Offshore wind no longer a game with big returns, says RWE

An offshore wind farm in the U.K. RWE was one of the incumbents winning seabed rights in a recent auction there. Fierce competition is the new normal and "excessive returns" are not realistic, said incoming CEO Markus Krebber. Source: Crown Estate

As RWE AG moves renewable energy into its core business while leaving coal and nuclear behind, the German utility is coming to terms with a new reality of slimmer returns amid fierce competition for green power.

One of the winners of the U.K.'s recent seabed lease auction for offshore wind projects, the company will pay £247.7 million each year until it makes a final investment decision on the 3 GW of capacity it was allocated. RWE was one of the only successful incumbents, with peers such as Ørsted A/S and Iberdrola SA tapping out in light of sky-high prices they deemed excessive.

Returns on the new projects are expected to land in the 5.5% to 8.5% range. "Is it significantly more competitive than previously? Yes. But ... the expectation that you can earn excess returns significantly above your cost of capital for decades to come is totally unreasonable," Markus Krebber, CFO and soon-to-be CEO, said on the company's 2020 earnings call on March 16.

Aggressive competition from oil majors like BP PLC and Total SE, which both won plots in the auction, only confirms the direction of travel and the value of RWE's activities in a scarce market, the CFO added.

For its future projects, RWE is assessing different route-to-market scenarios "time-wise and conceptually," Krebber said, including bidding into the U.K.'s contracts-for-difference, or CfD, auction and securing corporate power purchase agreements.

Upsides are significant, too, the CFO said. Governments' renewables targets are ambitious, and an emerging green hydrogen economy would require vast amounts of power.

In a different part of the North Sea, RWE is one of the developers holding priority access to build a project out of Germany's next offshore wind auction, alongside partner Northland Power Inc. The company has not said whether it intends to make use of that right, which would allow it to take over the winning bid and build the project.

RWE CEO Rolf Martin Schmitz, who will step down later this year, reiterated an industry call for two-sided CfDs in Germany, something lawmakers rejected in a recent change to Germany's offshore wind law. "CfDs are a European standard practice. It works well in other countries," Schmitz said on a call with journalists.

Germany is gearing up for a general election later this year, with climate change an increasingly crucial question on voters' minds. As the country exits nuclear power and renewable energy growth plateaus, Krebber sees little room for accelerated coal closures. "Politicians can wish for whatever they want but we have to balance the system every day," the CFO said. In one example of Germany's limited generation capacity, hard coal plants which were successful in recent closure auctions have not been able to go offline as they were still needed.

Across the Atlantic in Texas, RWE is expecting a €400 million hit from last month's unexpected cold spell which affected wind farms in the west and north of the state and forced the company to pay up to $9,000/MWh on the spot market to comply with its delivery obligations. An assessment of the situation is still underway, and the final burden may yet be shifted across the market depending on legislative decisions. One possibility is that the high peak prices could be rolled back, which would yield significant positive effects for RWE, said Krebber.

If nothing is done, the CFO expects further bankruptcies in the market. RWE has ongoing legal proceedings and the dust will not settle in a matter of weeks, which is why the company incorporated the hit in its earnings for its onshore segment. "I expect maybe a yearlong proceeding on this issue," said Krebber.

Whether wind fleets are to be weatherized will be a political decision, the CFO told journalists, with the costs ultimately borne by consumers. The Texas freeze will be cause for self-reflection at RWE, in the U.S. and beyond. There will be an in-depth analysis and the company's approach to operations and power sales may evolve, Krebber said.