When we make investments in the Milford Global Real Assets Fund, we adhere to the school of thought that buying a great company (based on industry/company dynamics and prospects) at a price that is fair today makes for a sound investment, given such companies’ ability to outperform expectations. The potential outperformance may be most prevalent where there are structural thematic tailwinds present. RWE meets this criterion given the important role it plays in the European energy market through its combination of legacy assets and low-carbon energy development capability.
RWE, based in Germany, produces both conventional fossil fuel-based energy and low-carbon-based renewable energy. Over the past several years, RWE has established itself as an energy transition leader as it has moved from producing energy primarily from coal, to becoming one of the world’s largest owner/operators of renewable power generation. It is also playing a central role in helping Europe respond to the energy crisis that was sparked by the Russia-Ukraine war that began in 2022.
In 2021, 27% of RWE’s energy generation capacity was coal-based generation. This is expected to be below 10% by 2027 and to be zero by 2030. The process of exiting coal-based generation has been through close collaboration with the German government, as the company balances the energy needs of the country with decarbonisation targets.
Navigating the European Energy Crisis
The company has installed Floating Storage Regasification Units (FSRU) in Germany to import Liquified Natural Gas (LNG) from international markets. It is also building permanent LNG import facilities to help reduce Germany’s long-term dependence on Russian natural gas. This LNG import capability is critical to ensuring that Germany, and other parts of Europe, can continue to power homes, and maintain industrial production at a reasonable cost.
At the same time, RWE’s Supply & Trading unit, and Flexible Generation units (nuclear, coal and natural gas) provide essential services and energy to keep the lights on in Europe. These business units not only provide energy to the market to balance supply and demand, but also provide storage and trading solutions. In the short-term this segment has some exposure to the fluctuations of power prices and spreads, so adds a layer of complexity in valuing the company.
Positioned for Long-term Value Creation
Looking further out, RWE is developing renewable energy (onshore wind, offshore wind, solar and batteries) which provide an alternative to conventional energy generation. The company’s 2030 targets are diversified across technologies and across regions.