RWE Aktiengesellschaft (OTCPK:RWEOY) Q2 2022 Earnings Conference Call August 12, 2022 7:00 AM ET
Company Participants
Thomas Denny – Head of Investor Relations
Markus Krebber – Chief Executive Officer
Michael Muller – Chief Financial Officer
Conference Call Participants
Vincent Ayral – JP Morgan
Peter Bisztyga – Bank of America
Olly Jeffery – Deutsche Bank
Rob Pulleyn – Morgan Stanley
Martin Tessier – Stifel
Alberto Gandolfi – Goldman Sachs
Deepa Venkateswaran – Bernstein
Sam Arie – UBS
Tancrede Fulop – Morningstar
Operator
Welcome to the RWE Conference Call. Markus Krebber, CEO of RWE AG and Michael Muller, CFO of RWE AG will inform you about the developments in the First Half of Fiscal 2022.
I will now hand over to Thomas Danny.
Thomas Denny
Thank you, Jess, and good afternoon, ladies and gentlemen. Thank you for joining the RWE Investor and Analyst Conference Call. We are well aware that it’s quite a busy day for you. Therefore, we’ll keep it short and give you enough time for Q&A later. With me is our CEO, Markus Krebber and our CFO, Michael Muller for the report on the first six months of the year.
Now, without further delay, over to you, Markus.
Markus Krebber
Yes. Thank you, Thomas, and good morning to — good afternoon to all of you and its good talking to you again after our summer break. RWE has delivered a very good performance in the first half of this year while navigating the European energy crisis. Due to the strong operational performance of all our core business segments, our core EBITDA stood at EUR2.4 billion at the end of June and group EBITDA was EUR2.9 billion. We demonstrated the robustness of our business model and eliminated our financial exposure to Russian counterparties entirely.
And furthermore, RWE is actively ensuring and enhancing security of supply in Europe by increasing power generation as well as by actively diversifying the gas supply to Europe, and of course by consistently pursuing our green growth program under our growing green strategy. We are right on track with our growth strategy. Our development pipeline is continuously evolving. We commissioned 1.2 gigawatts of new green capacity in H1 and a further 4.8 gigawatts is currently under construction.
On the back of the strong performance of our core businesses, the outlook for 2022 has been raised to a group EBITDA of EUR5 billion to EUR5.5 billion and an adjusted net income of EUR2.1 billion to EUR2.6 billion. In the first six months of the year, all our core business segments flourished, driving the earnings for RWE Group. The German operations from coal nuclear showed lower earnings year-on-year as expected. Our business model has proven to be robust and well balanced and our steady investments into green capacity are paying off. Our generation fleet recorded a high deployment and delivered a very strong operational performance and in the volatile market environment, the supply and trading business once again delivered an outstanding result.
Moving on to page five, on how we are navigating the current energy crisis. By the end of June, we had entirely removed our financial exposure to commodity deliveries from Russian counterparties. This means, there is no further financial downside since all financial implications have been fully covered in H1 earnings. The German government has set up a scheme to redistribute the losses from the shortfall of Russian gas supplies to all gas consumers from October 1 onwards. We do support the scheme since it avoids the collapse of companies suffering incredible losses from Russian under deliveries and subsequent chain reactions, which are difficult to control. RWE also suffered some losses in its gas business due to the shortfalls of contracted Russian deliveries. However, we have taken early steps to proactively manage our gas supply portfolio and we are a financial robust company. We therefore want to show our social responsibility and share the burden, hence we do not intend to claim losses from the shortfall of Russian gas supplies.
Moreover, I’d like to give you a final update on the coal write-off as a result of UK and European sanction. After final settlement the total amount written off in the non-operating result was EUR750 million. Also with respect of coal, there is no financial exposure with Russian counterparties left, everything has been reflected in H1 earnings.
With regards to our hedging activities, we are clearly taking a conservative approach and prioritize derisking over earnings maximization. As such, we are, for example, avoiding commitments on electricity delivery obligations relating to the German gas fleet and we have increased the internal buffer of unplanned unavailability of our fleet to avoid the risk of power buybacks in the current high price environment. For the avoidance of doubt, we do not expect any additional outages. This is just a pre-cautious risk management measure.
Finally, we continue to strictly monitor all counterparties, so far we have not recorded meaningful losses from credit defaults. We are supporting the improvement of energy security in Europe. On the one hand, we contribute to higher utilization of our generation fleet. On the other hand, we will bring back additional generation capacity. At the request of the German government, we are preparing to bring back 900 megawatts of lignite capacity from the security reserve as of October ’22. In the Netherlands our 1.6 gigawatt Eemshaven biomass coal firing hard coal plant is back in full operations. This is a result of the Dutch government’s lifting of restrictions from the Urgenda ruling at the end of June.
We are also helping to diversify gas supply. This year is more than 40 LNG cargos we have already provided four times as many deliveries to Europe in the same period last year. Furthermore, we organized floating storage regasification units and will operate the FSRU in Brunsbuttel on behalf of the German government. Operations should start as early as the end of this year and require certain infrastructure investments. We are also engaged in further LNG import activities in the Baltic Sea in Germany.
Besides floating regasification, we expect to take FID for the land-based terminal in Brunsbuttel in due course together with our partners Gasunie and KFW. Operations are expected to begin in 2027 and the planning includes the terminal’s preparedness for green molecules in the long term. On the import side, we signed an MoU with Sempra for an additional long-term LNG supply contract from the US from ’27 onwards for 3 bcm annually. And finally, we are well on track in filling all our booked gas storages and meeting all field level requirements.
Let’s move on to page seven and our core strategic agenda, our growing green strategy. We are making good progress with our investments in the expansion of green technologies. As we speak, we have 4.8 gigawatts of green capacity under construction. In the first six months we have in total commissioned 1.2 gigawatts net. In offshore we commissioned 500 megawatt additional capacity in the UK. For further growth, we entered the US offshore market securing a 3 gigawatt seabed lease in the New York Bight auction together with our partner National Grid.
First turbine first power. This is true for our Kaskasi construction site in Germany, where we celebrated its first power supply to the grid last week. If everything goes according to plan, the Wind Farm will start full operations at the end of the year. The Onshore Wind Solar business has commissioned more than 600 megawatts in six months, and we have also seen capacity additions of 100 megawatts from batteries. The acquisition of the Magnum plant in the Netherlands will add another 1.4 gigawatts to our green portfolio. Additional value comes with its potential for hydrogen applications, thanks to its construction design, Magnum is already hydrogen-ready today. The plant can be made technically capable of coal firing up to 30% hydrogen.
Moreover, there may also be the possibility of converting Magnum to use hydrogen as it sole fuel by the end of the decade. Speaking of which, we have started construction of our first electrolyzer, a 14-megawatt electrolyzer plant in Lingen and I’m very confident that we will see more news flow in the near future.
To summarize what is clear, RWE is leading the way to the green energy world while navigating the current energy crisis. We have proven the company’s resilience by benefiting from a technologically and regionally diversified business portfolio. In addition, we have eliminated the entire financial exposure to Russian counterparties and from Russian commodity supplies. With the wide range of activities, we are significantly contributing to improving energy security in Europe, be it with our generation portfolio by importing LNG and by setting up the infrastructure to import additional LNG directly to Germany. And of course, with our steady new investments into green technologies. For the green build out, we expect more than EUR5 billion of investments this year.
And with this, I hand over to Michael for the financial part of the presentation. Michael, please.
Michael Muller
Thanks, Markus and also a warm welcome from my side. A strong operational performance in H1 drove up earnings. Adjusted EBITDA for the core business stood at almost EUR2.4 billion and the RWE Group at almost EUR2.9 billion. In offshore wind, adjusted EBITDA increased to EUR632 million. Year-on-year earnings were higher due to capacity additions, including the Rampion full consolidation for the full period.
Furthermore, wind conditions were better than last year, and power prices for unhedged volumes were higher. For the onshore wind and solar division, adjusted EBITDA was significantly higher than last year, mainly due to the absence of a one-off effect. In Q1, we took a hit from the Texas cold snap which was only partly offsets bulk bookings.
This year, adjusted EBITDA was EUR491 million, higher power prices and new capacities and better wind conditions also drove earnings up. Adjusted EBITDA for the Hydro Biomass and Gas division stood at EUR755 million after six months of this year. The flexible generation business was up year-on-year due to stronger short-term asset optimization and higher margins. An outage at the Dutch gas plants Claus C has partially offset the increase. The plant was offline from the beginning of January until mid-April due to its steam turbine damage. RWE Supply and Trading reached an adjusted EBITDA of EUR545 million due to a very strong trading performance.
Adjusted EBITDA from the coal and nuclear division was EUR501 million due to an intra-year timing effect and increased income from short-term asset optimization in the first half of the year, it has been particularly strong. Year-on-year earnings from coal nuclear were lower as a result of capacity closures. On the back of the strong operational performance, adjusted net income amounted to roughly EUR1.6 billion.
Depreciation was as expected and in line 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 and volatile commodity markets. In Q2, we received the dividend payment from our 15% shareholding in E.ON. For adjusted tax, we apply the general tax rate of 15% for the RWE Group. Adjusted minority interest increased in line with a higher earnings in the wind business. The adjusted operating cash flow was EUR2.8 billion at the end of H1 and reflects the impact on net debt from operating activities.
Let me remind you, it is adjusted for special items and other effects that balance out over time. The higher adjusted operating cash flow echoes the high level of earnings. Changes in operating working capital — operational working capital was positive at the end of June. The decrease from higher accounts receivable for power and LNG had a positive effect. Conversely, working capital increased from the filling of gas storages. This is temporarily offset by an increase of accounts payable from gas purchases.
Net debt decreased to EUR1.9 billion net worth at the end of June. This was driven by a strong operating cash flow and a decrease in pension provisions due to higher discount rates. In the first half year, we invested EUR2.1 billion. Net cash investments include the payment for our lease in the 3 gigawatt seabed lease awarded at New York Bight. Our net position from variation margins from power generation hedging stood at EUR80 million. 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 higher discount rates, pension provisions have decreased and were only partially offset by a negative performance on planned assets. For the full year 2022, we confirm the outlook we gave at the end of July. Adjusted EBITDA for the group is expected to be between EUR5 billion and EUR5.5 billion, driven by the earnings increase in our core business. Adjusted EBIT assume to be between EUR3.4 billion and EUR3.9 billion. The adjusted financial result is now expected to be around minus EUR450 million for the full year. The higher interest rate environment, the higher liquidity requirements stemming from volatility in commodity markets have caused this. This fits with the development we have seen in the first six months. Furthermore, high gas prices will also require financing of higher gas inventories in storage facilities. In line with the earnings growth, in our wind business, adjusted minorities, I expect it to be roughly minus EUR350 million. Adjusted net income is forecasted to range between EUR2.1 billion and EUR2.6 billion.
We’ve delivered a very good performance in the first half of the year and have demonstrated the robustness of our business model. On the back of a strong operating cash flow, we expect more than EUR5 billion investments this year. Almost 90% of our CapEx in the first half of the year were eligible under EU taxonomy. Our investment discipline will stay a key driver to ensure value creation. Project IRR typically exceed base WACCs by 100 basis points to 300 basis points. And our growth is backed by a solid and strong investment grade rating. Just recently, Moody’s has confirmed the current rating. We will keep our dividend target of EUR0.9 per share for fiscal year 2022 which allows us to continue investing in the green growth.
And with this, let me hand you back to Thomas.
Thomas Denny
Thank you, Michael. We now start with the Q&A process. Operator, please begin.
Question-and-Answer Session
Operator
Thank you [Operator Instructions] And the first question comes from the line of Vincent Ayral from JP Morgan. Please go ahead.
Vincent Ayral
Hi, good afternoon, everyone and thank you for taking my question. So a couple of questions, the first one is regarding the nuclear extension, which is highly discussed in Germany. Mr. Schulz made a comment again today. We believe it’s highly likely and like to get a bit more color on which reactors could be extended from your standpoint? And can we bring back the reactors that were closed last year as well? And on the ones which are still running today, how much of the fuel raise do you have left for the coming winter, meaning, can they run through the winter as the reactor of E.ON, for example, so it would be quite interested in adding some color there and color as well on the framework for that. Would it be merchants or would you be basically receiving some sort of capacity payments — would be? So that’s the first question on nuclear.
And the second is on political intervention. Rise of — bills are rising all the way through Europe. RWE seems more sheltered than the number of other players from this risk but would be quite keen to hear your views there, especially in the UK, where we have a change of leadership and where you have some exposure among other things on the rocks from a site. So those would be the two questions, please. Thank you.
Markus Krebber
Yes, thank you, Vincent for the questions, which I can fully understand, but also, especially on all the discussions you have is politicians, it’s difficult to comment in public, and this call is public. So let me keep it brief. On the nuclear extension, I don’t want to engage in any kind of speculation, what could be the political decision. You probably know that the German government has asked the TSO and together with regulator to run a stress test result. Another stress test results are due within the next couple of days and I think based on that, the government will take a decision what to do on the nuclear side. And please don’t ask me what I think the outcome might be. I don’t know, I don’t have the basic information about the full overview of the stability of the grid and security of supply.
The same actually is true on the windfall profit tax side. I think also that discussion is in the end a political one. I think the arguments are all on the table, it’s difficult to determine what is windfall and which sector has affected. You have also many sectors benefiting from different development. So in the end, we have to wait for the political decision, and then we can communicate the consequences for us, but I don’t want to engage in speculation. What I think might happen.
Vincent Ayral
I fully understand all that. But could you, on the nuclear at least be factual about what technically how you can help, basically what is possible for you if you are asked to run the reactors, can you run them in Q1 next year on the existing runs? Are you technically able to bring back the older reactors, which have been decommissioned at the end of last year? This is just technically, what can you do if you’re asked to help?
Markus Krebber
So, technically, it also depends on the timeline. You have three elements, one is what could you make available if you simply run them also in the first weeks of the next year and then maybe what you — how long you could run them with one reconfiguration of the nuclear core. The second is new fuel rods and the third one is potentially also bringing back capacity which has already been closed, and all has totally different lead times. All this information is made available on their request to the government, they have to take decision and I don’t speculate further.
Thomas Denny
Thank you, Vincent. Next question, please.
Operator
Next question comes from the line of Peter Bisztyga from Bank of America. Please go ahead.
Peter Bisztyga
Yes. I guess, good afternoon. So two questions from me. First one on your CCGT teams. I understand that you’ve changed your future hedging strategy here, but I was hoping you could walk us through what the implications would be for those assets, particularly in Germany, in the event that the government have to trigger an emergency in Q4 this year? So for example, have you unwound existing hedging on those assets? So could you still have power buybacks risks on those if they were curtailed? And would there be downside risk to your revised guidance if those plants were unable to operate? So that’s my first question.
Then the second one, might just try and approach the windfall tax question from another angle, which is, could you give us some insights as to what’s your justification is, why you shouldn’t windfall tax in the UK on your block renewables obligation power output because I think it’s from my perspective, difficult to argue that you’re not going to be making a windfall on those older assets? So just interested to hear what justification you might be giving to the business secretary when you meet him week?
Markus Krebber
Thank you, Peter. It’s a nice try to approach the same question from a different angle. But I think all the arguments have been made, you want to have a stable and firm investment environment and not skip potential investments because rules are changed retroactively and then the question is, how you — do you determine what is the good and acceptable profit and what is the bad profit, which should be taxed at a higher rate. If you have more profits, you’re going to be taxed on a higher profit if you pay more anyhow and what is the difference between providing energy to the public or to provide, let’s say, online services which have recorded high growth rates and huge profits under the Corona situation, while others have suffered.
But let me leave it there, I don’t want to go any further. And I think, it’s also — all the arguments are in the public already, in the discussions in the UK, but also here in Germany, but it’s now a political government question and they have to take a decision and then we deal with it. On the CCGTs and the hedging, you never want to be in a situation where you are curtailed on the gas supply side, but you still have the power delivery obligation and then you have to buy back in the market and that’s why we have adjusted our hedging policy to avoid that situation in any circumstance. So we have really reduced significantly the hedge ratios by putting in higher buffers for unavailability but not hedging our CCGTs in Germany at all.
So we don’t expect — I mean the only financial implication, you can expect is, if power prices come down now, we would have made more profits hedging. So there is a foregone upside, but we do not expect that we are in a position where we have to see buybacks at higher prices and that we have a downward trend in our guidance. We are here really [indiscernible] guidance but also with our hedging policy on the very conservative side.
Peter Bisztyga
Okay. So just to be 100% clear, you are sort of comfortable whether no exposure even in kind of Q4 this year on that front?
Markus Krebber
Correct, yes.
Peter Bisztyga
Perfect. Thanks very much.
Thomas Denny
Thank you, Peter. Next question please.
Operator
Next question comes from the line of Olly Jeffery from Deutsche Bank. Please go ahead.
Olly Jeffery
Thank you. Good morning and — or good afternoon by the way. A few questions from me please. The first one is just on the 900 megawatt lignite that could be coming back into operation in October. A couple of just kind of points around that. First of all, what’s your kind of base level expectation for how much these lignite plant might run. My numbers could potentially see that running a couple of terawatt hours, is that how you see that? And then when you think about — you look at the German Q4 power price, it’s up to kind of EUR500 a megawatt hour. You look at the short run marginal cost of lignite but mainly carbon cost there, you can see, how you [ph] can get to quite a large spread, those lignite assets could get. And I was just wondering, do you all see that potential upside and when thinking about the 2022 guidance, have you been quite conservative in how you thought about how much that lignite asset might run and that’s the first question.
And then the second question is [indiscernible]. The second question is, do you think that with some of the lignite asset potentially becoming more profitable and the issue around 2030, around closing lignite, the current environment makes it more easy to have conversations with government about potentially taking over the lignite assets at some point. It would be great to get your thoughts on both of those questions. Thank you.
Michael Muller
Okay. Olly, let me take the first question on the lignite. I mean, you know the situation as follows. The government has put the law in place that basically allows the government to bring back the capacity and the government has also communicated its intention to bring — to allow us to operate the lignite power station starting October 1st but there hasn’t been a formal order yet. And therefore, for us is yet unclear what — how that exactly will be designed and that also includes the question for how long will they allow us or order us to run them and under which conditions that is? And therefore, we are very reluctant about taking any assumptions around this one.
And when you calculate the number for 2022, you always also have to bear in mind, the costs are covered by the government for providing that service. But the moment you run them, half of your income is accounted against the cost you would have — you occur. So therefore, the upside we see in 2022 is not so significantly, and that is also when you talk about the guidance. We haven’t included a significant upside there because we also don’t expect that to be so large in the quarter of the year.
Markus Krebber
And I take the second question, Olly, but maybe let me also comment on the forward curve, I think calculating profits using the power forward curve is I think not wise. Why? I think the forward curve is distorted by very low liquidity and when you calculate the fundamentals, you should come out with much lower power prices. And I think the moment, the market goes back to normal, we also should expect a normalization there or when you actually deliver the power in the [indiscernible] so the physical reality strikes. I think we see a reason — more reasonable prices, because in the end seeing power prices which is significant more than a marginal very low efficient gas plant plus CO2 emission prices is very difficult to justify. Other than you really expect an event on gas-fired power generation and the market needs to clear with demand destruction.
On the lignite discussion. Yes, you can be ensured that we have ongoing discussions with the German government on many things, security of supply, gas as well as power, bringing back units and we have also on the agenda the Topic 2030 and everything which is around it. But please also understand that when you look at that from a priority point of view, the 2030 and foundation question is probably not top priority but be rest assured that we have it on the agenda, but at the current point in time there is no news we can communicate.
Olly Jeffery
Thanks. Really helpful.
Thomas Denny
Thank you, Olly. Next question, please.
Operator
The next question comes from the line of Rob Pulleyn from Morgan Stanley. Please go ahead.
Rob Pulleyn
Thank you. Thank you very much for taking the questions. Just two for me. The first one, if I can address this to Michael. The second quarter appears to have a large outflow and other changes of net debt, if you look at the slide versus where it was in 1Q. Could you talk to the drivers of that? I presume there is something to do with variation margin flow. And as an ancillary to this question, you previously have given the variation margin balance for your explicitly hedged period and it would be great to have an update on that number. Thank you.
The second question is not around [indiscernible] is around gas storage, and the [keylag] (ph) business that you have. And I just wondered, how storage filling was going in that facility, and I believe the one you have in the Czech Republic as well. And how is the carrying value of that gas, which is surely rising with the gas price accounted for? Thank you very much.
Michael Muller
Yeah, so Rob, on the first question, I mean, I mentioned that the balance for the variation margin from all our hedging activities is only EUR18 million at the end of the first half. So if you compare that against the year in number of 0.2 billion, we have seen an outflow on this one.
Markus Krebber
On the second question, Rob. I mean our gas storages are currently filled more than 85% so far above the threshold for this point — for the minimum threshold at this point in time. And we are very — I mean the Czech ones are even filled at a higher level. So we will reach the minimum level without problems ourselves. To the question of the value. Please keep in mind that, I mean gas storage business doesn’t work that you fill gas, keep the position open and you see where the price goes. The moment you inject, you typically sell on a forward curve and make a margin and we account that mark to market. So you always have the fair valuation of what we have as gas storage business at the end of every quarter. So please, don’t expect huge upside here from having unhedged gas in gas storages, but of course, it is a huge burden as Michael has said on working capital because it caused lot of liquidity needs.
Rob Pulleyn
That’s super helpful. Thank you. I will turn it over.
Thomas Denny
Great. Thanks, Rob. Next one please.
Operator
The next question comes from the line of Martin Tessier from Stifel. Please go ahead.
Martin Tessier
Yes, sir. Hi, good afternoon, everyone. Only one question from me. Regarding the German gas levy, you said that you will share the burden and not claim losses. Could you give us some color on or some magnitude on this financial impact? Thank you.
Michael Muller
Yeah. Martin, it’s — we cannot quantify the effect by now because it will depend on how much the Russians will supply from 1st of October onwards. Let me maybe explain the gas levy. You are entitled to compensation for under — for the purchase against under deliveries, Russian under deliveries from the 1st of October and the levy says or the regulations say, you can claim what you incur in losses on a daily basis. But if you have already covered the potential under deliveries earlier, you can claim these losses.
So since we have, as we have made clear already, covered all Russian supply — under deliveries of Russian supply by the end of last quarter. We know what the potential maximum loss would be, but the actual loss will depend on the under deliveries. Please understand that we at the current point in time do not want to communicate what the potential maximum loss is. It is a meaningful number, but it’s also not a number which gives us a headache, because we have not so many Russian suppliers left. And let me reiterate that regardless of what happens, even if they don’t supply anything from 1st of October, we will not incur additional losses because we have fully reflected the negative effect already at the end of H1. Now — or you could put it in other words, if there are deliveries from October onwards, this is actually a slight upside.
Martin Tessier
Okay. Thank you.
Thomas Denny
Thank you, Martin. Next one, please.
Operator
The next question comes from the line of Alberto Gandolfi from Goldman Sachs. Please go ahead.
Alberto Gandolfi
Hi, good afternoon. Thank you for taking my questions. I’m trying to ask couple of questions about medium-term earnings. Your 2022 core guidance could well be implying nearly EUR5 billion EBITDA towards the upper end for the core business this year. I appreciate that there is very strong profitability in hydro biomasses supply and trading. But there is five years to go still to your 2027 guidance, which at the midpoint is above EUR4 billion. So I guess, my question is, why haven’t you suspended also the 2027 EBITDA guidance as well as the 2023 or maybe I can turn around the question, is it still a valid reference point or because of the power prices because of more megawatts, more winds, higher spreads, again who knows what happens by 2027, but if we freeze the world today and we assume a bit of normalization even that guidance quite obsolete by now.
And the second question is still on numbers. In 2023 to 2025, if I’m not mistaken, you’ve been historically guiding for up to EUR400 million like EUR300 million EUR400 million earnings cliff from renewables contracts that expire. Clearly, the current forward curves, I was trying to understand is there an upside, not a cliff, but actually a [indiscernible] if we assume no intervention clearly by the government. And maybe it will be very helpful. You could share with us what’s the breakeven price, I believe, it’s about a EUR150, EUR200 if I’m not mistaken. So, if prices are EUR150, EUR200 you have no earnings cliff. So it would be very helpful in case maybe there is a price gap down the line, trying to understand because back to the 2027 point, I think your guidance is baking in clearly a much, much steeper cliff. Thank you so much.
Markus Krebber
So Alberto, it’s Markus Krebber. I think we should ask the operator to give you always the right to ask the first question because then it’s easier, so you ask now question on ’27 already. Let me put it that way. I think, taking the guidance of ’27 off the table because of market prices or the current market circumstances would not be wise. We should really expect also for the benefit of Europe overall that we see a full normalization by ’27 but of course, as we have indicated before, there is a lot of tailwind for renewables from all the programs, we are making good cash flows.
So more than expected, so there is potentially more headroom for investments. So if there is a reason to update the guidance ’27 is because we changed our investment plans, but for that, we cannot give you an update on an quarterly basis. So we will do that when we do our next full update with the Capital Market Day and revised investment plans and maybe forgive us also. We are very busy with navigating through the current crisis. We haven’t actually thought about it too also taking the guidance ’27 off the table.
Michael Muller
And Alberto, talking about the German [indiscernible] model, it just nicely fits towards markets that. I mean, first of all, you’re right. If you look at the subsidies scheme, the first step-down is to EUR159 per megawatt. And then the second step takes the subsidies on to EUR39 per megawatt hour. So clearly if you can see current power prices, we would be well above, and therefore, that would be also upside. But like Markus said. Our assumption for 2027 is still that there will be a normalization. So we shouldn’t assume current price levels to persist. And secondly, you also have to bear in mind, those price levels are captured prices so you also need to deduct from the base loads at some value to kind of — to come to the capture price. So in the short. Yes. Probably in the next years to come there — if prices stay at that level, there is some upside and the earnings could — won’t be as sharp as initially thought in our guidances, but in the longer run, we need to see how prices develop and then like Markus mentioned, our view is rather that there will be some kind of normalization in the medium, long-term.
Alberto Gandolfi
Thank you.
Thomas Denny
Thank you, Alberto. Next question please.
Operator
The next question comes from the line of Deepa Venkateswaran from Bernstein. Please go ahead.
Deepa Venkateswara
Thank you. So my questions, could you just update us on what your outright hedging for conventional as well as renewables is for the remainder of this year and the next couple of years? How that’s probably changed from the beginning of the year? And I think a couple of times, Markus, you mentioned about normalization of power and gas prices. Could you maybe give us your best estimate on when this normalization occurs ’23, ’24, ’25, ’27. Just curious to see how you’re thinking about, by when we should bake in normalization.
Michael Muller
So Deepa, let me take the first one and Markus can in the meantime, look into the crystal ball and come up with a number. On the one — on the hedging, I mean, we don’t communicate precise numbers anymore. I mean just roughly in renewables, you can assume like 80% hedge ratio because we always little bit more conservative with respect to renewables hedging because obviously, you have the volume risk and you want to avoid falling short if you don’t have sufficient wind and that is a hedge ratio. We obviously have achieved for this year and already also for ’23.
With respect to the conventional generation. I mean, you know that traditionally, we always said, if we enter into a year, we assume to be fully hedged. That is obviously not true anymore as Markus mentioned, we have unwound the hedges and keep them often for all gas fired assets in Germany. We have also deliberately included some more buffer for unavailability and also if we look at some market, especially the UK and Netherlands, we see reduced liquidity. So, therefore, it is difficult to hedge all the acquisitions further out, so therefore, without mentioning numbers, you can assume that especially in the prompt year, the exposure has reduced and also the outer year, our hedge ratio is lower than what you typically would have seen one or two years ago.
Markus Krebber
And Deepa. Let me try to give you an answer which satisfies you. So we have two major drivers of the current high price environment. One is a specific one on the power side, which is the situation of the French nuclear and to be very clear, I have no insight there. So the moment we can expect that normalizes and maybe we go back to 80% — 75%, 80% units being available, we definitely take this additional stress from the power sector.
But, I don’t know when that might happen. And the other one is the gas supply from Russia in the context of the Ukrainian war and this has two-time horizons. One is if we would see a de-escalation of war and also resulting in let’s say a de-escalation on the economic war front. So economic sanctions and counter-sanctions then we definitely will see a normalization, but that is also very difficult to predict.
So if you take that out, what we cannot predict, the next step we need is Europe needs enough LNG import infrastructure to replace at best the entire Russian gas supply, which clearly, I would put at another 60 bcm, 70 bcm import capacity into Europe. That will probably take until ’24, ’25 to get that. The next bottleneck then is — then we have the infrastructure that will definitely take maybe 40% of gas prices that will fall to global LNG prices, but then we have very tight global LNG prices and the third level is then when do we ramp up liquefaction capacity to export significant more LNG to the global market and that would probably take, if you look at the big developments in Qatar and also the US, probably take until ’26, ’27.
Thomas Denny
Thank you, Deepa. Next question, please.
Operator
Next question comes from the line of Sam Arie from UBS. Please go ahead.
Sam Arie
Hi, good afternoon, everybody. I have a bit of a crackly line, so can I checking, you can hear me okay?
Thomas Denny
Yes, we can hear you.
Sam Arie
Okay, great. So thanks for the presentation. And congratulations on the results, I wanted to come back to this question that we sort of touched on earlier about high energy and power prices in the UK in particular, and what policymakers might be able to come up with to address this.
I think, you had questions earlier but windfall taxes and so I know that’s controversial and sensitive and hard for you to comment on. So I said, I wanted to ask about another potential solution, which we’ve had some discussion of, which would be if the government were to come to the power market if you like and offer voluntary auctions for contract, for [indiscernible] CFDs but for existing assets in the same way these are offered already for new build assets including the great offshore wind CFDs that you have and so on. And then in that case, I guess the idea would be there may be some operators who have merchant or rough based assets would give up the higher prices they are getting from — at the moment for those assets and exchange for voluntary CFD at much lower price. And I suppose it would have to be lower than the CFD strike prices for new assets. And in exchange, you would get a contract that runs for 10 or 15 years and might be inflation proof and fundamentally more valuable still on an MPV basis, even though at a lower — lower price today.
So I don’t, I don’t want you to take too long to explain the idea and there is many scenarios. But my question is, do you think there is some kind of idea of a voluntary CFD for existing assets that could be a good solution for the situation we were in? Do you hear anything from the government that might be leading in this direction in the UK or frankly anywhere else? And if such CFDs were on offer for existing assets, would you see yourselves interested as bidders, would you bid an asset to that kind of contract structure, if it was offered? Thank you.
Markus Krebber
Yeah, thanks, Sam. I have also heard about this idea, but when it’s clear whether this comes and how it will look like. We got to take a decision what we do, but I think, it’s just one of the potential measures the government may take. So maybe when your line is stable maybe you call Downing Street 11 and work it out and then we decide what we do.
Sam Arie
Yeah. I don’t know who’s going to pick up the phone when I call that number. I got to wait few weeks. [Multiple Speakers] Listen, I first — further hard for you to comment, I understand that. But I suppose, what I’m getting at is, do you see on the horizon actually any ways to improve this current situation which obviously needs — need some kind of action, but which would be positive for industry, and that you could sort of support on a voluntary basis. And of course if there isn’t. Then you’re likely to get something on an involuntary basis. So just trying to figure out what are the territories or potential solutions that you would support?
Michael Muller
I think, I mean, related things. We have the discussion around windfall taxes. If you want to call it that way, but then also the big discussion about market design and market design short-term and long term. The only comment I’d like to make is, I think the approach the UK has taken was a very fundamental [indiscernible] process now with consultation of the industry is exactly the right thing to do because fiddling around with market design can have devastating effect, if you don’t oversee what are the final consequence. And we are currently not in a market design crisis. We are in an energy crisis, the problem is we simply don’t have enough gas and electricity and let’s fix that first, of course, the social consequences need to be dealt with. But I would definitely not rush into any solution here.
Sam Arie
Okay. Thank you.
Thomas Denny
Thank you. Sam. Next question, please.
Operator
Next question comes from the line of Tancrede Fulop from Morningstar. Please go ahead.
Tancrede Fulop
Hello. Good afternoon. Thank you for taking my question. I have two, the first one is on the Inflation Reduction Act in the US and if you could provide us some — give us some color what is the impact for you? Could you increase especially the extension of the production tax credits and investment tax credit, could that lead you to increase your renewables investments in the US? And is there, given your investments plan before the Act, is there some upside to your 2027 guidance? This will be my first question.
And my second question, you mentioned that you hedged more than 80% of your [Technical Difficulty] production process in ’22 and 2023. So could you maybe give us a directional indication regarding the profitability of the — of your [Eemshaven] (ph) wind and solar division, you materially raised the outlook of 2022. Can you expect a similar profit in 2023?Thank you.
Markus Krebber
Yes, thanks for the question. Let me take the first one, we see the Inflation Reduction Act clearly as positive because it gives a very stable incentivization framework for renewable build out wind and solar, but also for the first time significant support for batteries and also hydrogen. So that is very important that we have the stable environment now for up to 2030. So definitely positive. Of course, you still have competition in the industry around sites, around PPAs and so on. So I would not go so far to take us straightly to our ’27 guidance, we have always assumed an environment for renewable investments which would make investments viable. This is maybe now a bit more positive, but I cannot translate that straight into numbers.
Michael Muller
Tancrede, that the question concerning ’23 and profitability. I mean, we have deliberately said that we don’t update the guidance for ’23. I mean, we said it will be above what we have guided at the Capital Market Day, but we haven’t put out new numbers simply because the uncertainty, we currently see is too high. We discussed and you also brought that forward with the hedging. And there are quite some positions that are open unhedged and as Markus also said, on the one hand side, it is not clear how high price levels will be in the end, that will largely dependent also on the development in Russia, in France and so on.
And secondly, we also see quite some overvaluation in current forward market simply because there is limited liquidity. So assuming what will in the end then be the outcome is difficult and that’s why we said for the time being, we don’t communicate a guidance and we’ll do that at the right point in time, but it is — it will be above what we have, had communicated at the Capital Markets Day in November.
Tancrede Fulop
Okay, thank you.
Thomas Denny
Thank you. Next question.
Operator
There are no further questions in the queue, so I’ll hand the call back to your host for some closing remarks.
Thomas Denny
Great, thank you, Jess and thank you all for dialing. It has been very quick and efficient call and as always the IR team is at your disposal if there are any further questions, which you have not asked during the call. Wish you all a great summer. For those who still have to go on vacation, enjoy your vacation and talk to latest in Q3. Bye-bye
Operator
Thank you for joining today’s call. You may now disconnect your lines.
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