RWE is a good guinea pig for carbon reduction

RWE is a good guinea pig for carbon reduction
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Activist Enkraft wants a faster withdrawal of lignite, and Berlin could facilitate this by buying the plants

RWE suffers again for its lignite. Following the French group Axa’s decision to stop insuring the German company of 22 billion euros for its plans to burn lignite beyond 2030, activist investor Enkraft wants a quicker withdrawal. Although the how is harder to pin down than the why, CEO Markus Krebber cannot afford to assume inertia.

Regardless of who wins this month’s federal election, Berlin needs a lignite phase-out before the current 2038 deadline. Its Climate Protection Act cut the 2030 carbon budget for the energy sector from 175 million tons of dioxide. of carbon to 108 million tons. JP Morgan analysts estimate that it will emit 133 million tons if nothing changes. It makes more sense to remove the lignite and fill the resulting hole in the power supply with low-emission gas until sufficient wind and solar capacity emerges.

That could also suit RWE. Despite being one of the largest emitters of carbon dioxide in Germany, more than three-quarters of the expected ebitda for 2022 will come from renewable energy. If the lignite plants were to disappear, the remaining, greener entity would become an environmental, social and governance benchmark. Enkraft considers that the group’s valuation could go from 6 times the ebitda in 2022 to 10 times on average that of other integrated companies such as Enel, which would raise the share price from 33 to 50 euros.

The activist is less explicit about how this should happen. A private sale or unbundling would not guarantee emission reductions and seem difficult anyway. Although RWE has enough credits to protect itself from rising carbon prices until 2030, profits after that date will suffer. Hence, the lignite business may have a business value close to zero. Alternatively, Berlin could incentivize a faster exit from lignite by paying RWE more than the 2.6 billion euros it has already pledged to compensate for closed plants. But that has already raised the eyebrows of the European Commission.

A better plan would be for the state to acquire the plants for a symbolic price. In this way, the State would bear the operating costs, but would make sure to speed up the closure. And since Enkraft estimates that RWE purchased its credits when the carbon price languished below € 10 a tonne, they could be worth € 13 billion with the price above € 60.

If lignite disappeared before 2030, the state could reap a windfall, and provide a model for coal reduction elsewhere.