It certainly isn’t the biggest deal that Peter Terium, the CEO of German power company RWE, has ever made.
Nevertheless, the planned sale of the company’s headquarters in the western city of Essen, the 127-meter (417-foot) RWE Tower, has symbolic meaning. It suggests that the ailing energy company is in such a deep crisis that it has resorted to selling off its real estate. Handelsblatt has learned that the sale is expected to generate about €220 million ($295 million) in revenues. In a terse statement, RWE noted that owning real estate is not part of its core business.
But what is the traditional company’s core business going to be in the future? Its current core business, generating electricity, is declining at a record pace. In the first half of 2014, the amount of electricity RWE generated dropped by another 11 percent, to 110 billion kilowatt hours. Its operating result from conventional power generation with nuclear, coal-fired and natural gas power plants declined by 14 percent, to just under €600 million.
With that said, the division is now responsible for only a little over a quarter of consolidated operating results. In 2012, RWE’s large power plants still made up more than half of revenues. At the time, the plants were yielding returns in the high double digits, but now they are not even offsetting investment costs. The power plants are simply being forced out of the market by the government-subsidized boom in renewable energy. “Conventional power generation is on the retreat – and not just at RWE,” Mr. Terium said when the company’s interim financial report was released on Thursday.
These are bitter words for Germany’s largest electricity producer. In the first half of the year, its operating income declined by 40 percent to €2.3 billion, while the sustainable net income (adjusted for special effects) decreased by 62 percent to €750 million. RWE’s stock reacted with a strong price drop.
This development is critical to the reliability of the German power supply. Mr. Terium is decommissioning more and more power plants. He recently announced the planned shutdown of three plants in Germany: one powered by lignite, also known as brown coal, and two by bituminous coal. The total capacity of the three plants is 1,000 megawatts, the equivalent of what a modern nuclear power plant produces. In total, RWE has already mothballed 9,000 megawatts of generating capacity, including the three plants. A large share of this capacity is in Germany.
With electricity from solar and wind energy flooding the market, and being given preferential treatment in the grid, there is less and less room for coal-fired and natural gas power plants.
The story is much the same at Eon. CEO Johannes Teyssen has already decommissioned 8,700 megawatts, and another 3,000 megawatts are slated to be shut down. And the trend will only continue. Eon is currently reviewing the profitability of plants, Mr. Teyssen said when he submitted his interim report on Wednesday. “And when profitability disappears, we will react,” he added.
Both energy giants face the same problem: a sharp drop in wholesale electricity prices. With electricity from solar and wind energy flooding the market, and being given preferential treatment in the grid, there is less and less room for coal-fired and natural gas power plants. A megawatt hour has been consistently trading at less than €35 ($47) on the futures market. Gas power plants are no longer profitable at this price level, and increasingly, neither are coal-fired plants. The price of electricity was €20 higher in early 2011, before the Fukushima nuclear disaster.
Mr. Terium and Mr. Teyssen are appealing to lawmakers. “This doesn’t bode well for the security of supply, to which wind and solar cannot contribute very much,” Mr. Terium said. Because the wind isn’t always blowing and the sun isn’t always shining, he explained, gas and coal-fired power plants also need to be kept available.
The two utility CEOs are increasingly calling for a capacity market, in which electricity producers would be compensated solely for keeping generating capacity available. “We need a market design that satisfies the new challenges of the energy transition, while simultaneously guaranteeing the security of supply in the future,” Mr. Terium said.
The German government has recognized the problem but is taking its time to come up with a solution. The “10-Point Energy Agenda” from the Ministry of Economy calls for the development of a so-called green book by this fall, in which “various options, together with their pros and cons, will be presented for debate.” Following a public consultation, a White Paper is to be issued in the spring of 2015 that will include concrete measures. New legislation would then be enacted in the summer of 2016.
But German Economy Minister Sigmar Gabriel, a member of the center-left Social Democratic Party, has left no doubt that he isn’t a fan of comprehensive capacity markets. He recently said there would be no “dole money for old power plants” while he’s in office.
Translated by Christopher Sultan