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Germany's Biggest Utility, E.ON Is Divesting Fully From Centralized Power Plants

German Utilities and Power Plants

Executives from E.ON, Germany’s biggest utility, announced plans to leave the centralized power business in order to focus exclusively on distributed energy and “empowering customers.”

In a strategy approved by the utility’s advisory board yesterday, E.ON is preparing to split into two separate companies sometime next year. The new (as-yet-unnamed) company will take on the company’s coal, gas and nuclear assets, as well as its trading business and hydropower plants.

Once the spinoff is complete in 2016, E.ON will focus exclusively on renewable energy, energy efficiency, digitizing the distribution network and enabling customer-sited energy sources like storage paired with solar. The reformed utility will be active in Europe, North America and Turkey.

“We’ve now come to the conclusion that it will become increasingly difficult for a company with a broad portfolio to be successful and to grow in both the new and the conventional energy world,” said Johannes Teyssen, E.ON’s CEO and board chairman, during a press conference this morning.

E.ON’s dramatic move comes one year after Germany’s second-biggest utility, RWE, announced plans to completely transform its power delivery business in favor of a “prosumer” business model.

The new spinoff company will own significant upstream oil, gas and coal operations around the world, as well as 51,000 megawatts of fossil fuel power plants in Europe and Russia. The transformed E.ON will have 33 million customers, more than 600,000 kilometers of distribution wires and 15,000 megawatts of renewables.

In his presentation to investors and reporters this morning, Teyssen described how the “new energy world” is forcing E.ON to change: 

Until not too long ago, the structure of the energy business was relatively straightforward and linear. The value chain extended from the drill hole, gas field, and power station to transmission lines, the wholesale market, and end customers. The entire business was understood and managed from the perspective of big production facilities. This is the conventional energy world familiar to all of us. It consists of big assets, integrated systems, bulk trading, and large sales volume. Its technologies are mature and proven.

This world still exists and will remain indispensable. In the last few years, however, a new world has grown up alongside it, a world characterized above all by technological innovation and individualized customer expectations. The increasing technological maturity and cost-efficiency and thus the growth of renewables constitute a key driver of this trend. More money is invested in renewables than in any other generation technology. Far from diminishing, this trend will actually increase.

At the same time, the costs of some renewables technologies — such as onshore wind farms — have sunk to parity with, or below, those of conventional generation technologies. We expect that other renewables technologies could become economic in the foreseeable future.

Renewables aren’t just revolutionizing power generation. Together with other technological innovations, they’re changing the role of customers, who can already use solar panels to produce a portion of their energy. As energy storage devices become more prevalent, customers will be able to make themselves largely independent of the conventional power and gas supply network.

The proportion of customers that want to play a more active role in designing their energy supply is growing steadily. Above all, they want clean, sustainable energy that they can use efficiently and in a way that conserves resources.

E.ON will lose $5.5 billion this year, largely due to financial troubles with its conventional power business. RWE lost $3.8 billion last year for the same reason. Because of German laws that give solar and other distributed renewables legal priority on the grid, wholesale prices for coal and gas have spiraled downward and decimated the value of centralized power plants. Falling consumption is also hurting sales in Germany and throughout Europe.

Peter Terium, the CEO of RWE, described it as “the worst structural crisis in the history of energy supply.”

In his speech this morning, Teyssen recognized those challenges. But he also framed E.ON’s shift in a positive way.

“We’re already experiencing how difficult it is to combine these two very different cultures in a single organization. And we have to assume that the new energy world will become even more dynamic and diverse than we can imagine today,” he said.

E.ON executives say the company will not shed any jobs in the transition. The future E.ON will still retain 40,000 employees, while the remaining 20,000 will work in the conventional power business.

Shareholders of the new company are expected to get a 50-euro-cent dividend, which is about one-third of the total amount of the dividends paid out between 2008-2010.

Photo Credit: German Utilities and Central Power/shutterstock

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Bas Gresnigt's picture
Bas Gresnigt on Dec 4, 2014 9:08 am GMT

About a year ago the big utiliites made an initial offer to deliver all NPP’s (incl. decommission/waste funds, stopping the lawsuit for compenstaion for the sudden closure of NPP’s after Fukushima) for free to government. In the negotiations that would follow, I assume they were prepared to deliver some €billions extra to government. Merkel, being an excellent politician, flatly refused.

So E.ON couldn’t get rid of the ugly smell of nuclear. Being a CO2 producer doesn’t help either nowadays.
They lost the sympathy of German public (hence decreasing market share) in their decades long fight against the Energiewende ideas. Now the 100% renewable utilities, such as village Schönau, are booming delivering all over Germany.

As the name E.ON has this bad smell in Germany, I think that it is better if the board assigns that name to the power plant branch. The renewable energy branch starts in arrears with it’s competitors, if they keep the name E.ON.

Note that Vattenfall is strugling too. They try to get rid of their coal power plants as well.

Bas Gresnigt's picture
Bas Gresnigt on Dec 4, 2014 10:53 am GMT

….close some of it’s coal plants … may not be an option since they must get approval …
If the regulator, dena, doesn’t approve then dena compensates all losses until approval. However:
– dena will approve as there is overcapacity; and
– approval by dena implies that the plant is no longer allowed to deliver electricity.

When Merkel closed 8 NPP’s immediately after Fukushima, dena arranged (paid) for 2 mothballed power plants to go in standby mode during the winter months. During next winter one became spinning reserve for a few weeks. It never delivered electricity.

Capacity market
The descripton of the capacity market at your link does not fit with the free electricity market here:  Always ongoing trading between recognized parties (utilities, factories, traders, wind owners, etc.) in chunks of ~15minutes; intra-day, next-day, etc.  incl. years ahead.

After repeated loud requests of the incumbent utilities, Merkel installed a commission of inquiry. So little will change as the present regulations are cheaper for the citizen and German grid is very reliable.

Bas Gresnigt's picture
Bas Gresnigt on Dec 4, 2014 4:02 pm GMT

Roger,
I agree that calling the power plant branch E.ON would be better. But for another reason, see below.

The E.ON board estimates that the power plant branch will decrease greatly in Germany during next decades. In order to survive, they should to find merges in countries in which the electricity market is far behind (USA?).

Note that Vattenfall (one of the other big 4 utilities) tries to sell it’s German coal & lignite power plants (for a very low price).
And that last year the utilities made an initial offer to sell all NPP’s for free to German government (incl. waste/decommisson funds). They were even prepared to pay some €billions if government would accept.

So the 4 major utilities consider their NPP’s in Germany to be a significant negative asset now.
Not strange as these NPP’s have an ugly smell in Germany and cause that their customers run away to the 100% renewable utilities. So those are booming, while E.ON, etc are loosing market share.

Bas Gresnigt's picture
Bas Gresnigt on Dec 4, 2014 9:17 pm GMT

The real question is, why is E.ON doing this?”

They loose German consumers as customers because they operate/own those NPP’s and coal plants.
So it is either something like this, or face collapse over ?~5 years?
See my other remarks below.

Bas Gresnigt's picture
Bas Gresnigt on Dec 4, 2014 10:04 pm GMT

“Why is E.ON breaking up the company?”
To save at least the renewable branche for bankruptcy.

Germany gets ~74% of it’selectric from coal, NG, oil and nuclear.
It’s now ~70%.

What … if E.ON and RWE file bankruptcy?”
Let’s assume E.ON files bankruptcy (they won’t go at the same time).

You need approval from dena (the regulator) to close a power plant. Dena has 6 months to make a decision. So dena will not grant the request to close of the trustee in bankruptcy (receiver) for those power plants that are needed to ensure electricity supply.

Dena will compensate all losses for the power plants for which she refuse the closure request. And in the mean time look for other solutions (mothballed power plants, speed up renewable as in 2011, etc).
The trustee in bankruptcy will try to sell those power plants which are somewhat more attractive because dena judged them to be critical.

Note that the grid is operated by separate companies, so the grid is not affected when E.ON and/or RWE file for bankruptcy.
So electricity delivery is guaranteed.

Further a rigid utility less. One that didn’t realize in time that customer likes are most important.

Society needs flexible customer oriented utilities that want to reach highest customer satisfaction.
It’s clear that many utilities E.ON, SCE (S-California), etc. don’t fit to that profile.
So either they change or they should vanish.

Jean-Marc D's picture
Jean-Marc D on Dec 8, 2014 9:24 pm GMT

You’re really asking why they’d do that ??

They get guarenteed price from renewable, they can make a profitable business here. Nobdy is listening to their laments that even though conventionnal power is still needed, they are only getting massive losses from it and if they keep the conventionnal power, it’s probably the whole company that will go down or at least all the profits they could do that will disappear.

So it’s much better for them to put the non-performing part in a separate “bad bank” entity, and wash their hands out of it, let the German government handle the consequences, the cost once it’s bankupt of keeping it running at a lost to keep the lights on. It seems that many pro-renewables love the idea of things going that way, let me say that they just have no idea of what will happen when it’s the government that will own the problem. Suddenly politician will care about the true accountability for what’s happening financially.

Jean-Marc D's picture
Jean-Marc D on Dec 8, 2014 9:51 pm GMT

Electricity delivery can be guaranteed only when enough plants are available to produce it. Also for network reasons, it may be impossible to transport it from too far away (does happens sometime already that there’s enough electricity in the nort of Germany, but that some units in the south must be left running).

At the start of this evening the power produced by conventionnal units reached about 60GW because wind was only at 5.8 GW. Of course solar was 0 at 6PM. This morning 12 GW were unavailable for various reason, it could just as well have been this number in the evening, so this means that security of supply today in Germany could only be garanteed only with at least 72GW of conventionnal power. And we’re just seeing a standard cold winter day with low wind, but not the most exceptionnal cold winter day and not the lowest wind production level we would expect to see at least once a month. Those numbers also include nuclear producing at about 12 GW.

Well, those numbers tell me that if the current nuclear is removed, then Germany needs to keep almost all of it’s current fossil units running to not risk a country wide blackout. And someone will have to pay for that, even though 95% of the year 10 to 20GW of those units will not be required, so will find nobody to buy their electricity.

Bas Gresnigt's picture
Bas Gresnigt on Dec 9, 2014 12:45 am GMT

…if … nuclear is removed, then Germany needs to keep almost all of it’s current fossil units…
Of course not:

1. There is overcapacity. So plants that are less competitive make losses and utilities will close them. E.g. the 1.3GW Grafenrheinfeld NPP which is closed prematurely for economic reasons (=losses).

2. All base-load plants will be replaced, as those cannot compete.
They will be replaced by:

– by flexible plants such as lignite plants that use the circulating fluidized bed process, which burns at low temperature. Apart from the much higher efficiency, lower operating costs, and cleaner burning (little NOx, etc);  those plants can run at 20% of their capacity and have the ability to up- and down-regulate fast. That makes them much more competitive.

The low operating costs are caused because the fuel is cheap as only a big digging machine and conveyer belts are needed. And the low burning temperatures imply less maintenance.

– unmanned peaker plants (mainly gas). 
These run only during some hours when needed (there is one ~30km from my house).

– Large grid battery storage facilities (they are installing already a few in Germany).
As those batteries become cheaper (~8%/a?), you may expect much more capacity will be installed in coming years. Especially since pumped storage and peaker plants do not become cheaper or only a little.

Bas Gresnigt's picture
Bas Gresnigt on Dec 10, 2014 6:39 pm GMT

@Roger,
Your cost picture (below) needs additions.
According to EU experts the 3.3GW NPP at Hinkley will cost  £24B = ~$36B.
33GW base-load would cost $360B, with 35% economy-of-scale, and 15% spare (CF 90%): ~$300B.
So the ~$32B extra CGT for renewable is not much.

Consider also the higher operating costs of NPP’s compared to wind & solar.

Estimated electricity costs in the two situations:
1. Nuclear
Correcting for the above and the since 2012 inflation corrected (2%) guaranteed price for Hinkley’s electricity during 35yrs, delivers:
2023 $140/MWh; 2030 $160/MWh; 2040 $190/MWh (halfway guarantee period).

Add the loan guarantee, liability, decommission and waste subsidies.

2. Renewable
Based on German FiT’s + long term price decreases (8%/a PV, 3%/a wind):
1Mw PVsolar: 2023 $57/MWh; 2030 $32/MWh.
Rooftop solar: 2023 $80/MWh; 2030 $45/MWh.
Offshore wind: 2023 $148/MWh; 2030 $120/MWh.
Onshore wind: 2023 $87/MWh; 2030 $70/MWh.

Add your $6/MWh for extra CGT, and subtract that wind/solar have only 15/20yrs guarantee.

So you may understand the conclusions:
– of Londen city financial analysts who called the Hinkley deal insane;
– that UK going nuclear will become >2 times more expensive than Germany going renewable.

Bas Gresnigt's picture
Bas Gresnigt on Dec 10, 2014 7:58 am GMT

May be some rich US utility can buy the divested power plant company?

Though they may loose some $B in the end, they can learn valuable lessons by operatiing in the most advanced big electricity market place & regulatory environment in the world.
The Germans are 10 – 20years ahead 

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