When Russia unleashed its illegal and unprovoked invasion of Ukraine in February 2022, gas prices in Europe spiked by a factor of 10, driving a wave of bankruptcies and restructurings of European energy companies. Uniper was one of those.
Uniper is one of Germany's largest energy companies. It is active across more than 40 countries and has 19.5 GW of power generation capacity to its name. It was one of the funders of the built-but-never-used Nord Stream 2 gas pipeline that connects Russia to Germany and, for most of its history, was heavily reliant on Russian gas.
So when the gas taps from Russia were turned off, Uniper reported losses of $40 billion — the highest losses in German corporate history — and was subsequently nationalised by the German government. The company has since returned to profitability under its new CEO, Michael Lewis, our guest this week on Cleaning Up.
Michael Lewis joins Michael Liebreich to discuss the company's rise from the ashes, and how it plans to reach its climate targets and overcome the dunkelflaute.
Leadership Circle:
Cleaning Up is supported by the Leadership Circle, and its founding members: Actis, Alcazar Energy, Davidson Kempner, EcoPragma Capital, EDP of Portugal, Eurelectric, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit https://www.cleaningup.live.
More from Cleaning Up:
Michael Liebriech
Do we not have to accept that we have either a decarbonization problem or an affordability problem, don't we?
Michael Lewis
Well, we have a challenge to bring those two things together, the old challenge of security of supply, affordability and meeting our environmental objectives. That problem hasn't gone away, and different parts of the triangle pull in different directions, but we know that we somehow have to solve the climate challenge. There is no discussion around there. If you look at the science, we have to continue to drive in this direction.
ML
Hello. I'm Michael Liebreich, and this is Cleaning Up. When Russia unleashed its illegal and unprovoked invasion of Ukraine in February 2022, gas prices in Europe spiked by a factor of 10, driving a wave of bankruptcies and restructurings of European energy companies. No company was hit harder than the German utility Uniper, which was bailed out by the German government. As soon as the crisis had passed, the government and board brought in my guest today on Cleaning Up to steer the company out of those troubled times and back to financial stability. Please welcome Michael Lewis, CEO of Uniper, to Cleaning Up.
ML
Michael, thank you very much for joining us here today on Cleaning Up.
Michael Lewis
It's a pleasure, my pleasure to be here, Michael, thanks for the invitation.
ML
So let's start where we always start, if you could explain who you are and what you do, the short version for our audience, many of whom, of course, will know you. You are famous in certain circles, but there may also be some who don't know you.
Michael Lewis
Sure, happy to do so. So I'm Michael Lewis. I'm the CEO of Uniper. I'll come on to who Uniper is in a minute. First, a couple of words about myself. So I've been in the energy industry for over 30 years. I started in 1993 in PowerGen with the power generators that came out of the central Electricity Generating Board. I started as an environmental engineer, looking at emission controls, predominantly coal-fired power plants in those days. Then PowerGen was acquired in 2002 by EON. And I moved out to Germany to work on corporate strategy for EON, and ended up working in the renewables business, EON Climate and Renewables, and subsequently became the CEO. I then went back to the UK and headed up EON UK. And in the meantime, Uniper was split out of EON, so Uniper was spun off, and it contained all of the gas and conventional power generation businesses. And then I’ll come on to Uniper today... Of course, during the energy crisis, Uniper was, in fact the largest importer of gas from Russia, and when the Russian state or Gazprom turned the gas off, Uniper had energy sales contracts to fulfill, but didn't have the gas with which to fulfill them, so had to buy gas at highly inflated prices off the wholesale market back in 2022. So the German government stepped in and rescued Uniper, and we became 99.18% state owned. And they needed a new CEO at that point. And I got the call and was very happy to come back. I say come back, because clearly the portfolio of Uniper in the UK is actually the old PowerGen. And since then, we've been looking to bring Uniper back to commercial viability, which we've done, initially very successfully, turned around in 2023 back to profitability, partly because gas prices fell, but partly because we were able to hedge the gas volumes at the right time in the market. We developed a new strategy to decarbonise our portfolio over time, and we strengthened the balance sheet and improved our credit rating. So all in all, Uniper is now one of the largest energy companies in Germany, with a focus on flexible generation, building up our renewable portfolio, and also gradually diversifying our gas portfolio and moving to decarbonized gasses over time. And I should also say we have not only the old conventional power generation, i.e. coal and gas, we're gradually, or actually rapidly phasing out of coal, and we closed the last coal fired power station in the UK, Ratcliffe, last year. We also have a significant portfolio of hydro and nuclear plants in Sweden and hydro plants in Germany. So quite a diverse portfolio with about 40% of our output being CO2 free.
ML
Okay, now we're going to unpack various bits of that. And I think the audience will have got a sense that assets have moved around, changed hands. You've actually ended up with some of the same assets that you were with early in your career, and that you've been busy. There was a point when EON decided that it was going to sell the bits that became Uniper, and Uniper didn't yet have a name, and so I got a good laugh out of naming it E-OFF, because there was E-ON, the bit that they kept, and then E-OFF was the bit that they didn't, which has ended up being the core of the assets. But they were all, I don't know if they were all... but it was mainly coal and gas at that point. And you stayed with EON, is that correct? Just so we kind of get this straight.
Michael Lewis
Yes, indeed, at that time, I stayed with EON. I was the CEO of the renewables business at EON at that time. So I was very much marked to stay at EON.
ML
So you were E-ON. You were not E-OFFed.
Michael Lewis
Correct. But yes, it was for me to stay at EON to run the renewables business. But then, as I said, I went back to the UK to run EON UK. And at that time, EON then did this big deal with Inergie and acquired Empower, and I was responsible for integrating Empower, and in fact, we bought the new IT system Kraken, to migrate all of our customers from Empower and EON and to that new system, and rebranded it EON Next. So that's where I was when Uniper was spun off.
ML
And Kraken, of course, is the operating system developed by one of our previous guests. In fact, he's been a guest twice. Greg Jackson, Octopus, and for those who really want to get into the kind of the weeds of that reorganization that you talked about, or some of it, we had Episode 164, we had a former colleague of yours from EON, Leonhard Birnbaum, who came on the show last summer.
Michael Lewis
Absolutely, and that was clearly part of a much bigger deal — Empower — when EON took the networks and customers of the former Inergie and RWE took the renewables business of EON in this huge restructuring of the industry. But for Uniper, you know, we were, at times, outside of it, and now the focus is very much on that decarbonization journey.
ML
Well yes, but you know, we mustn't gloss over the bit in between, because Russia invades Ukraine, the gas flow is interrupted and essentially, Uniper becomes insolvent, can't meet its obligations. And amongst all of the dealing with that crisis, somebody makes a telephone call to this guy — at that point in Britain, running all of EON in the UK — and they say you need to come over and run Uniper. Where were you when you got that call?
Michael Lewis
Good question. I'm trying to think now, where was I? I think I was at home. Yeah, I was actually sitting in the garden, and the phone rang, and I didn't recognize the number. So that's where I was. But to be perfectly honest, it didn't require a lot of thinking. As I say, I knew the Uniper business, and I was following the whole Russian situation. Obviously, we were all embroiled in that crisis at the time. I mean, it was a massive shock to the energy system, that huge increase in gas prices. And if you recall, in the UK, we were going through this process of supplier of last resort on a regular basis, as so many retail companies were failing. And so I'd been following what was happening with Uniper, but fundamentally, I knew that it was a very strong business with a good set of assets, a great portfolio and a great set of people, because they were former colleagues from EON. So I was never in doubt that this was a good company. I think the problem was this black swan event of Putin's invasion of Ukraine, leading to cutting off Russian gas, and it was one single point of failure. That's what brought Uniper down. And I knew behind that were a great set of people and a great set of assets. So it wasn't really a difficult decision for me to be perfectly honest. And as I said, it felt like I was going back to where I started my career.
ML
So you arrive in the middle of all of that, and I guess, as you say, there's this black swan event. Presumably you felt pretty confident that the German government would, I don't know, had the government bailed out the company? It was a 13 or 14 billion euro bailout, as I understand, had they already done that? Was that already in place? Or did you have to negotiate that?
Michael Lewis
That was already in place. That was done at the end of 2022 and it was a €13.5 billion bailout. Actually, the original approval was much bigger than that. It was €34 billion because the forward prices in the gas market were much, much higher at the time. But during the first part of 2023, gas prices started to fall. And in the event, €13.5 billion was what was required. And the German government did, in fact, become the majority owner. So it was an equity investment in the company. So that was already done when I joined. Nonetheless, there was a huge amount to do, namely in getting an operating result back to the positive. Because in 2022, I think I'm right in saying it was the biggest loss in German corporate history to that date. But we turned it around and had a spectacular result in 2023, with the best result in Uniper's history. And that's continued into 2024. It's come down as power prices have come down because we'd hedged quite a lot of our output. That's come down, and it's starting to normalize, and the focus now is on our strategy, implementation and driving investment into renewables and flexible generation.
ML
How much have you paid back to the government, or how much I believe you've just announced your results? And I believe it's still an intention to pay back in the coming quarter.
Michael Lewis
No, no, it's not intenion anymore. We actually did it last week. So yeah, the payback was €2.6 billion euros. Now, of course, that was a special one-off payment that was negotiated as part of the state aid package. It was to do with how much we earned during the period of the state aid that we were supposed to receive till the end of 2024. Actually, we didn't receive any more after the end of 2022. Nonetheless, we had to pay anything back which was above a certain number. So we've paid back €2.6 billion. We've actually also paid back €600 million as a consequence of our successful legal case against Gazprom Export. So we won the arbitration proceedings there, and we won damages of €13.3 billion. And that meant we were able to pay back monies that were on our balance sheet, which we hadn't paid to Gazprom, because they turned the gas off and we were in dispute. So that money went directly to the government as well. So that was €3.1 billion. And of course, the government still owns 99.18% of the company.
ML
Okay, so €3 billion down in terms of repaying the government, and €10 billion more to go. But you have got, as you say, you've won this lawsuit against Gazprom. Gazprom was your supplier through, presumably, the Nord Stream pipelines, of which I believe you were also a part owner at the time. They didn't supply, and you took them to court and won. So now, presumably, as soon as the sanctions... because you can't take that money right now, but as soon as the sanctions are dropped, if they are you'll be on the first plane to Moscow to tell that nice Mr. Putin that you want his money?
Michael Lewis
Well, we are looking at how we can enforce that title. I mean, as I said, we've already been able to, because... I should say, anything we get from that goes straight to the federal government, so it doesn't go to Uniper, it goes to the federal government. So it's actually again, part of the state-aid settlement with the EU. So yeah, we are looking at what we do there. We've already been successful in that we've paid back some of that money, but you're right, there's still a very large amount outstanding. I think the prospect of any of that money being paid will be tied up in any political discussions following a peace agreement. And let's not forget, there's still a horrific war raging in Ukraine. It's absolutely tragic, and tens of thousands of people have been killed. That's still ongoing, and until there is any kind of peace agreement and any kind of political reset, I think we don't expect to see any of that damages paid.
ML
Although there is an oddity, which is that there are some EU countries that continue to use and pay for Russian oil and gas. And setting aside whether that's the right thing for them to do, I certainly don't think it is, they are doing that. And I suppose the question would be, if those are EU companies, why are you not able to claim against them?
Michael Lewis
Well, we have looked at various ways of enforcing but you'll have to forgive me, that is commercially confidential, what we're doing there. But it is a complex legal process, but I can't say any more about that.
ML
Yeah, and I guess you know, the Russians also sued you in, I think, St. Petersburg, and not surprisingly, they won in their court. So presumably all of that just means that all of this moves into some kind of negotiations at a government to government level. Will you be involved at all, do you think?
Michael Lewis
I think, as you say, rightly, Michael, that's a political discussion after some kind of peace negotiation is concluded. So that's something at an intergovernmental level. I think that has to be resolved. And there has to be a reset in the relationship between the EU and Russia and Germany and Russia. And let's not forget, we're still in the middle of a war.
ML
And so you've got, in theory, this kind of option value of the €13 billion finding against Gazprom, but it won't go to you anyway. Meanwhile, there's a business to run, right?
Michael Lewis
Yeah, indeed, exactly.
ML
And that business is very much at the heart of the biggest challenges really, facing not just Germany, but certainly Europe, which is around the conflict between decarbonizing and affordability and resilience. I don't know if conflict may be a bit of a strong term, but certainly those three themes, you're really at the heart of how that plays out.
Michael Lewis
Absolutely, and I think that's why I emphasized the fact that we are a supplier of flexible generation solutions. If you think about the Energiewende, we call it in Germany, the heart of it is electrification and the expansion of renewable generation to deliver those clean kilowatt hours. But you still need flexible generation. To some extent, you can use different tariffs to flatten the... or switch customer demand to match the generation. But in the end, you also need flexible generation, and in particular we need it for the so-called dunkelflaute, when we haven't had any wind or sunshine for a period. And we've seen it already in Germany. At the end of last year, we had four occasions where the power price spiked very, very quickly after a period of low wind and low sun in November and December. In fact, we had the power price hit €930 a megawatt hour. So we know there's a gap now emerging between firm capacity and peak demand in Germany, it's about four gigawatts. Now that is set to increase as we phase out coal, and I already mentioned we closed Ratcliffe last year. We also closed Heyden in Germany last year, another coal fired plant. That means we need to build new gas fired plants to fill that gap. And we need to build gas fired plants, which ultimately will be decarbonized later, but we need the capacity now.
ML
I was at a fascinating meeting, actually in Brussels, and there were some energy intensive industries, and there were a whole load of utility CEOs and power generator CEOs, and it was just fascinating following the conversation. Because the utility CEOs or the power generator CEOs wanted to sell PPAs, and the energy intensive industries said, well, we don't want a PPA, because what we know is, every time it's windy and sunny, the power price is probably going to be zero or nearly zero. So why would we enter into a PPA? What we need is electricity when it isn't windy or sunny, which I think is what you're absolutely focused on providing.
Michael Lewis
That's the point. And we are doing renewables as well, and we've approved a couple of big investments last year in solar and in hydro-pump storage. But you're right. We need that capacity for when the sun isn't shining and the wind isn't blowing. And in particular, when you've had a period of that weather, and that's when you get this condition where you need a large amount of firm capacity, and that's the gap that is growing. And the last government actually the Ampelkoalition, they did have a Kraftwerk strategy, which was in the process of being passed into law, Kraftwerkssicherheitsgesetz. Unfortunately, that wasn't passed before the government fell. So now the new government has to, or the new coalition that's currently being negotiated, will have to implement a new power plant strategy, which will have to build this or fill this gap of firm capacity by 2030. It's around 20 to 25 gigawatts that is needed by then, and it needs to be some kind of capacity mechanism.
ML
You said that you've got some renewables. You've got a lot of hydro. How much wind and solar do you have?
Michael Lewis
Not very much, because we started from a standing start. We're just building up our pipeline of projects, and we just approved 200 megawatts of solar just before Christmas, final investment decision. That will be our first new renewable project. But you're right, we have a big portfolio of hydro.
ML
When you say from a standing start. Where was the standing start?
Michael Lewis
Well, we didn't have any when Uniper was spun out of EON, and then there was a period where Fortum was looking to buy Uniper, and had bought a number of shares before the crisis, and was trying to complete a takeover. So Fortum had renewable projects, and when the business was — or when the German government intervened and Fortum exited — we then had to start fresh with our renewable strategy. So that's what we're doing now.
ML
I like the way you talk around it, "when the, when the, when the." When it went bankrupt and was rescued by the government, as others might say. But what you're saying is, so Fortum, this is the Finnish utility, so they had a lot of renewables, which they do. And what you're saying is that at that point, the strategy was not to replicate that portfolio within Uniper. But you have now embarked on that at least. I mean, 200 megawatts is not a lot, but at least it's a start.
Michael Lewis
You've got to start somewhere. And so the point is, we are looking to build up that business. As I said, our portfolio is transforming significantly. We are closing coal fired plants at a very significant rate, and so we need to replace that, both with flexible new capacity — and by the way, not just in Germany. We also have projects planned in the UK, at Connah's Quay for instance, which is potentially a CCS project, which we're currently in discussions on. So there are a number of flexible power plant projects that we're developing, plus renewables as well, to complement that.
ML
One word that I haven't heard yet is 'batteries.' And you know, you've already mentioned capacity markets and you've mentioned CCS, carbon capture and storage. These are all very expensive. We'll get on to that, but they're also very much in the gift of governments. Batteries seem more likely to make money — how can I put it? — without massive government interventions and support, because of the volatility that the rest of the system is causing? Are you pushing into batteries or have you made a decision just not to go there?
Michael Lewis
No, we have a number of battery projects. We've had a couple of very successful ones in Sweden, and we have some other battery projects across Germany and in the UK. And batteries will, of course, play a very significant role in the new system. I think the key thing is, though, that batteries cannot provide the system with the services it needs during the so-called dunkelflaute, because what usually happens is that the solar and wind capacity has not been producing energy for a period, which means the batteries are not charged. They are for short term storage, perfect, and will provide a very important service to the system going forward. What they can't do is provide power in the dunkelflaute.
ML
And I can understand that you are government owned — 99 point whatever the number was, you said — and so therefore the focus on the dunkelflaute, maybe it makes sense, because it's the bit that's very difficult to see how private players can make money meeting that demand. And I'm thinking it's presumably, I don't know if you agree with this, but more than, let's say 24 or 48 hours, the first 24-48 probably will be met by demand response and batteries, a bit of this and a bit of that. But after that, the dunkelflaute is when it starts getting beyond that sort of time... is it just uneconomic to build huge assets, enormous assets, whether it's hydrogen and storage caverns or whether it's CCS, just because of that particular problem? Doesn't it become uneconomic and therefore purely in the gift of governments to meet that resilience requirement of the dunkelflaute?
Michael Lewis
Well indeed, and that's why we have a capacity market. In the UK, we've had a capacity market for 10 years or so, and there's several 10s of gigawatts in that capacity market. We need something similar in Germany, so that we have that capacity on standby, ready to go on when it is needed. You're absolutely right, if you had to rely purely on the market, that would require prices to spike to enormous levels to pay for that capacity over the rest of the hours that it's not needed. So that's where the capacity market comes in, and that's worked very successfully in the UK, and I think that can work successfully in Germany. And that's a very important component of the electricity system. An electricity system which is dominated by renewables.
ML
Cleaning Up is brought to you by members of our new Leadership Circle: Actis, Alcazar Energy, Davidson Kempner, EcoPragma Capital, EDP Portugal, Eurelectic, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live, that’s cleaningup.live.
ML
By 2030, you've said that you're going to need 20 or 30 gigawatts to be covered by capacity markets to make sure that it makes sense to build those gas-fired power plants. Does that not become — if you roll on beyond 2030 and you get to 2045 when Germany might now we learn from the new coalition potentially have a constitutional requirement to be net zero or to be zero-carbon in electricity — don't you end up with hundreds of gigawatts, potentially, of capacity that has to be there for the dunkelflaute for the one week a year, or the four days a year, or whatever it is when there's no wind and no sun.
Michael Lewis
Well, I wouldn't like to make predictions that far ahead, to be perfectly honest. But yes, you will need more for sure. But I would also expect there to be technological innovations in that period. You know, we've talked about demand side management, and we should look at how we can move that demand. And one of the things, by the way, Germany also needs is a significant investment in digitalization. You know, the smart meter roll out in Germany is way behind that of the UK, and it's the smart meter roll out that has enabled things like the demand-side response in the UK, which was very successful during the crisis a couple of winters ago when I was there. So we need to move these things forward in parallel. But yes, there will be significantly more firm capacity required if nothing else changes. It has to meet peak load demand, but if you can reduce the peak load demand by shifting demand through various mechanisms, price signals and so on, then you can reduce that demand for firm capacity.
ML
But realistically, I mean the amount — you say technological developments and demand-side management. But this is the dunkelflaute. Every so often, every few years, it's not even just three or four days, it can be a few weeks, and I'm just struggling to see any technological development on the demand side, or new things on the supply side that can get you through potentially a couple of weeks of very low wind in winter without simply shutting industry down, or possibly shutting down more than just industry. And it may be that it's happening at the same time as other countries in Northern Europe. So I'm just struggling to see how you can do that without a very substantial generating fleet that sits around the rest of the time.
Michael Lewis
And there's no doubt you will need a substantial generation fleet for that peak demand, but it won't necessarily be the same size as the peak we have today, is my point. So yes, you're absolutely right. You cannot eliminate it, and after a two week dunkelflaute, you will need a very significant amount of firm capacity that is on the system, waiting for that situation to arise. That is the absolute necessity of a system that requires electricity 24/7 that's dominated by renewables.
ML
It's feeling very expensive. What is it going to burn, this fleet that sits around waiting for a dunkelflaute?
Michael Lewis
Well, initially it's natural gas. Then we have to look at what can we do in the future? And you know, the original Kraftwek strategy that the last government proposed envisaged these plants being converted to hydrogen eight years after they come into operation in the 2030s. That may well be an option. It depends on how the cost for hydrogen develops. Now, initially that would be blue hydrogen, which is much cheaper than green hydrogen as of today. It may well be that changes over time, but we'd also have to look at carbon capture. So I'd leave open the question of decarbonization, and you've got to remember that these plants will be operating fewer and fewer hours. As we grow renewables and as we decarbonise heating through heat pumps and transport with electric vehicles, we will see, obviously, a significant increase in demand, but also with electric vehicles, a significant increase in the volume of batteries on the system. I remember doing the calculation two or three years ago that if you were to replace the UK's — UK numbers, because I was in the UK at the time — 30 million vehicles, cars, each with a 70 kilowatt hour battery, that's enough potential storage for three days of UK electricity consumption just in car batteries. So you are constantly adding devices to the system which have a different effect on supply and demand. So what we'll see is those plants absolutely necessary for that peak demand in the dunkelflaute, but they won't be running many hours, and a system which is dominated by renewables and which is largely electrified with electric vehicles, which are much more efficient than internal combustion engines; heat pumps, which are much more efficient than gas fired boilers; you will see a much more efficient system in terms of energy consumption per useful unit of output, and a much lower CO2 intensity system, so you can afford to have some gas-fired generation on the system for quite a while — is the point — and it's still much better than today, right?
ML
And you won't find me disagreeing with much of that, certainly. You know, I've talked a lot about the primary energy fallacy. When people say, oh, you can't do electric heating because heating demand is five times electrical demand, it's like well it's not, once you put it through a heat pump, and so on. But it is a future nevertheless, even though it reduces the primary energy demand, what it does do is increase electricity demand very considerably, by a factor of — I think Lord Turner came on, he does our year closer each year, and we talked about how, even in the developed world, even though we've become more and more efficient, in the future, electricity demand will be maybe two or 2.5 times as high as it is today. And I wouldn't be surprised, I don't think we would disagree that the only way really to get through a dunkelflaute is going to be gasified power stations. Three days of cars —the statistics that you cite — that's very nice if those cars all have been bought in time, and if they all have full batteries, and still, it's only three days. It's not a week or two weeks.
Michael Lewis
No, I agree. And they've all got to be connected, and they've all got to be full batteries. It was just to give an indication of the amount of storage that comes onto the system purely by virtue of electrifying vehicle fleets. And it's not primarily meant for providing system services, but it can, and it's a fairly big resource. But you're right. There's no way you can get around the fact that you need that firm capacity for those specific circumstances. But what you can do is reduce the peak demand. And that's, I think, something that electricity and time-based tariffs and so on can help to do that. So that you talked about with industry saying, "Well, why do I want a PPA when I can get free electricity," well the same goes the other way. When the electricity price is very high, then industry may make different decisions about scheduling production.
ML
Now, I want to come back to something else that you said, which is that this stuff will be expensive, but it won't be used for many hours. But you've also talked about CCS, so CCGT generators, so combined cycle generators, which like to work 24/7, 365, ideally, or as many hours as possible. And so you're building some of those, and you're building them with carbon capture, which, of course, drives up the pr. They're very expensive to start with, then you're adding more capital expenditure, and you're doing this on the thesis that you will need them for relatively few hours of the year. Does that make sense?
Michael Lewis
I think in the end, we have to look at different technologies and see what is possible. But if we are to eliminate carbon dioxide or emissions from the energy system, we have to look at what technologies are available today. And from today's perspective, CCS is one of them on CCGT, potentially blue hydrogen is another. There may be other technologies we don't know about today. The point is, we have to be pragmatic and work out which is the most efficient way of doing it. But the fact of the matter is, we have to have assets which can produce electricity when there is no sun and no wind, and theer hasn't been for a few days. That's the problem we're dealing with. That's the last bit of the Emergiewende, which we have not yet solved.
ML
For me, the words that you've used that I don't want to say I like, but that resonate, is "blue hydrogen," because rather than CCS with post-combustion carbon capture on a big power station that likes to run much of the year, you've got that huge capital investment, and then you only really need it — you might run it more hours — but you'll only really need it for a few hours a year. Whereas if you take the carbon out pre-combustion, and then store the results, which is blue hydrogen, you can then use it in a peaker of some sort, an open cycle OCGT — you could use in a reciprocating engine. Very cheap things to buy, or much cheaper things to buy. I can kind of see the logic for that. I'm not sure I see the logic — and as you say, these are tested technologies. It's really not with carbon capture. It's just not worked efficiently anywhere in the world.
Michael Lewis
Well, I would only say, I'm not dogmatic on this. It is about a problem that we can see coming down the track, and we need to find a solution. And it may well be blue hydrogen plus a reciprocating engine. I'm not dogmatic about it. That may be part of the solution, but I think we should be open minded. We should try out different technologies, see what works, see what the ability is to reduce the costs over time, and try to get to the most pragmatic solution, which is the most economically efficient solution, which provides secure energy, but also provides the lowest CO2 emissions.
ML
Michael, you say you're not dogmatic, but at some point you're the guy with the checkbook, right? You're the CEO of the company that has to place the billion euro bets. And you know, it's all very well to say, "well, we have to see." It's 2025, you've got to be zero-carbon by 2045, which means pretty much you have to place those bets within the next very few years. Do you not?
Michael Lewis
We have to start trying out various different things at scale, and we are already doing that. And let's remember when we started on renewables, if I go back to 2005 when EON built its first offshore wind farm, I mean the cost of offshore wind... And these were very small projects — Scroby Sands, just off the coast of Norfolk was 60 megawatts — very expensive on a levelized cost of energy basis. Lots of challenges, lots of problems. But we took the view, and many people, by the way, at that time, were saying 'this will never work, it's a waste of time, out at sea these things will corrode very quickly.' All sorts of problems were put in place. But the governments of Europe, in particular the UK, Germany and Denmark, had a long-term perspective and said, 'No, we expect this technology to grow. We will get scale effects. We'll get the learning curve. We will get technological innovation.' All of those things happened. And the cost of offshore wind came crashing down, along with other technologies — onshore wind and solar as well — which actually opened up the key to solving the net-zero problem. My point is we weren't dogmatic at the time. So let's try these projects. And we all eventually moved to some kind of auctioning system, a CFD or something like that, to reveal the true cost of these projects. And it was very, very successful. And again, if you asked me 15 years ago, I thought concentrating solar power was going to be much better than solar PV. Many analysts did. In the event, we couldn't get it to work very well, so we didn't pursue it, but we still did some projects at the beginning. So what I'm saying is, if we can replicate that long-term perspective, provide the right incentives, provide the right auctioning system, whether it's a CFD or another mechanism, and then let the market work out what's the best way of solving this problem?
ML
I hear you, and by the way, it's not like I know a better answer, right? But when I hear the example— clearly that has worked with solar photovoltaics, it's worked with onshore wind, it's worked with batteries and electric vehicles. We've got these very cheap solutions, and that's been great. But you use the example of offshore wind. Well, the UK's last auction round cleared at £59 per megawatt hour, but that's in 2012 money. So that's £85 pounds per megawatt hour. And that offshore wind is — there's a clue in the name — offshore. Maybe that price may even include bringing it onshore. But it's certainly in the north of the UK. By the time you've brought it to the south, we're really looking at about £100 per megawatt hour, so $120 per megawatt hour. And meanwhile, other parts of the world, the US are — the backdrop here is our economic competitors. And I'm speaking now as Europe. Our economic competitors have got wholesale prices of $30-40 per megawatt hour in Asia and in the US. So how do we remain competitive? Because when I said you're at the crossroads, there's three things: we've got resilience, which we have to achieve — we'll have capacity markets and lots of gas generators and Uniper is positioned in the resilience space, that's great. But you've got the decarbonization — that surely is in opposition to affordability. And do we not have to accept that we have either a decarbonization problem or an affordability problem, don't we?
Michael Lewis
Well, we have a challenge to bring those two things together. And it's the old challenge of security of supply, affordability and meeting our environmental objectives. That problem hasn't gone away, and different parts of the triangle pull in different directions, but we know that we somehow have to solve the climate challenge. There is no discussion around there. If you look at the science, we have to continue to drive in this direction, and we have been very successful. Yes, the latest round of the offshore wind was more expensive, but the trend over time has been a very significant reduction in the price. And by the way, I expect that to continue going forward, as people will double down and look at how we can improve the supply chain, how we can drive efficiencies in construction, all of those things that are stimulated by innovation. So we have to continue on the journey. But my point is, we shouldn't be dogmatic today about what the solution is in 2045. We should try out different types of technology, different systems, and see which gets us furthest down the route with the lowest cost. Yes, it's a challenge for Europe that other competitors are not driving net-zero as hard, but I think it's very, very important that we do as much as we can, as quickly as we can, provided it doesn't make us uncompetitive. And I think there is a way forward. We've already talked about electric vehicle. Electric vehicles, heat pumps, all of them are much more efficient, and we still waste a lot of energy, by the way, in consumption, particularly in residential households. So there's still a long way to go, I think, in making sure that we can stay competitive. And we should also think about the fact that many of these technologies will endure long after their amortization periods. They're still going to be there when we've paid off the capital cost.
ML
I must confess, I do joke about this. Sometimes I look at what's happening in the UK and essentially, I can't see how we end up lower than £100 per megawatt hour wholesale power price in the south of the country, given what we have to build to meet the needs. And I joke about how it makes the UK a fantastic country to invest in for energy intensive industries, except not until 2045 once we've paid it all off. Because we'll have huge amounts of generation, and we'll have a copper-plate country between the north and the south. How fabulous. But meanwhile, there'll be 20 years when it'll be very, very expensive to buy power.
Michael Lewis
It's a challenge, as you said. We are all looking to see how we can square this circle, and I think the way we do it is we are not dogmatic about what the right answer is. We have to put a framework in place and let competitive markets — where possible — drive innovation and drive costs down. And I think notwithstanding what you've said about offshore wind, it is still much, much cheaper than it was 15 years ago. And I still think there's a way to go in reducing the cost further. But we have to continue this journey, there isn't an option where we do not deliver net-zero.
ML
Let me just explore that. Because let me ask, 'Do you think there's a world in which Europe effectively, either de jure, in actual regulation, or de facto, just because having been non dogmatic and tried everything, we just can't get it to work economically. Do you think there's a world where Europe says, 'Do you know what, 95% decarbonized is good enough?' Do we? Because I can see how all the things that you've talked about with a bit of batteries, a lot of renewables, demand response, interconnections — I'm an investor in X links from Morocco — we do all those things, but the last few percent just become incredibly expensive, and that's the 5%, let's say, that might require hydrogen and hydrogen stored in caverns and all sorts of things that, to be honest, being non-dogmatic, I simply can't see becoming even close to affordable.
Michael Lewis
Well, that was going to be my answer. You already answered it. That's part of not being dogmatic, saying, if the last 5% requires an extraordinarily large cost, then clearly you wouldn't do it. So yes, it is about making sure we get as far as we can on this road whilst remaining competitive, whilst keeping energy affordable and whilst keeping energy secure. That's absolutely the right answer. And you know, we need to continue to innovate, continue to invest in R&D, and continue to explore new technologies. Maybe there's technologies we haven't even thought of today, which will be coming on in 2045. I don't know, but what I do think is that I am constantly surprised at how the energy system has evolved over the last 20 years, and in particular the development of renewable energy.
ML
Yes. I mean, you've said a few times, "oh, there might be new technologies." I mean, I'm sitting here — maybe I'm overly cynical, but actually I think I'm too much of an economist, in a sense, an engineer and an economist. Because even small modular reactors or nuclear fusion, even if there's an enormous breakthrough within the next few years, it's hard to see, just given how substantial the energy sector is, energy demand, how hard it is to integrate, how hard it is to build new assets at speed, I can't see it playing much of a role at all in the timeframes we have. It's 20 years until Germany, particularly, constitutionally, looks like it has to be net zero. No new technologies, we will see cost reduction on existing ones, but no new technologies are really going to be meaningful.
Michael Lewis
Well, that may or may not be the case, but my point is only we need to continue the journey. We need to incentivize people to innovate. We need to incentivize people to reduce costs. That's exactly what we did with renewables, and it had an extremely positive impact on the development of that technology. And I remember, again, if you go back to around 2005-2006, I remember being at a conference and somebody showing me all of these new re-gas facilities that were going to be built in the United States, because the US was going to have to import large quantities of LNG. Within two years, they'd all switched to liquefaction, because fracking had completely changed the picture, and that happened incredibly quickly. Now, of course, there was a long gestation period as the technology was developed and all the rest of it, but the implementation happened very quickly, and it wasn't in anyone's forecast two or three years before that. Quite the opposite. So I'm just saying sometimes things happen which nobody is predicting and which have a fundamental impact on the energy industry. That was one of them.
ML
If you look at something like... You have a fist full of hydrogen projects — hydrogen hub projects — including projects that require the importation of green ammonia and turning it back into hydrogen for combustion. Is there anything you see on the technological horizon that makes that — how can I put it — work economically? This is a process which is 20% efficient, so even if it required no capital and no maintenance, the resulting electricity would be five times the cost of wherever it is generated. Chancellor Scholz thought he was going to buy stuff from Canada or Namibia or goodness knows where. Hopefully the new government will be more sensible. But without paying for capital and maintenance, you've got five times the electricity cost. And if you pay for capital and maintenance, it's 7 or 10 times. And yet, this is something that you're investing in. Isn't there a return to reason in this system?
Michael Lewis
We've said very clearly, you know, we said it to the last government, that when they were talking about converting these power plants to green hydrogen, we said, "Whoa, it's too expensive from today's perspective, you need to make that blue hydrogen to start with," which is still expensive compared to natural gas, but much, much cheaper than green hydrogen. That's part of the pragmatism. So what I'm saying is we have looked at various projects — green hydrogen, green ammonia — we haven't invested any very significant money, so far. We're continuing to look at how that market has developed. And very honestly at the moment, the market is not developing in line with the targets laid down by the EU and Germany, because there isn't sufficient customer demand because of the cost. So we have adjusted our development portfolio accordingly. So we will keep a very close watching brief on that. We're not about to spend billions on investing in a project of that kind. What we will do is keep optionality and see how the market develops.
ML
Michael, it's great pleasure talking to you, and I do apologize: I'm giving you all the tough questions. As you can tell, I've been looking forward to this, but we are going to need to wrap it up. But I've got a final question, or a final topic, which is, at some point, the intention is for Uniper to return to private ownership, to be privatized. First of all, any indications from the incoming government? Have they said anything about this? Is there anybody saying, "well, actually this should be a German state asset, we rescued it, it should now belong to the state." So are you going to be re privatized do you think?
Michael Lewis
Well, that is actually the legal requirement. If you look at the state-aid agreement that was reached between the German government and the EU, the requirement is that the German state has to sell down to 25% plus one share by the end of 2028. So that's the legal position, and the former German government made it very clear they would comply with that condition, and I would fully expect the new German government to comply with EU law. So it's a question of how they do it, not if they do it. That's the formal legal position, and we will see what approach the new government takes.
ML
Very good. Well, I can only really wish you the best of luck navigating the next year or two, or at most three, then getting yourself back ready to be privatized and become a public company, presumably. Again, back in some way, where you started, I think it was 30 years ago.
Michael Lewis
Yeah, absolutely. And, you know, I would just add at the end here, I think Uniper has a great future ahead. And like I said, we've got great people and great assets and a very clear strategy. But you have really probed very hard on some of these really thorny problems of the energy transition. And I think it's always worth reminding ourselves, yeah, there are very, very big problems ahead, and we haven't yet squared all the circles. We have an outline of how we get there. But I'm an optimist, so let's look back at the progress we have made. In my lifetime in the energy industry, in the last 32 years, I joined a company that was 80% coal-fired generation. The last coal-fired plant was closed last year: Ratcliffe, once the jewel in the crown of the CGB. And that's happened in a very short period, and it happened because we unlocked the potential of renewable energy. So we have to remain optimistic. We have to remain pragmatic. And above all, we have to try things out, lots of experiments, understand which technology works, and quickly replicate them. And I'm absolutely convinced we can do it.
ML
And Michael, just to be clear, I said I don't have any better answers, necessarily. And you know what, in the multiverse, there's probably one version of the universe where I might be sitting in your chair, and you might be sitting in my chair giving me a very hard time. And if there is then, I hope you're enjoying it as much as I have enjoyed talking with you today. It's been a real pleasure.
Michael Lewis
Likewise, thanks Michael.
ML
Thank you, Michael.
So that was Michael Lewis, CEO of German utility Uniper. And as always, we've put links in the show notes to resources that we mentioned during our conversation. So that's Episode 164 with Leonhard Birnbaum, CEO of another German utility, EON. Episode 175 with Greg Jackson, CEO and founder of Octopus, and Episode 190 which is the third year-end review with Lord Turner. All that remains is to thank the team behind the scenes and invite you to join me this time next week for another episode of Cleaning Up.
ML
Cleaning Up is brought to you by members of our new Leadership Circle: Actis, Alcazar Energy, Davidson Kempner, EcoPragma Capital, EDP Portugal, Eurelectic, the Gilardini Foundation, KKR, National Grid, Octopus Energy, Quadrature Climate Foundation, SDCL and Wärtsilä. For more information on the Leadership Circle, please visit cleaningup.live, that’s cleaningup.live.