Innogy deal

E.ON goes large and bets on retail

Germany EON RWE
Blue sky thinking. Source: AP

The deal is as complicated as the cabling at an electricity substation: German power giant E.ON will buy Innogy, the networks and green energy arm of rival RWE, while at the same time swapping important assets from nuclear power stations to gas storage plants. This will result in E.ON becoming a provider of energy networks and retail services only, while RWE will take over E.ON and Innogy’s renewables business and get a hefty stake, almost 17 percent, in E.ON. It’s enough to cause a short-circuit.

To cut to the quick though, the deal, announced two weeks ago, means that E.ON will emerge as one of Europe’s largest electricity providers and Germany’s biggest electricity operator and retailer, with around 1.5 million kilometers of electricity infrastructure and a new business model.

In terms of energy generation, it says around 80 percent of its profits will come from producing electricity, a business model dependent on government regulation and agreed fee structures, meaning regular but limited profits. Any real growth will then have to come from E.ON’s second pillar – its retail business. After the Innogy acquisition, E.ON will supply around 50 million customers, making it Europe’s biggest retailer. Therein lies the rub.

“What's stopping Amazon selling electricity to Prime customers?”

Torsten Henzelmann, energy expert, consultants Roland Berger

Retail is an increasingly tough part of the electricity business, with falling revenues and profits. Competition is fierce. “Profits are under pressure in the classic electricity retail trade,” said Torsten Henzelmann, energy expert at Roland Berger, a consultancy. Discount re-sellers are capturing ground, and private generation of electricity, for example via wind or solar, is becoming more and more prevalent.

E.ON wants to thrive in this world, moving gradually away from classic sales of electricity. The company wants to increase its market share in electricity retail, while expanding into new products and services, including full-service solar installation work. The company will offer energy management to firms and even to entire city districts. Finally, it also wants to be at the heart of the shift toward all-electric vehicles.

There has been some early promise. Large corporate client business has shot up 60 percent this year. New clients include a large US IT company with European data centers, for which E.ON will act as energy adviser. And energy solutions sold to cities added €100 million to company profits last year.

But analysts like Mr. Henzelmann are skeptical about E.ON’s direction: Although these measures may secure market share, he says, they are less certain to boost growth. “Entirely new competitors are poised to join the energy market,” he warned.

These include a host of hungry startups, eager to enter a transformed digital electricity market, and also tech giants like Amazon and Google: “What’s stopping Amazon selling electricity to its Prime customers?” asks Mr. Henzelmann. More competitors will emerge as electricity systems merge with transportation: When gas stations recharge electric cars, they become serious players in the electricity market.

23 p21 E.ON, leading in Europe-01

E.ON boss Johannes Teyssen is convinced that its size can be decisive, all the more so when the merger with Innogy is complete. “Good ideas aren’t enough for innovation; they have to be scalable too,” he said at an E.ON convention on Thursday, adding that E.ON and Innogy will complement each other.

“Size is important in retail,” said Andreas Stender, an energy expert at consultants A. T. Kearney. The Innogy deal could mean huge savings in back-office areas like accounting and customer service, and extra clout could also help E.ON attract major joint-venture partners, including major players like Google and Amazon.

But while Mr. Teyssen may think he has nailed E.ON’s future, the future of many Innogy staff is far from bright: As many as 5,000 could lose their jobs as a result of the deal. That will be a serious blow to morale at a company that has recently seen popular CEO Peter Terium depart, and an unexplained acid attack on CFO Bernhard Guenther.

Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the author: flauger@handelsblatt.com

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