E.ON and RWE are posting losses due to a combination of squeezed coal and gas margins and the German nuclear phase-out
German utility E.ON posted its first ever quarterly loss and is laying off up to 11,000 workers. Compatriot RWE is up the creek following Frau Merkel’s decision to abandon nuclear power. And investors are no longer deeming these utilities a ‘safe haven’ in turbulent financial times. What is going on?
E.ON
Germany’s biggest utility has posted a net adjusted loss of €382m ($543m) during the second quarter of 2011. E.ON’s half-year profits have fallen 45 per cent and expects net income to be down to €2.1-2.6 billion this year – a drop of over 70 per cent.
Current market conditions – including overcapacity, technological change and government intervention – are making life difficult for the foreseeable future, the Duesseldorf-based company says. The planned permanent closure of nuclear facilities and the nuclear fuel tax has slashed first-half earnings by €1.9 billion.
Power generation fell by 3 per cent to 132.6 billion kWh during the first half of 2011 due to the enforced shutdown of its Unterweser and Isar 1 nuclear plants. E.ON operates six nuclear plants, with the first due offline in 2019.
By 2015 E.ON plans to generate 25 per cent of its revenue outside Europe, up from around 10 per cent today. Main targets for growth are building wind farms in North America and gas power plants in Russia. At €35 billion, however, E.ON is heavily indebted as a result of major acquisitions in recent years, and rating agency Standard and Poor’s (S&P) has put the company’s credit outlook on negative.
In order to decarbonize its generation and invest in growth areas, CEO Johannes Teyssen says E.ON will cut around 9,000-11,000 people – around 14 per cent of its workforce.
Through its co-operation with Gazprom in building the Nord Stream pipeline that will transport Russian gas directly through the Baltic Sea into Germany, E.ON is well positioned in the gas market, where analysts see the biggest growth potential in Germany’s fossil fuel power generation sector.
However, E.ON’s gas trading branch is a loss-maker because Gazprom insists on selling its gas in long-term oil-indexed contracts which, at low spot market prices, force it to sell gas at a loss. E.ON said that its gas trading loss in 2011 could be around €1 billion.
RWE
Germany’s second largest utility recorded a half-yearly profit slump of 40 per cent and recorded a net loss of €229 million in the second quarter of 2011, down from a €486 million net profit in the same period last year. RWE cites €900 million of decommissioning and nuclear fuel tax costs as a major reason why its operating profit fell 33 per cent to €3.3 billion.
The shutdown of RWE’s Biblis nuclear plant following Fukushima has reduced power output by 7 per cent compared with last year. The early closure of reactors resulted in an earnings shortfall, because RWE sold forward power that should have been produced in its two closed reactors. To meet its supply obligations the Essen-based firm has had to produce that electricity in more expensive plant or buy power on the market.
RWE operates five of Germany’s 17 reactors, with the first scheduled to close in 2016. RWE could be hit harder by the nuclear phase-out because it is less active in other markets than E.ON and relies heavily on nuclear and coal generation, which make up over 70 per cent of the company’s overall power generation share.
RWE has also been downgraded by rating agencies (Moody’s and S&P). RWE relies on lignite and hard coal for over 50 per cent of its power generation output. This also makes RWE the biggest carbon emitter in Europe and exposes it to the European Emissions Trading Scheme (ETS) more than its competitor.
RWE is weak in gas-fired and renewable generation, with portfolio shares of 20 and 5.5 per cent respectively. RWE wants to increase its renewable generation to around 30 per cent by 2025. However, RWE has debts of €27 billion and its balance sheet will struggle to shoulder much more of a burden.
RWE is looking to a partnership with Gazprom, which has announced its interest in acquiring power generation assets in Germany. Last month RWE said it had it secured exclusive talks with Gazprom that could lead to a power joint venture in Germany, Britain and the Benelux.
I somehow think that this decision to pull the plug on nuclear is only likely to be temporary, given the prospect of german consumers facing the prospect of increased power prices, workers the loss of jobs and Berlin increased costs in supporting its energy policies. Already there are calls in the ruling coalition for a special conference to reverse Merkel’s decison.
Posted by nicnewman | August 13, 2011, 12:17 AMThanks for your comments, Nic.
Will the next German government be more pro-nuclear than the current CDU/FPU coalition? Seems doubtful. Frau Merkel opted to shut them down to be popular, or at least be less unpopular. Given the highly emotive nuclear debate in Germany, would she dare risk the wrath of the voters to do a third nuclear U-turn? Wouldn’t that just hand the keys to the Reichstag to the SPD/Greens, who undoubtedly would do yet another U-turn?
Posted by timprobert | August 13, 2011, 10:36 AMIn the whole atomic industry in Germany 30,000 people are working. If you shut down an OPEL car maker facility, also 30,000 lose their job. “JOB” is the worst pro nuclear-argument you can bring. Nuclear power is capital intensive while renewable forms of energy are labour (job) intensive. For example, in Germany in 2002 some 30,000 people were employed in the nuclear industry. On the other hand, more than 53,000 people are presently employed in the German wind power industry alone. Overall, the renewable energies industry in Germany has already secured 120,000 jobs despite its as yet only small share of power generation. Further expansion of renewable energies is adding new jobs on a daily basis. Millions of new jobs could be created worldwide within the space of a few years by expanding the use of renewable forms of energy. E.ON and RWE should have invest in more reliable technology rather than in nuclear energy. Many magazines in Germany condemn RWE’s and E.ON’s mis-management and not understanding the market.
Posted by Mikkai | August 15, 2011, 12:30 PMThank you for your comments, Mikkai.
The situation that RWE and E.ON find themselves is a difficult one. They are vertically-integrated, essentially fossil fuel energy companies.
Germany has large coal reserves, but carbon prices are making coal power less attractive, and will be less so once the EU ETS is tightened post 2013. Germany doesn’t have much of its own natural gas and the power of Gazprom has squeezed RWE/E.ON’s margins to the point of making a loss.
Both utilities need to decarbonize their generation portfolios but have huge debts and they will have to sell off assets to invest, possibly to Gazprom, which has an obvious opportunity to leverage its natural gas assets by owning power plants in Europe.
Plus it’s not immediately clear whether vertically-integrated utilities can harness the same economies of scale by replacing coal and nuclear plants with wind farms. They are certainly not as beneficial as owning gas and coal assets when operating gas- and coal-fired power plants.
The traditional business model of the utility, i.e. building big power plants and wanging the electricity down a wire, needs to evolve.
Posted by timprobert | August 15, 2011, 5:20 PM