HomeBlogCould utilities have adapted quicker to the global clean energy transition?

Could utilities have adapted quicker to the global clean energy transition?

In an interview not long before the end of his presidency, Barack Obama was asked why it was proving so difficult to make the kind of radical changes people expected of his term in office.

Speaking on the Marc Maron podcast, Obama said, “Sometimes the task of the government is to make incremental improvements or try to steer the ocean liner two degrees north or south so that 10 years from now, we’re in a very different place than we were. But, at the moment, people may feel like we need a 50-degree turn. We don’t need a two degree turn. You say ‘well, if I turn 50 degrees, the whole ship turns. And you can’t turn 50 degrees.”

It seems a bit like that when thinking about the traditional utility, particularly in Europe. These often century-old institutions were happily complacent in their predictable behaviours for decades. But while events do sometimes hasten changes for government policy, it’s been a long time since anything really threatened the hegemony utilities enjoyed, until clean energy‘s momentum proved irresistible.
Peter Terium
It’s hard to be too critical of utilities who have struggled to come to terms with the extent of disruption faced thanks to decarbonisation, digitalization, distributed and renewable energy. But when looking at the timeline of cataclysmic financial losses over the last decade it does resemble more a slow car crash than a boat altering direction.

With all the money involved in these enterprises, it’s a wonder behavioural psychologists could not have been engaged at some juncture to advise managements to guard against one of the predominant frailties of human nature: denial.

Finding an official figure for the combined losses suffered by utilities both in Europe and beyond is elusive, as, to an extent, it is still happening right now. EY calculated a couple of year ago that utilities across Europe wrote off €120bn of assets because of low power prices between 2010 and 2015.

The motto seemed to be ‘gas power plants will be mothballed until morale improves – and the fad of renewable energy is seen through’. Such was the dismissive attitude to the new energy forces in town and the extent of denial.

It’s not just about the slowness in in pulling back from old lines, but also the amount of money lost by not seeing the writing on the wall sooner, and embracing new ways and businesses.

In 2014 the International Energy Agency (IEA) predicted that decarbonising the global electricity grid will require almost $20trn in investment in the 20 years to 2035, at which point the process will still be far from finished.

Hindsight is a great thing, but the timeline of utility mishaps over the last decade or so shows a real stubbornness to face up to a devastating megatrend.

Some analysts believe the old school utilities aren’t nimble enough to participate effectively in the new value chain, while others are more positive about it. The fact remains a lot of money was unnecessarily lost before the penny dropped. Could it have been minimized, or even largely avoided?

For context, look at where one of Europe’s strongest utilities was just 17 years ago.

RWE is emblematic of the under siege European utility we have come to know in recent years.

In 2001, RWE earnings before interest, taxes, depreciation and amortization, advanced approximately 40 per cent to just under $8.1bn (€6.6bn). The following year operating results were $4bn and already signs of strain and impatience with challenges to the status quo are seen.

The then RWE chairman, Dietmar Kuhnt, hit out at the EU’s proposals for an emissions trading scheme which he said discriminated against power producing companies which have already taken steps to reduce CO2à‚ emissions.

Incredible to modern sensibilities but Kuhnt issued a warning at the time that his company would cancel a new power plant, which would create 4000 new jobs, unless the European commission made significant changes to its planned environmental regime.

The power plant in question was a new lignite plant in Germany set to emit 2.9m tonnes of CO2à‚ a year less than the plant it was to replace, with a second to be built by 2008.

Kuhnt said that investment in the second stage of the plant would not go ahead if “if its profitability is jeopardised by unreasonably stringent sanctions or carbon dioxide penalties.”

Three years later, an announcement by then CEO, Harry Roels, that the company would invest €12bn ($16bn) in German electricity generation over the next 15 years as he addressed the company’s annual results press conference, didn’t indicate much of the upheaval to come, or any great fear of Brussels’ green intentions.

“It is widely anticipated that Germany will have to replace 40 000 MW of generation capacity over the next 20 years as it phases out nuclear generation and has to replace the aging facilities in its fossil fleet,” read a February 2005 news article.

‘Plans to invest some €20bn worldwide in property, plant and equipment until 2009 were also divulged as the company revealed that it had cut its net debt by €11bn in just two years.’

Two years later RWE increased its operating result by 14 per cent to €6.1bn and announced plans to modernise its existing fleet, investing around €25bn over the next five years, with a particular priority on gas turbines. If there was any appetite by the company for renewables at this time it was well hidden.

Later in the summer of 2007, the departing CEO Roels again expressed exasperation at the continuing policymaker commitment to an emissions trading scheme, telling the Times that threatened price controls by Berlin plus confusion over carbon dioxide emission cuts and break-up plans for utilities from Brussels meant that “rational arguments” were not being heard in “a very emotional discussion”.

He warned Berlin that RWE could take legal action if price controls were introduced and that such controls could result in a “heavy attack on profits, and that could lead to the investment levels being affected”. He added: “Germany has not yet answered the strategic questions surrounding energy.”

He ended his monologue by urging the Merkel government in Berlin to use its “hundreds of billions” of euros of deposits of lignite, or brown coal, to reduce its dependence on energy sources such as gas from Russia or Norway.”

Late in 2008, Germany’s highest civil court found EON and RWE to be operating a “market-controlling oligopoly” which restricts competition, more evidence that utilities were no longer going to have an easy ride.

Whatever about Brussels, in Berlin there was no clear Energiewende policy as of yet. In March of 2008, RWE Power was given approval by the Arnsberg regional government to build a new two-unit hard-coal power plant, as part of its ongoing power plant investment programme.

Despite some challenges, there was still a very much business as usual attitude to the general scene, as can be gleaned by looking at Power Engineering International’s 2010 Year in Review feature.

But then the trickle became the flow that would later turn into a torrent.

In September 2010 the company cancelled the construction of the 800 MW, EUR1.5bn ($1.9bn) Czeczott coal fired power plant near Katowice in southern Poland, citing the cost of carbon permits making it financially unviable.

Fast forward to 2012 and new chairman Peter Terium announces RWE will shed up to 2,400 jobs in an attempt to cut $1.2bn in annual costs by 2014 as part of the company’s ‘RWE 2015‘ programme.

2013’s results announcement saw the utility lost more than $3.8bn in 2012 as it wound down unprofitable fossil fuel plants due to sliding wholesale prices. It was RWE’s first loss since 1949 when the German Republic was formed.

Incidentally at the same time, Vattenfall, a Swedish utility with the second-biggest generation portfolio in Germany, sawà‚ $2.3 billion in lossesà‚ in 2013 due to this same “fundamental structural change” in the electricity market, and E.ON was faring much the same.

In 2014, the head of RWE Generation Matthias Hartung warned that more plants would close without regulatory change and the company again announced a big loss, this time $4.1bn.

In May of 2015 Terium predicted that the company would endure another two years of pain before the recovery process went into full swing. He told the Financial Times that the utility was moving through a “vale of tears” that “will last beyond this year and the next”, but that the “recovery is going to come”.

Still clinging to the wreckage of conventional power thinking he added, “There are bloodstains on our balance sheet before maintaining that power prices were “bottoming out”. “If coal picks up, and we get our act together on CO2, power prices willࢀ‰.ࢀ‰.ࢀ‰.ࢀ‰trend slightly upwards.”

“German society still needs significant conventional power as a back-up,” he added as what had been a token rear-guard action seemed to increase in fervour.

In 2016, some respite, with a positive financial result but it appeared a false dawn. “Overall, we have achieved a thoroughly respectable result for the first quarter,” said chief financial officer, Bernhard Guenther. “RWE confirms its earnings outlook for the group’s business performance this year.”
RWE management
But earnings and profits dipped significantly again later in the year.

2015 RWE and E.On released their 2014 Annual Earnings Statements, finding that the companies’ were not making a profit on its fossil-fuelled power plants. The former suffered a 30 per cent loss in profit from coal, gas and nuclear plants, and lignite mines by year end.

“Framework conditions in conventional electricity generation are deteriorating faster than we can take countermeasures” RWE Chief Executive Peter Terium said in the annual report.

Despite acknowledging that “the group is still in troubled waters”, the board decide to extend Terium’s term to 2021, believing him to be best placed to steer the ship to calmer seas.

Around this time RWE’s renewables business increased 9 per cent, however, renewables made up only five percent of the company portfolio. Moving, but moving fast enough?

The ongoing pressure led Terium to state that he expected earnings contribution of about $686m (€500m) from services and decentralised energy by the end of the decade, as RWE ‘looks to make up ground in green energy development.’

But the bad news was unrelenting. In 2015 the company failed to win an anchor shareholder and are forced to concede defeat in its bid to bring in a new outside investor from the Middle East.

In April Terium, almost pleadingly, stated that the company’s very existence was under threat if the German government opted to pursue its policy of forcing ageing coal-fired power plants to pay more for emissions.

“The so-called climate contribution for conventional power stations affects our very existence,” Terium said at the company’s annual general meeting in Essen. “This contribution would mean immediate closure for the majority of our lignite mines and lignite-fired power stations.”

“We want our company, RWE, to remain active in all parts of the value chain,” he added, as rival E.ON had already taken the plunge into splitting its company in two.

A year later, an almost unrecognisable transformation as Terium departed his role at RWE to become the head of the company’s split renewables and retail division, Innogy.

From a scenario where the CEO had been earnestly hoping for a stay of execution for thermal power, a new almost evangelical figure appeared, in the embrace of clean energy and new digital techniques ” such as a crowdfunding partnership with the aim of finding the best new start-ups to build Innogy, and the world’s clean energy future.
Peter Terium and Crowdfund
Meanwhile RWE posted a $5.98bn loss at the end of the year. By the end of the following year, Terium departed Innogy following internal disagreement on the extent of investment in the new division.

In a final recent twist, E.ON and RWE, came à‚ to an agreement on a deal that promises to transform the German energy industry.

E.ON agreed to take over a 76.8 per cent stake of utility company RWE’s subsidiary Innogy in exchange for a far-reaching range of assets from E.ON’s renewables and gas storage business.

In return RWE has been granted an effective participation of 16.67 percent in E.ON, and will pay the company EUR1.5bn.

Who would have thought at the turn of this century that RWE, such a stable and profitable traditional utility business could have experienced such turmoil and such financial loss. The response of the company almost falls into the Kàƒ¼bler-Ross model – otherwise known as the five stages of grief, denial, anger, bargaining, depression and acceptance.

Ultimately some of the financial loss involved might have been rescued if the company had reached the acceptance stage much sooner.

Now the dust is beginning to settle, we wait to see what the new, nimbler and more savvy utility will do next in a much changed landscape.