The purpose of this note is to:

  • Address RWE’s response to our recent report Apocoalypse Now, by acknowledging that, per the executive summary, all the headline figures were based on unhedged model estimates from publicly- available, third party information sources.
  • Detail how improved disclosure by RWE could reconcile our estimates from those provided by RWE in company reports.
  • Undertake a scenario analysis to highlight how carbon prices could impact the economic viability of RWE’s hard coal and lignite units. We find RWE’s hard coal and lignite units could be uneconomic with carbon prices in excess of €17/t.
  • Reaffirm our thesis: coal is under severe economic pressure across the EU due to market forces. These market conditions are shining a spotlight on the legality of closure payments.

We welcome RWE’s response to our report, Apocoalypse Now. A robust debate about when, not if, coal power will become economically obsolete is essential to cost-effectively decarbonise the EU economy in a timely and just manner. The purpose of this note is threefold: address RWE’s response to Apocoalypse Now; detail how improved disclosure could help explain the differences in estimates; and highlight how carbon prices could impact the economic viability of RWE’s hard coal and lignite units in the future. 

Greater levels of disclosure are needed to reconcile our estimates from those provided by RWE

We believe a material difference in our modelling estimates and RWE’s estimates is primarily due to hedging. RWE includes hedging in their EBITDA estimates. Utilities use hedging as a risk management strategy to safeguard themselves from the losses that derive from power, fuel and carbon price volatility.[i]

Most EU utilities, including RWE, hedged their exposure to rising carbon prices by buying enough permits when the price was low to cover their future emissions output[ii]. This proved to be a strategic decision of huge importance as carbon prices increased from €5/t in 2016 to €25/t in 2019. Based on a 2017 earnings call, RWE claims it has “financially hedged” its carbon exposure until the end of 2022[iii]. The Lignite & Nuclear business and the European Power business are hedged differently. Lignite & Nuclear generation is hedged forward on an outright basis, while the European Power is hedged on a spread basis. According to a presentation last year, as of 30 June 2018[iv]:

  • 70% of lignite was hedged with an average carbon price of ~€5-6/t in 2019, with the remaining 20% being an implicit fuel hedge and 10% an open position.
  • 80% of hard coal was hedged in 2019, with the remaining 20% being an open position.

As detailed in Apocoalypse Now, our model estimates do not include any revenue or cost hedging, primarily because we want to understand the underlying viability of generation units based on publicly available information.

However, independent of hedging, we cannot reconcile our model estimates from the estimates provided by RWE in their company reports. We offer three possible ways improved disclosure could reconcile our estimates from the estimates provided by RWE.

Firstly, RWE does not break out EBITDA figures for its hard coal and lignite units. Hard coal units fall under European Power while lignite units are within Lignite & Nuclear. According to RWE’s 2018 Annual Report[v], both business segments are expected to report combined EBITDA of €550-750mn for 2019. Without breaking out segments into fuels it is hard to substantiate to what extent RWE’s hard coal and lignite units are profitable based on their definition of EBITDA.[vi] This contrasts with our modelling that RWE’s hard coal and lignite units would have lost €975mn in 2019 if the company did not hedge its exposure to carbon.

Secondly, our cost assumptions are based on publicly available, third party sources. In 2017 (and restated in 2019) RWE’s CFO stated during an earnings call that the “full cash”[vii] of their lignite units excluding carbon was €22/MWh, whereas our capacity-weighted average long-run marginal cost (LRMC) excluding carbon for lignite is €27/MWh. Per Apocoalypse Now, we define LRMC excluding carbon as fuel, variable operating and maintenance costs, and control technology costs. RWE confirmed that its “full cash” cost estimate is their definition of LRMC but has not provided an updated estimate for its lignite units since 2017.[viii] RWE has not revised this figure on the assumption that this figure is “valid over our planning period and incorporated cost escalation assumptions as well as our cost reduction programme.”[ix] We believe it is possible that RWE’s full cash costs could have increased since 2017, as declining utilisation would result in fixed maintenance costs being spread over a smaller number of operating hours which would increase the marginal cost.[x]

Thirdly, as with other utilities in Europe, RWE has converted several hard coal units to biomass. According to company reports, Amer (652 MW) and Eemshaven (1,600 MW) were converted to co-fire biomass in 2019, with 31% of Amer’s capacity operating on biomass. It is unclear to what extent Eemshaven is operating on biomass. In addition, our 2019 estimates did not include UK capacity market estimates for due to a European court ruling.[xi] Aberthaw units (1,2,3) with 575 MW each can now receive payments as the UK capacity market is reinstated. It is not clear to what extent RWE’s estimates reflect biomass conversions and the reinstatement of the UK capacity market.

Carbon price scenario analysis: RWE’s hard coal and lignite units could be uneconomic with carbon prices in excess of €17/t

To illustrate how carbon pricing impacts the economic viability of RWE’s hard coal and lignite units, we have conducted a scenario analysis. As detailed in Figures 1 and 2, as RWE’s units are progressively subjected to prevailing carbon prices, their LRMC increases and EBITDA declines. Based on our modelling estimates, all else equal and assuming no hedging, RWE’s hard coal and lignite units could become uneconomic with carbon prices in excess of €17/t – some €8/t below the current prevailing price.[xii] RWE is betting that lignite and hard coal units will still be viable due to the expectation power prices will rise from the last German nuclear units coming offline over 2020-22. We believe RWE is underestimating the disruptive impact of lower carbon sources of power by betting their lignite and hard coal output will remain in-the-money at least for the next 3-4 years.

Figure 1. Our estimated LRMC of RWE’s hard coal and lignite units at difference carbon prices

Source: Carbon Tracker analysis

Notes: Revenues are based on assumptions in end notes or Apocoalypse Now and thus do not include pass-through at different carbon prices.

Figure 2. Our estimated EBITDA of RWE’s hard coal and lignite units at different carbon prices

Source: Carbon Tracker analysis

Notes: See the end notes or Apocoalypse Now for assumptions.

RWE can improve its disclosure by providing boiler-level estimates                            In Apocoalypse Now we provided boiler-level estimates broken out by the different cost and revenue components. For the LRMC, this includes fuel, carbon, variable operations and maintenance, fixed operations and maintenance, and air pollution control technology costs. For revenue, this includes in-market revenues from the wholesale power market and out-of-market revenues from balance and ancillary services markets. The assumptions underpinning these estimates are detailed in the executive summary of Apocoalypse Now. RWE currently does not provide boiler-level estimates. This makes it difficult to determine the extent to which any cost discrepancies are related to, for example, differences in utilization, plant efficiency, or ancillary or other revenues. The truth is, only the coal generation operators know the exact profitability and costs. Only by RWE providing boiler-level estimates can there be an open and honest conversation about how quickly and how cheaply coal and lignite units can be closed. We look forward to working with RWE’s shareholders through the Climate Action 100+ Initiative to help improve company disclosure.


[i] This activity is an insurance policy against price movements. Hedges are either purchased as derivatives on the futures market or agreed upon directly between the parties involved as an over-the-counter (OTC) agreement. When utilities sell power in futures market or OTC they buy fuel and carbon associated with selling this power. This process effectively guarantees utilities a rate of return for the power they sell. The goal of the utility’s supply and trading group is to optimise power sales and operating costs to maximise the rate of return.


[iii] CEO Rolf Martin Schmitz on Q4 2017 Results – Earnings Call Transcript:

… on carbon, to be clear what I meant, we are financially fully hedged. We have not covered our entire carbon short position. But to the extent we needed that we have achieved the market pass-through factor. The market pass-through factor of carbon is currently around 0.6, 0.7. Our intensity is much higher and we have hedged to the extent that we are financially carbon flat.

[iv] Slide 28


[vi] According to RWE’s 2018 annual report: “Adjusted EBITDA is defined as earnings before interest, taxes, depreciation and amortization. In order to improve its explanatory power in relation to the development of ordinary activities, we remove non-operating or aperiodic effects: capital gains or losses, temporary effects from the fair value of derivatives, impairment and other material special items are shown in the non-operating result.


[vii] In 2017 and 2019, Markus Krebber, CFO, stated that the cash cost of RWE’s lignite units, excluding carbon, is €22/MWh.

Markus Krebber, CFO, Q3 2017 Results – Earnings Call Transcript:

“… I mean we were very transplant and said that lignite, the entire lignite complex for mining and power plant is cash neutral at prices of €22[/MWh], these prices are defined as base load prices minus CO2 prices, we have the current prices and you know that the carbon intensity of lignite is slightly above 1 ton per megawatt hour and the possible effect of carbon we have in your model.”

Markus Krebber, CFO, Q2 2019 Results – Earnings Call Transcript:

“On the other question, CO2 and lignite profitability, so what we have — the information we have given, I think, two years ago is still valid that the full cash cost of lignite at €22 per megawatt hour excluding carbon so — and full cash cost means operations of the mine, the power plant and also — not only OpEx but also CapEx. These are the full cash costs. So when you say €22[/MWh] plus extra spot carbon prices, you’ll see what we need to achieve as a hedged margin to be cash neutral on our lignite fleet.”

According to our modelling, the capacity-weighted short-run marginal cost (fuel and variable O&M) of RWE’s lignite units, excluding CO2, is €20/MWh, similar to the €22/MWh estimate provided on the 2017 and 2019 earnings calls. As detailed below and in the executive summary of Apocoalypse Now, the lignite fuel cost based on the fixed cost for the mine which varies from €76-92/kW and is based on analysis from Agora Energiewende, while the variable O&M depend on the combustion technology of the boiler: US$4.49/MWh for subcritical technologies; US$4.79/MWh for supercritical technologies; US$5.98/MWh for ultra-supercritical technologies; and US$7.73/MWh for integrated gasification combined cycle technologies.

[viii] Based on email correspondence.

[ix] Based on email correspondence.

[x] See Figure 4 as an illustrative example


[xii] Carbon Tracker’s definition of EBITDA differs from RWE. Please see Apocoalypse Now for more information.