Electric Storm

E.ON's Teyssen: I've Got the Power

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Powerful words.
  • Why it matters

    Why it matters

    E.ON CEO Johannes Teyssen is on a collision course with Economy Minister Sigmar Gabriel over  government subsidies for conventional power plants.

  • Facts

    Facts

    • Germany’s vice chancellor and economics minister Sigmar Gabriel opposes government subsidies for conventional power plant operators to help them maintain an electricity reserve.
    • Most industry executives attending a Handelsblatt energy conference this week expect other providers to emulate E.ON in its decision to split into two companies.
    • Mr. Teyssen believes there are two energy worlds today: the traditional one and one that is betting on renewable energy.
  • Audio

    Audio

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It takes guts to counter a statement by a cabinet minister with one of your own.

That’s precisely what Johannes Teyssen did. Mr. Teyssen is chief executive of E.ON, Germany’s largest power company.

“The capacity market will come,” the head of energy company E.ON said at the Handelsblatt energy conference on Tuesday. Perhaps not right away, he added, but certainly in the long term.

The statement put him on a collision course with Germany’s economics minister, Sigmar Gabriel, a member of the center-left Social Democratic Party. On Tuesday in an interview with Handelsblatt, Mr. Gabriel, Germany’s vice chancellor, said the exact opposite.

Mr. Gabriel rejected the idea of paying power plant operators subsidies to keep fossil fuel power plants in operation as reserve during Germany’s transition to alternative energy.

The two men disagree on the issue of “capacity markets,” which if industry had its way would translate into subsidies in the form of minimum price guarantees to plant operators.

Electricity from wind and solar power is environmentally friendly, but unreliable. It makes sense for an industrialised country to keep natural gas and coal-fired power plants operational for emergencies. The central question is whether this should require subsidies – or will the electricity price naturally settle in at a level at which operating these necessary power plants as a backup source of energy can also be profitable?

Mr. Gabriel wants market forces, not state guarantees, to set electricity prices in Germany, where charges for electricity are among the highest in Europe.

The power industry had asked for state subsidies for fossil-fuel plants to offset losses as electricity prices hit new lows in following Germany’s government-led shift to alternative energy.

In the wake of a hasty transition to renewable energy sources in Germany following Fukushima, the government introduced subsidies for renewables. This in turn led to an overcapacity of electricity, and a dramatic fall in wholesale energy prices that hit utility firms hard.

But the utilities’ bid for relief was effectively blocked after Mr. Gabriel said in the Handelsblatt interview that industry was “trying to preserve existing overcapacity at the cost of German taxpayers.”

“The market can’t give the right price signals anymore,” Mr. Teyssen said. “If we don’t take action, power plants will be closed down at the wrong place and the wrong time.”

Mr. Teyssen also disagreed with Mr. Gabriel’s calculation of the significant overcapacities in the German electricity market. And Mr. Teyssen argued that the electricity market is no longer able to function properly due to excessive subsidies for renewables.

 

Germanys Electricity Market 2-01

 

Electricity producers closed ranks in the wake of Mr. Gabriel’s challenge, and they leapt to Mr. Teyssen’s defense.

“It’s obvious that we need a capacity market,” said Rolf Martin Schmitz, deputy chairman of competitor RWE. “Mr. Gabriel has now put an end to what he had originally touted as an open-ended dialogue,” said Mr. Schmitz. “This isn’t what a responsible approach to the most pressing problem in the energy market looks like,” said Hildegard Müller, head of the BDEW energy association.

Even local utilities agree with the energy giants. “E.ON and municipal utilities are now on the same side,” said Sven Becker, head of municipal utilities network Trianel.

Rainer Baake, state secretary in the Economy Ministry, sought to appease the angry voices from the industry. How the electricity market will look in the future is still an open question, he said.

Mr. Teyssen believes the discussion of possible approaches is only just beginning.

For the capacity markets, Mr. Teyssen is now hoping for support from the European Union. “In Brussels, people are realizing that intervention is needed.”

 

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Strong currents are shaping the market for electricity. Source: Getty

 

The utilities operators continue to address the question of what to do with their infrastructure of power plants that run on fossil fuels.

No stranger to bold moves, Mr. Teyssen announced in December he was planning a revolutionary restructuring to divide E.ON into two parts. The large power plants, long the company’s core business, are being spun off.

Mr. Teyssen said that the energy world had changed so radically that E.ON had no choice but to change too, and he explained why it made sense to divide the group.

There is no longer only one energy world, but there are in fact two, and they have as little in common as soccer and handball, he said. Although everything revolves around the ball in both sports, he explained, the rules are very different, as are the necessary skills and player traits, as well as strategy and positioning. “It’s the same in the two energy worlds. Both are about energy, but the success factors are increasingly developing in different directions.”

The new energy world is becoming more and more dynamic, shaped by renewable energy, intelligent grids and solutions tailored to the customer. On the other side, Mr. Teyssen said, “is the classic energy world of high-volume production and business structures for electricity, natural gas and other commodities.”

“According to our analysis, the two worlds have already moved so far apart that they require their own entrepreneurial approaches,” he said.

In the classic energy world, he explained, powerful, efficient plants in good locations, and with the lowest possible costs, are key competitive advantages. The success factors in the new energy world, however, are “speed, agility, innovation and digitization. What’s important here is to be alert for anything that could benefit the customer,” Mr. Teyssen said, “and the ability to bring it to the market faster than everyone else.”

Mr. Teyssen was confident about the outlook for E.ON.

Other utility firms are watching closely, considering their strategies.

“Breaking up E.ON is a bold step,” said Rolf Martin Schmitz, deputy chairman of RWE. He won’t necessarily follow suit though. “Each firm has to decide what to do according to what makes sense.”

Many others felt otherwise.

In a TED survey of the 1,200 attendees, 25 percent said that they expect to see many imitators, because the breakup follows the logic of liberalization. Some 58 percent said they expected to see at least “a few” imitators. Only 17 percent believed E.ON’s route to be unique.

However they decide, powerful changes are ahead for Germany’s utilities.

 

Handelsblatt’s Jürgen Flauger covers energy providers and policy, Silke Kersting and Klaus Stratmann cover politics and Georg Weishaupt writes about renewables for Handelsblatt. To contact the authors:  flauger@handelsblatt.com, kersting@handelsblatt.com, stratmann@handelsblatt.com and weishaupt@handelsblatt.com

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