RWE, Germany’s largest power producer, has decided to radically depart from its traditional business model based on large-scale thermal power production. Henceforth, the company will “create value by leading the transition to the future energy world”. This is shown by confidential strategy documents that were discussed at a recent meeting of RWE’s Supervisory Board in Warsaw which Energy Post has seen.
Photo: RWE power plant in Hamm-Uentrop by Dirk Vorderstrasse (Flickr)
The new strategy was decided on at a meeting of RWE’s Supervisory Board in Warsaw on 19 and 20 September. It will be discussed more broadly within the company in video conferences scheduled for 29 October. RWE is one of Europe’s biggest emitter of greenhouse gases.
The “Strategic Roadmap” discussed in Warsaw and a strategic document called “RWE’s Corporate Story” make it clear that the company’s leadership has accepted that RWE, which has traditionally relieved heavily on its coal-fired and nuclear power production business, has decided that it needs to radically change course it if wants to survive in the new energy world created by Germany’s and the EU’s Energiewende.
“The massive erosion of wholesale prices caused by the growth of German photovoltaics constitutes a serious problem for RWE which may even threaten the company’s survival”, states the Strategic Roadmap.
At the same time, RWE’s management has decided that the company will not be able to play a leading role in the new growth sector of decentralized, subsidized power production, which it says will remain “the only growth segment in the European power generation market” for the foreseeable future. “In a low-interest environment, it will not be possible for RWE to generate sufficient return within this subsidised industry. Our cost of capital will not be competitive against funding from private and institutional equity investors”, says the strategic document.
Instead, the company has decided that it wants to become an “enabler” in the renewable energy sector. According to the strategy paper, “The guiding principle is ‘from volume to value’ with technologies ranging from large-scale offshore wind and hydro to onshore wind or photovoltaic. But we will no longer pursue volume- or percentage- targets in renewables (x TWh/y % in 2025). We will rather leverage our skills set by taking a ‘capital light’ approach. Based on funds sourced largely from third parties, we will position ourselves as a project enabler, operator and system integrator of renewables.”
New vision for retail
In addition to defining a new role in renewable energy, RWE’s management has also laid out an ambitious new vision for its retail business. The European energy retail sector is “about to undergo a massive transformation in the coming years”, says the strategy paper. RWE has a strong position in this sector with a “stable and huge customer base of almost 25 million customers across Europe which provides robust cash-flows”.
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
However, the management notes that there are “three challenges” the company has yet to meet. The first is “customer centricity”, which “will become a critical capability which we have not sufficiently addressed yet.”
Secondly, the strategy paper notes that “developing an innovative and profitable prosumer business model is a challenge we also need to address successfully as we see a billion-euro market emerging alongside our traditional value chain”.
Thirdly, it says that “we have to manage innovation more creatively and professionally in future. We need to establish a culture, structures and processes that allow us to develop new business models which go beyond incremental improvement of the existing value chain. In a highly uncertain and volatile business environment, we need to transform ourselves from a ‘risk mitigation’ to an ‘uncertainty management’ company.”
Ultimate and irreversible distortion
The company has two other businesses that it views as pillars of its future revenues. First there is the trading business, which will continue to operate globally as it is doing now. Second RWE owns extensive distribution grids in Germany and some other countries in the EU that did not require ownership unbundling. RWE views those grids as an indispensable “technological platform for the energy market transformation in Germany and in Central Eastern Europe”.
Whatever market design replaces the present one, it is very likely that it will contain a significantly higher level of regulation and administrative intervention
That leaves of course RWE’s conventional generation business. The main function of this “existing conventional fleet” will be to provide backup capacity. The strategy paper says that “the prospects for RWE’s generation business are driven by the following convictions”.
First, “although we see a huge build-up of a renewable generation infrastructure ( … ) the demand for reliable capacity will not decline significantly any time soon. The system requires roughly 260 GW of reliable capacity in Central-Western Europe in 2013 and will not require much less in 2030.”
“The second conviction, which partly breaks with the targets of the present strategy, is that portfolio churn is not an option any more. We have to live with our assets and make the best of them.”
Last but not least: Currently, backup capacity is needed but not adequately remunerated. This is the result of an ultimate and irreversible distortion of the present market design. This situation will end at the end of this decade at the latest.”
The consequences of these convictions for “the strategic direction of the conventional generation business” are twofold, says the strategy paper. The first is that RWE will “pursue no-regret-steps consistently and without hesitation. This implies scaling down and restructuring our portfolio to maximise its flexibility and efficiency. We understand that in a market still oversupplied with capacity cost, leadership and efficiency will be key differentiators in competition.”
The second is that RWE will “fight for the most reasonable market design. In the long term, RWE with its present asset base should find its role as the most efficient capacity and base-load provider for Europe. Whatever market design replaces the present one, it is very likely that it will contain a significantly higher level of regulation and administrative intervention. That means that RWE needs to offer its expertise in order to contribute to the political opinion forming process in a credible, trustworthy but also self-confident way.”
“Push Europe’s energy transition”
It is worth noting that Peter Terium, the 50-year old Dutchman who has been CEO of the German energy giant since July 2012, was among one of ten CEO’s of European energy companies who on 11 October gave a joint press conference in Brussels in which they warned that the EU’s energy and climate policy is having a disastrous effect on the power production sector, even leading to the risk of major blackouts.
“We cannot have a renewables society without security of supply”, Terium said on that occasion, according to a report from Reuters. “The S.O.S. signal that we are sending today is about the need to have a power market design that catches up with this reality.” Although the press conference of this so-called Magritte Group, named after an art gallery where the initial meeting took place, may have given the impression that the energy industry leaders were fighting to retain the traditional market structure, RWE’s strategic documents make it clear that RWE at least has accepted that a new market structure is emerging which the company has decided to give its full support.
Once there is a clearer understanding of what RWE is about and why we take certain actions, we believe we can move beyond being ‘tolerated’
According to one of the two strategy papers, RWE’s new mission is to “create value by leading the transition to the future energy world”. It adds that “with our mission, we emphasize that we are doing all in our power to become the most trusted, high-performing partner for the transition of the European energy landscape. To achieve this, we will enter into multiple dialogues to support a thorough and mutual understanding. Once there is a clearer understanding of what RWE is about and why we take certain actions, we believe we can move beyond being ‘tolerated’.”
Indeed, it appears that the RWE management does not merely support the energy transition, but it actively wants to lead it. According to the strategy paper, the company’s goal is that in five years’ time, “RWE will have been vital in shaping the energy industry across Europe.”
RWE also wants to be “the most efficient, integrated European energy utility in Europe by 2018”. It has set itself three strategic targets: “Successfully shape Europe’s energy industry, regain our financial fitness and transform RWE into a high-performing organization”. The first of these three targets is re-stated in the paper as to “push Europe’s energy transition”.
Clearly, the management of RWE, until recently seen as one of the “dirtiest” energy companies in Europe, has decided once and for all to leave its past behind and embrace a future in which it believes renewable and increasingly decentralized forms of energy will dominate.
Franscé Verdeuzeldonk says
Extremely interesting. Thx!
Michael A. Marullo says
This is arguably the very first concrete step by a major utility to transform itself into a true ‘Utility of the Future.’ Until now, this term has been used to describe a largely opaque future vision, which has now been colored with specifics that may well open the door to others following suit.
This brings RWE in line with EU policy. Which is a good starting point to lobby at Brussels!
Remember that at 14 October, RWE (with the CEO’s of major utilities), warned that EU energy policy may lead to major blackouts. Thus creating Fear, Uncertainty and Doubt (while they are not responsible for supply reliability: Grid management is, and those have no fear).
So RWE now pursue rule changes that make them responsible for executing the EU policy, with more strict regulations!
This may lead to EU rules, such as the new rules in Spain!
Those are such that only wind & solar installed and operated by the utility (RWE) is profitable!
In Spain now all electricity produced by any PV installation is taxed with 8ct/KWh, even if not delivered to the grid! And the Feed-in-Tariff is free, so utilities can offer only a few cent/kWh in area’s where they have a monopoly (most of Spain).
So the utilities regain 100% control over the electricity market, as no consumer will install PV, etc.
Henk Daalder Windparken Wiki says
Watch out, RWE will remain the dirty man in the fossil arena.
They are a 70+ billion fossil company, and now discovered a 1 billion prosumer market, how important will that be for them?
Further the article states that they sufer from lower prixces, because of more renewable production in Germany. But this German market is distorted by companies like RWE, only at times renewable producers can cash with wind and solar, during some hours of midday sunshine. It is th edoing of fossil companies to produces jus ta little too much, to lower the price.
Now it wants to become an “enabler”, just like Shell was.
Embrace a renewable business, and choke it to death.
Shell did this 3 times, with solar, wind and biomass.
Don’t trust these guys, their core business will remain fossil pollution.
Their real target should be to install CCS on all their fossil power plants, by 2025, which by then wil still be 95% of their turnover, as Shell does.
Alice Stollmeyer says
I find it very hard to reconcile this with RWE’s active participation in the Magritte Group (#10CEOsInitiative).
Too good to be true?
Chuck Drinnan says
The electric utility industry is in the second major change of the last thirty years. The first made the industry much more competitive. Results of that change include lower energy costs and promotion of really strong companies to the fore front.
Now the industry is being changed to distributed generation and much more renewable energy participation. These changes are significantly changing the marketplace and large successful utilities must change or face a much smaller market and much less profits.
The RWE strategic plan is a breath of fresh air. It is a plan if executed that will make RWE a leading European Utility for the next decades.
A note to the negative commenter. RWE is a major fossil fuel generator and will remain a major fossil fuel generator until RWE is able to change its business model and until the fossil fuel generation business is no longer profitable. As an industry the best we can hope for is that major fossil fuel generators can orderly change their energy mix and enable the industry to cleaner and more efficient energy.
Nichol Brummer (@Twundit) says
I read in their statement that they are now acknowledging that their current fossil-based business model is in deep trouble, and that it will not survive. But they have no idea how to escape from this predicament yet. They state that their solution is a flight forward, talking with anybody that wants to talk with them, thinking up new ideas that they do not yet have. They are hoping to occupy some position of power and trustworthyness again in the future .. but they don’t know quite how yet. But accepting the situation is the first step towards finding the way to survive.
José DeSouza says
Baseload and renewables can’t live together. See why: http://energyshouldbe.org/download.html
This is nonsense. The reality is that 2/3 of RWE power plants are not needed any longer. Mothball them – keep the modern 1/3.
As usual utilities are sayings something quite diff from the reality. RWE has done everything they can to stop solar installations. Its sickening that a pygmie like Altmaier is going to be part of the new energy committee.
Antonio Alegret says
One of the RWE´s expressed three convictions was, “Currently, backup capacity is needed but not adequately remunerated”
In my opinion this is the key question about the RWE new challenge: to delay and control the beat of renewable current and above all the future market (2030),meanwhile getting adequately remunaration.
Could the wolf become hen? Yes, it depends on the sepherd(Fair Public Market Power Regulation)
John Bottomley says
This is absolutely huge for several reasons:
1. That a utility is leading the charge in change. Good for them! And who would have thought? Imagine the perplexed faces in Paris, Rome, Warsaw, and about every other state champion’s capital city!
2. That they intend to originate investment opportunities for pension funds/insurance companies – who truly do have much lower costs of capital than utilities. And RWE have rightly seen this (and admitted it – no small feat). Asset transfer from utilities to institutional investors will be one of the largest transfers EVER, and it’s going to take place in Europe over the next 5-7 years,
3. They intend to use their existing fleet of ‘big-iron’ thermal, in the long term, as backup power. Think about that….backup power.
4. Renewables and energy storage is the future, as now confirmed by RWE.
So, what say you Eon, Enel, EDF, PGE, CEZ, NEK, iberdrola, etc, etc?
Mark my words – RWE’s announcement & change in strategic direction is no less significant than Edison inventing the light bulb, companies drilling for water in Arabia only to find copious amounts of oil, and the current shale gas revolution shaking the global fuels market.
One of the world’s largest utilities has spoken. Now it gets REALLY interesting!
Follow-up by Reuters: ‘A latecomer to renewable energy, Germany’s RWE is trying to turn itself green at a time when it lacks the two resources it needs most: time and money.’ http://www.reuters.com/article/2013/10/31/us-rwe-strategy-idUSBRE99U0CE20131031
Sonora Energy Group says
RWE — Bold, Smart Move. Why can’t USA based utilities get out of their own way on this issue?
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