January 16, 2012 / 12:45 PM / 6 years ago

Analysis: Germany's utilities must learn to get smaller

FRANKFURT (Reuters) - Germany’s super-sized utilities need to reinvent themselves over the coming years, as a government-ordered nuclear exit forces them to reduce dependency on their home market, sell assets and rejig their energy portfolios to become more competitive.

Germany’s fast-track decision to phase out nuclear power following the Fukushima disaster last March raised prospects that the country’s energy mix would quickly become greener.

The only result so far, however, has been pain for Germany’s utilities, the key players in the planned energy shift, which have had to book billions of euros of writedowns, cut thousands of jobs and watch their share prices plunge.

E.ON and RWE are selling assets or raising capital worth a combined 26 billion euros ($33 billion). The groups are buckling under long-term debt loads totaling 90 billion euros.

This will make it increasingly difficult for the companies to keep investments high, analysts say.

The challenge for both will be to reconcile their need to spend on new technologies with keeping existing businesses profitable while chipping away at their debt.

“There are few options for utilities right now,” said Peter Wirtz, analyst at WestLB. “It’s not really about growing in a healthy manner, but shrinking in a healthy manner.”

Germany has said it will fully exit nuclear power by 2022, and the country’s utilities will be busy plugging the resulting hole in their production portfolios.

Nuclear power accounted for 45.1 billion kilowatt hours (kwh), or nearly a quarter of E.ON’s owned generation in the first nine months of last year. At RWE that share reaches nearly a fifth.

Compounding the challenge, growth in their home market will be hard to achieve as energy needs in Europe’s biggest economy are expected to fall in the future.

U.S. oil group ExxonMobil (XOM.N) expects primary energy need in Germany to fall to 415 million tonnes in coal equivalents in 2030 from 473 million tonnes in 2010, a drop of 12.3 percent.

“The situation will remain tense at least for the next 3-4 years,” said Helmut Edelmann, director of utilities at Ernst & Young.


One major hope for utilities is renewable energy, a business area which analysts say they have long neglected.

RWE’s renewable unit Innogy accounted for 214 million euros, or just 3.4 percent, of the company’s earnings before interest, tax, depreciation and amortization (EBITDA) in the first nine months of 2011.

At E.ON, renewable energy accounted for 16.6 percent of adjusted EBITDA.

Pressure to keep down investments, however, could make an expansion into green energy harder.

“RWE, for example, is banking on promising new areas like energy efficiency and electric mobility which are still a long way off but already claim a lot of investment,” Edelmann said. “Whether or not there is a valid business case needs to be proven.”

RWE slashed its investment plans for 2011 by up to 1 billion euros to roughly 7 billion euros. E.ON also cut investment by more than a fifth in the first nine months of the financial year 2011.

“The energy shift is no picnic,” said LBBW analyst Bernhard Jeggle, warning investment in renewables would suffer in the near future.

    RWE says it plans investments of about 5 billion euros in green businesses over the next four years while E.ON aims to spend 7 billion euros over the next five years, unchanged from what it spent over the last half decade.


    A second pillar of potential growth is expansion into foreign markets.

    E.ON has said it aims to generate a quarter of adjusted EBITDA from outside Europe by 2015 at the earliest. Turkish Energy Minister Taner Yildiz said on Monday that E.ON wants to invest in the energy sector in Turkey, with a particular focus on power generation, and is seeking Turkish partners.

    But crucial setbacks in recent weeks highlight how tough it will be to tap new growth areas.

    RWE in December said talks with Russia’s Gazprom (GAZP.MM) about power production ventures had failed while E.ON lost a bid for Portugal’s stake in EDP (EDP.LS) -- a move that would have given it exposure to the fast-growing Brazilian market and increased its renewables reach.

    Even E.ON’s deal last week with Brazil’s MPX Energia MPXE3.SA, in which it took a 10 percent minority stake in the company, was greeted with caution by analysts.

    “In the end, the company cannot focus on one area. It also has business areas which it needs to keep sustainable. If the current portfolio is neglected, a company can run into a trap,” WestLB analyst Peter Wirtz said.

    Without a clear path to grow their businesses, Germany’s big utilities could face pressure for more radical steps to remain competitive in a market where the energy mix is in flux.

    EU Energy Commissioner Guenther Oettinger last week even proposed a merger of E.ON and RWE.

    “With all due respect for E.ON and RWE, in a global context, they are just playing in the regional division,” he told German newspaper Rheinische Post. E.ON and RWE declined to comment. ($1 = 0.7882 euros)

    Additional reporting by Tom Kaeckenhoff in Duesseldorf; Editing by Noah Barkin and David Cowell

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