Dusseldorf At first glance, the coal division is just a nuisance for RWE. The exit is sealed, and Germany’s number one coal company must gradually wind up its power plants by 2038 at the latest.
In fact, according to information from the Handelsblatt, the electricity producer can still generate substantial profits for many years to come with the climate-damaging energy source. RWE has very cleverly protected itself against the greatest risk: the steadily rising CO2 prices.
“You can’t say that out loud, but RWE earns really good money with coal,” says an RWE insider. “What we are seeing at the moment is that the demand for lignite is there even with a higher CO2 price because capacities in the electricity market have become scarce,” said a spokeswoman for the group when asked.
In the first half of the year, the Group’s coal-fired power plants ran at full speed despite the coal phase-out and the climate debate. With the lignite power plants, RWE generated 21,500 gigawatt hours (GWh) of electricity, almost 50 percent more than in the previous year. The hard coal power plants increased production by a good third to 3400 GWh.
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In the course of the coal phase-out, RWE had already shut down two hard coal units and one lignite unit. Earnings before interest, taxes, depreciation and amortization (Ebitda) in the coal / nuclear energy division climbed by 75 percent to 545 million euros.
RWE refers to “favorable market conditions”. This is actually surprising, after all, although the price of electricity in wholesaling has skyrocketed, so has the price of CO2 certificates, which are intended to make coal-fired power generation more expensive. A certificate that entitles the holder to emit one tonne of the greenhouse gas currently costs around 60 euros. Last year it was only 25 euros on average.
At Germany’s largest coal company, of all places, the effect is fizzling out. “We can look forward to the rising CO2 prices calmly,” says RWE itself. After all, the company has been arming itself against the CO2 price risk a long time ago on extremely favorable terms – for the entire decade.
“We started stocking up on certificates on a large scale years ago”
“The financial effects of rising CO2 prices are fully covered up to 2030”, RWE soberly states in a report to the climate protection organization Carbon Disclosure Project: “We use hedging instruments to reduce these risks. We therefore do not see any potential effects until 2030. “
Behind this is a brilliant achievement from the company’s own trading department. “We started to stock up on certificates on a large scale years ago when the prices were in the basement,” reports an ex-RWE manager.
The group does not want to quantify how many CO2 certificates it has secured by 2030 and at what prices. For 2019 and 2020, however, he had set the average CO2 price per megawatt hour at five euros, for 2021 at eight and for 2022 at 16 euros, according to a presentation. For every megawatt hour of electricity in a lignite power plant, around one ton of CO2 is generated. RWE has secured the certificates at a fraction of the respective market price.
“The detailed information is well guarded,” says Barclays analyst Peter Crampton: “That is politically rather sensitive.”
In a recent large report on RWE shares, the analysts at JP Morgan described the Group’s CO2 hedging as a “black box” and a “great unknown” – and as a decisive factor in evaluating the power plant portfolio.
The analysts estimate that RWE has currently secured certificates for 200 million tons of CO2. When it comes to hedging, RWE can take into account that rising CO2 prices will also drive up the wholesale price. Other analysts and industry representatives consider JP Morgan’s estimate to be far too low.
RWE must fear the debate about an earlier coal exit
In fact, the subject is explosive. The RWE Group, which is still the number one enemy because of its coal commitment to climate protectors and is considered a “dinosaur”, is finally orienting itself towards the energy transition. Since the multi-billion dollar swap deal with Eon 2019, RWE has once again been a major player in renewable energies.
While the last nuclear power plant will go offline in the coming year and the coal phase-out has been decided, the Ruhr group has chosen wind and solar energy as its new core business, is investing billions and wants to become climate-neutral by 2040. Last year, he also accepted the timetable for the gradual phase-out of coal-fired power generation and the extraction of lignite in open-cast mining.
For this, RWE is being compensated by the federal government with 2.6 billion euros. Reports of good business with coal are likely to fuel the already strong criticism of the compensation payments and increase the pressure on the next federal government to move forward with the coal phase-out.
According to industry experts, RWE does not have to be afraid of shutting down its power plants even faster. “RWE already correctly assessed the developments on the CO2 market in 2017 and 2018,” says analyst Crampton: “Ultimately, it was clear that the price would rise significantly. That’s the way it is politically wanted. ”RWE insured itself completely against the CO2 risk for the power plant fleet at that time until 2030. Not for speculative reasons, but to mitigate the foreseeable risk.
“That was an excellent move”, says analyst Crampton: “RWE should therefore be able to operate the lignite power plants profitably in the coming years despite the rising CO2 prices.” And since the end of some coal power plants has now been sealed, RWE should even “surplus” Certificates ”- and could potentially bring them to market at a profit.
Industry circles even suspect that RWE has already started to monetize CO2 certificates. The trading department had recently performed very well. That could be due to good deals with CO2 rights, they say.
There is even speculation that in the coming years RWE will primarily sell CO2 rights on the market and in turn supply its own power plants with more expensive rights on the market. The trading department would then post high profits, but the profits from the coal-fired power plants would not be too generous – which would be politically opportune.
Risky bet on the price of electricity
“It is likely that the trading department will gradually sell some of the CO2 certificates,” says analyst Crampton.
According to estimates by Enkraft Capital, the business with CO2 rights must even be so lucrative that the investor sees “significant hidden reserves”. In a letter to RWE last week, the activist investor group called for the renewables business to be spun off from RWE.
She believes the company is massively undervalued due to the lignite activity on the stock market. “And that doesn’t even include the CO2 certificates,” says Enkraft Managing Director Benedikt Kormaier in an interview with the Handelsblatt. “According to our estimates, the hidden reserves resulting from the CO2 certificates and derivatives are between ten and 13 billion euros.” And that is still conservatively calculated.
In fact, the question of selling the certificates could arise even more frequently in the next few years. “If the electricity prices remain at today’s level, then RWE can cover the costs with them. But the tendency is rather that electricity prices do not stay at this high level, ”believes energy expert Felix-Christian Matthes from the Öko-Institut. If the electricity prices fall, it could be quite attractive to sell the secured certificates, said Matthes.
As positive as the prospects for RWE’s coal-fired power plants are in this decade, they are also uncertain beyond that.
(Photo: dpa)
It is a risky bet on the future of electricity prices. Nevertheless, RWE is not the only player who is clever with CO2 rights. Many hedge funds have stocked up on pollution rights in the long term and are speculating on rising prices. And RWE’s competitors have also stocked up, according to information from the Handelsblatt – in individual cases also until 2030.
But the competition also prefers to keep a low profile on the subject. A spokesman for the East German Leag, the second largest producer of lignite in Germany, said on request that the company did not “want to comment on these questions that concern internal details”.
The Düsseldorf energy company Uniper made a similar statement. “Since the markets are only liquid for a few years in advance, we usually do not hedge further than three to four years into the future,” said a company spokesman on request.
EnBW also did not want to comment on the purchase of CO2 certificates “for reasons of competition”. However, a presentation for investors shows that the energy company from Baden-Württemberg has also taken precautions. Even in 2024, up to 30 percent of emissions are covered.
As positive as the prospects for RWE’s coal-fired power plants are in this decade, they are also uncertain beyond that. At least if the Greens participate in government, a debate about an early coal phase-out to 2030 is expected.
And even if not, the economic outlook is bleak as the carbon price protection will expire. “We expect RWE’s lignite fleet to slide into the red as soon as the strategic hedging expires in 2030 – and the fleet is completely exposed to the price of CO2,” write the analysts at JP Morgan.
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