European energy leaders forced to take radical decisions

"Les Échos" 

ANNE FEITZ / JOURNALIST and THIBAUT MADELIN / CORRESPONDeNT in berlin on dec., 2nd

Sigle de l'entreprise, wikipedia

Lemonde.fr

German major E.ON intends to sell its nuclear and fossil assets. Renewables expansion makes conventional power plants unprofitable.

The European energy market has become frantic. Sunday evening, E.ON announced a kind of reorganization, which may stir the whole sector. E.ON, the German energy major, intends to sell its conventional power plants, among them, nuclear, coal and gas stations – to focus on renewables, power and gas grids then customers services. Analysts think that this movement tends to be an attempt to put less profitable assets in a kind of “bad bank”, namely a defeasance structure, whereas E.ON denies this possibility.

“We are convinced that energy groups shall focus on one of the two worlds to record success in the future”, E.ON Supervisory Board President Johannes Teyssen said. The world of the future, featuring a decentralized energy produced from renewables, or the world of the past, focusing on a centralized energy produced by high capacity power plants. “Thus the company shall be well positioned to act as an actor and a consolidation platform on the production market”, Johannes Teyssen highlighted, pointing out that this decision was not “a job loss programme”. 20,000 staff will join the new structure, on a total of 60,000.

E.ON will be still an energy group, featuring a new philosophy and a new financial profile. Three quarters of the result shall be produced through regulated activities, then renewables, which still benefit from generous fixed tariffs, and through grid management. In its corporate culture, E.ON takes into account that its customers have become more and more producers, solar as wind producers, and that they need new solutions.

Following suit

Others are considering following suit, as the sector faces a deep crisis in Europe, following the wide competition of renewables, the demand drop and the power wholesale price fall. Fourteen years after Germany’s first decision to get out of nuclear, Düsseldorf major surrenders to the German energy change in its way. “This move is deemed as really courageous but progressive”, RBC Capital Markets analyst John Musk said, in a note to his customers. “Now it remains to be seen if other integrated groups dedicated to community services will follow E.ON’s example.”

Presently some sector groups, owning important thermal production capacities, face a drop of their market capitalisation, such as France’s GDF Suez, Italy’s Enel and Spain’s Iberdrola, recording a ratio market price/ book value close to 1 or even less than this threshold. In a document released last month, Credit Suisse analysts observed that GDF Suez recorded a “conglomerate discount”, ranging from 5 to 40% and advised that the group should restructure and rate its grid activities in France separately. The French major already stroke the market by recording a € 14,9 billion of assets depreciation in its 2013 account statements, mainly on its thermal power plants and gas storage facilities in Europe. Then Gérard Mestrallet, the group’s CEO, spoke of a crisis “sustainable and deep” in the sector.

The sector considers that 70 GW of capacities have been closed or mothballed in Europe for now. In view to survive, energy majors hope that a political intervention and some wide scale capacity markets would be implemented, in order to strengthen supply security reportedly, but above all in order to make their fossil plants profitable. In Germany, the government shows its support to E.ON new strategy, as it promotes renewables. “By this decision, E.ON is the first group to adapt to the new deal in the energy supply chain. This move would probably give birth to new opportunities”, Economy Minister Sigmar Gabriel said.