On April 1, German coal power giant RWE split into two companies: one, containing conventional energy; the other, renewables. Craig Morris explains.
In November 2014, RWE’s main competitor E.On announced plans to divide its conventional and renewable business in two separate companies. The move was widely heralded in the investor community as smart thinking. Experienced Energiewende observers agreed, pointing out that the company was merely implementing a business strategy described by the late Member of the German Parliament, Hermann Scheer, who had argued all along that renewable energy undermines conventional energy assets.
For a while, it seemed that utility RWE might not follow E.On’s lead. The differences between the two companies are salient: E.On is more heavily invested in nuclear (which is being phased out) and natural gas (which is uncompetitive for the foreseeable future) than RWE, a big lignite firm – and lignite looks to remain comparatively healthy for roughly the next decade (see our paper German coal conundrum from 2014). An argument therefore could be made that RWE is safer than E.On for the next decade, so RWE might be well advised to sit back and watch E.On’s attempts at a split and learn from its mistakes.
But by December 2015, RWE had officially adopted its own strategy to split into two companies. Nuclear, gas and coal will remain in the firm still called RWE, while the new company contains renewables, grids and sales. Though the new “green” company still only has the provisional name RWE International, it goes into business today (April 1). A new name is, however, expected to be announced in the next few months.
Actually, the provisional name probably describes the focus quite well: international. As I recently explained, large utilities like to take their renewable business abroad to get around the conflict of interest described above: investments in renewables undermining existing conventional energy assets. As chance would have it, the former French monopolist EDF announced last week that it was the largest wind power developer in the US, having installed 1.06 gigawatts of wind turbines, nearly as much as the 1.07 gigawatts installed in all of France that same year. RWE’s new green power subsidiary apparently also plans to focus investments outside Germany, lest its lignite and other domestic assets be detrimentally affected. In addition, an international focus makes sense because Germany is about to clamp down on renewables at home, with the market potentially being cut by two thirds over the next decade.
Originally, Peter Terium, CEO of the old RWE, wanted to be the head of both new firms, but shareholders rebelled against the idea. Interestingly, the CEO of the new “green” RWE is not the former head of RWE Innogy (as the renewables division was previously called), but rather Terium himself. The former COO Rolf Martin Schmitz now heads the new “conventional” RWE. In terms of staff, “green” RWE is bigger, having taken on roughly 2/3 of the old firm’s employees.
While the green company might focus on investments abroad, the conventional one will fight an uphill battle at home and abroad. RWE has not only lost value in Germany, but also in the UK. While 2,000 people could be laid off in Germany, the number is 2,400 at Npower in the UK (report in German).
At home, the focus is likely to increasingly be on financing the coal phase-out, which has entered a new era of consensus now that labor unions are willing to talk about how to help workers and communities weather the transition. And there is also the issue of provisions for the nuclear phase-out; the debate revolves around whether nuclear plant operators have set aside enough funding for the phase-out – and if they haven’t, how the burden on taxpayers can be reduced. In this setting, the new conventional-only RWE basically appears as a management holding for decrepit industries.
In the end, both the split at E.On and RWE is probably about protecting new assets from liabilities stemming from the old. To the extent that the new “green” spinoffs of these two utilities mainly invest in renewables outside Germany, the new international investments do not conflict with the old domestic. On the other hand, set-asides for nuclear and (increasingly) coal would drain liquidity that could then no longer be invested at all, not even in renewables.
The German government is already working to ensure that the new green spinoffs remain co-liable for the former parent’s nuclear business, but the coal set-asides have not yet been defined. One idea is to pay current profits into a fund for the coal phase-out. E.On and RWE International might manage to keep profits from green investments from being included in that tally.