Has Eon shown the world the future?

RWE CEO Peter Terium

RWE CEO Peter Terium

In an August 2014 briefing note UBS wrote that: Our view is that the “we have done it like this for a century” value chain in developed electricity markets will be turned upside down within the next 10-20 years…

Within a few months of the note’s publication Eon has announced it is splitting into two businesses; one to concentrate on renewables, energy services and distributed generation – the future; and one to warehouse fossil generation and other upstream investments – the past. Eon is not alone.

Although RWE has stated it is not restructuring, its CEO Peter Terium was reported earlier as saying that: “In the future RWE’s competitive edge will be determined by our ability to be a service company applying energy supply capabilities and information technologies intelligently.”

In Italy, Enel have appointed the head of their renewables business as Group CEO, and in France, the new CEO of EdF, Jean-Bernard Levy stated last month that: “The first challenge is to improve the health of EDF’s economic situation.”

Why is this news from Europe’s utilities significant?

De Aar Solar PV farm South Africa

De Aar Solar PV farm South Africa

It is not simply, that they are locked into what Michael Liebreich of Bloomberg New Energy Finance described as the “utility death spiral”. It is that they face a multitude of challenges that combine to create an existential threat to their businesses. These include:

  • The reducing load factors on their current generation fleet, driven by the increased penetration of renewables, which is leading to lowered profits and stranded assets.
  • Their inability to meet take or pay type fuel contracts.
  • The increased energy efficiency of their largest customers, leading to lower demand for their product, and
  • The falling wholesale price of electricity as zero marginal cost renewables carve out a bigger share of generation. Or as Barclays put it in a recent research note: Electric utilities… are seen by many investors as a sturdy and defensive subset of the investment grade universe. Over the next few years, however, we believe that a confluence of declining cost trends in distributed solar photovoltaic (PV) power generation and residential-scale power storage is likely to disrupt the status quo. The utilities, who have seen their collective market value plummet over the last decade, are moving before that disruption whips the carpet from under them. Germany’s two largest, which dismissed that country’s move to renewables, and were reluctant players in the country’s renewables transition, or energiewende, are now running to catch up.

The revolution in renewable energy, driven by solar PV and wind power, is not just forcing a change in the business models of Europe’s utilities. It is also driving a profound change in the structure of Europe’s power markets; one which could have welcome benefits for the continent’s consumers. The completion of the single market in electricity is now a real prospect. The European Union’s 2030 climate and energy package has a very clear objective in the creation of an Energy Union, with an obligation on Member States to co-ordinate with their neighbours on the development of regional electricity markets. The opportunity is to avoid Member States locking themselves into expensive and wasteful domestic capacity markets, when they can trade with their neighbours. This is the aim of the European Commission which has announced its intention to shape a “North and Baltic Seas Offshore Energy System”, or more prosaically a North Seas electricity market, connected by an offshore grid.

SupergridFor a European project, it has a very ambitious time frame. This, in part, is in recognition of the urgent need to persuade European governments that sanctioning individual capacity markets is a sub-optimal outcome for their citizens. The Commission is aiming to have the Council confirm its initial commitment at its March 2015 summit with a requirement to report back in 12 months. This will be followed by an Agreement in the first half of 2016 under the Dutch Presidency to “lock in” the process. Underpinned by funding from the recently announced European Fund for Strategic Investment, there is now a real prospect that by 2020 the first legs of a European supergrid will be under construction.

For Mainstream, which has since its creation, been an advocate of renewable energy and of the Supergrid, this is a tantalising prospect. The future is still not wholly clear. Regulators and governments, taken aback by the speed at which change is occurring are still erecting barriers to progress, but this will change. Technologies like nuclear and CCS, so long supported by governments and those happiest with large, centralised electricity generation and captive consumers, have just not delivered the promised generation. Undercut and outperformed by wind and solar, and overtaken by rapid advances in high voltage transmission, storage and demand-side management, the big behemoths of the centrally planned electric economy are heading for extinction as surely as the dinosaurs. That is why Eon is splitting, why RWE is turning itself into an energy services company, and why Enel is hunting for renewables projects in the developing world. The new electric society is being built around us. Global electricity systems are opening to new players. Customers are demanding control of their supply. That is why Mainstream does what it does, and now Eon does too.

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One Response to Has Eon shown the world the future?

  1. Roger Faulkner December 5, 2014 at 12:43 pm #

    I hope the Germans get it right. They are leading Europe now to a renewable energy future. The supergrid is a vital part of that. I share the vision that the supergrid is the key missing link to make renewable energy practical and cost effective.

    A “dark horse” in all of this is the possibility of a breakthrough in fusion energy. It is safe to assume that it will take many years to scale up a breakthrough in fusion energy if it occurs, especially if it involves a new form of hot fusion such as was recently announced by Lockheed. A breakthrough in cold fusion (now re-branded LENR) could be much faster to scale; either of these has the potential to suck the wind out of most renewable projects. In a fusion energy future, a supergrid would still make sense, though it would cease to be “make or break;” there would still be an economic reason to share capacity to deal with peaks and outages. In the long run, in a fusion energy-based economy, the waste heat produced by generators becomes a critical concern, in terms of thermal pollution, water usage, and cogeneration. We could see a future in which small fusion-based cogenerators are dispatched more for heat supply (which is necessarily local) than for electical supply (which can be brought in from where it is most economical to produce), enabled by a supergrid..

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