more than 7-gigawatts of operating assets. This makes us the second biggest solar player in the U.S. and the fourth biggest player in wind and solar.
After closing, the operating assets from the transaction will contribute roughly USD 600 million to our EBITDA annually. Closing is expected in the first half of next year. Strategically, clean energy businesses complement our portfolio very well, both in terms of geography and technology.
We are also looking forward to welcoming around 500 talented and highly motivated professionals from CEE to our team. Jointly, we will accelerate our Green Growth in the U.S. An additional benefit of the transaction is the more than 7 gigawatt development pipeline of which we want to realize 500 megawatts and more per year. The transaction is fully funded through debt instruments and an equity measure via a mandatory convertible bond we signed with QIA. The €2.4 billion investment by QIA will already positively impact net debt in the fourth quarter of this year.
Let’s now move on to Page 8 and our green build-out program. In the first 9 months, we have commissioned 1.2 gigawatts in [Brunsbüttel]. 9.4 gigawatts are currently on the way of being added to our green portfolio. This includes the 3.1 gigawatt from the CEB acquisition in the U.S. and 1.4 gigawatt for flexible generation from the acquisition of Margam.
We expect the Margam transaction to close in the next month. Great progress was made at our Kaskasi construction site in Germany. As of today, 2/3 of the total of 38 turbines are installed in producing power. If everything goes according to plan, the wind farm will be fully operational at the end of this year.
Now let’s move to the financial performance in the first 9 months of this year. A strong operational performance, particularly from our green generation portfolio and the Supply & Trading business drove up earnings. Adjusted EBITDA of the core group stood at €3.5 billion, and the RWE group at €4.1 billion. In offshore wind, adjusted EBITDA increased to €859 million. Year-on-year, earnings were higher due to capacity additions, including the full consolidation of Rampion for the full period.
Furthermore, power prices and wind conditions were better than last year, even though wind conditions were behind the normal average. For the onshore wind and solar division, adjusted EBITDA was €649 million. This is significantly higher than last year, mainly to the absence of the one-off effect from the Texas cold snap. New capacity additions, higher power prices and better wind conditions also increased earnings. Adjusted EBITDA from the Hydro/Biomass and Gas division reached €1.164 billion at the end of September.
The flexible generation business was up year-on-year due to higher margins and stronger short-term asset optimization. An outage at the Dutch gas plant Claus C at the beginning of the year partially offset the increase.
EBITDA at Supply & Trading stood at €942 million at the end of the quarter. The result was made across all commodities and regions in a volatile market environment. The German coal and nuclear operations showed lower earnings year-on-year as a result of capacity closures. Adjusted EBITDA from coal nuclear was €633 million. Costs associated with the 0.9 gigawatts of lignite capacity, which was brought back online from the security reserves are included in the Q3 numbers.
On the back of the strong operational performance, adjusted net income amounted to €2.1 billion. Depreciation was as expected and consistent with our Growing Green investments. The year-on-year adjusted financial result is lower due to a higher interest rate environment and higher liquidity requirements in a volatile commodity market. It is in line with the guidance of around minus €450 million for the full year. For the adjusted tax, we applied the general tax rate of 15% for the RWE Group.
Adjusted minority interest increased in line with higher earnings in the wind business. The adjusted operating cash flow was €2.1 billion at the end of September and reflects the impact on net debt from operating activities. The adjusted operating cash flow across the higher level of earnings. However, it was marked by a higher operating working capital, mainly driven by higher volumes and prices from gas and storage. As things stood at the end of September, we expect the effect to decrease by year-end.
Net debt amounted to €0.4 billion at the end of September. This development was mainly driven by our Growing Green program. In the first 9 months of the year, we invested €3.1 billion, including the payment for our share in the 3-gigawatt seabed lease award at New York bid. CapEx for the Kaskasi project gradually kicked in as construction progressed. This was also the case for the remainder of the 4.9 gigawatts construction projects across Europe and U.S.
Our net position from variation margins from power generation hedging stood at minus €2.2 billion. This includes net variation margins from the sale of electricity as well as the purchase of the respective fuels and CO2.
In the context of high discount rates, pension provisions have decreased partially offset by negative performance of plan assets. For the full year 2022, we confirm the outlook. Adjusted EBITDA for the group is expected to be between €5 billion and €5.5 billion driven by earnings increase in our core business. Adjusted EBITDA is assumed to be between €3.4 billion and €3.9 billion. Adjusted net income is forecasted to range between €2.1 billion and €2.6 billion, and we confirm our target to pay a dividend of €0.9 per share this year.
Before I hand over to Thomas, let me say a big thank you to Susanne. As you may have not heard, Susanne is unfortunately leaving our team. Susanne will take over a role in the RDW Generation business as Head of Gas Controlling and U.K. Finance Director. Susanne joined the team in 2018 and has worked with lots of you during that time.
And I hope you also appreciated the collaboration as much as I did. So with that, Susanne Lange, thank you for all your contribution, and we really wish you all the best for your new role.
And with that, I hand over to Thomas.
Susanne Lange
Thank you, Michael. And also thank you, Thomas. Thank you both. But I also want to thank you folks on the phone every single day, it was my pleasure to work with you, and it was always great fun. And I will miss that for sure. But as Michael said, now it’s my time to move on. I hope you will continue to follow the RWE story and the stock. I wish you all the best and goodbye.
Thomas Denny
Thank you, Susanne, and thank you, Mike, of course, for the introductory remarks. We’re now happy to start with the Q&A process. So operator, Caroline, please begin.
Question-and-Answer Session
Operator
[Operator Instructions] We will take the first question from Robert Pulleyn from Morgan Stanley.
Robert Pulleyn
Congratulations, Susanne. Good luck in the new role. So Michael, May I ask you again, following the Con Ed deal and securing the desired solar, how does management now consider the relative preference for deploying capital, both geographically and by power generation? And to get the follow-up in from the start, what would it take to increase capital allocation to European-based renewables? And the second question, if I can just sweep it in. Do you expect the rising cost of capital and debt to trigger a consolidation in renewable developers? And what could be the implications for RWE of that changing competitive environment?
Michael Muller
Yes. Thanks, Rob, for the question. I mean I think one thing that is very clear from the current situation is that going forward, you want to have a balanced portfolio. So if you look into the different geographies, you are facing different issues and also different impact on interest rates and power prices. And therefore, our preference really is to have a well-built portfolio, both across technologies, geographies, but also offtakes.
So therefore, I wouldn’t say it’s again something but it’s really pro — a balanced portfolio. I mean the impact on rising cost of capital I mean as I said, I guess, in previous calls, what is important is that we assume that those increase both in inflation but also in cost of capital, will be reflected to some degree also in the top line, meaning either in CFDs or also what we currently see in wholesale prices. So therefore, indeed, the situation has changed, but I still believe that we can realize the spread over WACC of 100 to 300 that we have communicated so far going forward.
Robert Pulleyn
Okay. And sorry, just to remind, the follow-on there was what would it take to invest more in Europe. If you had a wish list given there’s many policymakers debating all sorts of things these days.
Michael Muller
Well, I mean, I think we already mentioned that in previous calls. We have a tremendous transition ahead of us. And that transition requires not only CapEx, which I think is easily to be made available, but really projects. So I think it’s more the question of regulators to improving the ability to develop projects. Therefore, we talk about availability of sites.
We talk about accelerating permitting. You talk about procedures, how you can claim our object permits. These are the relevant topics. And if they pick up I think that should enable additional [€9 million]. And I mean, as you know, we always talk about the gross and the net number. Obviously, if there are more opportunities that would clearly then increase our net numbers. And given the current situation, I think we’re also seeing more headroom to also increase the net numbers. But it’s really crucial what will happen in the next year around regulation. And I think do you had taken a good first step with the IRR, which clearly is a very attractive long-term program that provides stable, yes, on recondition for investments and it’s clearly helpful.
Operator
We will take the next question from the line, Ahmed Farman from Jefferies.
Ahmed Farman
I was thinking if we can start by providing us an update on what is being discussed in Germany and U.K. in terms of policy intervention and price cap in the power sector? And what is the time line that you see? And when can we get some clarity on these issues? So that would be sort of very helpful. And then secondly, I was hoping if you could sort of give some clarity and elaborate on your strategy within the LNG sector. So are you considering, being an off-taker and finding sort of long-term sort of gas LNG uptick agreements and taking on that merchant risk? Or are you sort of looking to invest in local infrastructure either on a merchant or regulated basis? So if you could just scope out for us what is the scale of ambition there. That would be very helpful.
Michael Muller
Yes, Ahmed, thanks for the question. I mean on the regulation; it is difficult to judge when we will get clarity. I mean both in Germany and U.K., discussions are ongoing. I think we are — currently, seems that if Germany is closer than the U.K., but let’s see what actually happens. I mean, in the U.K., it’s even not clear which direction they’re going for windfall tax or for inframarginal cap.
I think in Germany, it’s clear that they go for inframarginal caps. But even there, the devil is in the detail. So while I think the overall concept, I think, addresses our concerns, which is to make sure, on the one hand side, you keep as much capacity in the market. And secondly, you also keep an investment framework that still enables people to invest going forward. It very much depends on the details, how it’s exactly designed.
And that is where we are currently, also, by the associations trying to shape that in a way that is positive for the economy, meaning that it keeps capacity and also keeps stable investment framework, which is ultimately required to drive that energy transition.
To your second question on LNG. I mean so the investments we currently do in the infrastructure, I would rather phrase that as good corporate citizenship. I mean what we are doing here is we supported the German government in getting the FSRUs, and now we are supporting in building up the infrastructure because we have in-house expertise. But — and it also comes along with investments, but that is clearly not the focus of our business model going forward. Around long-term offtakes, I mean as I mentioned, we have an MOU with Sempra for longer-term contracts and we also have another longer-term contract already signed. But at the same time, it’s part of our trading business and especially as a CFO, I’m carefully looking at what are the risks we are taking with respect to LNG. And I think for the time being, in LNG compared to the big guys, we are rather a boutique player that is running pretty profitable in that arena, and that’s actually also what I would like to keep going forward.
Operator
We will take the next question from line, John Musk from RBC.
John Musk
Yes. Two questions from me. Firstly, coming back just on the interventions or potential interventions, and in particular, in Germany. Can you just give a little bit more color if possible around the risk of clawbacks, so not just potentially caps on power prices going forward, but do you see any risk from clawbacks into past earnings from the higher power prices?
And then secondly, on weather and in particular, what’s been relatively low wind resource this year. Have you got a number you can provide for the impact from the weather year-to-date?
Michael Muller
Yes. So John, on the interventions, I mean, if you have followed, at least, the document that Reuters published, that doesn’t contain clawbacks. So the discussions we have seen is that the intervention would start on the first of this October. Yes. But let’s see where it’s really getting.
So I think that’s still open. I mean we clearly request on the one hand side, not to come up with any clawbacks in order to maintain confidence of investors. And also secondly, we asked for a clear limitation of that intervention so that there must be a clear end date. Concerning wind resources, I mean, October has been — I would say, on average, I think offshore was slightly more, onshore was slightly less. So nothing specific to comment here.
Thomas Denny
And for the year as a whole, I mean, obviously, has been better than last year, year-to-date, but still has been below our long-term average. But I hope that answers your question, John.
Operator
We will take the next question from the line, Alberto Gandolfi from Global Sachs.
Alberto Gandolfi
Susanne, congratulations. The first question is on renewables and a bit more specifically in the United States. It’s interesting to see that after so many years of corporate behaving quite similarly. Now we start to have a little bit of a divergence. I think things are happening in the credit market in regulation.
So yesterday, one of your key competitors in Iberdrola in renewables announced basically scale back of investments in U.S. renewables in a moment where you’re actually acquiring an asset in U.S. renewables. So can I just say in light of recent developments, I’m talking about anything from 1 to 6 months, how comfortable are you with U.S. returns? Do you see PPAs beginning to adjust to higher CapEx, cost inflation and higher funding costs. And are you still comfortable with the situation over there in terms of continuing to grow organically.
The second question is a bit more on what I would call capital preservation. You have a very, very strong balance sheet. Even adjusting for margin calls, you are the renewable developer with the best capital structure out there given the current credit context. So credit to you on that. Do you think that you should just, at the moment, enjoy that position because of the uncertain credit conditions? Or can you be a bit more countercyclical and actually use that balance sheet to start to invest a little bit more in renewables in a moment where some of the incumbents are pulling back and some of the smaller developers, perhaps also have to scale down. So is it the moment actually to accelerate investments and capture greater returns? Or is it the moment to be even more prudent?
Michael Muller
Yes. On that — I mean, about the U.S. So I’m not really concerned about returns in the U.S. I mean, clearly, we need to see where the development is going forward, but at least the investment cases I’m currently seeing, and we’re about to take quite some additional FIDs for the remainder of the year. And the insights has into those they all are having positive investment cases, meaning that they all meet our return requirements.
So that’s indeed looking rather positive. But as always, I think it’s something to observe. And secondly, I think the benefits of also of the ConEdison acquisition is that going forward, we are active not only in different technologies, but also a very diverse portfolio of markets. So ranging from merchant market, corporate PPA market but also utility PPA markets. And I think that also will allow us going forward to diversify the approach. And even if temporary, some markets are not so attractive, then going to other ones.
Your last question, as a good CFO, I would answer the question differently. I mean, for me, it’s very important that we keep our investment discipline, especially in those times. If the current situation would open up opportunities for us, we clearly would go for that. So I would say the benefit is like you rightly pointed out that in principle, we have the flexibility to act here. And I think the ConEdison transaction also shows that, that if there’s an attractive deal out, we take the opportunity to get that. But at the same time, please be reassured, our top priority is keeping the rating and being profitable and meeting our return expectations.
Operator
We will take the next question from line, Vincent Ayral from JP Morgan.
Vincent Ayral
Just coming back again, sorry about that, on German power cap. The Reuters article seems to be indicating an only very limited retractive element, but a fairly high levels of basically a cap among other things on lignite. Could you give us a bit of color on what has been really decided? Is it reflective to talks you’ve been participating in? What are the numbers you’ve been seeing per technology would be quite interested in that? And the second, we note that, yes, it was a very good Q3 again quite clearly. Yet you haven’t moved your guidance. We understand there is a bit of uncertainty, but coming from point one, 2022 should not have a massive risk from the government intervention in Germany. What are the reasons for not having upgraded your guidance here, where the quotient coming from?
Michael Muller
Yes. I’ll try to answer the question. I mean the article you referred to is also an article we have seen, and also the information we have received from the associations that are currently looking to the document. But I mean, bear in mind there isn’t yet a proposal to the cabinet. And typically, after cabinet, they needs to come to parliament. So I would say it’s still a long way to go until I would really comment on the exact numbers. So therefore, we remain careful. And that’s also the reason why with respect to the guidance, we are very comfortable in keeping the current guidance. Because on the one hand side, there is substantial risk around the exact design of that — of those caps or if you then go to the U.K. potential taxes.
And secondly, as we mentioned, we, for the time being, have higher volume of unhedged capacities because we have reduced our hedge ratio. And obviously, what we currently see is that spot markets are lower than forward markets given the higher temperatures and then the sufficient gas supply in Europe. And so therefore, there is not only the risk about regulatory intervention, but also a price risk that led us to confirming the outlook.
Operator
We will take the next question from line, Deepa Venkateswaran from Bernstein.
Deepa Venkateswaran
So one question that I had was on your variation margin position. So Michael, if you could either give the data for 9 months or 3 months, whichever you want to, in terms of what was the overall outflow of variation margin? And how much of that was for the liquid tenor? So that’s on the variation margin. And the second question is also on the working capital that you’ve had, I think, $2 billion in the first 9 months because of gas storage. Do you generally expect this to unwind to a large extent by the end of the year? Or should we now think of this as maybe more structural because of the higher cost of gas, and you’ll start filling it up as they get depleted? So just wanted to get a sense for that.
Michael Muller
So Deepa, I’ll take the simple question first, and Thomas take the more difficult one. So I’ll start with the working capital. So first of all, the assumption is that most of that gas should be withdrawn in the course of this winter, meaning Q4 and Q1. But please bear in mind, as you know the way how gas forge is optimized, it very much depends on temperatures and on price levels. So what you currently see in the market is because gas prices are soaring because of warm winter, that leads to gas withdrawals being shifted to later months, which is actually good for security of reserves, so that’s positive.
Some markets are working here, fine. So therefore, if I look at the current numbers, I would expect the volumes to be — large volumes to be withdrawn by the end of Q1. But having said that, in the case that we have a warm winter, it could well be that the gas and storage is kept and — for the next winter and then it wouldn’t happen. So that’s very much dependent on the actual price levels going forward.
Thomas Denny
And on variation margins, deeper. So you probably recall that H1, we announced a net position of variation margin of plus €80 million, 8-0. So pretty negligible. Now the same number for variation margins from our hedging activities is minus €2.2 billion. So effectively net debt has been increased by €2.2 billion or €2.3 billion in the third quarter alone.
Deepa Venkateswaran
And how much was the liquid tenor, change?
Thomas Denny
So typically, that unwinds over the next 3 years or so, mostly in the next year probably. But we — as you know, we hedge for 3 years out, so it should all on [indiscernible], of ’25. But you know that it’s always a very volatile position from quarter-to-quarter.
Operator
We will take the next question from line, Peter Bisztyga from Bank of America.
Peter Bisztyga
Just wanted to ask whether there’s been any discussions in the Netherlands about potential price cap or intervention that could impact your activities there? And also just wondering, are there any current discussions either in the U.K. or in the Netherlands, or does it seem so in Germany that could bring your gas-fired power plant or indeed actually our trading activities into the scope of any windfall taxes or clawbacks?
Michael Muller
Yes, Peter, thanks for the question. I mean the whole idea of that inframarginal cost cap is that you don’t intervene with a dispatch of the assets. And that was actually the reason why they haven’t included gas and coal into that mechanism. And therefore, when you talk about the Netherlands since, we, apart from the small stake in the nuclear power stations, only have gas and cold generation. There are currently no relevant discussions ongoing for us.
Peter Bisztyga
Yes. And just — I know you were saying that the U.K. is currently incredibly vague, but any sense on a potential windfall tax? I mean could that be a similar surcharge to what the energy companies are facing and could that be on your entire power generation business? Or is it all discussions just to storm in for taxing and renewables?
Michael Muller
I mean, you know better than I that the political environment hasn’t been very stable in the U.K. lately. So therefore, also the ideas around regulation have been in different directions. So it’s really difficult to judge.
Operator
We will take the next question from line, Piotr Dzieciolowski from Citi.
Piotr Dzieciolowski
Two questions. So firstly, I wanted to ask you about your CO2 hedging and how that could be affected by the fact that you’re bringing back some lignite capacity, then you also shorten the asset life of the other capacity. In a way, I’m specifically maybe asking about this CO2 hedge reserve, which is impacting the balance sheet. How should we think about it over the next — over the medium term? And second question, I wanted to ask you about kind of a levelized cost for the offshore asset. So at the trough of the market, we’ve seen the CFDs coming to kind of like 40 pounds in Europe. And if I ask you today, where would you see a CFD for the standard project somewhere in Europe. Would that be given the cost of capital inflation just as a reference or as a bracket, if you could provide a helpful benchmark.
Michael Muller
Yes, starting with the CO2 hedges, I mean, bear in mind, the strategic position that we had was only on the implicit position, so not on the full exposure. So when it comes now to additional assets being brought online, we would need to hedge — to sell and buy the spreads, meaning for lignite, it would be selling power and buying the equivalent of CO2 for that generation. So therefore, what’s currently happening does not have an impact or the other way around on the strategic position.
I mean on the LCOEs that is really difficult to quantify because it very much depends on the parameters you look at. I mean take the U.K., the CFD rates are, I think, related to 2018 or so rates and inflated — are inflation linked. So therefore, even if the numbers see low — look low in the front year, given the inflation projection and also the duration of the assets, that value obviously goes up over time. The same is true for how long is the CFD. Is it for 15 years, is it for 20 years, so how much merchant tail do you incorporate?
And then it also very much depends on the regulation and design to take the U.K., you have to invest also into the grid connection and then sell it at a later stage. And then in some other geographies, you have to do include the growth in others you don’t. I mean, I guess you can discuss with the IR teams some more numbers, but it’s really difficult to just take a simple number as a benchmark.
Operator
[Operator Instructions] We will take the next question from line, Sam Arie from UBS.
Sam Arie
Thanks for presentation and for the great info today. I want to try and ask a couple of questions. The first is on sort of gas, and second on CO2, which you just touched on. So on gas, and I’m going to apologize if you’ve said this some already and I’ve missed it, but you’ve got a very useful slide talking about your LNG infrastructure activities. And I just wanted to check, if you told us the kind of — have you given us much info about the kind of CapEx commitment there, the total quantum, the kind of framework that, that has.
Is it effectively regulated infrastructure investment? What kind of returns are you expecting? It would be great to have a little bit of a better understanding about all the activities on Page 6. The second point I wanted to ask on gas is — I mean I tried this on LNG earlier this morning, so I don’t know whether you’ll be able to answer, but it feels to me that consensus is that the Russian gas has gone. And then we’ve got the plan for a world with no Russian gas, which obviously is prudent and makes sense, and supports investments like the ones on Page 6. But if you look ahead to 2026 when some of these come on, I mean who knows whether there’ll be some Russian gas coming. And I just wondered if, let’s say Europe was able to tolerate 10% of gas supply coming from Russia. So there was another 50 bcm of Russian gas coming back sometime between now and 2026.
Can you just talk us through what you think that would mean for the market for RWE? If any of your positions would be kind of undermined by that development if it happened. Of course, it’s just a scenario. And then maybe let me have a go at that, and then if this time I’ll come back on CO2.
Michael Muller
Okay. Good. I mean on the gas infrastructure, as I said, that’s not our core business. It’s more supporting the government. So what you can assume is that if we invest, we have agreements with the government that the investment is then paid back with a, I would say, normal return that you would expect on those assets over the duration of the investment, and that we also get a management fee on top.
I mean the investments in the FSRU are currently talking about is, let’s say, a mid-2-digit million-euro number. So it’s not substantial if you compare it to the overall investment plan. Second around this one, and that goes to our LNG business. Obviously, those import terminals come with capacities and those capacities can be booked, but also other players can book those capacities. So we have booked some of capacities that then goes into our LNG trading book. And I mean as you would usually do, is we also then would hedge that against LNG volumes and, say, TTF prices. So that’s part of the regular trading business that we do.
I mean, on Russian gas in 2026, obviously, that’s a pure speculation. I mean what I would foresee is, yes, I mean I think I mentioned that previously, I always distinguish between 3 different time periods. I mean in the short term, that has changed now in the recent weeks because of the high temperatures. But in principle, you are seeing in this winter, very high prices. Also, part of that is just uncertainty.
Obviously, what you then see, say, in the next 1 or 2 years, is prices driven by essentially demand destruction. And then if you go into ’25, ’26, prices are set by LNG import prices, which are higher than Russian gas prices that have been price setting in the former times. Even if you assume that Russian volumes would come back, my base case would still be that LNG will be, to some degree, price setting in Germany. So therefore, as long as the volumes that potentially come are small, it probably doesn’t impact prices to a large extent. Obviously, if there would be larger volumes than prices could come down. But as I said, I mean — I think we all have been surprised by the intervention and Putin’s activities. So I wouldn’t bet on the future with that respect.
Sam Arie
I get this now. And I wasn’t asking you to — I just — your answer is very helpful, actually. I just have to think through, I mean, I guess, how things perspective of right now could maybe change over the coming years. Can I try my CO2 question just very briefly?
Michael Muller
Well, you can try and see whether we answer that.
Sam Arie
Okay. I mean, I suppose the point is, I’m just a bit surprised, we had other focus across Europe on price caps and then from margin or windfall taxes and so on. And there doesn’t seem to be much focused on the CO2 scheme, which, as far as I can tell, at current levels is quite expensive for the European power consumer, and not making any difference in as much as at least in the power sector. It was kind of there to encourage you to run gas instead of coal, which is sort of the opposite of what we want to do now. So I’m surprised there isn’t some kind of pressure from the utility industry to introduce like a CO2 cap or suspend the CO2 scheme or — I know there was talk about releasing more permits from reserves, but I think that hasn’t happened.
So I’m just really surprised that in order to talk about how to get bills down in the cost-of-living crisis, this year CO2 scheme seems to be like untouchable. So I just wondered what’s your perspective on that. And do you think there’s any chance that we would see more changes on the way the CO2 scheme is run, at least in the short term?
Michael Muller
Yes. I mean on CO2; I think you have to distinguish between short-term and longer term. And then clearly, in the short term, reducing C02 prices would bring down power prices, that’s clear. But at the same time, I think if you take a step back, CO2 is probably one of the only real market tools that have worked properly to shift generation from CO2-intense generation to lower carbon generation. And therefore, I mean, we support keeping that regime. And by the way, if we talk about investments — certainty for investment, I think it’s also important that the CO2 regime stays because we are — I mean we’re all hedged relying on that regime. So therefore, if you want to keep certainty for investors, and if you want to keep the longer-term transition into low carbon technologies, I think you need to keep the CO2 regime in place. Therefore, we are very supportive here.
Operator
We will take the next question from line, Martin Tessier from Stifel.
Martin Tessier
The first question from me is a follow-up question on the guidance for 2022. So if we take the lower end of the guidance for all segments, excluding Supply & Trading, and then derive an implied Q4 for these segments. Then if we added to the 9 months core EBITDA of €3.5 billion, we end up already with a core EBITDA of €4.4 billion. And if we just add the €940 million EBITDA from Supply & Trading over 9 months, that would be almost €5.4 billion core EBITDA for the full year. So could you elaborate a bit more on how you see the evolution of the Supply & Trading business because it seems to me that this is the segment where you are a bit cautious.
And you just said basically that most of the gas withdrawals will be made in Q4. So if gas prices are much lower this winter, we could indeed see negative summer/winter spreads, which will indeed impact the business. So any impact from you on this topic would be helpful. And second question is a very general and open question regarding cost inflation, especially in the U.S. according to what are the main dynamics and differences regarding cost inflation in the U.S. versus Europe.
Michael Muller
Yes, Martin. I mean, first of all, on the outlook, I mean, I mentioned 2 topics where there’s quite some degree of uncertainty, just reiterate those that is power prices because of unhedged margins. And secondly, as a regular topic when it starts and if it already starts in ’22, which provides some uncertainty, plus obviously full stop. Therefore, we are cautious here. I mean on the Supply & Trading, there’s always some volatility on the business, and it depends on the opportunities if they arise.
So therefore, we kind of took an average assumption for Supply & Trading going forward as an earnings contribution for the fourth quarter, which I think is the right approach here. Talking about the topic you mentioned about gas stores, yes, that’s right. But at the same time, please bear in mind that given the current situation, there’s quite some demand for liquidity. And I think I mentioned that in the previous call, while we safely navigated that situation, we have reduced the hedging activities, and we also have a close eye on liquidity, especially towards year-end. And therefore, we are not necessarily engaging all the business opportunities that could be up in the market simply because in parallel to market opportunities, we are also managing liquidity here.
Talking about the difference between renewables in the U.S. and Europe. I mean, in the end, it very much depends on the individual markets. I think the benefit of the U.S. is clearly, especially if you think about developing pipeline that we have certainty around 10 years for the tax equity, which helps you to develop projects, plus you had also different optionalities between PTC and ITC, and you’ve also a special subsidy for batteries in place.
So therefore, for example, solar in combination with battery. It’s both included in the tax equity, indeed provides attractive incentives to invest. I think that is a clear differentiator between the 2 markets. Other than that, I mean permitting in some parts of the U.S. is not an issue.
The more you go into the, say, East Coast states, that also becomes an issue. So that’s pretty similar. Yes, as I said in the very beginning, for me, what is important is really have a diversified portfolio to play the options and then, at the same time, leverage the scale as a company via I would say, attractive financing, but also procurement power you have and also knowledge you have in engineering and operations.
Operator
We will take the next question from line, Olly Jeffery from Deutsche Bank.
Olly Jeffery
Two questions for me, please. The first one is going back to the price caps. Now I know you don’t want to be drawn on levels of price caps, and that’s understandable. But my question here is that within the information that came out yesterday, it was talking about €100 megawatt hour plus surcharge for general renewables. The question I have is that do you think, when it comes to this being bottomed out, we will end up seeing different price caps for onshore wind, solar and hydro? Or do you think you will see 1 cap for all of those technologies? So not a view on the level, but just a view on do you think there will be different ones for those different technologies? That’s the first question.
And the second question is a follow-up on the Supply & Trading. Just to have a — so I know you’re going for a normalized performance in Q4, that’s your expectation. Just to have an understand of how you see that business performing. So I know it does well within volatility. And I know it depends on your positioning. But generally speaking, without looking at the position, is there a reason to think that business perform as well when prices are going up as going down as long as there is volatility? Or does it depend directionally, are you more likely to be a better place in the markets going on way. Again, I know it depends on positioning but broadly speaking, can we say when there’s continued volatility that, that division has an opportunity to carry on doing well as it has done this year so far?
Michael Muller
Yes. Olly, on price caps, I honestly don’t know. I mean, our proposal is to keep it as simple as possible because, I mean, bear in mind that all needs to be implemented at short notice. And already what we are currently seeing as proposals is pretty complex. So therefore, the more different price caps you introduce, the more difficult it becomes. But at the same time, you never know what happens in politics and in governmental processes and parliamentary processes. So let’s see what the result is. I mean, we will clearly push for simplicity. And therefore, we like the idea of having only 1 cap for renewables. On our [ West ], as you rightly said, the key driver is volatility.
It’s not the direction if it’s up or down because it could take long or short positions. And also that would change over time. So it’s indeed volatility, but at the same time, and I think that’s what I mentioned, if there’s too much volatility that doesn’t help either. Because on the one hand side, you know that the value at risk goes up, it becomes too expensive and then traders reduce their positions.
And secondly, in the current environment, volatility also comes with high liquidity needs. And therefore — I think a good year, you probably see when there is volatility in distortions in the market but not too much. I know that’s very generic, but — it very much depends on the exact positions we’re having.
Operator
We will take the next question from line, Wanda Serwinowsk from Credit Suisse.
Wanda Serwinowska
Just one question from me on the 900-megawatt lignite capacity that was reactivated on the first of October, if I’m not mistaken. Would you be able to comment on the generation because this one is exposed to the merchant power price in my understanding? And should we expect any upside from that unit basically to be offset by higher reactivation cost in Q4 this year?
Michael Muller
Yes. Wanda, first of all, about the 900 megawatts, I think we mentioned that in the last call, you should assume like an availability around 75%. So we assume a lower availability given that these are all the units that haven’t operated for some time, so be more cautious here. Secondly, the way how it is designed is, I mean we get all the cost reimbursed. So there is no downside risk attached to that. However, we also have to share half of the profit against the cost we are guiding back. So therefore, you first need to earn the cost before you kind of get the upside. And therefore, it very much depends on actual power prices but also then a potential price cap, which obviously limits the upside you can get from the assets.
Wanda Serwinowska
So is it fair to assume that in October, basically, it was 75% in line with your expectations?
Michael Muller
No. We don’t report — I mean, I guess you can look up the Raymond numbers, but we wouldn’t report that here. But at the same time, you can also see that October prices have been fairly low. So yes, you could do to math, take the average October numbers and then take it with a 75% and then the availability, but they didn’t all start on the first of October, plus they also have to consider the cost that they have to bear. So difficult than that.
Operator
We will take the next question from line, Louis Boujard from ODDO BHF.
Louis Boujard
I have to — the first one, I would like to come back in the U.S. regarding the investment here, and more specifically on the solar panel. It is supposed that you might get maybe better pricing if you can have a local partner here, and better investment possibilities. Do you have — and have you already secured domestically produced solar panel for your future development here? And how marginal are going to source your solar panels in these regions going forward?
And my second question was regarding the lignite capacity, but this time it’s 1.2 gigawatt. It was supposed to be closed on December 2022, and then it has changed. So I guess that it is likely that you did not in your former hedging strategy take into consideration this position open for the future. So could you confirm that here you might have maybe eventually a bit more room of maneuver for hedging position to be taken in the current market situation.
Michael Muller
Yes. Let’s start with the additional lignite volumes, indeed, you are right. They haven’t been considered so far and therefore, haven’t been hedged. So there are open positions. But obviously, before we move into hedging of those positions, you need to consider, on the one hand side, the liquidity need for hedging those and at the same time, also look at the inframarginal cost — our caps.
So in a situation where you get limited upside from those assets and hedging cost you quite some liquidity, it could well be that you decide not to hedge. So that very much depends on market price levels, but also on the exact design of the inframarginal cap once it’s published. Around U.S. solar, well, indeed the solar topic is a very relevant one. We know from Con Edison that for their projects, they have already secured as the solar panels for the new projects. I mean, medium term, you can assume that this is a topic we’re clearly addressing and thinking about how you can secure longer-term contracts, and we also think about supply chain, what are the best purchasing strategies, how can you bundle volumes. Can you potentially also bring capacities away from China. So that is something we’re looking at holistically.
Operator
We will take the next question from line, Ian Mitchell from JPM.
Unidentified Analyst
Yes. It’s Ian Mitchell here. So I’m afraid it’s another question about price caps, but it should be a very quick one. One of the Reuters articles were saying that the price cap and legislation was going to be presented to the German cabinet on November 18. The comments that you made earlier suggested that we might be further away from a resolution than that. So do you think that, that article was wrong, and you would say there’s no chance that we get this clarity on the legislation next week? And if it’s not next week, is there a risk that we’re pushing all the way into 2023, for example? .
Michael Muller
Ian, I also read the 18th of November, I think that’s pretty ambitious. And following the cabinet, it also goes into the parliament. So I mean I just compare that with U.K. I mean you saw that they also follow the path of an inframarginal cap and then once they get to the details, found out how complex it is. So I wouldn’t rule out that it will take longer. Obviously, from my point of view, I also would like to see clarity as quick as possible. But at the same time, it also needs to be a solid regulation that we can live with. And so the — I mean the word thing would be that we have a regulation, and nobody knows what it means.
Thomas Denny
And I can say the IR team also appreciate clarity rather sooner than later, but let’s see. Back to the operator.
Operator
There are no further questions. So, I will hand over back to your host to conclude today’s conference.
Thomas Denny
Great. Excellent. Well, thank you all. Thank you for the lots of questions. And as I said, we hope that we have more clarity on price caps. So whatever happens in the coming weeks that the IR team without Susanne is going be accurate as posed any time. And have a safe — great day, and speak you soon. Bye, bye.
Operator
Thank you for joining today’s call. You may now disconnect.
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