collateral damage

Clean Energy May Clean Companies Out

energy transititon_rwe_eon_dpa
Germany's energy transition challenges the very existence of the two largest power companies E.ON and RWE.
  • Why it matters

    Why it matters

    Faced with the energy transition, executives at Germany’s two major power companies, E.ON and RWE, took the wrong strategy but their difficulties are also partly due to the government’s interference in energy markets.

  • Facts

    Facts

    • Large-scale efforts by government officials to push the nation toward wind and solar power have heavily damaged the two energy giants, which have recorded unprecedented losses and seen their combined market value  shrivel by €37 billion since 2011 as share prices have plummeted.
    • Executives at the power companies virtually ignored the shift to renewable energy, investing heavily in nuclear and coal-fired plants through much of the 2000s.
    • Government intrusions into the market including grants to renewable energy companies and priority on energy grids have further damaged Eon and RWE, which have shed thousands of workers in efforts to restructure and cut costs.
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    Audio

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Now, it’s RWE’s turn. After E.ON, Germany’s second largest electric utilities company and market leader announced plans for a radical restructuring, its rival RWE will also completely reposition itself to avoid going under as Germany’s energy transition moves forward. RWE will merge or liquidate its subsidiaries on a grand scale.

If you want to see how much the transition to renewable energy in Germany has roiled the domestic market, just look at how the two heavyweights are reacting.

Without question, company executives at both firms — past and present — contributed greatly to the crisis now threatening their very existence.

They reacted much too slowly to the new world of energy and they held on to their nuclear, coal and gas power plants for far too long.

Now, E.ON CEO Johannes Teyssen and RWE CEO Peter Terium are being forced to take drastic measures since the government’s large-scale intervention in the energy market inevitably meant their companies would suffer collateral damage.

The fall of E.ON and RWE is unprecedented. E.ON had record losses this year of €3 billion ($3.3 billion) while RWE skidded into the red on a similar scale last year for the first time since the end of the Second World War.

Since 2010 — the year before the Fukushima reactor catastrophe upended the energy world — E.ON’s operating earnings have shrunk by 50 percent to €4.7 billion while at RWE’s have fallen by almost half to €4 billion.

Executives at the energy giants snoozed through the shift to renewable and decentralized energy production.

Shareholders are suffering most. Since Fukushima, the two companies have lost €37 billion in market value. E.ON shares nosedived by 49 percent and RWE shares by 56 percent.

But employees also are feeling the pain. At the close of 2010, E.ON had a staff of 85,000 while at close of 2014, the company had barely 58,500. At RWE, the number of workers fell from 71,000 to just under 60,000. A large number of employees were passed on to new owners with the sale of subsidiaries, but thousands of jobs were eliminated. Remaining employees were subjected to one money-saving measure after another. The “E.ON 2.0” program delivered net savings of €1.3 billion per year. RWE cut costs by €1.5 billion with its “Neo,” “Lean Steering” and other internal programs.

Executives at the energy giants snoozed through the shift to renewable and decentralized energy production. In 2005, for example, RWE launched a massive program of construction and modernization of major power plants, investing more than €10 billion to build huge gas-fired power plants and even brown coal-fired plants. The change in energy policy didn’t begin after Fukushima, but in 2000 under the “Red-Green” coalition government with center-left Social Democratic Party of Germany (SPD) and the Greens.

Yet for much too long, the energy companies feasted on the high profits generated by their mega power plants while sneering at solar energy. It wasn’t until recent years they began investing in renewable energies on a large scale.

But it’s also true no other industry have been subjected to such massive government intervention as the production of electricity. Within the span of ten years, wind, sun and other renewables have built their market share from nine to 26 percent, not because they are commercially superior, but because they receive generous remuneration by law and get priority in the power grid. Meanwhile, the share of the electricity market subject to free market forces is shrinking dramatically. In just three years, wholesale electricity prices have plummeted from just under €50 to barely €30 because of the renewable energy boom.

No company can withstand such massive market interference. The power of the energy upheaval is so great that even the most modern gas-fired power plants no longer pay their way. And the government wants them to supplement wind and solar energy.

And the meddling goes on.

RWE fended off a planned coal tax, but is still shutting down several brown coal plants. If the German government were to lock in the nuclear fund reserves established by E.ON and RWE to dismantle the nuclear power plants, it would be understandable, but considering the existential crisis the two companies face, it would be a mortal blow.

The energy transition cannot be reversed but it challenges the very existence of the two power companies E.ON and RWE.

 

To contact the author: flauger@handelsblatt.com

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