Ailing German energy giant RWE spins off renewables

RWE's decision comes at a time of rapid changes in Germany's energy landscape. The transition to green energy sources has dealt a heavy blow to its largest utilities' business models. Renewables, mostly wind and solar, now produce roughly a third of electricity, but the largest power companies, such as RWE and E.ON, with their focus on fossil and nuclear power, have been slow to adapt. Additionally, more than half of Germany's nuclear power plants have been switched off since 2011 and the rest will be shut down by 2022 at the latest, whilst concern about the ability of these large utilities to pay for the decommissioning has recently risen.

According to the plans, RWE will spin off its renewable energy business, its regulated gas and electricity grids and the retail subsidiaries. Ten percent of this "new company", which does not yet have a new name, will be sold to investors by the end of 2016. Eventually, 49 percent could be sold, CEO Peter Terium said. RWE, which had recently said it had problems to raise capital, thus gains access to fresh funds and the new company would appeal to investors who are interested in a largely regulated and green energy business. "We do not split RWE, but we bring order into our house, in a fashion that makes us fit for the energy markets of tomorrow", Terium said.

RWE's supervisory board, where municipalities from North-Rhine Westphalia hold a blocking minority, has not yet approved the new strategy. But Terium said he is hopeful this will happen in a meeting on 11 December. Terium claimed that the hasty and premature announcement was necessary after the plan had leaked to the press.

RWE shares leapt more than 14 percent on the announcement. But even after this jump, RWE's market capitalisation is still less than half of its value one year ago. RWE is under pressure on numerous fronts, as Terium admitted at the press conference. "Renewable energy has replaced conventional power stations, particularly gas power stations, faster than anticipated."

Power prices have fallen sharply in recent years, mainly due to the expansion of green energy, but also because of the economic crisis in Europe. Also, Germany's exit from nuclear power "has rendered our long term plans obsolete", Terium added. On top of that, RWE is highly indebted with 26 billion euros outstanding, albeit much of that in the form of long-term commitments to cleaning up decomissioned nuclear power stations and nuclear waste.

Bank analysts largely applauded RWE's decision. Erkan Aycicek from Landesbank Baden-Württemberg (LBBW) said that RWE had faced a dilemma. On the one hand, it was clear that the company needed additional equity, because additional credits would have been problematic regarding credit ratings. But the municipal owners blocked this because it would have diluted their share and cost them their blocking minority. "This is a solution in terms of financial engineering. Now RWE has access to fresh capital, and this is important for their short- and mid-term solvency and the ability to invest in the future", Aycicek said.

On the other hand, Aycicek said, the decision had been taken under pressure. "RWE is invested in fossil and nuclear energy, where profitability has decreased a lot over the last years and hence deteriorated the overall financial position of the company." To regain a long-term perspective for the core business, revenue from conventional power plants would have to go up. "This could happen, albeit not in the foreseeable future, or possibly if the German government reverses its decision not to introduce capacity payments for fossil power stations."

In contrast to RWE, E.ON is not selling parts of its business while retaining overall control, but will be split in separate entities. The main company will keep exactly the business fields RWE is spinning off into the new daughter company: grids, renewable energy and retail. Trading and fossil power generation will be placed into a new company called Uniper. Some of Uniper's shares will be handed out to E.ON's owners in late 2016, and more will be sold on the market. But E.ON, in contrast to the original plans of the management, will keep the nuclear power stations.

During the last months, the political debate about the ability of Germany's four largest energy companies to pay for the decommissioning of nuclear power plants and the disposal of toxic waste had intensified. In reaction to E.ON's original plans, the German government announced the introduction of a law that would make current operators liable for the cost even if they would sell or spin off their nuclear operations.

Read a CLEW dossier on utilities in the energy transition here.