mercredi 24 décembre 2014

The European energy sector is facing a revolution in models and strategies

Les Échos, Dec. 19th


E.ON, GDF Suez, EDF’s models:  marching on the new revolution in the energy sector


In order to solve its crisis, E.ON, Germany’s number one, made a radical turn by splitting its activities in two parts. Would GDF Suez and EDF, France’s energy giants, avoid such a upheaval?

By Anne Feitz and Véronique Le Billon, journalists in the Industry service
Two weeks ago, when E.ON announced that the company intended to split its activities in two parts, it aroused various interests in the market and made its competitors think about the future of their strategies. Indeed, E.ON’s solution is radical: this strategy consisted in grouping its conventional assets – particularly its nuclear, gas and coal plants – within a company rated separately, in order to focus on a new E.ON based on renewables, grids and energy services. Not only E.ON’s growth has been hampered by Germany’s decision to go out from nuclear, but  also common conditions faced by all European energy actors worsen the situation: the decrease of energy demand, then the competition of renewables and low cost coal finally the volatility of power price. Would GDF Suez and EDF, France’s energy giants, escape such a upheaval?
Confronting this difficult position, GDF Suez announced radical measures to start with the new year: Gérard Mestrallet’s group decided to depreciate its European thermal plants and storage sites by €14,9 billion suddenly, thus amounting to a dramatic net loss of €9,7 billion in its 2013 statement. According to the CEO, this measure intended to depreciate “the older era” in order to focus on energy transition in Europe (namely on renewables and energy services) and on development in growing countries. That’s a two-speed strategy, which may go further, according to several analysts. “GDF Suez would do better if it gives the choice to investors between several rated entities, which would herald different level of risk (such as stable revenues because of regulated tariffs, growth on emerging markets, then free energy markets), as E.ON is trying to do”, said Michel Debs, analyst by Crédit Suisse. Nevertheless, it’s too early now. “We have activities and production projects of thermal and renewable energy everywhere in the world, it’s highly logical to keep the integrated model of the group”, the group retorts. Moreover GDF Suez is not in the emergency situation E.ON is facing right now: Cofely, the group’s subsidiary positioned in services, has already recorded a €15 billion turn-over. Since the buying out of International Power, the company has boasted strong positions on the international market: 55% of its produced power is produced out of Europe. “The group did not waste time to build its strategy, it’s credible abroad and has a true experience”, says Arnaud Leroi, associate by Bain & Company.
On its side, EDF enjoys its position of quasi monopoly either in power production or in distribution, together with central regulated tariffs. “There is a French exception, because we are positioned on a “cost plus” model: we take the costs, we add them then we add a margin. Thus there is no particular problem”, deems an expert of the sector. EDF’s facility park will be fully working whatever happens: whereas solar and wind energy, whose production takes profit of a purchase obligation and whose marginal production cost is nearly non-existent, the nuclear park and hydraulic power plants record very competitive costs and they compose the main part of EDF production facilities.” The strategy will be revised if we enter the era of consumer-producer or in the time of micro networks, but this situation looks very unlikely in France up to ten or fifteen years”, said Michel Debs.
Nevertheless, EDF is confronting the contradictory orders of a protean State: supplying the less expensive possible power – even by suffering from a tariff deficit, invest, hire and maximize the dividend… above all that, by abiding by European directives of market liberalization and according to a new-born constraint: reducing the nuclear part in power production from 75% to 50% by 2025. With the cancellation of regulated tariffs for professionals within one year, EDF may also loose some market shares. Furthermore, the new way to calculate tariffs for households now is based on market price, which is a bearish condition which weighs on EDF’s profitability. “France’s position is quite under pressure to consider different options, but the country does not need to find solutions in a hurry. Maybe if EDF intends to reduce its investments, things may happen”,  says an analyst.
In order to avoid a crisis in the sector, both French groups try to reduce their exposition to market risks in a similar way. In the joint-venture dedicated to build two EPR in Great Britain, EDF intends to limit its investment up to 45 or 50% in order not to consolidate this stake in its accounts. The company will do the same within Amundi, the subsidiary for developing renewables. Then GDF Suez has followed the same scheme in inviting partners in projects located in Canada, Brazil and Australia, and in the field of renewables in France, to avoid consolidating these investments and reduce its indebtedness. Moreover, energy groups are looking for guaranteed incomes: for instance, in Great Britain, EDF has dealt a  guaranteed price for the power the company will produce during thirty five years, which will warrant a kind of pre-existing profitability similar to that produced in a quasi-infrastructure. GDF Suez and EDF investment in marine wind energy, which benefits from a purchase obligation, enables also the companies to collect fixed revenues on the long term. Finally and even if GDF Suez is ahead of EDF in this field, diversifying in services will allow them to get a lower risk profile with an activity deemed less profitable but far less demanding in capital than the other activities in their portfolio. 
Anne Feitz
Journalist in the Industry service
Véronique Le Billon
Journalist in the Industry service

Some important points

As Germany’s E.ON announced a change of model in early December, in order to focus on renewables, grids and services, this revolutionary position leads other competitors to revise their own strategies.
Facing the same difficult environment as E.ON, GDF Suez already announced radical measures for the new year, by depreciating nearly €15 billion on its European thermal plants and storage sites.
Even if EDF seems quite protected by the quasi monopoly the company detains on either power production or distribution, and also by regulated tariffs, the growth of decentralized means of production will lead the company to strategic changes sooner or later.


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