Utilities Fight for Bailout, Fear Meltdown

Power plant sunset imao
The sun is setting on the era of traditional power production. No-one yet knows how the clean energy phase will look, or what it will cost.
  • Why it matters

    Why it matters

    Big utilities says can’t pay for the nuclear phase-out without more government help. If it doesn’t, the companies might go under — and that would be even more expensive.

  • Facts


    • In addition to getting out of nuclear power by 2022, Germany plans to draw at least 80 percent of energy from renewables by 2050.
    • In the end, the bill for Germany’s nuclear phase-out could be as much as €70 billion — and it would fall on many shoulders.
    • Consultants calculate that since the government embarked on its energy transition in 2011, the four big energy providers in Germany have had to write down €18.6 billion on the value of their traditional power plants for “unplanned depreciation.”
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The view from the window of Garrelt Duin’s office — the economics minister for North Rhine-Westphalia — takes in coal and gas-fired power plants, factories and smokestacks.

Mr. Duin works in the state at the heart of the country’s energy industry that is marked by the brand new gas-fired power plants, spinning wind-power turbines and slagheaps that scar the landscape.

Viewed from Mr. Duin’s office above, the nation’s transition to renewable energies is complicated and messy.

Companies are scrambling to adapt or be destroyed as Germany rushes to switch to clean energy in the wake of the Fukushima nuclear disaster. Germany plans to draw at least 80 percent of energy from renewables by 2050.

The subsidies for renewables have already caused huge losses for Germany’s utilities and they are hastily adjusting their structures.

“Either energy providers embark on a radical restructuring in the direction of renewable energies, grid operation and energy services. Or they go bankrupt. The third alternative is protracted agony.”

Patrick Graichen,, head of the energy-transition think-tank Agora

No one knows yet how things will look when the clean energy times roll in. The economic viability of gas-fired power plants is uncertain. The yield of wind energy is high but undependable.

Companies are trying to limit their losses by rushing into renewables and winding down their traditional power business.

There’s a time bomb ticking away in the background. All nuclear power plants are to be phased out by 2022, but it isn’t clear yet who is going to pay.

Mr. Duin, a Social Democrat, is worried about the cost – and the jobs that will be lost.

Electricity from renewable sources is being generated in ever-increasing amounts and given preference, he explained. That threatens the economic feasibility of utility providers with their coal- and gas-fired plants.

E.ON, Germany’s biggest utility, recently announced losses of more than €5 billion. Earlier this week, the share price of RWE, the second-largest utility, also fell by more than 5 percent – before it announced it would spin off its renewables division to cushion the impact of losses in conventional energy.

The country’s utility companies have three choices, according to Patrick Graichen, head of the energy-transition think-tank Agora: “Either energy providers embark on a radical restructuring in the direction of renewable energies, grid operation and energy services. Or they go bankrupt. The third alternative is protracted agony.”

The utilities face costs in the billions to shut down their nuclear power plants. If the government doesn’t help shoulder the costs, the companies could collapse.

“As long as the cost of a nuclear phase-out is not resolved, E.ON and RWE will be confronted with extremely critical questions on the financial markets,” Mr. Duin said.

The chief executive of RWE, Peter Terium, went further: “We need money for growth. At the moment, we’re not getting it.”

If the companies hemorrhage money because of the unresolved nuclear issue, the runaway costs of ending nuclear power could be thrust on German taxpayers.

Now, many are asking whether a bailout would make sense, just as major banks were rescued by taxpayers at a cost of billions – a controversial question.

Market economists say government rescues of companies have never worked.

Environmental advocates say the companies and their shareholders have earned profits for years from nuclear power plants — and now they should bear the burden.

Shareholders say whoever makes bad management decisions must pay for the mistakes.

And yet utility managers and politicians seem to be making arrangements for an eventual bailout. In the end, the bill for Germany’s nuclear phase-out could be as much as €70 billion — and it would fall on many shoulders.

Last week at a meeting in Berlin, managers and politicians wrangled over who is to pick up the bill.

Utility officials traveled to the Economics Ministry to meet the recently government-appointed nuclear commission and talk about how the nuclear phase-out is going, nearly halfway to the 2022 deadline.

First the commission wanted to whether energy companies have put aside enough money to cover the phase-out. The main bone of contention is the interest rate these financial reserves are expected to earn in model calculations.

The deputy head of RWE, Rolf Schmitz, took the floor and mixed a concerted offense with a conciliatory offer.

“If the framework conditions are changed, if the interest rates for the funds reserved for the nuclear phase-out are suddenly no longer allowed to be valid,” he thundered, “then we at RWE can’t shoulder the burden.”

He demanded that “the liability of the operating companies be limited in terms of the length of time and the sum to amount to pay.” And he recommended a foundation be formed in which the utilities and the state jointly participate.

“It is also a matter of 60,000 jobs,” Mr. Schmitz warned. “I’m saying that quite openly.”

The 19-member nuclear commission is tasked with finding a way out of the mess by spring 2016 at the latest. It is headed by former Brandenburg premier Matthias Platzeck of the Social Democrats, former Hamburg mayor Ole von Beust of the center-right Christian Democrats, and former environmental minister Jürgen Trittin of the Green Party.

The energy transition is entering its sixth year, and 2016 will be a year of decisions.

A.T. Kearney consultants calculate that since the federal government decided in 2011 to exit from nuclear power, the four big energy providers in Germany have had to write down €18.6 billion on the value of their traditional power plants “in unplanned depreciation due to the energy transition.” The companies include RWE, E.ON, EnBW, and Vattenfall of Sweden.

The energy business is ailing beyond that. In 2014, RWE didn’t earn enough to cover its capital costs. After minus 8.3 percent in 2013 and minus 25.2 percent in 2014, the operating results through three quarters of 2015 declined another 15.2 percent. The forecast for 2015: the bottom line will only be two-thirds of the results for 2012.


Peter Terium Rolf Vennenbernd DPA
Peter Terium of RWE announced this week he is splitting his company. Source: Rolf Vennenbernd DPA


The head of RWE, Mr. Terium, says the “business model of a centralized provision of energy has been destroyed.”

Business is also dismal at E.ON. The company’s profits, corrected for one-time events, declined by 30 percent in the first nine months of 2015, after falls in 2013 and 2014. With expected profits of €1.4 to 1.8 billion this year, E.ON is earning almost 60 percent less than in 2012.

Investors doubt whether the companies can get out of this quandary on their own.

E.ON and RWE stock prices are as low as they were in the early 1990s — and analysts interpret recent developments as a sign that it is high time to sell shares.

On the Eurex futures market, E.ON stock is among the most often traded derivatives this year — although with a market capitalization of €18 billion, E.ON shares no longer account for even 2 percent on the DAX blue chip index. Here as well, investors are speculating on a further fall in share value.

“The expenses of the nuclear phase-out are like a ball and chain for the energy companies,” said Thomas Deser, fund manager at Union Investment. “Until they rid themselves of the hindrance, almost no one believes in a turnaround.”

Investors are correct, according to an assessment by Düsseldorf auditors Warth & Klein Grant Thornton, ordered by Germany’s economics minister Sigmar Gabriel. The authors provide painstaking proof that the €38 billion set aside by E.ON, RWE, EnBW and Vattenfall are in no way enough to cover the expenses of the nuclear phase-out in the current state of affairs.

The low interest rate is a core problem.

In calculating how much to set aside for the wind down of nuclear power, the utilities assume that until their due date in the distant future, their financial reserves will earn an average of 4.58 percent in interest each year. This figure is close to the 4.53 percent that the German Central Bank accepts for financial reserves. According to the German Commercial Code, this is permissible.

But at 4.53 percent, the monetary guardians orient themselves to the average interest rate of the last 15 years – an unacceptable premise for the appraisers.

“For a current valuation (of reserves), historical rates of interest” are not relevant, appraisers said. The international standards for financial accounting instead require assumptions that reflect “current market developments.”

Thus an “authoritative assessment” of financial reserves comes from an industry stress test by the European insurance monitoring agency. Instead of the utilities’ 4.58 percent, the monitoring agency assumes an average rate of interest of 2.6 percent for the coming 15 years – barely more than half as much as the energy companies predict.

That means that instead of setting aside €38 billion for the nuclear phase-out, the firms should immediately put up a whopping €69 billion.

That would not only devastate the utilities’ net worth. It would also unhinge the assertion by economics minister Mr. Gabriel that “the assets of the companies entirely cover the financing of the dismantling of the atomic power plants and the disposal of radioactive waste.”

After subtracting debts and other liabilities, the three energy providers had assets of around €81 billion at the end of 2014.

After the record write-down by E.ON of €8.3 billion in the third quarter, the figure could reach €73 billion, not including further possible write-downs by RWE at the end of the year. If the companies had to set aside that much for the realistically required reserves of €69 billion, they would be totally out of money – and hence incapable of staying in business.

And it’s not clear how much dismantling nuclear plants and disposing of the radioactive waste will actually cost.

The firms’ assumption that €47.5 billion will get the job done is controversial. The commission charged with finding a radioactive waste repository, for instance, fears that in a worst-case scenario the amount could go as high as €70 billion.

So regardless of what the nuclear commission recommends, hard realities lean in the direction of an eventual fund or foundation to share the costs — and that would transfer part of the expenses for a nuclear phase-out onto taxpayers.

During recent weeks, the utility companies have grown more hopeful that they will be able to limit the long-term consequences of the nuclear era through a favorable deal with the state. The tone adopted by their chief executives is accordingly moderate, even if their representatives took a more aggressive tone during public hearings before the nuclear commission.

Johannes Teyssen, the chief executive at E.ON, has said: “No one can be allowed to hide in the bushes. This task must be shouldered by all parties.”

Johannes teysen Rolf Vennenbernd DPA
Making a radical move to rescue E.ON, chief Johannes Teyssen is in uncharted waters. Source: Rolf Vennenbernd DPA


And Mr. Terium, the head of RWE, even offered an apology in recent days. “Perhaps the classic energy providers did not number among the early pioneers in renewable and decentralized energies,” he said. “From a present point of view, that might have been a mistake.”

Now, Mr. Terium said, the power companies’ problems “cannot be solved by the firms alone, but only in an intelligent and cooperative partnership between government, social partners and stakeholders.”

Under this reasoning, the companies and German government have indicated the direction as well as the points of conflict.

If politicians such as NRW’s economics minister Mr. Duin have their way, there would be a foundation into which utilities would inject at least a part of their €38 billion in reserves, starting in 2018.

But that money is in many cases bound to power plants that are becoming less and less economically feasible through the energy transition. Some politicians propose that the companies should also give up entire power plants or other sectors that are currently still profitable.

For example, E.ON and RWE could end their participation in the Dutch-British-German company Urenco, which makes nuclear fuel elements. Within the industry, the value of the shares is considered to be around €1 billion.

And consideration is being given to handing over the eight nuclear power plants that, according to Arthur D. Little consultants, will still bring in €17 billion until 2022.

For their part, the utility companies are only ready to relinquish assets if they would be freed from liabilities that could last decades. Among their big weapons are lawsuits against the state running into the billions. They claim they have been harmed by switching off the seven oldest nuclear plants, as ordered by Chancellor Angela Merkel immediately after the Fukushima disaster.

They might drop their lawsuits if the German government were to accommodate them regarding the financial reserves.

The protagonists in this argument are under pressure to quickly come to an agreement. The word from SPD circles is that Germany’s economics minister, Mr. Gabriel, wants to have the issue out of the way before parliamentary elections in 2017. Since many thousands of jobs hang in the balance, Mr. Gabriel wants to avoid conflict with trade unions.

For their part, the highly indebted companies need clarity on the financial front as soon as possible in order to concentrate fully on saving their hides. Admittedly, they would lose capital through the compromises under negotiation. But they might then have new avenues of financing.

“A recapitalization of the companies is unavoidable,” said one manager working in the region. Either new shareholders would have to come on board or old ones would have to provide much new funding.

Then the companies would at least have the chance of investing – late but massively – in renewable energies and other branches with a promising future.


Big Utilities Lower Valuations-01


This includes business in the increasingly complex transmission of electricity. Above all, they could become involved in the operation of wind parks on the open sea which, in contrast to rotors on land, require investments running into the billions.

By deciding a year ago to split off fossil-fuel power in the new Uniper subsidiary — and concentrate in the future on green electricity, grids and trade — E.ON established the foundation for just that. The company already counts as the third-largest operator of offshore wind parks in the world. But there is still a long way to go. In the first nine months of 2015, the share of wind in E.ON’s electricity rose from 7.2 percent in the same time period a year ago to no more than 9 percent.

And this week RWE followed suit in a different kind of spin-off. A new company will be created that includes the renewable energies divisions as well as its distribution grid network and retail division. Conventional power plants, including nuclear, coal and gas-fired electricity stations, would be kept in the current RWE.

But the shift might be more difficult for RWE. It is true that in the first nine months of this year renewables brought in €251 million more operating income than in the same period a year ago. At the same time, however, the generation of conventional electricity yielded €406 million less. The share of green electricity is just barely 5 percent.

Ultimately, Germany’s new green future may not look much like a market economy.

The price for electricity from wind parks is guaranteed to utilities by the government. For facilities on the ocean, there is an initial reimbursement of 15.4 cents per kilowatt hour, and on land 9 cents per kilowatt hour.

In the distribution of electricity, the state also guarantees secure returns of about 10 percent for long-distance networks. This benevolence is expected to increase.

When he thinks about RWE and E.ON, Mr. Duin said: “For me, they’re just names I don’t have strong feelings about. But I fight passionately for jobs.”

Maybe Mr. Duin should realign his priorities – less emotion could yield better results.

The nuclear power plants will yield €17 billion until 2022, and the nuclear industry has received more than €200 billion in subsidies — and as much as €70 billion is at stake in the controversy over Germany’s nuclear phase-out.


This article first appeared in WirtschaftsWoche and was written by Florian Zerfaß, Konrad Fischer, Christian Schlesiger, Reinhold Böhmer and Angela Hennersdorf. To contact the authors:

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