Germany’s Energy Transformation in Action

RWE, Germany’s largest power producer, has decided to depart radically from its traditional business model based on large-scale thermal power production. Henceforth, the company will “create value by leading the transition to the future energy world”, according to confidential strategy documents.

RWE is one of Europe’s biggest energy companies, with 2012 sales of €50 billion. It is also one of the continent’s largest emitters of greenhouse gases. The company has 25 million customers, mainly in Germany, the UK, the Netherlands and the Czech Republic.

Its new course is likely to have a profound impact on the European energy sector. A new “Strategic Roadmap” discussed at a recent Supervisory Board meeting in Warsaw and a strategic document called “RWE’s Corporate Story”, written by the management and still to be discussed inside the company, make one thing clear: The company’s leadership has accepted that it needs to radically change course if it wants to survive in the new energy world created by Germany’s and the EU’s “Energiewende.”

That is a big step for a company that has traditionally relied heavily on its coal-fired and nuclear power production business.

The reason for this acknowledgment of reality is simple, according to the Strategic Roadmap: “The massive erosion of wholesale prices caused by the growth of German [solar] photovoltaics constitutes a serious problem for RWE which may even threaten the company’s survival” (link added).

Responding to political pressure

According to the strategy papers, RWE’s new mission is to “create value by leading the transition to the future energy world”. One of RWE’s targets will be to “push Europe’s energy transition”.

This is all the more surprising as Peter Terium, the 50-year old Dutchman who has been CEO of the German energy giant since July 2012, was among one of ten CEO’s of European energy companies who recently gave a joint press conference in Brussels in which they warned that the EU’s energy and climate policy is having a disastrous effect on the power production sector, even leading to the risk of major blackouts.

“We cannot have a renewables society without security of supply”, Terium said on that occasion, according to a report from Reuters. “The S.O.S. signal that we are sending today is about the need to have a power market design that catches up with this reality.”

That press conference may have given the impression that the energy industry leaders were fighting to retain the traditional market structure. However, RWE’s strategic documents make it clear that RWE, public declarations notwithstanding, has accepted that a new market structure is emerging.

Energy transformation in action

The strategy papers discuss in some detail how RWE expects its five main business sectors –- renewable energy production, retail, grids, trade and conventional energy production – to evolve.

In renewable energy production, RWE’s management has decided that the company will not be able to play a leading role in the new growth sector of decentralized, subsidized power production. This part of the market, however, will remain “the only growth segment in the European power generation market” for the foreseeable future.

“In a low interest [rate] environment, it will not be possible for RWE to generate sufficient return within this subsidised industry. Our cost of capital will not be competitive against funding from private and institutional equity investors”, says the strategy document.

Instead, the company has decided that it wants to become an “enabler” in the renewable energy sector.

According to the strategy paper, “The guiding principle is ‘from volume to value’ with technologies ranging from large-scale offshore wind and hydro to onshore wind or photovoltaic. But we will no longer pursue volume-[driven] or percentage-[driven] targets in renewables (x TWh/y % in 2025).

“We will rather leverage our skills set by taking a ‘capital light’ approach. Based on funds sourced largely from third parties, we will position ourselves as a project enabler, operator and system integrator of renewables.”

New vision for retail

In addition to defining a new role in renewable energy, RWE’s management has also laid out an ambitious new vision for its retail business. The European energy retail sector is “about to undergo a massive transformation in the coming years”, says the strategy paper. RWE has a strong position in this sector with a “stable and huge customer base of almost 25 million customers across Europe which provides robust cash flows”.

In addition, RWE needs to “develop an innovative and profitable prosumer business model (…) as we see a billion-euro market emerging alongside our traditional value chain”.

In addition, “in a highly uncertain and volatile business environment, we need to transform ourselves from a ‘risk mitigation’ to an ‘uncertainty management’ company.”

All of this implies a major change compared to utility companies’ traditional way of doing business, which was based on volume sales to captive customers.

Ultimate and irreversible distortion

When it comes to its huge power generation assets (gas-fired and coal-fired power plants), the strategy paper notes that “Portfolio churn is not an option any more. We have to live with our assets and make the best of them. This implies scaling down and restructuring our portfolio to maximise its flexibility and efficiency. We understand that in a market still oversupplied with capacity cost, leadership and efficiency will be key differentiators in competition.”

This means that RWE will not invest anymore in new conventional power plants. The main function of those plants in future will be to serve as backup capacity for when there is not enough wind and solar power in the system: “In the long-term, RWE with its present asset base should find its role as the most efficient capacity and base-load provider for Europe.”

RWE expects governments to take a leading role in organizing “capacity markets” to serve as backstop for renewables and it hopes to play a significant role in these markets: “Whatever market design replaces the present one, it is very likely that it will contain a significantly higher level of regulation and administrative intervention. That means that RWE needs to offer its expertise in order to contribute to the political opinion forming process in a credible, trustworthy but also self-confident way.”

In short, RWE – long seen the “dirty man” of European energy – seems to have accepted that its old power stations will be playing second fiddle in the energy world of the future.

Editor’s note: This article is adapted from Energy Post where it was first published.