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20 September 2019

German Giants, one for the people, one for renewables

There are at least two ways of viewing this week’s swap of assets (no it’s not a merger) between RWE and E.ON, possibly three.

If you are German you may be wondering if the merged customer entities of E.ON and innogy makes the company too dominant in Germany, but this week the European Commission said that the German energy market is too diverse and in the hands of too many suppliers for this to skew the market. It would not be the first time this particular set of Commissioners got that type of decision totally wrong, since they seem idealistically tuned to large corporates.

But the key way of thinking about this deal is that one company has opted to take the safety of tied customer relationships, in an era when we encourage customers to swap supplier as often as possible, and one has taken on the role of generating the energy that they will use – with RWE getting a renewables development pipeline which should more than double its renewables holding, virtually overnight, making it a true force in renewables.

The deal was finally agreed this week by the European Commission, with key exchanges and sell offs agreed – selling off innogy’s electricity and gas retail business in the Czech Republic and parts of E.ON’s electricity retail business in Hungary; selling off E.ON’s heating business in Germany; and selling off its EV charging stations in Germany as well.

The deal for E.ON means a more predictable life, and lots more employees, and it says it will try to cut as few as possible, from 70,000 it wants to shed under 5,000. We shall see. This business is all about improving the grid to get electricity delivered to customers, and there is the potential for much bigger downsizing as its grid begins to automate, and become more reliable. So it’s game is “keep the customers, get out of the risk of renewables, and try to save on costs.”

E.ON starts that role off by losing up to 2 million of those customers in return for the European Commission giving it permission. It will especially lose those in Eastern Europe, who typically pay a lot less and use more fossil fuels. But it gets to keep 50 million of those customers across 15 countries.

But RWE in one transaction could become the largest non-Chinese renewables operator in a few short years. It has 9 GW of renewable energy today and now inherits a pipeline of some 17 GW of mostly wind projects. It says that it will pick and choose which of these to continue developing and has made various posturing comments about only taking those which are up to its return rate, as if E.ON’s return rate was any worse. It will already know which ones are right for it, and it will be the majority of them. It has chosen power instead of people, sensing that perhaps the renewable revolution has not quite yet run its course, and there is plenty of good to come. E.ON may end running on renewables assets, but it is likely that RWE will create them.

There may need to be a significant culture change for the RWE part of the equation to work, but it seems ready for this challenge, although we have seen many companies founder over such a culture switch. It needs to think outside the box, be ruthless on negotiating deals and win auction after auction.

Currently the largest renewables developer outside of China is supposed to be NextEra Energy in Florida which already has 17 GW of renewables in operation across both wind and solar and RWE made the point that it will stick with offshore wind in Asia, and work with solar and onshore wind in Australia.

And right there is one key issue. In Germany the glacial speed of permitting has held up many of the local onshore projects, and within its portfolio it may inherit projects who’s profitability will have passed their “sell by” date in that territory. Does RWE have the political clout to change the rules in time to preserve as much value as possible in the German market? Perhaps.

But picking the most profitable 12 GW out of 17 GW, will still put RWE in line with NextEra in short order. EDF Renewables is perhaps another of the few companies which are currently stronger with some 13 GW of renewables under management and a number of massive design wins, particularly in the US, in its pipeline.

Rolf Martin Schmitz, CEO of RWE said of the deal “We intend annual net investments of €1.5 billion to consolidate and further strengthen our renewables position. Now we are putting all our energy into tackling this task.” That probably seems a little too low a number and reeks of being safe.

The portfolio has one huge offshore deal in Germany with the 325 MW Kaskasi offshore project which comes with enticing state subsidies. Not all of the deals will be that juicy.