fokkebok
A lot is happening in the global energy markets with key drivers for change being the Russian crisis due to its invasion of Ukraine and more from the IPCC that makes clear that time is running out to exit fossil fuels and transition to green energy. The fossil fuel industry continues to say that there’s no substitute for fossil fuel, but a more determined narrative is emerging to say that now is a time when a rapid transition is possible. There’s a lot to be learned from European fossil fuel providers. DONG Energy (Danish Oil and Natural Gas) has completed its exit from its fossil fuel past and is now the world’s largest offshore wind project developer with a new name, Orsted (OTCPK:DNNGY). Here I revisit my coverage of RWE Aktiengesellschaft (OTCPK:RWEOY) while noting the two major events mentioned above that look like they may help speed the change to a low carbon energy future. RWE is not only making a fast transition, but its business also is looking future proofed. Investors interested in US oil and gas industry majors Exxon Mobil (XOM) and Chevron (CVX) might pay attention.
Two major events have dramatically changed prospects for decarbonization of energy
In recent months the world’s fossil fuel-based energy system has experienced dramatic change that foreshadows an end to the use of fossil fuels. The fossil fuel industry has been confident that there remain decades before this becomes a real threat, but I no longer think that this will be the case. Rapid change is in the air, masked by urgent action to address crisis, especially in Europe.
Climate change, a 50-year-old problem that’s suddenly upon us in earnest
Recently the IPCC produced the third of its major reports as part of its Sixth Assessment Report, which is titled “Climate Change 2022: Mitigation of Climate Change.” This is a massive report which involves many climate scientists from all over the world. It’s dense and detailed, but unambiguous that time is running out for humankind to build a viable future. There’s a massive amount of data, some of which remains unrealistic (such as Carbon Capture technology), but the overall takeaway is that today’s technology can achieve net zero emissions and limiting global warming to 1.5C, but only if extreme action is taken immediately. There’s no room for any new fossil fuel endeavors as the existing pipeline of projects will already tip the world over 1.5C.
Until now IPCC reports have ended up being ineffective because politics got in the way of clarity about what needs to be done. The sixth series of reports tells the truth about the emergency that the world finds itself in. And countries seeking to delay the transition from fossil-fuel based energy systems (such as Australia) have been named in the latest discussion from the United Nations. Interestingly Australia has very recently changed government and it’s once more joining the international efforts to address climate change.
While there’s much to do, the UN highlights eight reasons for optimism that climate change can and is being addressed. These are:
- Electric vehicles are on the rise
- Cost is going down for low emissions technologies
- Mitigation laws are expanding
- It’s still possible to change industrial emissions
- Cities present a big opportunity for climate action
- Economic measures are being deployed
- People care and they’re engaged
- CO2 removal is now essential to reach the goals – but it’s complicated
This area is so central to investment in energy and transport that I urge investors to read at least the summary press release. Two hundred and seventy-eight authors from 65 countries (41% developing/59% developed countries) and 354 contributing authors reviewing more than 18,000 scientific papers makes this a summary that can’t be ignored. It starts with noting that average annual emissions in 2010-2019 represent the highest in human history, and that we are not on track to address the problem. The good news is that some countries are getting their act together and 826 cities in 103 regions have zero emissions targets. There are options in every sector: Energy efficiency, electrification through renewables is happening, demand management is practical, electrification of transport is happening, cities are reducing emissions and becoming electrified, buildings are going zero carbon, industry is engaged, land use is becoming addressed, clean investment is happening along with clean economic policies.
The above indicates a new awareness and impetus to address the climate issues. A paper in the prestigious journal Nature indicates that it might be possible to limit warming to 2C if current pledges are honored, but a safer 1.5C target is much more difficult to achieve, requiring much steeper emissions reduction before 2030.
The Russian invasion of Ukraine changes everything in Europe
Russia has been central to global fossil fuel provision, especially in Europe. The trauma of the invasion of the Ukraine and realization that Russia is able to mount the invasion because of its huge fossil fuel revenues has galvanised Europe (and the rest of the world) to address as a matter of urgency ceasing to import Russian oil and gas. Atrocities in Ukraine have increased the outrage and urgency for action, notwithstanding that ceasing to import oil and gas as fast as possible is going to hurt.
The effect of the above dramatic events are being felt in Europe. An example of accelerated action is that Germany announced the biggest energy policy reform in decades. Key energy legislation reform is proposed to speed the build of solar PV, onshore and offshore wind projects in Germany. The goal is to achieve 80% renewable power by 2030, which involves 115 GW onshore wind, 215 GW solar PV (new build 50/50 rooftop and open spaces) and 30 GW offshore wind. This proposal has been updated in the light of the Russian invasion of Ukraine, and the plan is for projects to get priority until greenhouse gas neutrality is achieved. It isn’t a done deal, but there seems real commitment to get serious about an exit from fossil fuels for both climate security and also economic independence from Russia.
It’s being recognized that fossil fuel-based economies end up being dependent on unreliable energy providers, with oil and gas price spikes. Renewables provide autonomy and security.
The Russian crisis is producing follow-on actions around the world
It’s interesting that a short-term return to abandoned/to be abandoned fossil fuel assets is catching fire around the world. Actually even before the Russian invasion, there was an emerging shortage of fossil fuels due to massive cuts in investment by the fossil fuel industry as the COVID pandemic bit.
Notwithstanding fossil fuel projects getting some traction, as far as I can gather in no case is reversion to fossil fuel assets anything other than an emergency response to a perceived urgent issue. In every case the intention is to close down the assets, although the closure may be slightly delayed. This is not how the fossil fuel industry is seeking to portray these events. Everywhere, including India and throughout Asia, the move is to accelerate the renewable energy transition.
RWE’s response to these two emergencies
The above announcement about freeing up the process of renewable energy implementation goes directly to RWE’s business in Germany. But RWE’s renewable business expansion is not limited Germany and Europe. New initiatives concerning offshore wind in the US and India are going to have a big influence on RWE’s global business.
During RWE’s Q4 2021 Earnings report in mid-March CEO Markus Krebber had a lot to say about the current situation that RWE find itself in. It was all about rising to the challenge of exiting fossil fuels and becoming one of the world’s major players in offshore wind.
Note that RWE has no assets, operations or people in the areas affected by the Russian invasion. There are contracts with Russia for 15 tWh of gas (50% due for delivery in next 12 months) plus 12 million tons of coal, with 2 million tons due in the next 12 months. The goal is to reduce exposure where possible, and no new energy supply contracts will be entered into with Russian counterparties. RWE is actively diversifying its fuel supply and all non-energy supplies from Russia have been terminated.
The plan is to invest Euro 50 billion in the energy transition by 2030, with 90% of capex compliant with proposed EU green investment taxonomy. This will deliver 50 GW of green capacity across wind, solar, battery, flexible generation and hydrogen, with earnings of Euro 5 billion.
In March 5.6 GW renewables were under construction by RWE, with 3.3 GW wind (2.2 GW offshore), 1.2 GW solar PV, 0.6 GW batteries, 0.5 GW flexible generation. Offshore wind is a big deal with expansion into the US (3 GW lease award) and Indian (develop an offshore wind business with Tata Power in India) markets underway.
The plan is to stick to climate targets (notwithstanding the Russian situation) and embark on 1.5C compliant CO2 reduction pathway as soon as possible. Having said that, RWE will work with the German Government if it temporarily needs to increase coal usage for the coming winter.
Gas is a big deal and RWE’s approach is to embrace LNG in the short term, while at the same time indicating that this foreshadows a switch to green hydrogen. It’s clear that there’s a question mark over natural gas as a bridging fuel. CEO Markus Krebber made the point that Germany is the most exposed in Europe to Russian gas, and that RWE is the best positioned German company to make the switch from gas. Talk of extending coal is OK if the Government needs it, but for RWE from a business perspective it isn’t relevant because it isn’t a strategic focus. RWE is going renewable.
In the May Q1 2022 earnings call RWE CFO Michael Muller further developed on Q4 2021 comments of March 2022. He made clear that RWE strongly supports German Government efforts to become independent from Russian fossil fuels. This involves accessing LNG shipments from the US and Qatar. RWE is willing to support short-term power needs by helping with up to 3.5 GW of coal-fired capacity of recently decommissioned or soon to be decommissioned coal plants. Muller made clear that this does not reflect a change in RWE’s strategic direction and the planned renewable buildout will be brought forward to 2030. Almost 90% of RWE’s CapEx is green. The number and scale of renewables projects all over the world is staggering as befits the world’s No. 2 offshore wind project company. Readers interested in getting a sense of this need go no further than browsing RWE’s 87 press releases so far in 2022. And the renewable boost from the Russian invasion of Ukraine is evident from the fact that RWE is currently hiring 200 new people in Germany, with 50 already hired. RWE intends to benefit from a big boost in renewable investment in Germany even though it’s still quite early to know exactly what the German Government has planned.
Offshore wind and renewables grids
In comments on my recent articles I’ve noticed that there’s a determined group of fossil fuel investors who act as if huge changes in renewable energy capacity are pipedreams of “green” enthusiasts (with a clear message that anyone “green” is somehow deluded).
It doesn’t take much searching to see how far along the transition to renewable energy has gone. RWE’s choice of offshore wind developments at the center of how it plans to exit fossil fuels is instructive and now the company is the world’s second largest offshore wind developer. This has meant straying well beyond the borders of Europe to enter emerging offshore wind markets in the US and Asia.
I’m based in Australia and I follow closely discussion as offshore wind begins to become part of reshaping of the Australian grid from being one of the most fossil fuel focused in the world. A recent article discussing reshaping the Australian grid might help some investors for whom this technology area is foreign.
Conclusion
We live in uncertain times with many things contributing to the uncertainty. Europe is the center of much turmoil as it takes the climate emergency seriously, with massive changes in how energy and transport will be configured in the future. The Russian invasion of Ukraine has thrown another curve ball because Europe has been heavily dependent on Russia’s fossil fuel energy to cover core European needs.
While RWE is successfully executing on its energy transition plan, the market is indifferent, with the share price flat year on year, and in the last month there has been a 10% decline in share price. This seems to provide an opportunity for conservative investors looking to tap into the changing energy landscape with one of Germany’s major energy companies that has a huge global reach. I find it extraordinary that no Seeking Alpha authors have covered this stock in the past 30 days and only one Wall Street analyst has provided coverage (but with a strong buy recommendation).
I’m not a financial advisor but I follow closely the changes happening as power production begins to transition from being based on fossil fuels to low carbon renewables. I hope that my commentary helps you and your financial advisor get some understanding of emerging investment opportunities in a major German energy company with a global reach.
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