Changed market environment: EnBW recognises impairment losses on power plant portfolio
Karlsruhe. Increased climate change mitigation requirements and stricter climate legislation are further impacting the profitability primarily of coal-fired power plants. EnBW has taken the consequence of adjusting its medium to long-term profitability forecasts in line with current market assumptions. This has resulted in the recognition of substantial impairment losses and increases in provisions. To a lesser extent, the altered market expectations also affect offshore wind farms. In total, the one-off effects amount to some €1.25 billion. The impairment losses are of a purely accounting nature with no impact on the operating result. They therefore affect neither the earnings guidance for 2021 nor the dividend amount to be paid out for the 2021 financial year.
In the preparation of its half-year financial statements, EnBW identified indications of impairment in the amount of approximately €950 million in the Sustainable Generation Infrastructure segment. The bulk of this (about €700 million) relates to conventional power plants. In this connection, EnBW primarily expects increased climate change mitigation requirements.
These altered assumptions also necessitated a €300 million increase in provisions for onerous contracts*, in connection with contracts for bought-in electricity that have ceased to be profitable.
Offshore wind farms are also affected to a lesser extent (about €250 million). The impairment losses on offshore wind farms are mainly due to accounting effects that relate among other things to the accelerated feed-in tariff model** and have no impact on operations. A further factor is new data on variations in offshore wind conditions and the long-term trend in electricity prices. Especially in the long term, EnBW expects slightly lower market revenues here relative to its previous strategic expectations.
Both the impairment losses on the power plant portfolio and the provisions for onerous contracts in connection with contracts for bought-in electricity are one-off effects. They will have a negative impact in the 2021 annual financial statements but will have no effect on the operating business or the full-year earnings (adjusted EBITDA) guidance for 2021. EnBW publishes its half-year results on 29 July 2021.
* What are provisions for onerous contracts?
EnBW operates its own power plant portfolio and additionally purchases electricity from power plants that do not belong to the Group. In respect of this bought-in electricity, EnBW has undertaken to reimburse the operators for all costs. Due to the decline in the market situation, these power plants – like EnBW’s own – no longer run at a profit. This results in losses to EnBW over the contract lifetime, for which the Company has to recognise provisions for onerous contracts.
** Accelerated feed-in tariff model
Operators of offshore wind farms that are subsidised under the German Renewable Energy Sources Act (EEG) may opt for an accelerated feed-in tariff model under which they are paid a higher initial subsidy than under the basic model but for eight years instead of twelve. The wind farms therefore bring in more money per kilowatt-hour in the first eight years than in the years that follow. However, depreciation is charged on a straight-line basis over their entire useful life. An impairment loss has to be recognised for the mismatch between the annual inflow of economic benefits and the diminution in value accounted for in the straight-line depreciation.
Regarding the content of this press release, EnBW has also published an ad-hoc announcement according to §15 WpHG: to the ad-hoc announcement.
EnBW is one of the largest energy supply companies in Germany and Europe, with a workforce of 24,000 employees. It supplies electricity, gas, water together with infrastructure and energy-related products and services to around 5.5 million customers. Expansion of renewables is a cornerstone of EnBW’s growth strategy and therefore a major focus of capital expenditure. Since the beginning of its corporate transformation, EnBW has invested some €4.7 billion in its Renewable Energies segment. About a further €4 billion is to be invested in the further expansion of wind and solar energy and also in fuel switch activities by 2025. Installed renewable energy capacity will account for 40% of EnBW’s generating portfolio by the end of 2020 and is targeted to reach 50% by the end of 2025. This is already having a noticeable impact in terms of reducing CO2 emissions, which EnBW plans to halve by 2030. EnBW aims to attain climate neutrality by 2035.