Battered E.ON and RWE still far from bottom

August 14, 2013

By Olaf Storbeck

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

Shareholders of German utilities have gone through three horrible years. Since April 2010, E.ON’s stock-market value has declined by 55 percent and RWE’s by 68 percent. The German stock market as a whole gained more than a third in the same period. But the battered shares probably have further to fall.

Both companies are at the beginning of a painful adjustment to the inexorable rise of renewable energy. Many of their existing conventional power plants can no longer be run profitably, while future profit making opportunities are stunted. And there is very little the companies’ management can do.

Erratic German energy policy has not helped. High subsidies for solar and wind generation, as well as the government’s 2011 decision to phase out nuclear power fairly quickly, have exacerbated the pain. But the transition would have happened anyway, because fast technological progress is cutting down the cost of solar and wind power.

These sources of electricity do not have the economies of scale of traditional gas, coal or nuclear plants, so utility customers are increasingly producing electricity – at zero marginal cost – often from nothing grander than a few solar cells on the rooftop or a windmill on the farm.

The trend leaves much of the old infrastructure as a mere backup for cloudy and windless days. During this summer’s peak hours, renewables have provided as much as 40 percent of Germany’s electricity. Average wholesale spot prices dropped by 14 percent and RWE’s operating profit fell by 62 percent.

Relief is not in sight. On the contrary, since utilities sell most of their generation three years in advance, the full impact of the recent drop in wholesale prices on profits has not yet been felt. Worse, for the utilities, the renewable share is increasing in Germany much faster than anticipated.

RWE and E.ON are trying to adjust. Their ambitious cost-cutting programmes and huge asset disposals seem to be on track, but the best utility investors can hope for is managed decline.

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