Energy Post reported recently that German utility RWE is “shedding its old business model and embracing the energy transition”. This is not surprising, writes solar industry pioneer Peter F. Varadi. In fact, says Varadi, the new strategy merely formalizes what is already happening in practice. (Photo: Tim Fuller)
The situation which the large German utilities are facing is very similar to what was happening in the telephone business which similarly to the electric utilities also started with central stations connected to customers by wires and was also a monopolistic situation which was regulated by localities and governments. Same way as the utilities, it was a regulated, stable and profitable business. The emerging cell (mobile) phones which were not connected to the local central station by wire, but could be used anywhere in the world, became a fast growing, and importantly, an unregulated business, where profit is limited only by competitors.
Telephone companies realized this during the nascent stage of the cell phone revolution. They had the vision to overcome their “corporate culture” of the wired phone business. They established independent separate corporate structures for their unregulated cell phone business and put their money into it. They even unloaded the wired telephone business which was not a growth area anymore. As a matter of fact Verizon, one of the largest US telephone companies, lost 45% of its wired customers over the past 5 years. Verizon in May 2009 sold its wired telephone business in 12 mostly western states of the USA to Frontier Communications Corporation.
Facing similar changes in the energy market, not only RWE but the other three major German electric utilities, E.ON, EnBW and Vattenfall have also opened their eyes. They have realized that PV, the technical curiosity they ignored and even hindered for so many years, has become one of the major electricity sources in Germany, even threatening their survival. Maybe they took notice of the changes the telephone companies made and suddenly decided they should do what the old saying teaches: “if you cannot beat them, join them”.
“We (the utilities) will be here 20 years from now to honor our guarantee, but one cannot be sure that our competitors will be around”
If I would have written this paper 2 years ago and wrote what you are going to read, I would have called it utopia. Nobody would have believed it. But this unbelievable story actually happened. These four large German utilities decided to become “green”. This can be seen – if one goes to a German oriented search engine, for example “google.de” – from their recent advertisements. They show that all of the four major German utilities are “solarized”: there is RWE Solar, E.ON Solar, EnBW Solar and Vattenfall Solar. The four large German utilities have indeed suddenly turned “green”.
All four German utilities have branched out into the unregulated decentralized solar electric business, offering to install PV systems and guaranteeing them for 20 years. Funds come from the owners of the houses or farms or from investors. The utilities themselves are not investing money.
The utilities have realized that instead of fighting PV, they can sell decentralized PV systems and also develop a maintenance business of the decentralized PV systems. They all offer their customers the possibility to install a PV system on their property and connect them to the grid. They also offer a 20 year guarantee and if needed insurance. They can be successful in selling PV systems, because they can say: “we (the utilities) will be here 20 years from now to honor our guarantee, but one cannot be sure that our competitors will be around.” With this, they will be able to develop a truly “win-win solution”.
For utilities it is a win situation to design and install the PV systems on the roofs of homes and barns. RWE has already gone one step further. Since the spring of 2012 RWE is offering “RWE HomePower solar“, (http://solarstrom-tag-und-nacht.de/), a sophisticated electric storage system which is now also being promoted and subsidized by the German government for houses. All of this constitutes a new business for them. Making houses and farms independent from the utilities like RWE is doing, they may lose the homes and farms as electricity customers, which was a regulated business, but they will stay as customers in an unregulated business needing maintenance of their PV systems. If the customers have surplus electricity they can sell to the utility and if they need electricity they can buy from it.
The PV industry and home owners will win also. The utilities will become one of the big customers of the PV industry and in their own interest they will not cause problems in interconnections. The home owners will be happy to wind up with an uninterrupted electricity source and an assurance that they will pay the same amount for electricity for 20 years. They will not be affected by fuel cost fluctuations and will not be faced with blackouts because of grid overloading or a tree falling somewhere on a power line or a lightning strike into a transformer.
The utilities have started a change without investing a penny!
The RWE Solar web site declares: “Switch now to smart energy. Make your roof a profit center”. E.ON Solar: “You should be your own electricity producer”. EnBW Solar: “Innovative all-round-carefree-package for Photovoltaic customers”. Vattenfall Solar: “Without moving parts, noise and emission-free, thousands of plants in this country provide electric power.” (The quotations are translations from the German web sites of these companies). It is hard to believe, but they are all talking about PV.
So, while at one level they are still discussing how to change their business model, in practice they have already started a change. “We will rather leverage our skill set by taking a ‘capital-light’ approach. As RWE declared in its Strategic Review, “Based on funds sourced largely from third parties, we will position ourselves as a project enabler, operator and system integrator of renewables.” They also started the next step to make small regulated customers independent from the utilities.
This does not mean that they will simply discard their old business model, the regulated centralized electric generating system. They will keep that intact. They are also not planning to invest their own money to add any meaningful PV systems to their existing generating capacity.
This approach is quite understandable. By making homes and farms independent the utilities are losing many small customers but they escape the menace that these homes and farms ruin their profitable peak power business by dumping the large quantity of PV electricity (over 20 GW) into the grid at peak power times, when the sun is shining. That utilities are not investing money in PV systems themselves is also understandable, as they already have enough capacity for peak power. They do not need to add PV which is producing electricity also during peak power. Losing regulated electricity customers is compensated by entering the unregulated decentralized solar-electricity business where like in the Phone companies’ cell phone business only the sky and competition are the limit of profitability.
In other words, the utilities have started a change without investing a penny! It seems the German companies selected a possible solution to the problem caused by the decentralized PV systems and simultaneously entered that business.
Of course success is not guaranteed. The decentralized nature of PV may seriously hurt the utilities’ bottom line, making it necessary for them to restructure their old business model after all. RWE’s stock has lost over half of its value over the last three years, and though it has bounced back somewhat in recent months, it is by no means back at its old level.
© Peter F. Varadi. All rights reserved
Peter F. Varadi is the co-founder in 1973 of SOLAREX Corporation, Rockville, MD (USA), which pioneered the utilization of solar cells (PV) for terrestrial applications. By 1978 it had become the largest PV Company in the world. After it was sold to AMOCO in 1983, Varadi continued to work as solar power consultant, first for SOLAREX, later for the European Commission, The World Bank, NREL, and many other organizations. In 2004, Varadi was awarded the European Photovoltaic Industry Association’s (EPIA) John Bonda prize.
Varadi is the author of two books and has just completed his third book: “SUN Above the Horizon – the Meteoric Rise of the Solar Industry”, which will be published in the first quarter of 2014 by Pan Stanford Publishing. Parts of this paper are taken from this book. See also his ealier article on Energy Post: The Emergence and Great Future of Smart PV Systems.