Home truths

How much will Eon and RWE's UK investment and operations suffer from their struggles in their domestic German market, asks Jeremy Bowden?

Tough operating conditions for major utilities in Europe, especially in Germany, are forcing cutbacks and strategic rethinks in major power companies across the region. With German utilities alone supplying 11.8 million UK customers, more than just the Horizon nuclear project could be in the firing line here as continental margins are squeezed further.

On the plus side, with the Energy Bill under scrutiny, and given the UK is unlikely to follow the same sort of radical energy policy that has so badly hit the major utilities in Germany – through nuclear closures and renewable overcapacity – investors might be persuaded to see the UK as a relatively safe haven. Says an Eon spokesperson: “It is our belief that it [the Energy Bill] will pave the way for a transformation of the electricity market in the UK between now and 2030. Undoubtedly it is a real opportunity to shape the future path of energy in the UK and it must be grasped with both hands.”

RWE, however, has expressed concern over UK policy in the past and appears less certain, telling ­Utility Week: “Our core markets are changing remarkably fast. And political decisions – not only in Germany, but also in the UK and the Netherlands – are associated with substantial financial burdens for us.”

Along with nuclear closures, the main German policy impacts on RWE and Eon – the two German utilities with major operations in the UK – has been the erosion of their share of their home market. Municipal and small suppliers have expanded capacity, taking advantage of very generous solar and other renewable feed-in tariffs and other incentives.

“The regulated part of the market is growing, while the competitive part is losing ground,” says the RWE Npower spokeswoman. She adds that RWE is largely focused on the competitive part – cheap large-scale coal and gas. “There is a substantial pressure in the whole energy industry due to the immense expansion of renewables and the weak economic situation due to the euro crisis. For this reason, we will be reviewing our investments and making further cutbacks, without losing sight of our overall growth prospects.”

The renewable surplus has forced German gas-fired plant to remain under-utilised, and in December, mild weather, low demand and higher than expected wind generation even turned power prices negative as utilities chose to pay users for a few hours rather than incur costs associated with temporary baseload plant closure.

Renewable development in the UK, on the other hand, is more focused on large utility-funded projects such as offshore wind, nuclear and carbon capture and storage (CCS), although the nuclear closures in Germany and Switzerland have substantially raised investment risk in that sector. Dramatic UK residential and small-scale solar expansion was nipped in the bud after a rollercoaster two-year rollout. It has now settled down to steady growth, with little chance of capacity rising sharply enough to incur the same scale of baseload and gas plant closures seen in Germany during times of high renewable production.

“In the UK, intermittent renewable flows are relatively low at present, but increasing within the overall generation mix. Baseload plant is not regularly switched off to accommodate them at present,” according to an Energy UK spokesperson.

Operating conditions for large utilities have been made even worse in Germany due to a sharp drop in power demand associated with the economic slowdown, leading some analysts to suggest profitability will only return with large-scale capacity closures – which could leave renewables without back-up. Strong gas prices mean gas-focused Eon is faring even worse than RWE – which is more dependent on coal.

So far, Eon has pledged to cut annual costs by £1.3 billion to 2015, while RWE, burdened by heavy debt, has promised to sell a multi-billion portfolio of assets – including its half-share of the £696 million paid in October by Hitachi for the UK Horizon nuclear project set up by the two German utilities in 2009.

The RWE spokeswoman comments: “We have presented the public with a programme designed to increase our financial strength. It is a four-pillar approach: capital measures, divestments, efficiency enhancement and adjustment of our investment budget. The sale of our stake in Horizon is part of the above-mentioned divestment programme.”

RWE has denied rumours that it is considering a merger with another European company such as Iberdrola, which owns Scottish Power – although the company does not rule out such a move in the future.

Eon says: “The reasons behind our decision to pull out of the proposed UK nuclear have always been clear and transparent. We took a decision to focus our investment in the UK on other strategic projects that will allow us to deliver earlier benefit for customers and our company, rather than the very long term and large investment new nuclear power calls for.”

German utilities have lagged behind in developing renewables – Eon has barely any wind or solar capa­city. And the situation won’t get any better in the near term with RWE bringing 3,630MW of coal-fired plant on-stream in 2012-13, while Eon adds another 1,055MW – largely to replace nuclear baseload, complicating Germany’s renewable goals. But further German baseload expansion needed to balance intermittent wind and solar is unlikely to come from utilities, as they quickly cut back, retrench and prioritise remaining investment in renewables and grid expansion and modernisation. RWE has put aside €5.5 billion for major renewable projects in the UK and Germany, and by 2014 it wants renewable capa­city to hit 4,500MW.

On its UK investment plans specifically, RWE says: “The UK will continue to be one of our core markets. We see potential in particular in the retail business, in our modern and efficient power stations, and in renewable energies.” The company opened a combined-cycle gas plant at Pembroke in Wales last October, and is due to close its 2,000MW coal-fired power station at Didcot this month. It has consent to develop a 2,400MW gas plant at Willington in Derbyshire, and has already said it will not go ahead with an application to build a new supercritical coal-fired power station at Cambois in Northumberland.

Under European rules, Eon must close its 1,940MW coal-fired Kingsnorth power station imminently. It plans investment in smart meters and a number of renewable projects including the London Array offshore windfarm in the Thames Estuary, but has pulled out of planned CCS projects alongside new coal units.

Jeremy Bowden is a freelance journalist

This article first appeared in Utility Week’s print edition of 15th March 2013.

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