* Renewables and nuclear exit have rocked business model
* Capacity being mothballed, shares have tumbled
* Potential for a merger among top players
* Sector could also copy 'bad bank' idea
By Christoph Steitz and Vera Eckert
BERLIN, Jan 21 Big problems are prompting big
ideas about reforming Germany's utility sector ranging from a
super-merger among players in the "big four" to creating a "bad"
utility to take over loss-making plants.
The business model for German utilities has crumbled over
the last three years, rocked by the country's decision to drop
nuclear energy by 2022, record-low wholesale power prices and a
boom in solar and wind power capacity that is pushing coal and
gas plants off the grid.
Shares in top listed utilities E.ON, RWE
and EnBW have shed a combined 40 billion
euros ($54.25 billion) in market value since Japan's Fukushima
disaster in March 2011 which prompted Germany to spur its exit
Their value is down 35-47 percent versus a 15-percent
decline on the broader STOXX European 600 utility index
over that period.
"The pressure for consolidation is building up and will
result in takeovers, mergers, other forms of cooperation, but
also in players dropping out of the market," said Norbert
Schwieters, head of global power & utilities at PwC.
Peter Terium, chief executive of RWE, has said the energy
industry remains "too fragmented" and faces a wave of
Some signs of movement are already emerging.
Sweden's Vattenfall this month agreed to sell its
majority stake in Hamburg's electricity grid back to the city,
giving Scandinavia's biggest utility a capital gain of at least
300 million euros.
However, finding buyers for other assets, including
loss-making power plants, could prove harder, financial and
industry sources said.
Some argue a better approach would be a merger to create a
German super utility better able to compete internationally.
EU Energy Commissioner Guenther Oettinger has voiced support
for a merger of E.ON and RWE, for example, to ensure Germany
remains a player in global energy.
In terms of valuation, E.ON and RWE look cheap compared with
international rivals. They trade at an average EV/EBITDA
multiple of 3.5, less than half the 7.5 for the global utility
sector, according to Thomson Reuters Starmine data.
One senior source close to both companies, who declined to
be named, said there was sufficient overlap between the two
companies that a merger would make sense.
E.ON and RWE both declined to comment.
A combination of the two would create a utility with a
market capitalisation of $59 billion, second only to EDF
as Europe's largest utility by market value, which is
84.44-percent owned by the French government.
While critics have argued that such a merger would do little
more than lump together companies facing the same structural
crisis, and create anti-trust issues, proponents see it as a
"In the medium-term or long term, something bigger may
happen on the generation side," said Frederic van Parijs, senior
portfolio manager at ING, a holder of E.ON shares.
"I would not be surprised if the landscape looks very
different in 5-10 years."
Germany's utility sector is no stranger to big M&A deals.
Its biggest utility, E.ON, was created through the merger of
industrial giants VEBA and VIAG in 2000.
In 2011, RWE and Spain's Iberdrola came close to a
60-billion-euro tie-up, sources said, but the plan was scrapped
due to unresolved shareholder issues and RWE's already gloomy
'BAD BANK' IDEA
Government could also play a role by creating a "bad
utility", an idea inspired by the crisis in the financial sector
where billions of toxic assets were taken off banks' balance
sheets and placed in so-called bad banks, government-backed
warehouses for foundering assets.
E.ON and RWE alone are mothballing or closing more than
15,000 megawatts (MW) of capacity, the equivalent of about 15
nuclear plants, citing low power prices and operational hours
for gas and coal plants shortened by surplus renewable capacity.
With thousands of megawatts in the red, industry experts are
discussing whether a "bad bank" model might make sense for the
"As part of this scenario, you would have a big publicly
owned utility, which unifies loss-making plants similar to a
public financing fund," said Michael Salcher, partner at
For the time being, Germany's ruling coalition has mooted a
plant-by-plant approach under a so-called 'capacity mechanism'
that would compensate utilities for keeping loss-making plants
Yet even that could be a long way off, said Roland Vetter,
head of research at CF Partners, a financial advisory firm.
"It is understandable that politicians would like to push
such a big decision as far away as possible because it most
likely will lead to additional system costs," Vetter said.
($1 = 0.7373 euros)
(Editing by Jason Neely)