IN DEPTH: Utilities fight for survival

The meteoric rise of renewable energy is threatening the viability of major European utilities, raising the spectre of widespread blackouts and even higher electricity bills.

Peter Terium, the boss of Europe’s second-largest utility, RWE — which lost €2.76bn ($3.8bn) last year after a €2.5bn net profit in 2012 — describes the situation as “the valley of tears”.

“There is no gas power plant making money in [mainland] Europe,” explains E.ON board member Leonard Birnbaum. “[Margins] are such that the entire gas generation fleet is bringing tears to our eyes.”

The problem for fossil-fuel-reliant utilities is that wind, solar and nuclear energy get priority on national grids. On days with plenty of sun and wind, little electricity is required from coal and natural-gas plants, forcing many to be switched off.

And as the proportion of renewables on the grid continues to grow, the prospects for these utilities look bleak.

“We certainly made mistakes,” admits Terium. “We went into renewable energies late — maybe too late.”

RWE and others have been caught out by the faster-than-expected build-up of renewables. Now they would like to make significant investments in profit-making green energy, but they do not have the funds to do so — and with huge losses stacking up, may not be able to get the finance they need.

The speed at which fossil-fuel plants are becoming loss-making is so great that utilities will not be able to endure it for long, warns Birnbaum.

Consequently, natural-gas and coal plants are being mothballed across Europe at a breathtaking pace. In the Netherlands, RWE has closed its state-of-the-art Claus C combined-cycle gas plant, which it opened less than two years ago.

“With an efficiency of nearly 60%, it has the lowest emissions possible for fossil-fuelled power stations,” says Terium. “And now we’re mothballing this power plant, because it is being forced out of the market by subsidised solar power and is therefore making losses. Accepting this is difficult.”

RWE and E.ON have told Germany’s federal network agency, BNetzA, that they want to mothball 5GW and 4GW of fossil-fuel capacity respectively. In addition, E.ON said last month that it wants to shutter 13GW, or a quarter of its European fossil-fuel fleet over the medium term.

utilities+panel.jpgSweden’s Vattenfall wrote down fossil-fuel assets worth SKr29.7bn ($4.61bn) last year, pushing its 2013 result to a SKr13.54bn loss, reducing its chances to invest heavily in renewable energy.

But nothing tops the pain of France’s GDF Suez, which announced losses of €9.74bn in 2013 and acknowledged impairments of €15bn, mostly deriving from European power assets.

“The situation regarding energy production and natural-gas storage in Europe has unfortunately deteriorated both profoundly and also durably,” says GDF Suez chief executive Gérard Mestrallet.

According to analysts, about 50GW of fossil-fuel generation will have to be mothballed in Europe by 2017 if utilities want to maintain their 2012 profit levels. But if such a large amount of baseload capacity is closed down, there may not be enough back-up for when the wind isn’t blowing and the sun isn’t shining, which would lead to blackouts.

The continent’s top utilities have made a gross misjudgment, according to a recent Greenpeace report, Locked in the Past — Why Europe’s Big Energy Companies Fear Change.

Not only have they failed to jump on the renewables bandwagon, it says, but they have overspent on a massive and unnecessary 85GW of fossil-fuel capacity build-up over the past ten years.

“Europe’s energy companies are wounded animals with bleeding profits and a gloomy outlook,” says Greenpeace’s EU energy expert, Franziska Achterberg. “So far, their response has been to vent their rage at renewables and lobby aggressively against any policies that help secure an energy transformation.”

The stance of some utilities has indeed raised eyebrows.

Ignacio Galán, chief executive of the world’s largest wind-power operator, Iberdrola, has repeatedly rallied against Spain’s solar sector, and in particular concentrating solar power, which he describes as inefficient and costly. His strategy appears to have backfired spectacularly — after a series of regulatory changes and cuts to solar support, Spain also imposed brutal cuts to wind subsidies.

Iberdrola and 11 other utilities, including GDF Suez, E.ON and Italy’s Enel — many of which are significant green-energy investors — formed the so-called Magritte Group last year to lobby for an end to renewables subsidies in Europe, arguing that they are pushing up power prices and distorting the market.

Worried about their sinking market value and lack of profits, the group’s members also object to an EU renewable-energy target for 2030, lobbying instead for only a single binding target for greenhouse gas emissions (along with the retention of fossil-fuel subsidies).

While the Magritte Group’s arguments may have gained some traction within the European Commission, judging by its recommended 2030 targets, the utilities must know that they cannot stop the rise of renewables. So what can they do to save their businesses?

Franziska-Achterberg.jpgWell, in the short term, utilities have been cutting costs — reducing staffing levels, limiting capital expenditure and, perversely, divesting renewables projects.

For example, late last year, RWE announced it would cut 6,500 jobs and vastly reduce its investment programme in 2014-16.

In the longer term, many utilities are pinning their hopes on the introduction of capacity markets, which would see companies paid to keep fossil-fuel capacity idle, to be switched on during shortages of wind and solar energy. Full or partial capacity mechanisms are already in place in Spain, Ireland, Lithuania and Greece, while France is moving to establish one for peak demand from 2015.

“We will keep this [loss-making] capacity in the grid as back-up only if those plants also make money,” Birnbaum cautions.

Without capacity markets, says Terium, “the lights will go out in Germany”.

There were predictions of blackouts in the country when eight nuclear plants were shut down following Japan’s Fukushima disaster in 2011, but they did not materialise. In fact, Germany has since become an even greater exporter of energy.

German energy minister Sigmar Gabriel has told utilities he will meet them in the first half of this year to discuss capacity mechanisms, yet he clearly rejects the creation of a fully fledged capacity market, instead suggesting that the government investigate which regions need such a mechanism. “We won’t include all conventional [fossil-fuel] power plants in a capacity market. That would be a bit expensive. We won’t do that,” he recently told an audience of industry heavyweights, indicating that another layer of energy subsidies would only add to the country’s already-high electricity bills.

Studies have warned that a capacity market would cost several billion euros a year in Germany alone, but Birnbaum says such figures are overblown.

“Capacity markets won’t make any power plant operator rich,” he tells Recharge, before declining to say how much he thinks the mechanisms would cost.

Despite the pressure from the loss-making fossil-fuel assets, E.ON chief executive Johannes Teyssen said last month that renewables has become a “mainstay” of the company’s earnings and praised its wind fleet as one of the industry’s most reliable and profitable.

With more than 5GW of wind and solar capacity on its books, E.ON is actually among the world’s leading renewables players, with green energy representing one of the few bright spots for E.ON in its 2013 financial report, Teyssen admitted. The utility has earmarked 27% of its overall investments in 2014, or €1.3bn, for its renewables expansion, with most of that going to the Amrumbank West and Humber offshore projects, as well as onshore wind farms in Europe and the US.

Nevertheless, in an ad-hoc survey among an audience of about 300 energy executives during a recent Berlin conference organised by the Handelsblatt newspaper, 60% of those polled said they did not expect E.ON and RWE to survive the current crisis.

Those 60% don’t know E.ON well enough, Birnbaum says.

But he does acknowledge the difficulties ahead. “As operators, we have already reconciled ourselves with the fact that in the conventional [fossil-fuel] sector, we will lose the earnings we had in past years.”

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