Tuesday, 5 November 2013

“Energiewende” – energy transformation............................ reducing dependence on fossil fuels and changing the role of the large traditional utilities.

From a recent article in the Financial Times:

Last updated: August 5, 2013 8:52 pm

Europe’s utility groups forced to find new business models

The World's Largest Wind Farm©Bloomberg
The UK produces more offshore wind energy than the rest of the world combined
The small village of Dorfen in Bavaria in Germany is no stranger to renewable energy. For decades the community sourced its electricity from the water fed out of a local lake. Today, its sources are still renewable but principally generated from local bioenergy plants as well as from more than 600 privately owned solar panels on the roofs of houses, offices and farms.
Last year, the share of electricity produced from renewable sources by the local utility was 81.5 per cent, among the highest in the country. In the summer months, a substantial share of the electricity generated from solar panels is fed back into the national grid to be used elsewhere.
Dorfen is a prime example of the “Energiewende” – energy transformation – the German government is trying to push through as it tries to reduce its dependence on fossil fuels. It is committed to closing its nuclear power stations by 2022 and at the same time it wants to generate at least 35 per cent of its electricity from renewable sources by 2020.
Yet Dorfen’s experience of electricity generated locally by households and businesses also underlines one of the consequences of the new energy world order: how the focus on renewable energy is changing the role of the large traditional utilities. While the dominant players including Eon and RWE are investing in renewables, their main sources of supply remain gas and coal.
The decision to dispense with nuclear energy has put pressure on balance sheets but the industry must come to terms with it, say executives.
“We are beyond the point where we are feeling sorry for ourselves. While it is frustrating when we have visitors from other countries who tell us they cannot believe we are shutting down world-class power plants, we’ve accepted that this is what society wants,” says Marcus Schenck, chief financial officer of Eon in a recent interview with EY.
“We now have people coming to our plants and seeking operational and dismantling advice. We are partially monetising this and we need to seek out more opportunities around it,” he adds.
Times are tough for the European utilities sector. Nearly 15 years after the power markets were liberalised, companies are being forced to find a new model of working in the face of increased regulation and a changing energy mix with pressure to build low-carbon generation.
Weak demand for power thanks to the long-running economic crisis is perhaps an even bigger factor. The International Energy Agency estimates total EU energy demand is expected to decline by 2 per cent between 2010 and 2015, compared with a 10 per cent rise globally over the same period.
Moody’s, the rating agency, warned last November that wind and solar plants were having a “profound negative impact” on Europe’s gas and coal generators, noting that their business models were being “severely disrupted”.
This year, in March, Eon called on governments to help operators of gas-fired power plants. Other utilities including Denmark’s Dong Energy and Norway’s Statkraft also warned that more gas-fired power plants were set to close in Europe.
Last month, Swedish state-owned energy group Vattenfall said it would split its operations, seek business partners and slash costs and investment after taking a $4.6bn hit to its asset values due to “increasingly gloomy market prospects”.
There is no visibility as to what will happen to renewables past 2020, policy is not clear and there is a huge technical change going on aroundcompanies
- Dieter Helm, economics fellow at New College, Oxford
The situation is particularly acute in Germany where the reforms have seen a flood of subsidised electricity produced by wind and solar power plants drive down wholesale prices during times of peak demand, eroding the profitability of gas-fired power plants in particular.
Nor has the sector delivered a great performance on the stock market recently. Research from Citi notes that Europe’s utilities have underperformed the market by about 35 per cent since 2008. Its analysts warn that the wider use of renewables and an increased focus on energy efficiency could lead to a “50 per cent reduction in electricity volumes sold by traditional utilities within the next couple of decades”, prompting new business models to emerge.
Executives have to determine “what is an appropriate strategy in a world of uncertainty”, says Dieter Helm, an economics fellow at New College, Oxford. “There is no visibility as to what will happen to renewables past 2020, policy is not clear and there is a huge technical change going on around companies.”
Many of Europe’s utilities are still dealing with the legacies of a mergers and acquisition boom that gripped the sector before the financial crisis in 2008 as companies tried to boost their purchasing power, secure fuel supplies and target overseas markets. National champions were born. However, when the downturn took hold, many utilities found themselves with relatively high debt.
“The model of creating a pan-European energy utility major, with operations spread across different regions and regulators failed to deliver in the downturn when diversification did not seem to be a help,” says Peter Atherton, analyst at Liberum Capital. “Utilities are also local businesses so the expected economies of scale from mergers and acquisitions did not materialise. Since the crash they have either stopped growing or shrunk.”
Rating agency Fitch recently warned the five largest Fitch-rated utilities – Eon, RWE, France’s EDF, Italy’s Enel and Spain’s Iberdrola – could suffer most as they “have stubbornly high net debt, leaving them with limited rating headroom if conditions deteriorate further”.
Today, faced with sluggish demand and low power prices, companies are refocusing on those areas where they see growth potential and selling assets to free up debt and raise capital. Many are also investing heavily in renewable sources of generation.

In depth

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One of the biggest changes already taking place on the regulated side of the industry is the entrance of new players as utilities look for external partners to reduce the cost of building assets. In the UK, for example, EDF is looking for a new partner for nuclear new-build.
“We will see a more diverse set of owners for [regulated] assets and a more diverse source of capital such as infrastructure funds coming in once the assets are built,” says Nick Luff, group finance director at Britain’s Centrica.
“There is not enough capital for traditional utilities to own them,” he adds.
In the UK, the electricity market reform being pushed through by the government as it tries to meet ambitious carbon reduction targets and keep the lights on is changing the way the market works. According to some, the introduction of contracts for difference – which seek to safeguard returns for nuclear and renewables developers by guaranteeing them a fixed price for their electricity over the lifetime of a plant – heralds a return to a regulated market and raises further questions.
“The end-game for the generation business – if the EU keeps on with trying to reduce carbon emissions and promoting renewables – is a re-regulation of the market,” says Liberum’s Mr Atherton.
Copyright The Financial Times Limited 2013.

Europe’s utility groups forced to find new business models - FT.com

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