Dr. Michael Müller, RWE: Navigating Energy Transition, Changing Regulatory Environments & Risk-Driven Capital Allocation

[MUSIC] Leading corporate transformation, the podcast by V. Ha'ul AutoBysime School of Management, powered by PWC, on the transformation of companies and their culture, from decision makers for decision makers, or from entrepreneurs for entrepreneurs. [MUSIC] Dear listeners, a very warm welcome to a new addition of our V. Haul AutoBysime School and the co-host of our V. Haul podcast leading corporate transformation, powered by PWC. My name is Martin Glam, I'm a professor at the V. Haul AutoBysime School of Management. And with me, as always in this podcast, is Gory von Herrschhausen from PWC. Gory. Thank you Martin. Warm welcome also from my side. My name is Gory von Herrschhausen. I'm the co-host of this podcast. I'm the transformation consultant in this round. I lead the cross industry transformation consulting practice at PWC. So this is everything out of financial services and public services. But my role in this podcast, of course, will be to ask about the transformation of the business. And transformation is the perfect segue for our podcast today, which is opening up a new podcast series. We're very proud. Very excited about this. Very excited. So next round that we have the perfect start point with a company that is transformation by itself. You can say transformation by nature. And let me introduce our guest today. It's a very special honor to introduce Dr. Michaela Müller. He is the CFO of RWE AG. Michaela, thank you very much for having us today. And giving us the opportunity to speak about your company and yourself today. Most of our listeners will know of course our WE AG. But please give us a short overview of your company and of your health. Yeah, happy to do that. So my name is Michael, CFO of RWE. Maybe what is interesting, I'm not the typical CFO by education. So I started mechanical engineering. I also got a PhD in mechanical engineering. And then over time evolved into the CFO function. But I'm very happy in the current role. Yeah, live in Krayfeld, have three kids and love to work with RWE. So maybe a few words about RWE. I think it's a good quote saying RWE is a transformation in itself. So RWE is energy transition. It's one of the major utility companies in Europe and we focused on energy generation. And more than half of all portfolio is in renewables. And the other half is in what we call flexible generation. So that's pump storage, it's batteries, it's gas assets, it's biomass assets. And we also still run what we call legacy business, which is the Lignite activities in Europe, and we also have agreement with the German government to phase it out by the end of this decade. And we also still have the nuclear assets, which we are currently decommissioning. So therefore RWE is a perfect example of the energy transition. Having traditionally had a very CO2 intense portfolio. And investing heavily into renewables. And by that shifting it into a green portfolio, we are in line with 1.5 degree reduction path. And the ambition is to close coal by 2030 and to be carbon neutral by 2040. Thank you very much Michael for this intro and this overview. I can say that I've been looking forward to this meeting to talk a lot. The energy sector is so important. You hear about it practically every day in the news. It's fundamental to the German industry in general. It connects to all of our households. So it connects, it's relevant to everybody in Germany and everywhere. And it's at the same time quite complicated. There is technology, there is the structure of the companies and the markets. And there is regulation, a lot of regulation. We will talk about this. And a lot of change. And you alluded to this already. So my suggestion is we try to unravel a little bit of all this by looking a bit into history and to talk about three major turning points or milestones in the development of RWE over time. When we look back quite a bit back RWE started as a big conch lomerate. There's a lot of utilities in Germany did. And you turned into a utility and then as a into a very focused electricity company. Can you talk about this part of transition? Yeah, I mean what you refer to is if we go back 20 or 30 years, the utility industry was fully regulated. And it was almost like cost plus industry. And to be fair at that time, all utilities were earning awful lot of cash. And since growth was limited, because in the end, growth could only come from an increase in energy demand. And that was limited. Most utility diversified. Diversified into different industries. And that was kind of the starting point of that big conch lomerate. I mean, go back out of a used to have 200,000 employees. Now we only are 20,000. So you see the big difference between four and two today. And we used to have Hochthev, a construction company, Lamire, a mechanical engineering company. We had telecoms, we had water business, Heidelberg, a drug, a broad conch lomerate. So what happened was with the start of the liberalization, power prices significantly came down. We had to focus more. And a first step was really to generate cash and to deliver the company. And that was really the first wave of disposals. What then happened was that we invested heavily into still at that time conventional generation. Because the belief at that point in time was you do reduce CO2 emissions by investing into more modern cold fired or gas fired assets. So an old asset that had 30% efficiency should be replaced by a new unit that has 43% efficiency or 60% efficiency. But if we're still conventional, we started with the renewals. And in Germany, most prominently was PV. And PV and the builder of PV, I heavily subsidized in the beginning, significantly brought down power prices. And all utilities even suffered more. And so that at the lowest point in time, so there were times where the market cap of RWE and those good times was like 100 billion, it came down to below 10. And on top of what happened was that RWE was forced by the government to fund half of its nuclear provisions, which was 6 billion in cash to be paid at once. And so we were in a very difficult situation. And the way how we came out of that situation was we looked at the group and said, "Look, what is the at that time growing business, the future that was lost, that was the grid business, that was the renewable business, and that was the richer business." So we IPOed that part of the business at that time called energy. That brought in cash for ourselves, but also for energy to fund further growth. And what was left after that transaction was energy as a company with a new business. And it was RWE with the remaining conventional business, with not such a strategic perspective, and a large shareholding in energy. And at that time, we then decided, so what do we do with that large shareholding? And in the end, the deal we made with EON was the following that we completely transformed the industry. Because previously, EON and Adelaide were both focused on the entire value chain. So both of us had generation in conventional renewables. We had trading, we had grid, we had retail, so the entire value chain. And after that transaction, it changed. So EON now is fully concentrating on grid and retail, and we are fully concentrating on conventional generation and renewable generation. Can you say, I mean, that's a provoked question, but which one is the more profitable business model? I mean, that goes back to, I guess, in business administration, you'll teach that lecture. The return always needs to match the risk profile. So grid business is a regulated business, so therefore the risk is much lower. And therefore also the returns are lower. And then you have the conventional generation business or the renewable business, which more and more is getting a secured income, so therefore reducing the risk. But still does have merchant parts that are higher risk. And therefore our business comes with, say, an absolute higher return, but also higher risk. While EON has a more lower risk. But stable income. Exactly. So provocatively, I would have said in 2016 or around then you thought the production with renewables was the more attractive one because you spun off the rest. You put everything else into energy and sold it later on to EON and kept the rest. And if I had been the management then, you know, I would have said that I would have said that I would have said that I would have been the most attractive one. have liked to keep the good business. But that was exactly the strategic discussion we had. And as you can imagine, we would have loved to keep both. Yeah. Next one, everybody would have wanted to keep the gross business. But you also had to look at what is the best option. And it was clear. And IPO would only work with the gross business. So you had to IPO the gross business and keep the rest. I think in hindsight, it turned out that this was exactly the right strategic move. But you're right. So at that time, there was also the discussion in the other B.E. The one is the new coal. And the other one was kind of the old coal, the kind of the legacy guys. And that was also a cultural thing. I imagine, absolutely. I mean, you were completely, first of all, a company tied to atomic energy. And if anything, you were a producer of energy on the basis of coal. And now you're this company. It's renewables. But it still is. It would also be by question. You need to manage both. Let's say the old RWE and the new. The phasing out of the old. Yeah. Let me say two things. One was the first step indeed was that kind of the remainder that first was only the conventional generation and that large share in energy was obviously very much focused on this legacy bit. So the operational part was purely the legacy business. But what was interesting at that time, the remaining company suddenly was very small. And what you found there was a highly engaged team. And there was this fight spirit. They wanted to demonstrate that they can run the business and that they can improve the situation. So indeed, there was a very strong culture. And then with the deal with EON, where with suddenly then got the renewable business into the business. And by now we're a business with conventional generation and renewables. And then having the clear strategy to transform the company over time, that created even more momentum. And also clearly increased the spirit and the motivation and also the pride of the company. But how does internationalization connect to this? Yeah, good point. I mean, typically people would think about RWE as the German company. I mean, at former RWE, there was the saying we're at the A40 company. A40 is the motorway that runs through SNN Dortmund, because probably 80% of the employees were located at that motorway. If you look now at the company, yes, we still have the Lignite operation with almost a thousand employees. But we do have more than 3,000 employees in the US. So we run the large US business about the third of our income and of our investments on the US. We run a big business in the UK, big gas fleet in Netherlands. We have traders in Singapore in New York. So it is a very international company. And an interesting story is two years ago, we celebrated our 125th anniversary. For that, we invited half of our employees to Essen to a big party. And there were two impressive learnings. One, for the Germans, they suddenly saw all those Americans, Australians, Singaporeans, Brits, Netherlands, coming. And they told me, that's a completely new company. I haven't experienced that we're so international. And the other way around, kind of the international people coming to Germany suddenly realized, wow, that's a big, important company in Germany. And there's this big legacy of this company. Yeah, interesting. So Michael, tell me about this internationalization a bit more because I'm curious about that. You know, energy production is local. I mean, you can't produce here and then export, right? You have to be with production wherever you are. So you have to be local business anyway. At the same time as an RWE, you're a German company. So you're a foreigner there. And you know, I used to teach this stuff. So there's this element of the cost of being foreign if you go to front country. You don't know the lay of the land. You know, you're not close to the government and all these things. What's your competitive advantage that allows you to be profitable and earn a return on investments in the US or in Australia or in Japan or wherever you are? Korea. I mean, you have a very big geographical footprint, right? Yeah. Very good question. And that's also a discussion we have been having intensively. I mean, first of all, take the US when we acquired in the US a large business. We clearly said we want to run the US business also under US governance. So we do have a one-tier board running our US business because we clearly said you can't run a US company from Germany like a German company. So the US business is much more independent than the companies here. So you need to cater for that for that culture. And also most of the US business is run by Americans or people that live there. Obviously, also multinational. The same is true in UK. We have a very strong presence with lots of people there. Same is in the Netherlands where we also have strong logos. So you need to have strong local presence. I mean, the benefit we have is clearly is an understanding of the industry. A benefit is the strong balance sheet. I guess we'll come to the business model but you need to have a very strong balance sheet. And that obviously helps us to support the business across geographies. And we have one central commercial hub or trading business which clearly has a solid, a very professional understanding of energy markets across the world. And that helps and that competence we leverage in the different countries. I know we want to come back to that trading because that's very interesting. But I would like to ask one question that goes back a little bit to the transition to the green energies, the renewables and looks at the same time to the US especially. I mean, we are confronted with it every day. There is the new government over there or not so new anymore. There is the Trump government. And with it, a fundamental shift in its energy policies or its attitudes towards energy generation and all that. Which means that you're bet on renewables including in the US wind farms and all these things. It's challenged. And the news was already that you will pause your investments in the US in wind farms. And does it raise questions generally about the focus of RWE, the big bet on the renewable on green on the green deal and transition? What do we look at that? So, no, we still believe the strategies in tech. And honestly, if you look at the world, the energy transition will happen. Yeah, no doubt. I mean, take China. If just for the sake of energy independence, China will drive the green energy transition. No doubt. Yeah. If you look at the US, that growing energy demand by industrial growth or data centers cannot be catered by conventional generation at all. There will be the strong need for renewables. The same is true in Europe. I mean, look, there will be the next flooding. There will be the next catastrophe and people will ask again, so what do we do for the next generation? So I deeply believe the energy transition will happen. What has changed is that people and in energy industry and utilities, we always talk about this triangle. It's about sustainability. It's about affordability. And it's about energy security. And while sustainability has been very much in the focus of the last years, now the element of affordability and energy security becomes more relevant. And to be honest, I think that is also good because we need to win the population on that path. So give me an example. Clearly, the first parts of the energy transition was very much related to utilities. I mean, in Germany, you talk about the handful of companies that were impacted. If we now move on with the energy transition, you talk about mobility. Everybody of us now has to go for an EV vehicle. I drive one. I love it. But you can imagine the discussions when we drive on holiday. Where do we stop? So you need to change your behavior. But if you change it, it's fantastic. But it impacts us individually. It's about heating. Everybody needs to think about this heating. It's about industry. So suddenly, the whole population is impacted. So the impact of that energy transition on people is becoming much more severe the more we advance in the energy transition. Same is true around prices. Decarbonization of conventional generation is fairly cheap. So you talk about abatement costs, so CO2 abatement costs of 80 years per megawatt. If you go into mobility into industry, that easily goes up to 200, 300. And so therefore, the affordability topic becomes much more relevant. And that is exactly the challenge now. How do we adjust the energy transition? That we kind of take the people along our way that we make it affordable and then it will happen. So therefore, long answer to your short questions. We believe the energy transition is intact. It will potentially slow down a little bit, but it's still intact. So if you look at our company, we had an investment program from 2024 to 2030 or 55 billion. We have now reduced it to 45 So that looks like a reduction. But look, I mean, which company in Germany does invest 45 billion in seven years? You hardly find any money. So it's still a strong growth business, but just a little bit reduced compared to where we started. I like your picture with the triangle. There is one dimension that is shaping this triangle very much, which is of course politics, right? So you are always linked to public policy, to major public debates. So there's a strong connect to this regulation and to politics. Can you talk a little bit about how do you manage this? And how can you influence it? And how do you react to this? Of course, in Germany first, but also maybe interesting to hear how you do it in the US. First of all, it's right. So if you look at our business model, how does our business model work? We do take very large investments and then need to earn the money back over 20 or 30 years of lifetime of the asset. And also, if you look at the ratio, so probably an offshore wind farm is the highest, which maybe has like 25% of the revenues as op-hacks. So 75% is margin. So that's a tremendous margin. If you go to onshore or PV, it's even less the op-hacks. So in the end, the key driver is the off-take. What do you get as an off-take? And therefore, and you think about the long period of time. So you have paybacks of 15 years. And so therefore for us, it's always very important before we take an investment decision to understand not only the current regulation, but also how does the market fundamentally develop? So take the US. You mentioned that we now have paused investments into offshore in the US. That's clear because in the current environment, you don't want to take an investment decision. But at the same time, we do see a growing energy demand in the US, and we believe over time, the US will also need offshore. So therefore, if you take investment decisions, you obviously need to cater about short term risk and avoid that you get sunk costs. At the same time, you also need to look through legislative periods and look at, that's the country fundamentally need the energy. And how is more the environment? So that's why, for example, our focus is only on industrialized countries with stable government and also growing industries. Because that's the basis for long-term investments. But maybe you can put it this way, right? If you are a long-term investor like you are, you sometimes even are more independent from current administration, because what is right in long term will stay right no matter who is in politic power at that time. And the second topic clearly is portfolio management. If you look at us, you can also argue we're rather an asset manager. So talking about this 45 billion, it's a question, where do you allocate 45 billion? And so you need to think about diversification. So how do you think about in which geographies do you want to go into which types of off-take do you want to go? So some of the off-takes are with big corporates, some are with regulated entities, some are with governments. You discuss about which technologies do you go in offshore wind, maybe a little bit more risky, but obviously higher return. Solar, very easy to build, therefore very competitive, but at the same time very stable business. And so you want to have that mixture in a portfolio of different technologies and also different durations. So that's why you also want to continuously invest to be also then able to adopt certain things and be able to capture the proper value of the portfolio. So it's a lot of all this is connected to again to regulation and to political decisions. And it seems to me that you jointly with Eon tried to influence the debate at the moment quite heavily. There's this, I don't know, discussion paper or strategy paper that the two companies published jointly. There were interviews with the two CEOs jointly that one could listen to a read. And you know, think in there you ask basically for a new start of you know the thinking about the energy vendor, the transition of energy in Germany. And one figure that's prominent, you say we can save I think 700 billion euros if we do it smarter. Another thing that you ask for is a closer, if I read it correctly, closer coordination between production and distribution, right, which would question somehow this nice little split between the two companies one focus on production and the other and distribution. Can you explain how we can all save so much money in Germany is 700 billion. That's quite a quite a lot. Maybe let's first take a step back to what you asked about regulation. What is also for us important is not only looking at the fundamental markets looking at diversified portfolio. You also need to make sure that you built trust worth relationships with governments. So if you do something pro-Domo, that's short lasting. So maybe you do good money for the next five years, but then it's over. So the idea of that paper was really jointly so Marcus and Leo from from from Alvi and and Ion, they said look, we need to take a step back and put aside kind of our own company interests. So really take the perspective we are experts in the energy world. So if we take that expert opinion, what needs to happen in order to move the energy transition forward. So that's important if you look at that is it's a deliberate step back and more a neutral view on on the energy transition. Now coming back to your question, I always like this comparison of a big tanker. So if you go into the harbor say Hamburg harbor and you see one of those small ships moving a big tanker or container ship, this ship probably moves in a 90% angle or 90 degree angle to move the ship slightly. And I think the same happened with the energy transition. So politics strongly pushed for a change and this push was stronger than effectively needed, but in order to get something going. Yeah, you need to just exaggerate push stronger. But as I said, we now need to care more about affordability and security of supplies. So we now need to readjust and come up with a more realistic picture. So talking about the grid build out the way how the current grid build out was planned was that the government said look, what are our ambitious plans on EV electric vehicles. And if you sum that up and also industry that comes that leads you to an energy demand that almost doubles in the next years. Then they look the other side, OK, if that's the demand, what is the supply? They looked at their ambitious targets for offshore, ambitious stars for unsure for solar and added all those targets. And that leads you to an energy system that is completely overbuilt that will never happen again. If you want to start a transition, that's probably the right thing to do. If you want to kind of get moving, you need to be ambitious, but it's now time to readjust that to more realistic numbers. What also happened is that the permitting for grids has significantly been accelerated. So formally it took seven to 10 years to build a high voltage grid connection. Now it only takes three or four years to get the permitting. So we are also much easier to readjust our planning. So therefore we said, if you take a more realistic perspective on the build out and on the demand, that can almost self save you half of the investment you have initially planned. And that's this seven million is not only us. It's also McKinsey has a starting on this one. So that's one of the elements. The other one is again, formally we just looked at each individual technology so so we kind of were proud if an offshore wind asset was built. But if you look at the economics of an offshore wind asset, it's not only the offshore asset, but the power also needs to get to the consumer. So say if I build a offshore wind farm for two or three billion, you have to spend the same amount for the high voltage grid connection. Yeah, so it's not a two billion, three billion investment. It's actually a six billion. And what this paper is asking for if you now want to design the future system, you need to incorporate that into a consistent picture. So take the example of the German or see the area where we can build offshore in the German or see also has something which we this is that's the duck most mouse we call so that's the form of a mouse of a duck. And that's very far out in the North Sea. And you can imagine if you don't build out there, but you only build closer to the shore, maybe you bit little less. But the whole system costs comes down because you don't have to build those long connections. The same is true is with PV on households. If you just build PV, solar panels, that's also like a social topic. I mean, who is building PV on rooftops? That's typically the middle and the upper class. So people who have private homes, yeah, and that can afford that. Yeah, but that's typically not where the demand for power is. So what happens is you build out those solar panels in those nice houses, but you need not only look for the panels, but you need to think about the whole grid that needs to build out to transport the power from those houses to the demand centers. And now why the deal is just let's take that system integrated perspective, not only generation, but generation with grid. And if you optimize that so simple examples, if we would have a lot of time. like a traffic light system. So where is green light? So where is it cheap to build out and where is more expensive? And if we consider that in the build out of new generation, that would bring down the cost. RWE has a history in nuclear power. So, and in the current public discussion, we see a lot of controversy around this topic. So there's a call out for maybe re-activating nuclear power also in Germany. So of course, it's very interesting to us. What do you say for this kind of transition and becoming green? How important is nuclear power and what's your take on this one? Very simple. It's too late. So Germany has taken the decision to exit nuclear and the exit has happened and now it's too late. Secondly, if you go into German population, you maybe find a majority, but it's a very thin majority. So I don't believe that Germany really wants to have nuclear. And in that environment, it's hard for an investor to run a nuclear station. And that's why we said, now the decision is done and we should focus our energy rather now in quickly building up backup gas capacity, by the way, which is probably also cheaper than running nuclear. And we solve the problem quicker and we also have a higher public acceptance for that topic. I mean, it sounds fascinating. Google wants these little modular things. It sounds almost like kutely things. You build them in your backyard. And it seems to be a kind of renaissance around in other countries as well. Italy is talking about it. Spain is talking about it and so on. I understand that you got your fingers burned in that discussion for many, many years, but no appetite for anything at the moment in that regard. I mean, maybe also taking a view on those small modular reactor. What is the idea behind them? I mean, in principle, any theory would say smaller units are more expensive than large ones. So why do you go to small amounts? So the idea is that you can really manufacture them in series. And by that, bring down costs. So that makes sense theoretically, but it requires that each nuclear reactor, small reactor, is built exactly the same. And when you currently see is nuclear regulation is local. And the moment a local state, a local government starts to ask in the permitting for additional amendment, then this serious manufacturing doesn't work anymore. The same is true in regulation for nuclear, you have to always be on the state of technology. And since state of technology is evolving, every 10 years, you need to adjust the design. So I hardly see an opportunity that really you get one design that then can be manufactured 250 times to make it more cheaper. So therefore for me, nuclear does work in two situations. One is if you have a say different purpose, say like the French or the Brits, who also run nuclear weapons. So they want to have the expertise and also some mature around that. But that's a different topic than a pure economic view. Or if you build them from a pure energy security perspective, like some Eastern European countries that simply say, look, we don't have conventional generation. We don't have enough renewables. We want that as a tool for independence. But it's not economic. It's purely driven from either kind of defense policy or a national independence policy. Nuclear power in this way was, I don't know, the discussion of the last 40 years or so. It's accompanied my, all my life basically anyway, looking forward now, fusion. That seems to be the vision or one part of the vision for the future. I think the current government has put it also in their program. They want to build the first fusion reactor in Germany, will RWE build it? First of all, being an engineer by background, I love innovation. If I go back when I did my my Abitura, I remember that there were articles about fusion. Absolutely. It was the same as today. Not a lot has changed. It's still very early research that is done. I do appreciate that we try to push it forward, but it's still a long way to go. As other we, we are currently in discussions with some startups to support them in that development, but it's really more supporting them on the development and it's far away from kind of being there to be a commercial and my commercial viable solution that also contributes significantly to the energy system. I think energy generation, we talked a lot about it. We can talk for even hours, I guess, but maybe we can switch to another topic. A very important piece of your business model is energy trading. My question is, can you tell us a little bit more about what RWE is doing in the energy trading? Happy to do that. First of all, if you talk about energy trading, you have to distinguish between two sites. One is what we call the commercial asset optimization, that's optimizing our assets and the second one is what we call proprietary trading. To demonstrate the example, there's this saying, what is a hedger? A hedger is somebody who sells what he has and he buys what he needs. In our example, we have power generation, so we sell the power and for our conventional assets, we need to buy gas or CO2. That's hedging and that's what we do on the commercial asset optimization site. The trader does the opposite. He buys what he does need and he sells what he doesn't have. The trader is the opposite position to the hedger. We actually do both. Now, let's start with the hedger. It's clear we need to market our assets, but what is especially interesting is an asset is an option. It's a physical option, so you have the opportunity to run the asset, produce power and then you have to feed in CO2, gas, coal, or whatever. You can decide if you run it or not. This option can be out of the money and you can also dispatch it anytime. As any option trader would trade around the volatility of prices, we do trade around our assets and by that realize value. To give an example, we talk about three to four euros per megawatt hours that we earn on top by trading around our asset. That's one of this commercial asset optimization site. The second one is the proprietary trading piece where we act as a trader. To explain the big difference between stock trading. For a stock, there is no fundamental value. The value of, say, a company is always driven on beliefs of future incomes or of the value of assets. In commodity trading, you always have a physical underlying that at some point settles. If I take a power plant, say to more at 10 o'clock, power needs to be produced and the system needs to be in equilibrium. There needs to be sufficient power produced to fulfill the demand. What we do is we try to model that physical settlement. At which price does the market settle? If you look at the market and the market prices higher than our settled price, we would go short and we would basically sell the power and then buy it back later or the other way around. The trading business builds on our experience of commodity markets. We have built that starting with power and then we have built that even water. We started power is influenced by gas, by coal internationally. In order to understand coal internationally, you need to understand how coal is shipped. You need to understand freight. If you want to understand freight, you need to understand iron ore because ships that transport coal also transport iron ore. That's how we can build a knowledge across the globe in different commodities and leverage that expertise in our trading activities. We currently use AI as to model weather. We try to be better in predicting the outcome of weather than the market does and based on that trade. We use our proprietary information of winds on our turbines to also feed our weather models to be even better. That's the whole trading piece but very important. It's always fundamental driven. I have two follow-up questions. The first one is, is it possible to create failure because what you say is it's very analytic. There are the different parameters. If you judge them well, if you manage them well, it's a very stable as you say. It's a hatching approach and the trading approach. So my first question is, can you produce failure? And the next one of course is looking at technology. Are there people doing the trading and hatching or is it just the machine? Is it just the artificial intelligence that you're using? First of all, yes, there is risk associated with that. Because even though you believe your model is right, there is always the risk of errors. What you also have is that sometimes markets don't behave rational. That's also something that impacts you. So giving example, we also run algo traders, not because we want to earn money with algo trading, but you need to understand how algo traders work. So algorithmic traders. Because that drives behavior in markets. And only if you understand how they work, you can also predict and understand why markets are reacting. So there is risk associated with that. with that. And that's why also we have a very diligent risk management as any bank does. So we have valued risk. We have Delta limits, gamma limits, all these stress tests in place. And we also have a very, what we call, is more the qualitative risk culture. So we build our traders, we have incentivization models that also make sure the traders are incentivized in the right thing to minimize the risk of those topics. Interesting. So, but maybe the second question and you partly answered it. So technology and artificial intelligence plays a role. Yeah. It does. I mean, look, give you the example. In the dispatching of our assets, what you also need to do is to adjust to the availability of our assets. So if in one of our power plants, the shift recognized an issue, say with the turbines, and they need to run down the turbine in the next 15 minutes, then they would report that to the market. And then our dispatchers actually do have an algorithm that then tries to buy back in the market and substitute that. So kind of the operational trading is often done then by algorithm traders. But clearly the brain of the trading strategies and also designing those algorithms is. Yes. So when we talk about trading, what is the the the the the edge or the capital of our trading business? It's people and IT. Cool. Very interesting. That would be fascinating to continue the discussion on that. I have to say. But let's move on a little bit. So trading for us, you know, leads us to looking at the finance domain of our W a bit more broadly. And I would like to start with a view on your share price. So it depends on, you know, what your starting point is when you look at the timeline, right? If you look at when you started your new strategy in 2016, it looks good because your share price moved quite considerably up since then. If you look at the very long term, right? And it's up and down. And if you look at the last, I don't know, two years, it's a sideways. So so where is it going? What what's your story? What's your story to investors? I mean, let's first understand why why share prices have moved in the way. I mean, first of all, as you rightly said, since 2016, the company has really developed tremendously. So the strategy worked and also the market very much appreciated the strategy. What happened last year and to be fair, we lost almost 30% to 28% on our share, which obviously is not idea. So what happened on the one hand side commodity prices, so power prices and gas prices significantly came down and investors feared that this would impact our business model going forward. We had increasing interest rates and as a business that invests long term interest rates are relevant. So the lower interest rates are the better for our business models. So therefore, increasing interest rates didn't benefit the business. And we also had a general pattern at that time. People were more enthusiastic about US, about cyclical businesses and not so much utilities. So there was a move portfolio management of asset managers that moved money out of utilities, especially renewable utilities into other technology or other businesses. And thirdly, some competitors of us in the offshore arena had significant issues with their projects and also had big impairments. And there was a read across of investors also on us, even though we haven't done any impairments all our projects are on time on budget. But people just looked much more carefully at utilities and then renewable developers. That has changed now slightly. So if you look at 2025, so we are 18% up. So momentum has shifted. Investors are more careful about US. They love more defensive stocks. So they moved back into utilities. And yeah, to make it short, we still believe in our strategy. And we also get support for the strategy. But still, the share price is not where both the investors, but also we see it. Right. One particular aspect when we look at companies is that one of the quite well-known hedge funds invested and put some pressure on management Elliott. And there, I think the concern is the size of your planned investments and rather maybe more forward coming with the cash disembursement to share all this to increase your share buy back program and so on. So is that how looking at management specifically at you at the CFO? How much does that take up your your capacity or your thinking your your concerns? I mean, first of all, as a CFO, but as a markets, the CFO, we are in constant dialogue with investors. And so you on road shows, you talk to investors, they they come here. And it's clear that if you share price drops by 30%, they are not just as happy-camperous out there. Absolutely. So you get challenged on your strategy. And that's right. Yeah. So we fully share the view of investors that we are currently undervalued and we're also asking ourselves, so what are the right steps to to bring the value we see in the company also into the share price. And as I said, some of our peers did have significant issues on their projects and also with interest rates increasing the question of profitability of investments has been much more pronounced than it was three or four years ago. So the question is a question. So we come back to the topic of asset management. Where do you allocate capital? Exactly. And you still plan to invest. We talked about 45 billion over the next year. Exactly. So that's a massive sum of money. Exactly. And then so the the right challenge is, and that's also what we clearly discuss as a management team is one is you want to optimize your cash flow. But then you need to see what you do with the cash flow. Is that do investment and then where do you invest? And how much do you invest? How much do you distribute to your shareholders? Either via dividends or share buybacks? Or how much do you use to improve your balance sheet? And in that context, we also decided that we would reduce the investment program simply given the higher uncertainty we currently see in the environment. As I said, long term, we still believe it's viable. But short term, we see higher risks. So therefore, we are more cautious with taking investments as we reduce the investment program. We also increased the return expectations on our projects. But we still believe we do have a good pipeline of strong projects that are very attractive and that we want to pursue. Yet we decided on a share buyback because in the US, we at least put a big US offshore project on hold that freed up a billion of capex. And we also see that in Germany and Europe, the hydrogen buildout is slower than expected. That also freed up a billion of capex. And so we use those two billion excess cash to fund a 1.5 billion share buyback program that is currently running. Yeah, that's an interesting one. This share buyback. We heard that Elliott is even looking for more share buyback. And so my question would be first, what's your answer to this? And the second, of course, how is it if Elliott wants you to buy back shares? How does it work? Do you get a call? Very curious about that. How does this goes? I mean, first of all, to be transparent, you have different investors with different opinions. Yeah, sure. And the one you named is probably very vocal external. But in can tell you, we also have investors that are very vocal internally that not necessarily have the same position. Yeah. So what is the task of management? The task of management is to take concerns and ideas of investor serious. The task of management is also to take the decisions we believe are best for the company, say in the medium term. And these are exactly the debates we have with investors. We try to understand their arguments. And we try to convince them of our arguments. Why we believe this is the right approach. So Michael, I have two questions that look at your steering model. When you look at investments or generally at your business, one is, you know, there's all this risk out there. And especially you are now active in so many countries, there is a lot of political risk, geographical risk. How do you manage that? I mean, I assume that you as the CFO are the, in a way, the chief risk officer also of the company. What's your, do you have a dashboard that gives you on a daily basis, the political risk indices of countries? Or how do you do that? We didn't talk about that. But before I came to that role, I was CFO of our trading business. And I remember well that our lead trader, he always told me, look, you are the risk controller. I am the risk manager. And I think that's a good wording. So what I want is that all the senior managers feel being risk managers. So I want them to take this holistic approach and risk, what is risk management? Risk management on the one hand side is considering opportunities returns compared to risk. And risk management is being cautious about tail risk and trying to mitigate the tail risk. Because it's typically the tail risk that kills you, not kind of, of the regular risk. And that's a mindset I want to have with every manager. So therefore, it should not be me having the dashboard of the company. I want the CEOs, but also the CFOs of the businesses to really have that risk compass for their business. Yeah, but as the risk controller, you need to provide data, you need to provide the compass. If you like, you need to have a concept of how to measure risk. And as I said, especially for instance, political risks, how does it come into your decision making? Well, what you do is you obviously have that discussion around what are the different risks you look at. So as we said, the biggest risk for us is market risk. So we look at what can moves in commodity prices be. And that's something we model. We look at extreme scenarios and also see what is the impact on those and do their harm us. And how do we mitigate them? And we run a monthly commodity management committee where we exactly discussed the commodity risk. How do we hedge them? How do we mitigate them? Second big risk is indeed regulatory risk. So in the board, every second week, we discuss the regulatory situation in the big countries we are in. And we have country hats that kind of in each of the big geographies that then feed into us what are the topics. And we intensively discuss what are regulatory risk and how to mitigate. Then we talk about counterparty risks. So we also on a quarterly basis discussed the big counterparties discuss the big performance risk. Another big topic is clearly on our big projects, project risk. So delays, budget overruns. So we run with all our businesses quarterly review processes where we look at all the major projects and see the progress and discuss issues. And by that, get the transparency of the major risk parameters. Super interesting. Thank you. I said I had two questions about this steering model and the others about performance measurement. I looked up a little bit and one of your major key parameters that you look at is EBITDA. I'm always curious about the ability. I'm just intrigued by practitioners' focus on EBITDA. And that's all the more so for a company that has investment horizon of so many years is so asset-heavy, so investment-heavy, and clearly needs to reinvest. And therefore, clearly depreciation and amortization is not for nothing. What's the logic of using EBITDA in RWA is performance evaluation? We as a board are also in our longer-term incentive plan incentivized based on earnings per share over a four-year horizon. So that's at least a bottom line number. Now look, one is the operational steering. I think it's right on EBITDA because that's where the margin is considered. That's also where on M cost are considered. So operation maintenance costs are considered. So that's the right short-term steering that you should look at. At the same time, we do look internally also at return on capital employed. So especially when we discuss capital allocation, look at businesses and understand where really value parts are and then what do we need to do? So it's more a matter of time horizon. You need to look at. And we also intensively do post-completion reviews so that you look at projects in hindsight and do the same calculation. Again, you did at the investment decision and then try to get learnings out of that and also then steering implications. Maybe before we come to you as a person and one quick question on the operations of your finance function. If you look at the operations of your finance family, how digital is this? I know that you moved on SAP S/4HANA. Maybe you can give us a little bit of an understanding how digital is your finance function. In principle, I would say that utilities are typically far advanced in digitalization. As we discussed, it's an asset-heavy business. So it's kind of the investment. It's IT and people. Also, if you think about the whole trading business is fully digitized, or if you think about on-m of our assets, that's very digital. And also the whole technical, so we call it OT, so the operational IT of the assets that's very digitized. If I look at the finance function, yes, we just lately introduced S/4HANA across the company. What we now need to look at is really building on the strengths of the system. So we now set up end-to-end process owners, and we now need to streamline along those processes to really capture the benefit of the S/4HANA technologies. And to be fair, there's still a way to go. And that also then goes hand-to-hand. I guess the next question will be AI. Exactly. So we actually yesterday discussed how can you try to substitute processes, especially in those end-to-end processes, purchase to pay by AI and by that, even drive further optimization? So you're on the way, but not at the final destination yet. No, definitely not. Definitely not. But I would also not say we are lagger. Definitely not. I think people usually underestimate the utility industry, but as always, as you said, you are already on S/4HANA. There are many who need to follow. So listeners who follow our podcast will know that we typically address three big blocks. One is the company's structure and strategy, the other's finance. Now let's come to the personal side. As a kind of transition to that or stepping stone to that, I make the observation that when we look at the board, the management board of RWE, there are three finance experts from that board. It consists of three people and all three are finance people. The CEO is an ex-banker. You're the CFO and the Chief HR officer has also finance background. How does that work? I mean, do they all know everything about finance and then talk into your business? How does the collaboration work with them? As I said, I'm probably the stranger in the other direction. I'm the engineer by backdrop. So, I should be one of the other roles. It is a very asset management-like business. And the other aspect I like to highlight is the expertise you need in our company is very much commercial and general management driven. So take the example of the automotive industry. I know those colleagues you have in top management in the board, one production board member and he's a production expert. He must be an engineer by background or you have the development guide that is an engineer by that background that needs to know in depth how to develop a car. Or if you go into the consumer industry, you have a marketing expert. In order to be, yes, we run technologies but we don't build it. So we don't manufacture it, we don't design it. So we're really more using the application of those technologies. Or if you look at our power plants, when we do maintenance, it's not us we typically bring then the experts from say the C-men's, the G-E's to do that. So what we do is really manage our suppliers. And so therefore the capabilities are more around general management skills and commercial skills that are required. And I would say these are typically the skills that comes with the education experience of our finance people. Interesting. Coming to you as a person, I mean if we look at your background, you actually started as an engineer at our WTH, at the Technical Social Aachen. And you got indeed the proverbial PhD in rocket science. Because I looked at that, it worked at the Institute of Jet Propulsion and Turbo Machinery. I found that very, very impressive. What did you do there? Yeah, I mean, honestly, as a kid, I always wanted to be an engineer and commuting to Aachen. I came by our power plant vice-vilose. I always wanted to build a power plant when I was young. That was really my dedication. And I still love to be in a power plant and discuss with people. At the same time, I realized doing my studies, I do have interest in economics, in business, in driving things. So that combination of understanding the technologies and still commercially optimizing them and running a business, that was in the end, but fascinated me. So in the end, what I did was, in parallel to the studies and PhD, I also got a degree in business administration. So that already triggered that interest. And that actually, throughout my career, kind of always was the threat. It's always that commercial side and it's the technical side that I love. So you started your career and of course, coming here with a consulting background, I'm very interested. So you started your career in consulting with McKinsey. What is the most important takeaway from that time and would you suggest people to start in the consulting world first before joining management? Now my HR colleagues must not listen to me. They obviously want me to promote starting with RLB. Look, I really appreciated that. It's a great place to learn because you work in teams of two people, three people with one boss. So you never get such a close coaching in any point of your career than in consultancy. So it's a great place to learn. You get exposed. to senior management pretty early. So if you like that work and you also are willing to kind of have that specific lifestyle, I think it's a great place to be, to learn. I have seen fantastic people there. I really appreciate that. But at some point I also then decided, no, I just want you to consult, but I want to decide. Yeah, and I want to implement things and I want to see the impact of my work happening. So taking your own medicine. Exactly. Exactly. And that's something you can only do if you're an accompany. So therefore, yeah, starting consultancy, learning there is a great experience. And then you just need to find the right point in time to switch. Yeah. Or you love it. And then you stay like you did. Yeah. So you switched from McKinsey to RWE. And you stay down for roughly what, 20 years or so, something like that. So you hit it off so tremendously with your first employer that you never thought about leaving. I know you moved within RWE quite considerably across disciplines. Yeah, actually, I had this funny story that I had an internal coaching session a few years ago. And the internal coach told me, look, write down on a piece of paper, what is for you important in a job and what are potential jobs you could do and then kind of put a scoring behind that. And she gave me that exercise overnight. And the next morning we discussed it, she looked at me. They had just jobs within RWE. And you thought about jobs outside of me. I hadn't. Yeah. And why is that? I mean, first of all, as we discussed with my background, that's the ideal company. And secondly, this industry is so much in transition. And I have always experienced if you want to drive things, if you want to change things, they let you do that. So on the way, I really had great opportunities to drive things, which I loved. And still today, I mean, we are a driver of the energy transition. And that's what motivates me and that also motivates all the people around me. One question. If you look back into your career, is there something that you would tell your younger self that you would have done different looking back from today? If I look at my PhD, I think if I would have done my PhD after starting consultancy, I probably would have done it much quicker. Right. I think we could go on quite a bit. But I think we need to come to close on. Time is time. Which, anyway, time is short. As always, the last question that's podcast is a question to you, Michael, about possibly a book recommendation or if you prefer a podcast recommendation, something you would like to-- A source of knowledge. A source of knowledge. With them even. With them. Wow. Now, I actually just lately read the book, The Shortest Story of Germany by James Horz. And it's a good reflection on the current political development we're seeing in Germany, especially with the right wing and the left wing. So it's definitely worth reading. So it looks at the history of Germany, maybe a little bit exaggerated, but it's definitely food for thought. Thank you. And food for thought that's valuable in these times. Thank you so much. That was a very interesting talk, Michael. Thank you so much. Thank you. Thank you. This was great, actually. I said at the beginning that I had looked forward to it and I enjoyed it, tremendous. I learned a lot. And it was just pure fun talking to you, Michael. Thank you for making time available. And thank you to you, listeners out there. Thank you for listening into this episode. And as we said, stay tuned, because we have lined up a whole set of new podcast episodes that will come on shortly. Thank you very much and goodbye. Thank you so much. And just stay tuned because we will have investors, entrepreneurs speaking. And so it's going to be a very interesting season this time. That was leading corporate transformation, the podcast by Vika Ull Aurobysheim School of Management, powered by PWC. Editorial team, Marvin Shunah, and Ziemann Gerlach.