Electricity Currents

Seismic Moment? Germany’s RWE Tiltsfrom Volume to Value

Jan./Feb. 2014, Vol. 27, Issue 1 1040-6190/$–see front matter 1

The past couple of years have been harsh on utilities

in Europe, notably in Germany. With wholesale prices

depressed due to the rapid proliferation of renewable

capacity flooding the market, and rising retail tariffs

due to a variety of taxes and levies to pay for them, the

Big 4, E.ON, RWE, EnBW, and Vattenfall have suffered

drops in their stock prices. An assessment by

EurElectric concluded that under prevailing conditions,

the future appears bleak and business-as-usual is not a

sustainable strategy.

Following discussions at a board meeting in

September 2013, RWE announced in October that it was

changing its business strategy from large-scale thermal

power production to become an enabler in what remains

the only promising growth segments within the

beleaguered industry: renewable energy and

decentralized generation. Henceforth, RWE will focus

on creating value rather than volume. RWE’s strategy,

though, is less clear than that ringing statement of

purpose suggests, as its initial public announcements

are somewhat ambiguous.

In Electricity Currents This Month:

Seismic Moment? Germany’s RWE Tilts

from Volume to Value . . . . . . . . . . . . . . . . . . 1

European Utilities Hitting Alarm Bells . . . . . . 1

How Inaction Can Cost Half a Trillion Euros. . 3

The End of Demand Growth, Coming to

an ISO Near You . . . . . . . . . . . . . . . . . . . . . 3

Sun-Drenched Arizona Confronts Tough

Choices in Setting Solar Policy. . . . . . . . . . . . 4

Electricity Currents is compiled from the

monthly newsletter EEnergy Informer pub-

lished by Fereidoon P. Sioshansi, President

of Menlo Energy Economics, a consultancy

based in San Francisco. He can be reached

at fpsioshansi@aol.com.

European UtilitiesHitting Alarm Bells

The continued growth of renewables in

Europe has been adding capacity in a

market already besieged with overcapacity

and tepid demand, as many European

economies have not fully recovered from the

2008 global financial crisis. The result has

been depressed wholesale electricity prices,

falling share prices, and red ink for thermal

generators. Coincidentally, many of the same

generators are critically needed to provide

backup power for ever-larger amounts of

intermittent generation from wind and solar

resources.

Continued on page 6

The situation has progressively worsened to the

point where the incumbent generators have

decided they’d better take a united stand –

something unprecedented in Europe, where each

utility usually tries to protect its own turf and

lobby for its own interests.

In the spring of 2013, the CEOs of 10 of the

largest European utilities met at a gallery

housing the art of Belgian surrealist Rene

Magritte in Brussels to discuss a unified

strategy. In mid-October, the so-called Magritte

Group released an unprecedented joint statement

calling for an end to subsidies for wind and

solar generation, which they said add too much

capacity to a market already struggling with

overcapacity.

The utilities represented – France’s GDF Suez,

Germany’s E.ON and RWE, Spain’s Iberdrola and

Gas Natural, Italy’s Enel and Eni, Sweden’s

Vattenfall, Czech Republic’s CEZ, and Dutch

GasTerra – currently own roughly half of

Europe’s generation capacity. Some rely

predominantly on coal-fired generation while

others have more a diversified portfolio. What

unites the group is the current unsustainable

wholesale prices and, to a lesser degree, their lack

of major investments in renewable generation,

with a few exceptions.

The group chose as its spokesperson GDF Suez

CEO Gerard Mestrallet, who declared, ‘‘European

energy policy has run into the wall.’’ With

demand falling due to the economic crisis and

the EU’s energy efficiency policies, he pointed

out, wholesale electricity prices have dropped by

about half since 2008 while energy bills for

domestic consumers have risen 17 percent in the

past four years alone; 21 percent for industrial

users.

Mestrallet complained, ‘‘In sectors like steel,

cars, and refining, when there was overcapacity,

capacity was closed. But in the energy sector, we

have massively subsidized additional capacity in

solar and wind, which has led us to the absurd

situation in which we find ourselves today.’’

He added that the overcapacity has been

aggravated by the U.S. shale gas boom, which has

led to a flood of cheap U.S. coal exports to Europe

as American utilities switched to less-expensive

gas-fired plants. That, he said, has resulted in

retirement of roughly 51 GW of modern gas-fired

capacity in Europe – the equivalent of the

combined capacity of Belgium, the Czech

Republic, and Portugal. The loss of these flexible

gas plants is jeopardizing Europe’s energy

security, Mestrallet said, since they are essential

backup for intermittent wind and solar.

What does the Magritte Group propose? Their

wish list includes a pan-European capacity

mechanism that would pay incumbent utilities to

keep critical thermal capacity on standby as

backup for intermittent renewables.

Echoing the theme, Peter Terium, CEO of RWE,

said, ‘‘We cannot have a renewables society

without security of supply. . . . The SOS signal

that we are sending today is about the need to

have a power market design that catches up with

this reality.’’

A second wish is an overhaul of the existing

European emissions trading scheme (ETS), whose

prices have been too low and volatile to make

low-carbon generation from natural gas and

nuclear viable.

It is clear that the group is determined to lobby

the European Commission on these and other key

issues where they are united.

Few would disagree with the basic facts, yet

critics of the big incumbents point out that these

same utilities were too slow to become active

participants in the growing renewables bonanza

and/or to respond to the rapidly changing

market dynamics. In Germany, for example, the

major utilities own only 7 percent of installed

renewable capacity. (The percentage is even

smaller in the U.S. – where most renewable

capacity is owned by private investors who

sell the output to utilities under long-term

contracts. In Australia, virtually all renewable

generation is currently small-scale and customer-

owned.)

This allowed newcomers to capitalize on

emerging technologies and gain from the

government subsidies. The incumbents, who

2 1040-6190/$–see front matter The Electricity Journal

essentially sat on their hands, are now crying

‘‘foul,’’ these critics contend.&

http://dx.doi.org/10.1016/j.tej.2014.01.003

How Inaction Can Cost

Half a Trillion Euros

Warren Buffett, the legendary investor who’s

made a fortune for himself and shareholders of his

Berkshire Hathaway holding company, was once

asked how to make a million. His answer: Buy an

airline for a billion and watch your investment

shrink to a million. Mr. Buffett, of course, was

making fun of the notoriously dismal record of

major airlines.

An article in an October issue of The Economist

asks how to lose half a trillion Euros – an even

more challenging task. The article describes a

breezy, sunny Sunday last spring when renewable

generation in Germany topped 50 percent at a time

that demand was low. Between 2 and 3 pm on

June 16, renewable capacity feeding the German

grid reached 28.9 GW. Despite the network

operators’ best attempts to turn down all thermal

units as low as they could go, they were faced

with 51 GW of capacity and barely 45 GW of

demand. To keep the network from collapsing,

wholesale prices plunged to minus s100/MWh –

paying customers, traders, or whoever a hefty

reward for taking the unwanted capacity.

Had there been millions of electric vehicles (EVs)

or other storage devices, the excess capacity could

have been easily absorbed, but today’s networks in

Germany and elsewhere are not yet ready for such

episodes. And these episodes are becoming more

common, not just in Germany but also in Texas,

California, and a number of other places where

renewables are a growing share of total generation.

The reverse problem, when renewable

production falls off suddenly and/or

unpredictably, such as when prevailing winds die

down unexpectedly or when cloud cover reduces

solar output, requires thermal generators to

quickly make up the difference. This is becoming

an issue, since many thermal plants are not

dispatched frequently enough and/or for long

enough hours to remain viable, especially when

wholesale prices remain depressed, as they have

been in Europe, the U.S., and Australia, among

other regions.

The Economist reckons that Europe’s top 20

utilities have lost roughly half their value, around

half a trillion Euros, since 2008. Declining

wholesale prices, notably in Germany, get most of

the blame. As the share of renewables grows to 35

percent by 2020 and 80 percent by 2050, the

problem will only get worse. Germany’s

renewables accounted for 23.5 percent of

generation in 2012, up from 15 percent in 2007.

The rapid growth of solar PVs, now at grid

parity, is adding to utilities’ woes. As a growing

number of consumers become prosumers, they will

contribute little to utility coffers while relying on

the critical services provided by the grid to

balance their variable consumption and distributed

generation. As The Economist notes,

In such a world, the old fashioned utilities play two vital

roles. They will be the electricity generator of last resort,

ensuring the lights stay on when wind and solar gen-

erators run out of puff. And they will be providers of

investment to help build the grand new grid. It is not

clear that utilities are in good enough shape to do either

of these things.

As pointed out elsewhere in this section, the

plight of European utilities, especially in Germany,

has reached a critical junction where fundamental

resetting of renewable energy policies, market

rules, and utility pricing and business strategies

may be needed – sooner rather than later. The loss

of half a trillion Euros hopefully will prove

sufficient to get politicians’ attention.&

http://dx.doi.org/10.1016/j.tej.2014.01.004

The End of Demand Growth,Coming to an ISO Near You

Like energy efficiency gurus, environmentalists

and many others, Electricity Currents has been

Jan./Feb. 2014, Vol. 27, Issue 1 1040-6190/$–see front matter 3