Treehugger Tuesday

Major Germany Utility to Change to Renewables

The following article just appeared in the New York Times:

With Spinoff, German Utility E.On to Focus on Renewable Energy
By Stanley Reed
December 1, 2014 8:33 am

LONDON — European and German policies aimed at reducing carbon emissions are making life difficult for traditional power generation companies and forcing them to change.
In the most radical move yet, E.On, one of Germany’s largest utilities, said on Sunday that it would gradually leave the conventional electricity generation business of coal, nuclear and natural gas power plants and retain its renewable energy and distribution businesses. The company said it would start the process now and present a plan to spin off most of the unit that held the conventional power generation to shareholders at the annual meeting in 2016.

“We are seeing the emergence of two distinct energy worlds,” the company’s chief executive, Johannes Teyssen, said on a call with analysts on Monday.

Mr. Teyssen said that E.On was convinced that utilities would need to decide whether to focus on renewable energy like wind and solar power and related businesses or to stick to power generation that produces greenhouse gases.

“We see this as an extremely brave but progressive move by E.On,” John Musk, an analyst at RBC Capital Markets in London, wrote in a research note for clients on Sunday. “It will provide investors with two focused operations, with two simple strategies and two separate investment opportunities.”

Analysts noted that E.ON was putting its riskier businesses, including nuclear and other conventional power generation as well as oil and gas production, in the new unit while keeping in the main company steady earners such as distribution of power and gas to industrial and retail customers as well as the government- subsidized renewable operations.

By making the move, the company is saying, “you’ve made our business extremely risky, so we are going to put the risky parts in a separate company,” said Deepa Venkateswaran, an analyst at Bernstein Research in London in an interview. Ms. Venkateswaran compared E.ON’s gambit to the creation of a “bad bank” to hold risky assets at a financial institution.

E.On’s share price rose about 5 percent in afternoon trading on Monday.

Mr. Teyssen said that the new energy businesses were so different from the old energy world that it was difficult for companies to run them both well. He said that narrowing the focus would make E.On and the new company it was creating “faster and more agile.” He also said that these companies would be more attractive merger and acquisition partners.

European utilities are struggling with sluggish demand for power as well as with competition from electricity generated from renewable energy sources. Renewable energy has reduced the power prices that utilities receive and has undercut the competitiveness of some traditional power plants, including those fired by natural gas.

The utilities and other heavy energy users are being pressed by mandates like the European Union’s pledge to cut greenhouse gas emissions by 40 percent from 1990 levels by 2030.

German utilities like E.On have been squeezed particularly hard by the sweeping transformation in energy use in Germany known as Energiewende being pushed by the government of Chancellor Angela Merkel. These policies include the most ambitious and costly effort in Europe to bolster renewable energy, as well as a phasing out of nuclear power stations.

E.On and others are struggling to adapt, with some shutting down both nuclear and gas-fired power plants and curtailing their investment budgets. This has created concerns that Europe may face an electricity crisis in the coming years.

E.On said it would be taking an additional €4.5 billion in writedowns this year on top of €700 million previously announced, leading to a substantial loss for 2014. In 2013, the company reported a profit of €2.5 billion on €122 billion in sales.

E.On’s strategy will be watched closely by German rivals like RWE and other European utilities trying to cope with similar problems.

E.On said that over the next year, it would lay the foundation for a new company, as yet unnamed, that would include E.On’s nuclear, coal-fired, gas-fired and other conventional power stations in Europe and Russia. That company would also hold the oil and gas production in the North Sea and in Russia and its wholesale gas business, which buys from Gazprom in Russia and from other sources under long-term contracts.

The new company would inherit most of the company’s liabilities for decommissioning its nuclear plants, in Germany and Sweden. It would also hold the hydropower business.

E.On itself would keep the renewable energy business, which is mostly wind power, as well as its wholesale and retail power units, where it hopes to nurture a growing business in providing technology for energy efficiency. E.ON would retain all of the company’s outstanding bonds.

Ms. Venkateswaran, the analyst, estimated that of E.ON’s €9.3 billion in pretax profits in 2013, €4.4 billion would be from units under the new company while nearly €5 billion would come from the greener, more predictable businesses. She said that remaining company would probably be assigned a higher valuation by investors because it is less risky.

E.On plans to retain a minority stake in the new company for several years and eventually sell it down. The company also said it was selling its businesses in Spain and Portugal to Macquarie for 2.5 billion euros, or about $3.1 billion, and that it was putting its North Sea oil and gas business under review.

RWE has already reached an agreement to sell its oil and gas production in the North Sea and elsewhere.

A version of this article appears in print on 12/02/2014, on page B5 of the NewYork edition with the headline: German Utility's New Focus.