More on Utility Death Spiral in Germany
March 12, 2014
More on Germany’s Walking Dead.
The German mega-utility RWE provided another dismal reminder today of the painful transition European power companies are undergoing.
According to 2013 financial results, the utility lost more than $3.8 billion last year as it cycled down unprofitable fossil fuel plants due to sliding wholesale prices. The yearly loss is actually quite historic; it’s RWE’s first since 1949 when the German Republic was formed.
This follows poor earnings news from Vattenfall, a Swedish utility with the second-biggest generation portfolio in Germany, which saw $2.3 billion in losses in 2013 due to this same “fundamental structural change” in the electricity market.
The problem is well documented: high penetrations of renewables with legal priority over fossil fuels are driving down wholesale market prices — sometimes causing them to go negative — and quickly eroding the value of coal and natural gas plants. At the same time, Germany’s energy consumption continues to fall while renewable energy development rises.
RWE’s CEO Peter Terium called it “the worst structural crisis in the history of energy supply.”
To make matters worse for utilities, their commercial and industrial customers are increasingly trying to separate themselves from the grid to avoid government fees levied to pay for renewable energy expansion. According to the Wall Street Journal, 16 percent of German companies are now energy self-sufficient — a 50 percent increase from just a year ago. Another 23 percent of businesses say they plan to become energy self-sufficient in the near future.
It’s a real-world example of the “death spiral” that the industry has so far only considered in theory: as grid maintenance costs go up and the capital cost of renewable energy moves down, more customers will be encouraged to leave the grid. In turn, that pushes grid costs even higher for the remainder of customers, who then have even more incentive to become self-sufficient. Meanwhile, utilities are stuck with a growing pile of stranded assets.
When unveiling today’s dismal earnings, RWE’s Terium admitted the utility had invested too heavily in fossil fuel plants at a time when it should have been thinking about renewables: “I grant we have made mistakes. We were late entering into the renewables market — possibly too late.”
As power company executives collectively gnash their teeth, green energy advocates are praising the tumultuous shift these utilities are enduring. Although both sides disagree on the ultimate value of the outcome, the underlying situation is undebatable: Germany is in the midst of a massive “structural” change that is ripping gaping holes in the traditional utility business model. And now the cash is bleeding faster than ever.
In a shareholder document from last September, the German utility EnBW illustrated how bad the bleeding has gotten. EnBW has the fourth-biggest generation pipeline in the country, and has been forced to make a serious shift in its own strategy.
The first graph (above) shows how far forward prices for conventional power plant generation have plummeted since 2011. As the profitability of fossil fuel plants continues to fall, EnBW concluded in a strategy document that it needs to “develop new business models…without delay.”
Climate Denial Crock of the Week 
March 12, 2014 at 1:35 pm
Meanwhile, Germany’s CO2 emissions rose again last year as utilities frantically switch to coal to stay afloat.
http://www.umweltbundesamt.de/en/press/pressinformation/greenhouse-gas-emissions-rise-again-slightly-in
March 12, 2014 at 2:49 pm
important to point out that Germany’s co2 footprint is still down if you look at a 20 year period. I believe its a mistake to get lost in year to year variations when the general trend is positive.
That said, there needs to be more attention to changes in the grid, connectivity, regulatory structures etc to move things forward.
March 12, 2014 at 4:02 pm
Horsepucky. The statement is not a quote from the article cited, but contains incorrect inferences. The German utilities are not frantically switching to coal to stay afloat. They are frantically switching to renewables to stay alive. Pointing to a temporary blip in CO2 is an attempt to attribute something to statistical noise. As Amory points out, ironically, the increase in coal use is attributed to an increase export to France and Netherlands and in part to increased natural gas prices. Meanwhile renewables are gaining much faster than the blip in coal use. Its hard to miss the comment from the offered citation that says,
“As in previous years, renewable energy is the reason for the relatively moderate rise in emissions in 2013 despite greater use of coal-generated electricity. According to the Working Group on Energy Balances, renewables were already contributing 23.9 per cent of gross electricity production in 2013. UBA Vice-President Holzmann commented, “We would be well-advised to continue with rapid development of renewable energy.”
Amory Lovins –
http://www.ft.com/intl/cms/s/0/e6470600-77bf-11e3-807e-00144feabdc0.html#axzz2vmcJKQuD
March 12, 2014 at 4:31 pm
My electricity bill last month was $0.74 as a result of fitting solar panels. It does not tale a genius to work out that the power companies will have to rethink their business model. What amazes me is that they are not having a big push for the transport industry. It is a huge market and much of it available for conversion. These executives pull down huge salaries and sit in their offices seeing the turnover graph heading for the floor and can’t work out what to do
March 12, 2014 at 6:35 pm
It is easy to create mal-incentives.
Local generation is great … but it is often not cost=effective to design local generation-storage to cover all needs, especially given the cost of effective batteries at present. Some people are looking forward to V2G to use car batteries, but one still needs the grid.
Ideally, public utility commissions need to do “decoupling”:
1) Utilities need to be compensated for engineering and running the grid.
2) Utilities should get compensated for efficiency, not just how many KWh they generate.
When that sort of thing happens, one finds utilities giving efficiency tips to customers or (years ago) giving away CFLs to get people to try them.
While grids need to be re-engineered, I hope governments thin kahrd before accidentally dismantling them.
March 12, 2014 at 8:54 pm
I know that many of the “green activists” are just ecstatic that their efforts are driving the German public utilities towards bankruptcy. That used to bother me, but now it doesn’t. It will be a welcome dose of reality when some of the utilities finally shut down, and then those with solar panels will no longer be able to “use the grid as a storage battery” as they do now.
With the coal and nuke power plants taken permanently offline, then we’ll finally find out how well that solar supergrid really works.
Hope some of those folks have backup gasoline generators.
March 12, 2014 at 11:36 pm
I share your concern about the cavalier mindlessness of some “green activists”.
Energiewende is subsidy madness. I would love it if the creators of this scheme had the decency to compete fairly in the marketplace and not float on the artificiality of the preposterous feed-in tariff boondoggle they’ve created. Basically, Energiewende plays the average citizen as the chump in the game. The Economist explains how: http://tinyurl.com/b76ohll
I’m appalled at the destruction of value among the utilities. This transition was not intelligently handled.
***
Another way to look at this is to compare the market valuations of various companies.
RWE is the largest of the German electric utilities delivering a vital product/service to millions of businesses and households with vast infrastructure to make it all work on a 24/7 basis. It has paid steady and consistent dividends to a large slice of society for decades. It pays taxes. This vital company is valued at US$17.5 Billion.
Apple is a corporation that sells throw-away gadgets that unattached to the Internet would be largely useless. It has little in the way of infrastructure. It contracts its manufacturing to others and is perhaps the greatest tax cheat on the planet. It is valued at $478 Billion
Facebook is perhaps the greatest source of annoyance and gossip on the planet. It provides “the world’s biggest water cooler” where the industrial productivity of thousands of businesses is destroyed. It’s mainly an ad slinger today. This company, offering no vital social service whatsoever, and scheming on how to emulate Apple’s tax cheating ways is valued at $180 Billion.
I no longer believe capitalism to be a rational system, at all. I no longer believe “the market” to be anything other than an insane casino. There has to be a better way to deliver the essential goods and services required for human life and the sustenance of the only planet we have than the rackets we’re enduring today.
What is to be done?
March 13, 2014 at 1:18 am
Stop complaining about renewable subsidies. They are being phased out in Germany. Wind has already achieved grid parity. There is no PTC for wind in the US. Can the same be said for fossil fuels? There is no plan to phase fossil fuel subsidies out. That is the true madness. Subsidies for century old industries , the largest and most powerful in the world. Where is your sense of subsidies when it comes to the fossil fuel industry? If there were no subsidies for oil there would need be none for competitors. Why not end fossil fuel subsidies immediately. Complaints against renewables echo oil industry propaganda naively parroting their distortions and are unbalanced. Renewable subsidies are a fraction of existing established industry subsidies. Their aim is to destroy competition by lobbying, rather than face renewables in the market where they are losing.
March 13, 2014 at 7:16 am
I’m looking for a good, credible, compilation of fossil fuel industry subsidies, if anyone has a link.
March 13, 2014 at 8:21 am
http://thinkprogress.org/climate/2013/11/07/2908361/rich-countries-fossil-fuel-subsidies/
March 20, 2014 at 3:40 am
Everyone agrees the direct subsidies are about 500 billion a year. After that its complicated and no one agrees, because the rest are “externalities” that everyone is fighting over. Those can’t be zero. Whats the cost of GW? If we know that, then you could say. One thing for sure, its way more than the cost of direct subsidies. Grist has a good article. It references the IMF. It references the US Interagency Working Group on the Social Costs of Carbon. (SCC)
http://grist.org/climate-energy/imf-says-global-subsidies-to-fossil-fuels-amount-to-1-9-trillion-a-year-and-thats-probably-an-underestimate/
“According to its research, 20 countries have pretax energy subsidies that exceed 5 percent of gross domestic product. The top three subsidizers are the United States at $502 billion, China at $279 billion, and Russia at $116 billion.”
http://www.nytimes.com/2013/03/28/business/imf-calls-for-curbing-fuel-subsidies.html?_r=0
I would go with IMF.
March 16, 2014 at 5:41 am
Never mind that the new UK nuclear deal (Hinckley Poiint), the first in a Western country after Fukushima, needs a higher feed-in tariff then most new renewables receive in Germany.
March 13, 2014 at 8:03 am
[…] largest electric utility, echoed his stark warning that utilities must change to survive. Terium admitted that his company lost money for the first time in 60 years last year—$3.8 billion—because it […]
June 11, 2020 at 9:12 pm
[…] largest electric utility, echoed his stark warning that utilities must change to survive. Terium admitted that his company lost money for the first time in 60 years last year—$3.8 […]