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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Welcome to the RWE conference call. Michael Muller, CFO of RWE AG, will inform you about the developments in the first quarter of fiscal 2023. This meeting is being recorded.I will now hand you over to Thomas Denny.
Thank you, Sergey, and good afternoon, ladies and gentlemen. Thank you for joining the RWE Investor and Analyst Conference Call today, in particular, given that we had pre-released numbers already two weeks ago.
Our CFO, Michael Muller, will guide you through our key highlights and financial performance of the first quarter and, of course, the outlook for the current year.
Before we kick off, let me also thank all shareholders for your strong support at our AGM last week. Your vote at the AGM confirms the strategic path of our company.
And with that, let me hand over to you, Michael.
Yes. Thanks, Thomas, and also good afternoon to all of you also from my side.
The first quarter was obviously a tremendous start into the new year with earnings significantly above Q1 last year. We recorded an adjusted EBITDA at the group level of €2.8 billion, driven by the operational performance across all segments but in particular of our flexible generation portfolio and trading business. The development for installed green capacity underlines the progress on our transition path.
We have added 4.9 gigawatts of capacity to our portfolio, mainly driven by the closing of the acquisition of Con Edison Clean Energy business with 3.1 gigawatts and the Magnum plant with 1.4 gigawatts. In the first quarter of 2023, we also made the final investment decision for Thor, a 1-gigawatt offshore project in the Danish North Sea. In total, we currently have 6.8 gigawatts of green capacity FID-ed or under construction.
We were also successful in the British capacity auction and have secured 6.6 gigawatt of capacity agreements for the delivery years '26 and '27 at attractive terms of €0.63 per megawatt. And we have issued a €1 billion green bond at attractive rates. The bond, divided into two tranches of €500 million, met strong interest from investors. We saw a final order book volume of close to €4 billion. The high interest demonstrates our great access to debt capital markets to finance our green growth investment ambitions.
Let's now move on to the details of the earnings in Q1. A very strong operational performance from our flexible generation portfolio and trading business led to an adjusted EBITDA for the core business of €2.3 billion, while 2022 figures were marked by a negative one-off.
In Offshore Wind, adjusted EBITDA stood at €473 million. Earnings were up on the back of capacity additions of Triton Knoll with 506 megawatts and Kaskasi with 342 megawatts.
Onshore Wind/Solar recorded an EBITDA of €247 million, which was down on previous year. This was mainly driven by lower realized electricity prices, regulatory interventions and lower wind resources in Europe. However, the consolidation of Con Edison Clean Energy businesses and further capacity additions had a positive effect.
Adjusted EBITDA of the Hydro/Biomass/Gas business was €1,177 million. The strong result was driven by short-term asset optimization and hedges conducted at attractive price levels.
Our Supply & Trading business had a good start into the year 2023. The Q1 result is up on the back of a strong performance and a negative restated one-off effect in previous years due to sanctions on Russian coal deliveries.
Overall, the group's adjusted EBITDA stood at €2.8 billion, including the Coal/Nuclear division. Year-on-year, Coal/Nuclear is up due to higher hedged margins from lignite-based power generation and higher margins on the extended nuclear operations of the Emsland nuclear plant.
On the back of this strong operational performance, adjusted net income amounted to €1.7 billion. Depreciation increased in line with our growing green strategy and investments. The year-on-year adjusted financial result is stable due to offsetting interest rate effects. For the adjusted tax, we applied a general tax rate of 20% for the RWE Group. Finally, adjusted minority interest reflects lower earnings contributions of assets with minority partners.
The adjusted operating cash flow was €2.4 billion at the end of Q1 and reflects the impact from operating activities on net debt. Changes in operating working capital were marked by seasonal effects from the purchase of CO2 certificates, compensated by positive effects from the reduction of accruals and of gas in storage.
Net debt substantially increased on the back of strong investments into our green growth. In Q1, we closed a €6.3 billion acquisition of Con Edison Clean Energy businesses. On top, we invested further €1.7 billion net in our green growth program, including the Magnum and the JBM Solar acquisition. Other changes in net financial debt increased by €1.6 billion. This includes timing effects from hedging and trading activities. Our net position from variation margins for power generation hedging stood at €1.3 billion. This includes net variation margins from the sale of electricity as well as the purchase of the respective fuels and CO2.
In line with our green growth strategy, we have added 4.9 gigawatts of capacity to our portfolio in Q1. The acquisition of CEB added 3.1 gigawatts, Magnum, 1.4 gigawatts. The further -- the growth further includes the German gas plant, Biblis, for 300 megawatts and several other wind and solar assets.
As we speak, we have a total of 6.8 gigawatt under construction across different technologies. In Offshore Wind, the project Sofia with 1.4 gigawatts and Thor with 1 gigawatts are well underway. Onshore Wind includes our U.S. project, Montgomery Range, with 200 megawatts and the U.K. project, Enoch Hill, with 70 megawatts as well as further smaller projects. In total, we currently have 2.7 gigawatts of solar capacity FID-ed or under construction, mainly driven by the 2.3 gigawatts of U.S. projects with Bright Arrow, 300 megawatts; Peregrine, 300 megawatts; and Big Star Solar, 200 megawatts, being the biggest. European solar projects amount to 400 megawatts of capacity currently under construction. Batteries includes 0.9 gigawatts of projects across the U.S. and Europe. Flexible generation and H2 capacities under construction contain the conversion of the Amer power plants to 100% biomass as well as further gas and hydrogen projects.
For 2023, we confirm our outlook. Adjusted EBITDA for the RWE Group is expected to be between €5.8 billion and €6.4 billion. Adjusted EBIT is assumed to be between €3.6 billion and €4.2 billion. And adjusted net income will range from €2.2 billion to €2.7 billion. And the dividend target is €1.00 per share for this year.
And with that, I hand back to Thomas.
Thank you, Michael. We'll now start the Q&A session. Operator, please begin.
Thank you, sir. [Operator Instructions] And our first question comes from Alberto Gandolfi from Goldman Sachs. Please go ahead.
Thank you. Good afternoon and thanks for taking my two questions. The first one is, Michael, I was wondering if you can share what your thoughts are on this very recent draft legislation in Germany. It looks like renewables have been identified as a key tool to keep very low electricity prices for industrial customers. So I was wondering if you can share with us the timing of this legislation and what you think could be the implications for your German business in terms of fast-tracking permitting, in terms of growth opportunity for you and trying to understand if this really could be sizable for you and maybe replicated as well in Europe?
The second question is again on renewables this time, not from legacy assets. Just on renewables, can you maybe tell us on the 6.8 gigawatt you FID-ed or under construction, what have you seen in terms of unitary revenues per unit, let's say? What have you seen in terms of IRR minus WACC? Have you seen stable spreads? Have you seen rising spreads, falling spreads? Maybe if you can give us, on Page 8, a bit of an overview? Given that so many investors are highly skeptical on the ability to create value on renewable investments, I was trying to see if we can hear from you what you're actually seeing on the ground? Thank you so much.
Yes. Alberto, thanks for your questions. I mean, on the proposal of the German legislation, it's probably too early to judge. Because if you listen to the debate in Germany, I would kind of classify that as an initial proposal that is now up for discussion. And I mean, we need to see in which direction it is leading. I think what is promising is that clearly is understood that the only way out of the current environment of high prices is investing into renewables. And therefore, that goes hand-in-hand with also the ask we have towards politicians to really speed up the whole process of building of renewables with, as you said, making sites available, accelerating permitting and these kind of things. But it's too early to judge what that concept really means. I mean, from our perspective, obviously what's very important is to emphasize any proposal they bring forward needs to keep forward market and PPA markets intact, because that is kind of the major driver to make sure that investments really happen soon.
Your question on the investments, on the returns of our 6.8 gigawatts pipeline, I can just reiterate what I said previously. I mean, our target is to yield 100 to 300 basis points margin on top of WACC. And I can reassure you that this is also given if I look at the pipeline. I mean, as we explained previously, it very much depends on the project. So you can assume better projects like Thor, where you have merchant exposure and its offshore project is more at the upper end. While if you talk about more regulated assets in the solar arena, it's probably in the lower range of that 100 to 300 megawatt -- basis points range, sorry.
That's great. Thank you.
Thank you, Alberto. Next question, please.
Harry Wyburd from Exane. Please go ahead.
Hi, everyone. Thanks very much for taking my two questions, please. So firstly, I wanted to ask about gas generation, whether you could help us a bit separate what's structural versus what's cyclical in your Hydro/Biomass/Gas segment? Obviously, you printed very good EBITDA in that segment this quarter, despite how prices being, on an absolute basis, much lower than the fourth quarter last year. Do you feel there's a structural element to this? And does that make you more confident about the outlook for gas generation looking forward just to 2027 and 2028, when you revisit your future guidance? And maybe can you help us understand whether you think that division is now structurally more profitable than it was pre COVID? So that's the first one.
And then I just wanted to ask you on hedging. We had Fortum this morning not making much progress on their 2024 power hedging. I wanted to just understand from you how your hedging is developing. You've obviously changed your policy a bit recently. Are you able to secure volumes in future years and sort of derisk your guidance in earnings? Or is it proving challenging, given the liquidity in power markets still? Thank you very much.
Yes, Harry, on your question, I mean, just gas generation, I mean, we already previously explained that basically when you look at gas generation, you need to think about three different income streams. One being the spread that you can hedge. Second one is capacity premiums you get in some markets, like I mentioned, the U.K., where we just recently were successful -- very successful in the latest auction. But we also have capacity payments paid in Germany for two assets. And we also commissioned the Biblis asset, which is just run for grid stability and it purely has an income stream coming from, yes, regulated income for providing the capacity. And the last element is then what we call the short-term asset optimization, which is a mixture of the short-term optimization and deployment of the assets but also income from auxiliary services.
Now if you look at what happened in the market, I think two things are relevant. One is we do see a tighter supply situation. So with the decommissioning of nuclear assets, coal assets -- I mean, some coal assets now have been brought back. But I guess, in the medium term, they will also go offline again. So you see a fundamental scarcity of firm capacity in the market. And secondly, what we also see in general is a higher -- an elevated price level. And so therefore -- I mean, to give you a simple example, if the average base load price is €60, then kind of if you see the typical fluctuation of the power prices, it is around €60, it can go down to zero. While if you have a power price level of €120, obviously it's kind of the -- the volatility or the variance in the power prices is significantly higher. So therefore, these are the two structural elements that has changed. One is the tightness and therefore leading also to more demand for flexible generation and more volatility. And the second one is the absolute higher price levels that also help those assets.
Now when you look at the earnings, I mean, let's start with the capacity. What we have seen lately in the U.K. auction is that was supply getting tighter. Also, the premium you get for providing firm capacity is going up. Spreads, as I said, tightness is obviously also helping here. And you still see some premium here in the markets because going into the winter and next year, there's still concerns about scarcity. Here, you obviously need to bear in mind that especially in Netherlands and U.K., liquidity is somewhat limited. And that leads already over to your next question, so you can't hedge all the high levels you currently observe. But obviously, that's part of our commercial optimization, where we try to capture most of the benefits and apply the right hedging strategy. And the last one is then the commercial asset optimization. And clearly, as long as we see the tightness and the volatility in the market as we currently do, that is something those assets benefit from. So therefore, structurally, we do see a higher earnings potential in that asset category compared to, say, the situation two years ago.
Your second question on hedging, I mean, we communicated that in the course of the crisis, we reduced our hedging activities to also make sure from a liquidity perspective, we could cope with the situation. Since volatility has come down and we also took quite some efforts to secure additional financing, we have restarted hedging. But very conscious on focusing in which areas you apply the liquidity and where you want to do hedging. But in general, it's less hedging. And we also still keep some security buffers to avoid falling short. So therefore, the overall hedge ratio is somehow lower than it used to be. But we try to focus, say, on the most value-accretive topics. And the last topic, I already mentioned, is that liquidity, especially in U.K. and Netherlands, is not tremendously good. So therefore, hedging very far out is somewhat difficult. Yes, so therefore, in a nutshell, we have -- we've started hedging not to a level we saw it two years ago, but I think still on a level where you can capture market opportunities in an optimal way.
Got it. That's very helpful. Thank you.
Thank you, Harry. Next question please.
Sam Arie from UBS. Please go ahead.
Hi. Hello, everybody, and thanks for the presentation. Congrats on another great quarter. I was actually planning to ask pretty much the same question as Harry. So I'm just quickly readjusting my question as a follow-up. And maybe I could just try and join a few thoughts together from Harry's question, your answer. And I suppose the context is thinking about where you might go when you do your next plan update at the end of the year. And I suppose to really stay on that point, when we look at these amazing results you're posting, it's the Hydro/Biomass/Gas and also the last few years in the trading divisions.
And I suppose if I'm not too simplistic, the point is this idea that you are essentially, at the moment, long volatility. And there's lots of volatility in the market, lots of resource that comes from having more renewables and the renewables being volatile when the wind and the sun move around and so on. And I suppose thinking about the old Growing Green strategy and the plan to build out the renewable asset base, there has to come a point when you become essentially short volatility. And I suppose it could be true that there is that time even if it's a few years away.
So if all that was true, what would I be thinking for the CMD? Maybe I'd be thinking it's time to move on from a pure focus on the renewable business and megawatts and gigawatts and to the long-term targets like that. And maybe I'd be offering a much more blended outlook with renewables plus flexible assets, focusing on markets where you can have both growing the flexible assets in a way that decarbonize, so you could still tap into subsidies and so on and harnessing the returns that Mark as, I think, described at full year as the place where the fund is. Renewables might be commoditized, but the flexibility is where the fund is.
So is that a good set of expectations to have at this stage, where you might be heading with your next strategy update? And do you have any sort of wider comments about these themes that you can help us with? Thank you.
Yes, Sam, thanks for the questions. I mean, honestly, if you look back when we presented our strategy at the Capital Markets Day two years ago, already at that time, we clearly said that we see a value in combining flexible generation with renewables. And we also said that one of our strengths is the commercial optimization, the commercial capabilities, and that we want to build upon those strengths. So, you could argue it's nothing new. I think what has changed in the meantime is that this strategy has proved right. So therefore, you can assume that we will stick to that strategy and then obviously also, yes, elaborate and then expand on that strategy in the next Capital Markets Day.
Same is true with what you mentioned, indeed, we are long volatility. That's what you currently see with our portfolio. And you're also right that, in principle, a renewable asset has a negative [gamma] (ph). And so there is some kind of offsetting effect. But maybe two aspects to mention here. On the one hand side, I think that is also a strength of our portfolio. Because what you see is, for example, when we auctioned the PPAs for our German offshore wind farms, we could offer to our customers not only pay as produce or pay as nominated but also base load assets. Because essentially, you can combine those assets and therefore do two things. You offer an attractive project and you hedge some of your positive gamma on the flexible generation and -- but that lock in the margins or potentially attractive margins.
I think from a risk management perspective, what is important is that going forward, you kind of keep a balanced portfolio and don't fall into the risk of falling short with your portfolio. But that is something clearly on our agenda. And bear in mind, we said our mix would be 30% merchants and 70% regulated income. And obviously, the regulated income, the way it's designed doesn't have the short gamma, so it's not short volatility. So therefore, I'm confident that we can keep the portfolio. But yes, there is clearly value in combining those two sides of the coin, so the long gamma on the flexible generation and the negative gamma on the renewable side. Yes, so for me, it's kind of a reconfirmation of our strategy. But I mean, clearly for the Capital Markets Day, that is something we'll shed some more light on, especially also on the earnings projections for Hydro/Biomass/Gas.
Okay. And we'll look forward to it. And probably we'll ask you again at H1 about the CMD and you said you want to tell us then, but we'll keep asking. We appreciate your comments.
You will hear a consistent answer in H1, I'm sure.
Sam, if you have good ideas for our CMD, what we should tell the market, please reach out to me. Next question, please.
Will do. Thank you.
We'll now take our next question from Pujarini Ghosh from Bernstein. Please go ahead.
Hi, and thank you for taking our questions. So firstly, on -- we saw a large restatement in the Supply & Trading business because you stopped sourcing hard coal from Russian producers. So my question is, is this now, I mean, done and dusted, or you still have some of these old contracts that you're expecting in future quarters? And any risk associated with that?
And my second question is on the broader renewable auction landscape. So on one hand, we have ever-increasing national targets and -- which is somewhat dampened, firstly, by permitting and, secondly, by the intent of regulators to keep auction prices low and then setting very low price caps. So on that front, what are you seeing on the ground? And we've seen some improvement, like in Germany, where they've raised the price cap for onshore wind and solar. So any color on permitting and auction landscape from what you're seeing?
Yes. Let's start with the restatement. I mean, if you recall a year ago, we recorded that €850 million loss on the coal contract. At that time, we reported that as non-operating result. But at the end of the year, we have reclassified that into EBITDA, so into the adjusted EBITDA. So therefore, it's now also included in the Q1 numbers if you do the year-on-year comparison. To your question, no, it's all settled. So there are no more risk attached to the Russian contracts. So that's all incorporated in the numbers of the financial year 2022.
With respect -- sorry?
Yes, thanks for that.
Okay. And with respect to the auctions, I mean, when I was on the road, I explained to people that what for me is important is that we have a portfolio of different technologies and also geographies for our development projects. Because each market is different and also regulation in each market may change. And I mean, you gave the example of the German auction with now the price cap being lifted, which I think was very relevant decision. Because before, you have seen that auction volumes went down. So now it's back into attractive territories. So in the end, that is kind of what you need to manage. You need to be in different geographies and then make sure you capture the right opportunities here.
But there's no kind of general pattern, I would say, across -- I mean, I think important is that the push towards renewable build-out and the commitment by governments to drive that space. And I think the example of Germany shows you that if economics are not as attractive anymore or not given, then the number of projects go down. And since governments have their respective targets, they will then revisit the regulatory regime and adopt it so that renewable build-out continues to happen, which I think is a good sentiment and confirmation for our strategy.
And in terms of the permitting, I mean, it seems to be at loggerheads with the ambitions, right? I mean, are you seeing any improvement on the ground?
We are seeing improvements. We are not seeing the improvements we would love to see. Yes, so our ambitions, as you can imagine, is always higher. I think it's too early to already kind of come up with a final judgment. I would wait the next year, 1.5 years. Because especially in Germany, there are still some initiatives ongoing that are not finalized yet. But it's clear that it's moving in the right direction. And we're also seeing already some initiatives that definitely help -- that are definitely helpful.
Okay. Thank you.
Thank you, Pujarini. Next question, please.
Rob Pulleyn from Morgan Stanley. Please go ahead.
Hi. Good afternoon. Thanks for taking two quick questions. The first one is can we talk about new German gas and when we could see or what the timeline is to see progress on the reputed 30 gigawatts of new capacity that's needed? And what sort of financial framework do you think you could get or what do you, I suppose, need to go ahead with those investments?
And the second one, just to follow up on some questions around merchant and PPA earlier, regarding the merchant exposure RWE retains, I mean, you mentioned Thor, Michael, and there's some smaller assets, too. Is the firm looking to transfer merchant to PPA, given the attractive current strike prices available in the PPA market, i.e., lock in high prices? Thank you very much.
Yes, Rob. On the first question, we are awaiting a proposal by the German government on the new German gas regulation of gas assets. And I mean, from Berlin, we are hearing that they are also in close discussions with Brussels around that one. So yes, let's see. But similar to my previous answer, we see a clear ambition for the government to address that topic, because they fully understand and support the necessity of building new gas assets.
With respect to what our requirements to take an investment decision, it goes into two directions. One is there needs to be some capacity premium payments, which can either be via investment incentives or capacity premiums like you have payments like you have in the U.K. But there needs to be some financial incentives on top of wholesale revenues. And secondly, what for us is also very important is that there is a clear path how you can decarbonize those assets. And that means if you talk about Germany, we need to make sure that there is sufficient hydrogen available at some point in time. And secondly, that there's also a framework in place that enables you to run them on hydrogen. Because as long as natural gas at lower price is competing with hydrogen, you won't run the hydrogen. So there needs to be some, say, contrast or difference, like scheme in place that rewards you running on green fuels.
The second question you had around the merchant exposure, yes, fully right. I mean, Thor is a merchant asset. But at the right point in time, we would also like to convert that into PPAs. And I mean, we are seeing interest in PPAs. So that is something we are actively managing. But at the same time, as we also said, I think that is one of our strengths with the commercial half of Supply & Trading that we don't shy away from warehousing commercial risk for some period of time and then look for the right point in time to also offload merchant risk again.
Thank you very much. I'll turn it over.
Thank you, Rob. Next question, please.
The next question comes from Olly Jeffery from Deutsche Bank. Please go ahead.
Thanks. Just two questions for me, please. The first one, just turning to Hydro/Biomass/Gas and profitability there with regards to how that is changing and what we expect to maintain going forward. So within Q1, you mentioned the three income streams, capacity payment, generation margins and short-term asset optimization. But we don't know, from outside looking in, the mix in that. So I don't know if you can give any visibility on that. Perhaps if you could -- perhaps at a very basic level, if you could at least talk about how much you see generation margins making up of that mix? Because that's the one that obviously will most likely to change over time. So any visibility you can give on that mix would be very helpful.
Second question is just going on Onshore Wind/Solar. I mean, some of your peers have talked about some delays to capacity build-out. I was wondering, are you having any issues with securing capacity in line with your plan? Have you had any delays? Are you having any issues that are worth mentioning within the Onshore Wind/Solar division compared to six months ago that you didn't envisage? Any commentary there would be great. Thanks very much.
Yes, Olly, I mean, on the generation piece, we typically don't share a split. I mean, historically, we always said it's one-third, one-third, one-third. But obviously, that has been somehow reshuffled now with the new numbers. I mean, also on generation margins, I mean, I guess, the -- what you need to bear in mind when you talk about gas assets, it is not the base load price that is relevant, but it's more the price in those hours where gas assets are operated. So it has a very strong, shaped structure. And so therefore, it's not so much if you see that power prices come -- or spreads come down, it's more how does the price structure of gas assets change that is relevant when you want to assess the profitability. But I mean, we have fully understood also, being on the road, that the topic of earnings transparency and also getting a view of what is a sustainable earnings level on Hydro/Biomass/Gas is essential for doing a proper valuation. And therefore, that is something we will look into when we prepare our Capital Markets Day at the end of the year.
Concerning Onshore Wind/Solar, I mean, as you know, we are seeing some delays in the U.S., which we also have communicated on some projects. But that's baked into the numbers you see here. Other than that, no delays. But obviously, what we are doing is now taking the appropriate steps to secure capacity. So you probably have seen our announcement with Siemens Gamesa, where we signed a five-year contract to secure 1 gigawatt of onshore wind turbines in Europe, which will provide us with a framework to allocate those turbines to projects. We are also running initiatives in the U.S. around electrical components but also currently in discussions around PV modules. So securing volumes along the supply chain is a topic we are currently deeply involved into. And therefore, we're also confident that we can properly manage that and that it doesn't slow down our growth ambitions.
That makes sense. Thank you. And then just one follow-up, if I may, just on your first answer. With regards to generation spreads, presumably some of the spreads you would have hedged in over the last year. But I would expect that we would -- we should see those spreads start to come down towards the back end of the year and be lower next year. So not talking about the other element for Hydro/Biomass/Gas but specifically on the generation spreads, is that the right way of thinking about it qualitatively? Or are there reasons why those spreads could remain elevated at this quarter's level?
I think the key driver is really the volatility you expect to see. I mean, what you can assume, and that's something you already see, is that spreads in summer are lower than in winter. But we still see elevated levels into the winter, yes.
Okay. All right. Thank you.
Thanks, Olly. Next question, please.
Next question comes from Meike Becker from HSBC. Please go ahead.
Yes, hello, and thank you for taking my questions. I'll keep it to two. One is the general one on the guidance. With such a strong performance in Q1, arguably ahead of your expectations as well, how comfortable are you that we are in the upper range of your guidance? And what has held you back from even sort of like increasing the guidance at this point? What is sort of like the uncertainty in the rest of the year? And maybe sort of like added on to that, how do you see the energy price environment now relative to the time where you make the guidance?
To my second question, can I pick up maybe a little bit like expanding on the questions before and think about the tension that we maybe have between the high earnings in the gas divisions right now and, on the other hand, the acceleration of renewables, the debate that we had but, I guess, put to bed for now on the electricity market reform in Europe towards long-term contracts with PPAs and also, I guess, towards capacity payments for new gas plants? Do you see both coexisting in the long term? Or not running the risk as we usually have in this sector, is there any excess earnings, someone will come, a political or social view, who will draw attention to it and we will end up in a long-term framework that is more on CfD than visibility and capacity payment? Thank you.
Yes, Meike, thanks for your questions. I mean, obviously, we have seen a strong Q1 result. But it's still early into the year. So therefore, we feel very comfortable with the guidance we have put forward. And secondly, around your question about the energy price environment at the time of guidance and now, I mean, if you look at the numbers, that's about same. I think after we guided, it slightly came down or it's a little bit up again. So that is more or less reassuring or that is reassuring to our guidance.
The second topic you raised is indeed an interesting debate. But honestly, there are some elements to that, that -- let me first explain that. First of all, I think what you need to start with is that historically, we have seen low earnings in the flexible assets. So what we now see is also kind of a return to somewhat healthy levels. So therefore, I wouldn't argue that this is not -- these are not excessive returns. I think that's rather the volatility you need to have those efforts online.
Secondly, what you also see in the political arena, they have clearly understood that if we want to green up the portfolio, you need both. You need renewable generation, but you also need firm capacity to balance it into the relevant hours. And if we want to decarbonize the portfolio, it needs to be at least, for an interim period, gas, eventually then move into the carbon capture and storage or into hydrogen. So therefore, politicians recognize the need of flexible generation.
Your last question was around, is there maybe, you call it, the risk moving into more capacity markets, regulated markets, CfD markets? Honestly, that is not necessarily for me a risk. Because I mean, I would rather start first with is there a necessity for those assets, which I would say yes. And so therefore, in order to keep them in the market, they need to also earn their capital cost plus some margin on top of that. If that is then via merchant exposure or via regulated incomes, I don't really hear it. So yes -- so therefore, I'm not so concerned about that one. For me, it's more important that also when you listen to the EU, they have recognized that the energy-only market is the most efficient way to dispatch assets. But it needs to be complemented in order to stabilize the energy system going forward. And that's, on the one hand side, building out renewables and then secondly, also keeping or building firm capacity.
Thank you. Very helpful.
Thank you, Meike.
The next question comes from Piotr Dzieciolowski from Citi. Please go ahead.
Hi, good afternoon. Two questions from my side. So firstly, I wanted to ask you because you said in your press release that you would need to restore solar and wind. And so will you be part of the solution buying European products? And do you see political help for this process?
And second, I also wanted to ask you the Irish offshore auction going on right here, right now. Do you have any expectations? And can you say even in the white bracket, how shall we judge if the price comes at certain levels, 50% would be good or 60% would be good? Or what would the level you'd be satisfied with? Thank you.
Piotr, I have to apologize, I didn't get your first question. Can you maybe repeat that?
Yes. So basically, there is a EU pressure to restore some of the supply for the wind and solar, bringing the production facilities to Europe. So for example, [indiscernible] building the production facility. And is this something you would also consider? And would that happen, do you think there would be a political help for developers to do such things?
Yes. No, very important point. And effectively, that is also something we are pushing. Because I mean, I think we are currently discussing what are the limitations to realize the green growth. On the one hand side, it's currently availability of sites and then permitting. If that is all debottlenecked, there is the risk that the next bottleneck to come is supply chain. And I mean, Olly already asked the question around supply chain and if that does limit our efforts. So therefore, we strongly support -- we support the initiatives by the EU to support it building up a European supply chain as much as we appreciate also the initiatives in the U.S. under IRA to support the buildup of a supply chain in the U.S.
On the Irish auction, indeed, that is something we expect today. But nothing I can comment on.
Okay. Thank you very much.
And our next question comes from Vincent Ayral from J.P. Morgan. Please go ahead.
Yes. Apologies, I joined the con call a bit midway, so I'm not sure all the questions have been asked before me. So I'll try a couple. And if they've been answered, please give me an idea. One is an update on the coal foundation. [indiscernible] asking. And that was not supposedly on the map. I've heard potentially conflicting reports that maybe the message has changed on that. So could you update us on the possibility to have discussions restarting on the coal foundation with the government? So that would be question one.
Question two is related to M&A specs we've seen on the press on -- earlier this week. How open will you be to an approach? And what would be the main issues to such a possibility from your side, or you would be against basically?
Another one is the EU gas situation on the next winter. How do you see it now? [indiscernible] services were down in Q1 year-on-year. And I recall that one of the reasons for your very solid CCGT guidance for Hydro/Biomass/Gas, I recall, was actually ancillary services supporting higher profit in 2023. So could you give us a bit of color on how much of this is contracted, what type of duration to get a sense of how it's working on your side, guys? Thank you.
Yes, Vincent, thanks for the questions. I mean, coal foundation, we have, I think, reiterated that quite a few times that obviously we are open for discussions if the German government would approach us. But currently, there are no discussions ongoing as they currently have different topics on their priority list.
On M&A speculations, I think you phrased it correctly, it's speculations. And you know we never comment on speculations in the market.
And the last question on ancillary services, as I said, the part of when we talk about the commercial asset optimization earnings, it is a mixture of ancillary services but also the short-term dispatching of the assets. So it all mingles together. I mean, with the current tightness in the market, it's not only a capacity tightness, but it's also a tightness with respect to grids. So therefore, topics like redispatches currently do reoccur much more often than they used to do. And also, if we move forward into a further green world with renewables, there will also be the need for additional, yes, ancillary services like inertia, black-start and these kind of things. So therefore, that also offers additional income streams for ancillary services. It's not so -- I mean, apart from the capacity premiums that we secure in the U.K., which are secured with four years' lead time, the rest doesn't really have so long lead times. But I guess, what is important is just to know that fundamentally, as long as markets stay tight and grids also are tight, that should provide for stable income streams on that side.
Thank you. Just one on the European gas situation for the next winter. So now the winter has been warm. We've seen the recent levels are hovering above normal in Europe general. Some regas projects have been already commissioned and others are on their way. How do you see the next winter sitting today? And a follow-up on the coal foundation, you're open for discussions. But do you think it's realistic to expect a scenario where discussions could restart this year before the end of the year?
Starting with the coal foundations, I mean, I don't start any speculations here. So please apologize for that.
On the gas situation, I mean, what is our view? We currently don't fear a physical scarcity of gas because you see storage levels being fairly high, around 60% in Germany, it's even a little bit higher. So therefore, physical scarcity is not a risk. But at the same time, I mean, we should bear in mind that we still have flows from Russia coming into Europe that could end any day. And that these feeds are not only required as we go into winter but also through the winter in order to supply the demand and then also to refill the storage levels, and therefore, it, on the one hand side, depends on the feed-in of Russian flows, if they continue. But at the same time, it's also a weather game. Do we get a tight winter or not? Because a tight or a cold winter could easily bring up prices again. And I guess, the last thing, which is not so relevant for physical molecules but more for prices, is the demand in Asia. So the moment demand in Asia picks up again, that will, for sure, drive prices in Europe.
So therefore, I mean, situation clearly has eased compared to the situation last year we had at that point in time. But it's not that, that's -- we can already lean back and think about an easing as we go into the winter. That's too early.
Thank you very much.
Thank you. This concludes today's Q&A session. And now I'd like to hand the call back to Thomas Denny for any additional or comments -- closing remarks. Over to you, sir.
Great. Thank you, Sergey, and thank you, Michael, for the call today. I'm sure there are some follow-up questions for many of you. As you know, we are at your disposal for the rest of the day, any time. So wish you all a good day, and looking forward to speaking to you soon. Bye-bye.
Thank you. This concludes today's conference call. Thank you for your participation. Ladies and gentlemen, you may now disconnect.