The small print in hundreds of energy supply contracts between power company Innogy and German cities contains a time bomb that could undermine a megadeal announced in March that will transform the country’s power market. Handelsblatt has seen one contract between a mid-sized city and Innogy that contains a get-out clause allowing the city to ditch Innogy as a grid operator if it comes under new ownership.
Innogy, the networks and green energy unit of RWE, is indeed getting a new owner under the asset-swap agreement with energy giant E.ON — and cities are scenting an opportunity to take back control of their power supply in a market that’s becoming increasingly fragmented with the surge in solar and wind energy. There are scores of such exclusive supply contracts with “change of control” clauses and many local authorities are pondering whether to invoke them, Handelsblatt learned.
The get-out clauses threaten to turn into a huge, throbbing headache for E.ON boss Johannes Teyssen who wants to turn the group into one of Europe’s largest electricity providers and Germany’s biggest electricity operator and retailer. In fact, such clauses exist not only in network supply deals but also in many of the more than 100 stakes that Innogy owns in regional and municipal utilities, as well as in shares stakes it owns in eastern Europe.
Innogy has close to 4,000 such contracts to operate the networks that supply gas and electricity to municipalities in Germany. They usually run for 15 to 20 years, meaning they’re effectively a license to print money, because the network operator is always able to charge energy suppliers for the use of its cables. The guaranteed income makes them an important reason why energy giant E.ON has decided to take over much of Innogy. Network and infrastructure fees generated 63 percent of Innogy’s operating earnings last year (see graphic).
Asked to comment, Innogy confirmed that change of control clauses existed in many supply deals and shareholdings — and that local authorities had expressed an interest in using the clause.
Under the deal, rival RWE, which owns 76.8 percent in Innogy, will split up Innogy and share its assets with E.ON. The plan is for E.ON to become 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.
Many towns are unsure whether E.ON will be as reliable as Innogy.
The planned revamp will make E.ON bigger while allowing it profit from the booming market for energy deals with cities — or that was the plan, at least. “Local energy structures are becoming increasingly important,” Mr. Teyssen said when he presented the deal last month.
But local politicians are wary of the deal because they trust RWE more than E.ON. RWE has been fostering relationships with local authorities and municipal providers ever since it was founded 120 years ago, and over the years, cities have acquired shareholdings in RWE, and RWE has in turn invested in local utilities, thereby securing lucrative supply concessions for itself. Innogy took over those contracts when it was split off from RWE two years ago to run RWE’s renewables business. E.ON, on the other hand, has done little to nurture relations with cities in the past, said one industry insider. “The motto was: either we get 100 percent or we’ll pull out.”
Mr. Teyssen got a first taste of the problem last week when Innogy said Australian investor Macquarie was interested in taking over its business in the Czech Republic and had cited the change of control clause. Even the western city of Essen, where E.ON, Innogy and RWE are based, said it will carefully examine its legal options. Consultancies and law firms have received dozens of inquiries from local authorities.
“There’s a wide range of motives,” said Henning Fischer, an energy expert at law firm Rödl & Partner. Many towns are unsure whether E.ON will be as reliable as Innogy. Others want to become more independent or to exploit the current low-interest environment to repurchase stakes or local power grids.
The big question is whether E.ON will be able to hang on to those deals. An E.ON spokeswoman said the company was aware of the problem and Mr. Teyssen is evidently taking it seriously. “The cooperation with city utilities is very valuable to us,” he said at last month’s presentation. “We will of course reach out to the cities and municipalities.” The key is now for E.ON to woo town halls up and down Germany to establish trust — and fast.
Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. To contact the author: email@example.com