FRANKFURT Faced with a plunge in profits, Germany's power utilities are having to bend to the will of the government and join the renewable energy revolution, while smartening up on the retail front with new customer-friendly energy saving products.
"The situation in the energy sector is miserable, in Germany and in the whole of Europe," Peter Terium, chief executive of RWE (RWEG.DE), Germany's second-largest utility by market value, said at an industry conference last month.
"We're all caught in the worst structural crisis in the history of energy supply."
Germany wants all its remaining nuclear plants - about 12.1 gigawatt of capacity owned by its biggest utilities, E.ON (EONGn.DE), RWE and EnBW (EBKG.DE) - shut down by 2022.
But the most immediate crisis lies with other thermal plants, many of which are now no longer profitable as subsidised renewable power output takes priority in the grid, limiting the operating hours for coal, gas and oil-fired plants and pushing wholesale electricity prices down.
These factors have led to a 60 percent drop in exchange-traded German wholesale prices since 2008 to below 0.037 euros per kilowatt hour (KWh) currently.
Closing or mothballing unprofitable plants are seen as part of the answer but regulators want many kept open due to the intermittent nature of wind and solar supplies, with capacity utilisation running at only about 10 percent for solar plants and 20 percent for wind parks, data from German energy agency DENA and industry association BDEW show.
Total generating capacity in Germany, Europe's largest consumer of electrical energy, stands at 178.3 GW, 71 GW of which is now classed as renewables, a more than 100 percent increase since 2007, according to the industry regulator.
In comparison consumption has fallen by more than 4 percent since 2007 to less than 600,000 gigawatt hours (GWh) a year, implying a requirement for generating capacity running at full tilt 24 hours a day, 365 days a year of at least 69 GW, ignoring all the periodic fluctuations in demand.
Wind and solar power accounted for 12.4 percent of production last year, coal-fired plant 45.5 percent, gas 10.5 percent, nuclear 15.4 percent, other renewables, such as biomass, 11 percent, and oil 5.2 percent.
So far RWE and larger rival E.ON have announced plans to shut or mothball at least 15 GW of capacity in gas and coal-fired plants, and RWE earlier this year said it would write down 2.9 billion euros on these assets, more than twice its 2012 net profit.
Utilities are also looking to restore their earning power by expanding both in renewables and in the retail supply side of their business, where they are adopting a more friendly image offering new energy management products such as smart metering and remote heating controls to help cut energy bills.
But that will take time. According to company presentations and internal documents obtained by Reuters, RWE and EnBW do not expect to be back at 2010 profit levels even in absolute terms before the end of the decade.
"The utilities have to move. That's an enormous feat, but it's absolutely essential," said Torsten Graf, manager of the MainFirst Classic Stock Fund (722756X.F).
And despite writedowns already taken, returns on invested capital at E.ON and RWE and EnBW will fall from an average 7.7 percent in 2013 to 6.5 percent in 2015, below the 10 percent average for European utilities, estimates from UBS and Commerzbank show.
Earnings before interest, tax, depreciation and amortisation (EBITDA) are expected by analysts on average to be down by a third this year from 2010 when profits peaked and are expected to fall further until 2016, as more plants go offline.
Meanwhile E.ON, RWE and EnBW have about 16 GW of total renewable capacity worldwide. EnBW aims to add a further 3 GW in Germany by 2020, RWE has a project pipeline of more than 10 GW but declined to give a timetable or say how much of that total is aimed at its home market, while E.ON plans to add roughly 0.7 GW to its group-wide capacity.
RWE has said it hopes its renewable activities and retail business combined will account for nearly half of its operating profit by the end of the decade, twice as much as in 2013.
Most of this, about 1.5-1.8 billion euros in operating profit, will come from RWE's retail business, which includes its regional units that sell power to end-users as well as selling energy management services to corporate and retail clients.
However, these services and the smart control products, which sell for at least 200 to 400 euros apiece, cannot make up for the decline in profits from power generation.
"If we're able to earn several hundreds of millions of euros in the next few years in these fields, then we've done a good job," RWE's Chief Operating Officer Rolf Martin Schmitz said.
(Additional reporting by Tom Kaeckenhoff and Vera Eckert; Editing by Greg Mahlich)