German utilities’ prospects have improved a bit, but they are still dismal. The good news is the German state statement that power generators have set sufficient funds aside — €38 billion — to cover the cost of decommissioning nuclear plants. Shares in E.ON and RWE bounced up more than 10 per cent on October 12. But the move came more in relief than delight. Stocks are still 50 per cent to 70 per cent lower than five years ago. The gloom is far-reaching.
Chancellor Angela Merkel’s 2011 decision to phase out nuclear power by 2022 — a sudden about-face turn after the Fukushima accident — is only one of several issues undermining the business model of large, centralised utilities. Berlin is determined to wean the country off fossil fuels and on to renewable sources of energy. The aim is to generate 40 per cent to 45 per cent of its electricity needs from renewable sources by 2025, up from 26 per cent today.
Hard road ahead
Yet while the construction of green generating capacity attracts generous subsidies, it’s hard for the likes of E.ON and RWE to take advantage because of their leveraged balance sheets. RWE, for instance, recently halved its green power investment plans.
What’s worse, the growing output of renewable energy is reducing the profitability of fossil-fuel plants. Once installed, solar and wind generate electricity at very low operating costs, crowding out producers who have to pay for their fuel. E.ON, the country’s largest utility by revenue, made €11 million operating loss from conventional generation in the first half of 2015, after having made €136 million in profit a year earlier. E.ON is trying to free itself from fossil fuels with a spin-off scheduled for 2016.
Carbon-heavy lignite, or brown coal, meanwhile, creates further difficulty. It generates around a quarter of Germany’s electricity supply and half of the electricity sector’s carbon emissions. Meeting ambitious climate protection targets requires a crackdown on lignite.
Vattenfall wants to offload its lignite exposure. It is hard to see either E.ON or Vattenfall crystalising great financial value with fossil disposals. Still, RWE, which generates 37 per cent of its electricity with lignite, may suffer more.
Some context
E.ON and RWE registered one of their biggest intraday rises in seven years after a regulatory stress test concluded that they have sufficient funds to decommission their nuclear power stations.
On October 10, German Economy Ministry released results of the stress test, saying the €38.3 billion set aside to pay for decommissioning the nuclear power plant fully covered the costs. The nuclear plants are due to be switched off by 2022.