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What E.on’s business shift tells us about the energy of the future

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The Walney offshore windfarm at sunset, Cumbria, UK

The decision last week by German energy giant E.on to split its business into two operating companies – with one focusing exclusively on renewable energy, efficient grids and customer services; and the other on nuclear and fossil fuels – may, in time, prove to be the beginning of the end of traditional energy systems as we know them.

E.on is the richest utility worldwide, operating with 70% of its power capacity outside Germany (US, Spain, UK, Benelux, etc). With about 62 GW electric capacity, it is among the largest power providers and its overall revenues almost tripled to €122 billion between 2004 and 2013.

The real importance of this is that it is the first global utility to demonstrate that the future is not fossil and not nuclear.

Consulting firm McKinsey said earlier this year that it was only a matter of time before one of the publicly-traded utilities would change its old-fashioned, conservative and polluting business model. This was not specific to Germany.

The rise of renewables

Many people have observed the steady decline of share values of utility companies compared to new actors such as grid companies and smart grid actors. E.on’s company performance has been shaky over the past few years. Overall, the market value of E.on, worth €37 billion in 2013, was only half of that of French leader EDF, and its share price has been in steady decline. E.on’s profit in 2013 was about $US 2.5 billion and was only about one third of that in 2007 and 2008. To illustrate its fading performance E.on’s owned electricity generation declined by 7% in last year compared to 2012.

So it was not surprising then, when Swiss UBS, one of Switzerland’s largest private banks with assets of about $US 1.5 trillion, recommended its institutional investors stay away from coal and nuclear energy and rather invest in [smart] grids, energy storage, energy efficiency and renewables.

E.on is also not a low emissions company. It has a high CO2 emission of 115 million tons – or almost three times as much as Switzerland. It emits almost half a kg CO2 per kilowatt-hour in its electricity mix though running about 25% of its portfolio with zero-carbon nuclear.

Surprisingly, E.on’s environmental performance in “green” Germany is even worse than in its global average. Globally, about 9% of all its power originates from non-hydro renewables, mainly wind power, and has 23 per cent of coal is in its portfolio. In Germany, by comparison, non-hydro renewables contribute only 1% but coal amounts to 32% of its company supply. All that contributed to the recent “Green Utility” ranking of E.on by its peers of EUROELECTRIC, the trade association of the power sector, to less than half the points compared to the leader, Iberdrola, from Spain. (Note that the ranking considers nuclear as “green” energy). In terms of ranking renewable shares of capacity, E.on received only a quarter of the points that was given to the leader, Energias de Portugal.

So E.on still has a long way to go. And that might be exactly the reason for change. They already have their back to the wall. The company has to phase-out about one third of its nuclear capacity in Germany over the next eight years. In addition, another third of their generation capacity in Germany, which comes from coal, needs to go down too. And with moves to more renewables globally, E.on’s worldwide share of almost three quarter percentage of its power mix in fossil fuels is questionable for a long term sustainable strategy.

Stranded assets ahead!

That is no viable way forward. As the company has already about 13 GW renewable power in pipeline, they needed to decide on the way forward one way or the other – either to bank on the future or to muddle through. Whether or not the present legal form that E.on has proposed (two separate companies) is the way to proceed, history will tell.

But politically E.on made a giant step – otherwise the stock market would not have rewarded it with record share value gains. A changing business model by one of the most powerful international corporates towards only embracing renewables in future is definitely a stronger push for the clean energy revolution than many climate targets I have seen by many governments so far.

Yes, there is hope that even some dinosaurs embrace new and clean market opportunities!

Dr Stephan Singer is the director for Global Energy Policy for WWF. He is based in Brussels.

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