Energiewende 2.0

E.ON's billion-euro deal with RWE transforms German energy market

High voltage
A transfer of power. Source: Getty

The German energy landscape just changed dramatically — again.

It’s the second time that there has been a sweeping change of the industry virtually overnight, after the country pivoted away from nuclear power in the wake of the Fukushima nuclear disaster.

Now, a €20-billion deal makes RWE into the country’s biggest provider of electricity while E.ON will be the biggest operator and retailer of power. E.ON is taking control of Germany’s energy grid and customer base. And RWE will generate green energy as well as running conventional power stations fired by coal and gas.

The corporate reshuffle is good news for E.ON and RWE, which now find focus after years of uncertainty triggered by the energiewende. But it’s unclear whether electricity consumers will benefit with one fewer provider on the market after Innogy is absorbed by E.ON.

The deal centers partly on the transfer of the Innogy from RWE to E.ON. Innogy was formed in 2015 and listed a year later. It included the renewable as well as distribution activities of RWE but has struggled. Its boss was let go unexpectedly in December, and earlier this month, its chief financial officer was the victim of an acid attack by unknown assailants.

E.ON is buying a controlling stake in Innogy from RWE for €20 billion ($24.6 billion). In exchange, RWE will get both E.ON’s and Innogy’s renewables businesses – along with a large stake in E.ON. Little actual money will change hands — RWE will pay just €1.5 billion for the renewables divisions.

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That deal makes E.ON one of Europe’s foremost providers of electricity, and Germany’s chief operator and retailer of electricity. It will supply 45 million customers with electricity and gas and run 1.5 million kilometers (932 miles) of power lines.

But the company bids farewell to its renewable energy ambitions and passes wind farms and hydropower plants to RWE. This transfer makes RWE into Europe’s third-largest producer of green energy, according to sources who spoke to Handelsblatt.

Now RWE will run both conventional power plants and green power sources. That’s a more sustainable portfolio and could be more profitable. Its boss, Rolf Martin Schmitz, reckons even as Germany moves to renewables, it needs to backstop wind and solar power which is vulnerable to sudden changes in weather. He bets that the government will remunerate handsomely whoever controls the backup power plants.

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Mr. Schmitz is trying to buy more such plants even as you read this: According to Handelsblatt’s industry sources, RWE is negotiating the purchase of coal and gas-fired power stations from rival EnBW. That deal could also run to the billions.

E.ON’s and RWE’s managers won the unanimous approval of their supervisory boards for the €20 billion deal, after spending Sunday in talks, sources told Handelsblatt. Despite this, there was skepticism among influential municipal shareholders and employee representatives.

But after years of losses and restructuring, the situation appears to be a win-win for the two companies. Nonetheless, it could wind up riskier for RWE than E.ON. E.ON can grow simply by adding more networks, whereas RWE has a constant battle ahead on the high-risk, highly competitive renewables sector.

Jürgen Flauger covers energy for Handelsblatt. To contact the author: flauger@handelsblatt.com

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