Speaker 1
I think the first question I had for you this afternoon is, do you think that there are enough targets in Germany today? Does the government need to do more in that regard? Or if not, what other actions are needed? And Hans, perhaps I can invite you to kick off.
Speaker 2
Yes. So I think if there's anything the German energy transition has more than enough of, it's probably targets. Because, I mean, we've got the 2045 net zero target for the entire economy. We've got something implied by kind of mid 2030s, the power sector fully decarbonized. We've got 80% renewables by 2030, and plenty of other targets in other sectors. Where we're lacking in my view is with implementation and actually the doing rather than the aiming and over the past years and decades, whenever we missed a short-term target, we got more ambitious long-term targets.
And this has really gotten to a point where we can't have any more ambitious long-term targets without looking ridiculous. So what does the government need to do it? It needs to move towards implementation. But the one thing, and the government can frankly do very little about that in the near term, but what it can do something about is when it comes to permitting and legal challenges to projects, to gridlines and so forth. And to end that on a slightly more positive note, the government is doing something about this and I'm seeing quite a lot of movement in that area.
Speaker 1
Marcel, I mean, you're investing, your organisation is investing into green energy, green power production here in Germany, also to the grids. So you're making investment decisions, but how are you deciding where to allocate capital in this context?
Speaker 3
Honestly, the energy transition is unfortunately a terribly complex project. You could call it a multi-generational project, probably one of the most ambitious ones that we pursued in Germany for a long time.
It requires a lot of angles to come together. And we tend to call it the triangle of the energy transition. And now as EnBW, the ambition that we have is to say, look, we want to make the energy transition work in all three of these angles of the triangle. So we do have our own power generation that's meant to be greened and we moved away from nuclear. We used to be the German utility that was most reliant on nuclear 10 years ago. We obviously aren't anymore.
We still have certain exposure to coal-fired power generation. So the challenge that we do face, so you put your finger right into the critical point, is how do we allocate the capital that we have in order to make progress in all of these fields at the same time?
Speaker 1
I mean, as we think again about this question about setting targets or implementation, you know, you're looking to develop projects that will essentially bring green energy, you know, into Europe. And do you feel that the German market today?
has the right targets and creates the opportunities for you to bring green energy here?
Speaker 4
The targets are clearly there and they are very, very ambitious. Somebody at Bloomberg had probably nothing better to do than calculate what it takes to do 250 gigawatts of solar by 2030 here, and it's 43 football fields per day between now and 2030. I mean, I don't even know where you can put this in Germany if you can do it.
So we do believe that probably 70% of the electricity you need to meet this target needs to be imported to Germany. And in addition to electricity, you may also need green molecules. So having the benefit to be in a startup and being quite agnostic in that respect, we are looking at both directions.
I cannot agree more with what the CEO of Githa was saying. If you believe that this is going to happen, it will happen. For sure, we believe that, you know, for sure if you do a 30 mega project is great, but if you want to move the needle, you need to do gigascale projects. Clearly challenging. I think the risk is not much the lack of capital when you do the project, the risk is mostly in having development capital at risk, because the mortality is going to be huge there.
And so when you have the offtake, when you have all these things and the project is becoming financeable, then you will find the capital.
Speaker 1
I mean, Marcel, as you think, does this question also tend to back to allocation of capital? Do the regulators effectively drive your capital, you know, towards one part of your business away from another?
Speaker 3
Absolutely, and again, the two of us, we have to say that returns aren't high enough. I mean, that's clear. And you may argue that we're going to give you that answer irrespective of whether the equity return is 5%, 8% or 10%. But if you just take a step back, I think the thing that's important for the people taking the decisions and setting the target returns, particularly for the regulated side of the business, what they ought to do is...just look beyond Germany.
I know we're here to talk about Germany today, but fortunately or unfortunately enough capital is somewhat mobile, right? So it doesn't have to be invested in this country. I guess there's a lot of capital that would love to be invested here and I think for a very long time we heard that story that people would love to invest in German infrastructure but didn't find the opportunities to do so.
Now the good message is there will be opportunities and there will be tremendous amounts of opportunities to put hundreds and hundreds of billions of euro to work in this country during the next 10 to 15 years. But the thing is, and that's what I'd love for regulators and again the decision makers to take into account a bit more, that needs to be compensated on a risk-return adjusted basis in a competitive way internationally.
So the reference point is not whether gas grids or H2 grids going forward are going to be compensated slightly higher than the electricity transmission grid here in Germany. The question is, you know, what are the competing regulatory systems that capital could go into? And that we heard that just in that earlier panel. If you look at the US, for example, that's pretty tempting right now. So it's not something for us as a company to do, but just overall.
an important perspective to take into account. And I think that is not fully embedded into that discussion as of today. And that probably explains why we have the return levels that we currently see. And the system is just not made for an interest rate development that we saw during the last 18 to 24 months.
You know, that was probably never foreseen. It still happened. We all know that. So something needs to be done. And, you know, that process is hopefully, I'd say our perspective, not finished yet.
Speaker 1
And Marco, I mean, you're looking to produce green energy in different parts of the world. When you think about, you know, Germany and but also other places you might send that energy, where in your mind are the most attractive places that you could send your energy? Would that also be the United States or how do you think about destination?
Speaker 4
United States for sure with IRA, maybe a huge market also for domestic production. Question there I think is whether you can use the incentive there also for export somewhere else. Assuming that's the case, clearly it needs to be convenient compared to local users there.
So CFD is clearly one instrument that would play a role. And when you talk to off-takers here in Germany, they are the first ones asking for this instrument. If you want, not our project of ours, but there are similar projects in the UK that are very much reliant on this very scheme.
Clearly, it's one that could really help things accelerate meaningfully.
Speaker 2
I think in general, Germany is still seen as an attractive market, also comparatively. I mean, I'm more on the unregulated side rather than on the regulated side doing market modelling. And I think...
I think that was eroded a little bit over the past year by these whole discussions, or not just discussions, but actual exposed revenue caps and so forth being applied, which was something that I think at least I, pre-energy crisis, would not have thought was possible in Germany and then ended up being done. But I would say generally, it's a comparatively high trust country.
On the regulated side I think something definitely needs to happen. And I think the mindset among many of the decision-makers is simply that still the pre-interest rate mindset of these guys are making a lot of money. And if we're being completely honest to ourselves and are looking at the multiples at which regulated businesses were sold four or five years ago, perhaps they didn't go quite far down enough.
I think the other thing I would want from regulators beyond this kind of just higher regulated returns is more openness towards new technologies. And I think that's something the Bundesnetagentur here in Germany has traditionally not been very good at. Just to give one example, batteries are booming right now in Germany. We're at 1.3 gigawatts of installed capacity with several more gigawatts in the pipeline over the next couple of years.
And that is despite and not due to the Bundesnet's agnostic actions. And there's more than one way in which it is being impeded by regulatory decisions there. So I would hope for more openness towards new technologies that can make a contribution to the energy transition.
Speaker 1
Marcel, your company is already a leading electricity producer. You referred to the history as well, but also the way forward and clearly doing a lot across wind in particular, and offshore wind. I mean, how do you see the picture for the development of power in Germany? And do you see that there will be a role for green hydrogen in the foreseeable future?
Speaker 3
I think there's definitely a role for it, but coming back to that question you raised slightly earlier, will that hydrogen come or will it be produced locally or regionally here in and around Germany? That I would question as of today. I'm not saying that I have the crystal ball, but I think the challenge is sizeable enough to decarbonize electricity generation for us to actually complete within the next, call it 10 years, plus or minus.
and we will most likely not be able to build out even more capacity in terms of renewables to generate the green hydrogen that we then will use to either use it in industrial applications or you know use it in our you know CCGTs that we built right now.
that will eventually run on hydrogen. So there is a need for it, there is a role for it. I don't disagree with you that the format could still be decided and it doesn't have to be green hydrogen for each and every application. But I'm also fairly convinced that it will predominantly have to be imported somehow.
I also think that from a cost-benefit perspective, that's just way more economical to do it. And I think that we're going to see a significant amount of developments. But all of that, again, unfortunately, has to happen really quickly. And just to give you one example, I mean, we heard a bit earlier about this somewhere between 20 to 40 gigawatts of new-built gas-fired power plants that we need in Germany that will eventually run on hydrogen in order to be fully decarbonized.
At EnBW we took an investment decision to build three of them. So they're actually being built as we speak. It's at least one and a half of these 20 to 40 gigawatts. So there's still more to come. So they are being constructed. They will become operational by 2026. They will run on natural gas for the first couple of years up until the point in time when we will have hydrogen available in sufficient quantities and at economic prices to actually make that switch. So they will be fully H2 ready from the get-go.
and we'll most likely make that switch somewhere in the early 30s. But obviously we don't know when exactly. But that's what we are working towards. But we will definitely have a situation where, fast forwarding 10 to 15 years, a very large chunk of the overall energy consumption that we have in Germany will actually be produced or procured from elsewhere.
Speaker 1
Hans, would you share that perspective in terms of the outlook for hydrogen versus electrons in the economy?
Speaker 2
Broadly, yes, I would say. I mean, ultimately, it's a question of economics and potentials. So, Germany is an OK place to produce renewable electricity. There's certainly better ones in the world. I mean, looking at some of the places where zero is.
is active and if I'm a renewable developer here in Germany and I have a project, I'm going to sell the electricity to the highest bidder. And that can be an industrial off-taker, that can be an electrolyzer, that can be a utility. And whoever’s going pay me most is going to get it.
So the electrolyzers will be competing with all other sectors and they will then have to decide is that going to give me a hydrogen price with which I'm competitive in the market or will imports win the game because making it in Norway, North Africa, wherever is going to be cheaper.
Where exactly this plays out, we will have to see. I mean, we've obviously done modelling on this and have views. And that's that broadly half of Germany's long term hydrogen consumption will be made locally and can be made competitively there as well, because it's relatively expensive to transport hydrogen over long distances. But not all of it. So there will be a large markets for imports.
as well. And that's just hydrogen. And if we're then talking about ammonia, for instance, which will be one of the main vectors for transporting hydrogen, and there it will be extremely challenging to maintain a local production of ammonia in Germany when we're importing hydrogen in the form of ammonia at the same time and then cracking that up again into hydrogen. Right. I mean, that's basically destroying energy just in that cycle.
Speaker 1
Okay, well that's very interesting. So one take away I'm taking from that very clearly is that half of Germany's hydrogen production you think will be produced locally in the long term. Frank, if I can maybe just, you know, thinking about, you know, open grid and the role you're playing in developing, you know, hydrogen grids, you know, interesting to hear as Marcel's talking about, he's already building H2 ready CCGTs here in Germany. You know, as you think about
planning and actually building the grid to deliver hydrogen, do you need to have the sources of demand and the sources of supply already in place before you will commit to build the grid? Or do we need to have the grid come first so that others will commit to deliver the green energy?
Speaker 5
Yeah, I think for quite a long time we had this typical hen and egg problem, so that the grid was not there, that nobody wanted really to produce hydrogen because there is no infrastructure.
And we said, yeah, we first need long-term contracts with off-takers, and then we built the grid. And then, yeah, that was also not possible. Because the industry just said, if I don't have a guarantee that I have a constant base load flow of hydrogen, then I will not change my assets and so on and so on. So and I think there we made really a big step forward now, together with the government, that we are in a procedure.
to agree on a so-called core grid in Germany, the famous Kern Nets core grid. And there indeed we took care that we have the flexibility to import hydrogen. So the grid, if it will be realized, is connected to Norway, Netherlands, Belgium, France, then also Austria, Czech Republic to take care of Italy, potentially also from North Africa, and then also the Baltic Sea.
And of course we also took care together with the other TSOs that we then also check where are the main areas of industry which will consume hydrogen in the future. So there were also some CHP targets given from the government. So all these kind of information were used and then the experts modelled this core grid which is around 10 000 kilometres. So it's quite significant and then we would.solve this hen and egg or chicken and egg problem.
Where we are still in discussion is about the economics. The big issue is, of course, the first customer who will be connected to the grid doesn't want to pay the full cost, which is logical. So we have to charge a tariff, which is then much lower and doesn't cover our cost. So there is a gap at the beginning.
And there we came to the government to a kind of a solution, how they can be financed in the meantime. And I can say on headline agreements was also in the Andersblad state and some days ago we are in line. However, now we have to further detail the legal stuff and so on. And you know, there can still be some surprises. So hopefully, I think we are on a good path. that we create then a grid at the end by 2032, which creates this flexibility.
Speaker 1
That's great to hear that progress. Maybe thinking a bit about the green power production and where you choose to build wind power and solar power in Germany. Clearly the sea is in the north, but I guess you're still making location or decisions about where to build in some cases. Do you think the right framework exists in Germany, Marcel, for making those type of decisions, or do you think that a more zonal-based approach to pricing would be helpful?
Speaker 3
Look, I mean, when you're trying to get to that question whether we would fancy a zone split, you have different price zones really in Germany for wholesale market prices, our response or statement would be a clear no because we think it would just be terribly inefficient compared to the situation we currently have. If you just simply speaking, if you cut the market in half, you have markets that are less liquid.
and less liquidity in the market is usually not a good thing. I don't want to remind all of us of what we saw happening in wholesale market prices during the last two years. Even if that doesn't come back, having less liquidity is bad. Plus the fact where would you actually take that cut?
because you would have to separate markets somehow artificially and that border needs to cross the country somewhere. And I think it's just terribly difficult to actually find that right location, quote unquote, to do. Plus, essentially the tricky bit that we have is renewables build out, that's one thing.
but transportation of electricity. So these large electricity motorways, as they are called. Some of these lines we actually build together with partners as well. Given we have one of the electricity TSOs in our portfolio as well. These things are just terribly complicated to build. You mentioned the fact that given yesterday night's decisions, it's probably easier to now connect onshore wind farms to the grid, because you can basically cross parcels of land.
I just take one of these transmission grid lines called Zutling that we built together with Tenet. That's a line that's about 700 kilometers long. We have to cross 20,000 pieces of land.
So we have to talk to 20,000 landowners and basically get their approval and have that registered in the Grundbuch and whatnot. So that's just one aspect. I'm not talking about the 106 species of animals that we have to take care of during the building process and etc.
So that's the tricky part in addition to building out renewables. And what I would ask the government not to do is try to steer in a micromanagement way where which type of renewables actually gets built out.
I think developers are smart enough to find solutions to that. We actually saw significant developments in terms of solar PV in the last couple of years. But we need more of everything in order to achieve the goals and the targets. Coming back to the first question that was said, what we do need is again significantly accelerated approval times.
It can't be that it takes seven years from the start of development to actually see an onshore wind farm. It's technically speaking not rocket science. But that's unfortunately the situation we have right now. We're quite positive about the developments we saw recently. Let's see what that package that was agreed last night was going to bring. But that's where the focus should be from my perspective.
Speaker 1
Hans, as you look at different markets, have you seen examples of sort of locational based pricing models where there have been maybe some advantages to the system?
Speaker 2
So there are a few places in Europe that have it, of course, Italy, Sweden, Norway, Denmark. Most US markets are even more local and have nodal pricing. There's a very strong discussion in the GB market underway to introduce either Zonal or and noted pricing.
So, this definitely isn't something that's only being discussed in Germany. And I agree with you that actually on the generation side, it would probably introduce more problems than it solves, especially for wind, because I mean, solar the generation pattern is pretty similar across the country. It's being built in the north, it's being built in the south, so not a big difference.
The wind is in the north, mostly and the wind economics is being threatened by a potential price zone split. And that's something that would have to be resolved if the price zone were to be split. And there's a reason, however, why I still think it's worth at least thinking about it. And that is the sheer imbalance we are going to get in our electricity system over the next 10-15 years.
So just to give you a few numbers, the government is planning to build 160 GW of onshore wind by 2045. 2040, I don't remember. 70 GW of offshore wind. So when it's getting windy, you'll be having 200 GW plus generation of wind. Most of which is going to come from the north. And Suedling, the project you mentioned, that has a capacity of 4 GW.
So we'll be needing 30-40 gigawatts, 30-40 suitelings, I'm sorry, to get most of the electricity from the north to the south if all the electric vehicle drivers in the south decide to charge their electric vehicles when power prices are low because it's windy. And then we're going to have Tenet or some of the other transmission system operators going to have to intervene and redispatch every single one of those electric vehicles out of the consumption mix again.
Speaker 3
If I may just add to that, because while I don't necessarily disagree, I think the thing that a price zone split would try to address is a temporary phenomenon of not having the transportation capacity that you need. Because essentially, we're going to see all these renewables assets being built, and unfortunately that capacity has to be built somewhere.
somewhere and in offshore wind we know where we can build that. We can't build it in the south of the country unfortunately, we'd love to. So you know I think we will definitely, and you said well 30 to 40 suit links, probably not that many, but you know we'll definitely see more of these large capacity transmission lines plus the converter stations etc. in order to balance the system out going forward. And I'm not saying it's not complicated, definitely not.
But I don't think that the price zone split as such would not actually solve that equation or solve the problem. We still have the fact that generation is located in other places than where we have the hubs of consumption. So that needs to be addressed somehow and I don't think it's only going to be price signals.