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Germany's Energiewende ,The Losers Line Up

Politics / Nuclear Power Jul 05, 2012 - 02:51 AM GMT

By: Andrew_McKillop


Best Financial Markets Analysis ArticleEuropean business news, 3 July, took a partial break from European crisis response Stability Funds,
which have no money but nicely written "forward looking" prospectuses, to look at Germany's sinking giants of postwar reconstruction and growth - the Big 4 power producer companies E.On, RWE, Vattenfall and EnBW. These are all floundering with Germany's Energiewende transition plan. RWE has the present headlines because, after spending about 1 billion euros on its Nordsee Ost wind park in the North Sea, it finds that it cannot start production because Tenne-T TSO, the local power transport (grid) operator has not built the connector to the 48-mill 295 MW windfarm 30 kilometres out to sea.

The basic lose-lose context for the Big 4 is easy to describe. Germany's utilities are being forced to completely change their focus away from nuclear and fossil "baseload type" power production, change their previous centralized structure, and change their business models. Until as recently as 2008, the Big 4 had been spoilt by enormous profits and had racked up their borrowing, but times really have changed. All are now implementing tough cost-cutting measures, and job losses will be huge. E.On alone is shedding up to 11 000 of its workers, and the industry as a whole could axe more than 20 000 jobs by as early as 2014.

At the same time, the sector is making an increasingly chaotic, even panic driven move into the renewable energy business -- but the cracks are opening wide. The latest example of RWE and its "missing wires" is only one small example, because it is becoming increasingly clear that the promised expansion cannot progress as it was hoped as recently as last year, due to an ever growing range of factors, all of them jeopardizing further investment in solar power, and especially wind power. This (windpower) is the mainstay of RWE’s plan to more than double the proportion of power it gets from renewables by 2020, the company said in a 3 July statement.


RWE still runs three of Germany’s nine remaining active nuclear reactors, after it had to close two others immediately on Chancellor Angela Merkel’s nuclear exit order, in May 2011. We now move up to the already riproaring process of building and installing windfarms (and solar plants) from China to Texas, and from Germany, India and Denmark, to Catalonia and the UK. Increasingly, windfarm developers are forced to delay or ditch plans for profitable power plants because they can’t get a grid connection. Authorities in China, the world’s biggest wind-energy market, are blaming that issue for the nation’s first slowdown in new construction in at least eight years. China will approve "only" 16 750 MW of new windfarms in 2012, the first year of non double-digit growth since 2004; for another very simple set of reasons, windpower has to move offshore.

For RWE this already provides an excuse for it drab stock price performance. "Offshore wind is still at a very initial stage in Germany and we are losing speed before we even got started,” RWE’s new chief executive officer, Peter Terium, who took charge on July 1, said in Berlin in week ending 29 June, adding that he "took the helm in this difficult environment” where Germany is making a forced and massive switch to renewable energy. To be sure, RWE shares dropped 1.1 percent on the announcement, investors in no way being mollified by Terium's claim that the decision to close all the country’s nuclear reactors by January 1, 2022 deprives RWE of low-carbon generation, forcing him to invest billions in wind turbines and solar panels. Mired in debt left over from the go-go years, RWE has to try reviving a flagging asset-sales programme and negotiate a deal with Russia’s Gazprom on gas supply after E.On was forced to bite the bullet and settle a similar gas supply and price dispute.

In Germany as in other countries where windfarm construction has mushroomed in less than 7 years, grid operators are more than simply digging in their heels on the necessary lavish spending needed to hook up windfarms, especially offshore. German grid operator Tenne-T TSO has told RWE it doesn’t know when it will be able to link up the Nordsee Ost project, forcing the German government, this week, to agree a framework for compensating wind farm developers for connection delays.


RWE's deputy CEO Rolf Schmitz said June 27 that unless the situation improves the company won’t reach its clean-energy target., itself variable geometry and easy to cut and slice, but regarding share value the situation is stark and clear. Terium succeeds Juergen Grossmann, who earned himself the nickname 'Nuclear Rambo' in the weeks following Merkel's nuclear exit decision with his raging pleas to not abandon nuclear power - and who saw RWE lose about 60% of its market value during his five-year tenure. Firstly as gas-import deals with Gazprom went sour, then as his diversification strategy went wrong, and finally when Merkel's reactor shutdown order instantly cut RWE's earnings.

Investors remain unimpressed by the prospects for RWE, whose profits dropped 34% last year. Based on the ratio of next year’s forecast EBITDA (earnings before interest, tax, depreciation and amortization) to corporate equity value and debt, the company is now cheaper than all bar one of the members in Europe’s benchmark utilities index. E.On is not so far away in this negative hit parade and the index itself is also falling, telling investors what they know already, that the European power market is now a black box with almost unlimited spending needs, but less than certain earnings.

Terium is styled in RWE corporate communication as the providential savior, due to having hands on experience of energy supply and trading, before taking charge of the small Dutch utility Essent when it was acquired by RWE. Terium's argument is that Essent was small and easy to turn around, but a big company like RWE or the other Big 3 is harder to move than a small enterprise, the key factor now being: uncertainty. At an almost Goethian bad moment, Terium is now forced to try selling RWE assets, starting with its possible 3 billion-euro-value holdings in Egyptian gas prospecting, development and production. This comes at a moment when, on one hand gas finds in Egyptian waters are possibly immense, and on the other hand Egypt is in economic and political meltdown.

RWE has to find about 7 billion euros rather fast, but while its 3 remaining reactors are still "cash cows", the favourite term used by 'Nuclear Rambo', its two others that are already shut down are black holes on the balance sheet. Apart from shutdown costs (where Merkel will most certainly play Fairy Godmother because there literally is no alternative), the biggest challenge is finding replacement generating capacity, but the choices are shrinking like ice cliffs in an Al Gore climate crisis movie.


"New build nuclear" is becoming almost an oxymoron: costs are so high and always rising, public opinion is always becoming more NIMBY, and nuclear friendly governments, like the UK government are uncertain friends when it comes to guaranteeing massively high power tariffs for years ahead. Building new coal-fired plants is theoretically possible, but "clean coal" as defined in German Energiewende terms of cutting CO2 emissions 40% per 2020 makes coal-fired power expensive. Unfortunately, less polluting gas-fired generators are not financially viable as long as Gazprom gets what it thinks is the right price for gas, until Gazprom changes it tune (which it will) at a still unspecified moment in the future. That only leaves renewables.

As Germany shifts from nuclear power, and raises the share of renewable power to at least 35% by 2020 (from 20% today) an epic organizational and infrastructure shift is threatening the Big 4, including the decentralization to municipal level of electricity, gas, heat and water treated as a bundle of services. Germany's stadtwerke are ideally placed to work that shift as I discuss in other articles (

Building new power plants, today, is simply not enough because power distribution and tariff setting come along with plant building, making the decisions always more complex, slower, and usually more expensive. For RWE and the other Big 3 there is only one way to fight this death threat: they have to spend on new production and power transport capacity, in the second case with their partner or subsidiary TSOs. For RWE the spending need set by Terium is future investments of about 5 billion euros a year, needing something close to a miracle in generating spreads to make that viable, because spreads are currently too low to justify investments in new conventional generation assets. Adding more stress to RWE's future outlook, and that of the other Big 3, private consumer and corporate electricity user groups are increasingly demanding their own conditions on final user distribution and metering.

For RWE and its rivals the situation is despairingly similar. Rival E.On is cutting jobs and de-leveraging, in E.On's case by selling Open Grid Europe, Germany’s biggest gas distributor, for 3.2 billion euros and winds up even more beholden to Gazprom than ever, as it has had to set deals with the Russian gas giant further cutting E.On's margin on gas sales, in return for larger amounts of Russian gas. RWE has moved fastest to embrace the only possible solution, and will invest 5 billion euros in renewables in four years, mainly in sea-based wind farms in Germany and the U.K. Onshore farms will include wind parks in Germany, the Netherlands and Poland, as well as investments in biomass power stations and the expansion of existing hydropower facilities.

The strategy is easy to criticise, the details of each Big 4 plan to adapt to Energiewende are always changing and lack conviction. Germany's 1400 stadtwerke, far from stealthily, return to the high ground and win public support with no-surprise power prices and a wide range of other energy services. The German power sector is therefore a crucible of change, out of which only the cinders may show there was a Big 4 - long ago.

By Andrew McKillop


Former chief policy analyst, Division A Policy, DG XVII Energy, European Commission. Andrew McKillop Biographic Highlights

Co-author 'The Doomsday Machine', Palgrave Macmillan USA, 2012

Andrew McKillop has more than 30 years experience in the energy, economic and finance domains. Trained at London UK’s University College, he has had specially long experience of energy policy, project administration and the development and financing of alternate energy. This included his role of in-house Expert on Policy and Programming at the DG XVII-Energy of the European Commission, Director of Information of the OAPEC technology transfer subsidiary, AREC and researcher for UN agencies including the ILO.

© 2012 Copyright Andrew McKillop - All Rights Reserved Disclaimer: The above is a matter of opinion provided for general information purposes only and is not intended as investment advice. Information and analysis above are derived from sources and utilising methods believed to be reliable, but we cannot accept responsibility for any losses you may incur as a result of this analysis. Individuals should consult with their personal financial advisors.

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