In November last year, E.ON made a startling announcement: the German energy giant, which supplies about 35 million customers, is to undergo a radical reorientation towards renewable energy.
Planned for 2016, the restructure will see the existing company split into two independent firms: E.ON will focus on clean power and distribution networks, while a new, as yet unnamed company will handle conventional generation and upstream operations. With twice as many employees, the renewables arm will be by far the larger – a reflection of what E.ON calls "the transformation of the energy world".
The firm’s CEO Johannes Teyssen said the restructuring was a response to "dramatically altered global energy markets, technical innovation and more diverse customer expectations" – the latter a nod to growing consumer pressures for clean energy supplies.
Teyssen did not specifically mention the impact of Germany’s renewables-focused Energiewende (energy transition) policy on conventional power generation, including the forced shutdown of eight nuclear reactors (half of which were owned or part-owned by E.ON), or the sharp fall in the country’s natural gas generation in recent years. Doubtless, though, they all played into E.ON’s decision, together with the firm’s $38 billion debt.
Winds of change
Reacting to E.ON’s decision in December, the president of Germany’s Federal Environment Agency, Maria Krautzberger, told the Guardian she expected similar announcements from Germany’s other utilities to follow. Of the remaining big four, Vattenfall had already announced earlier in 2014 that it would "transform its business into a more renewables-based portfolio", and has since restructured to create a new wind energy business unit. RWE clarified that it did not intend to split its core business, but that it would invest €1 billion in its renewables arm, RWE Innogy, between 2015 and 2017. It also announced last year plans to mothball about 3.1GW of fossil fuel plants. EnBW has said it will double planned asset sales to €3 billion to free up funds for clean energy investment.
It is difficult to predict what lies ahead for Europe’s energy sector. Much will depend on the impact of government policies, national and continent-wide. Under Germany’s Energiewende plan, which aims to switch off all of the country’s nuclear power plants by 2022 and cut carbon emissions by 40% from 1990 levels by 2020, renewables generated a quarter of national power for the first time ever last year. They also form the base load of the nation’s energy supply, while conventional sources make up the difference between supply and demand.
Yet current German policy has also overseen a resurgence in coal power: Chancellor Angela Merkel’s decision in 2011 to close eight nuclear reactors in the wake of the Fukushima disaster saw its generation jump by 11% over the following two years – although recent data from AGEB shows it fell again by 6% in 2014. Meanwhile, gas-powered generation, which is relatively clean, slipped from 89twh in 2009 to 58.5twh last year – a drop largely attributed to solar power growth.
Such unintended consequences highlight the inherent ambiguities in even the most one-sided government policies, and the difficulties for utilities in making accurate market predictions.
Europe undecided
Taking Europe as a whole, much will depend on whether the EU’s Emissions Trading System (ETS) finally gets its act together. Dogged by the 2008-09 economic downturn and a two billion surplus of carbon allowances, prices are currently about €7 a ton, down from a high of nearly €30 in 2008. A "market stability reserve" has been proposed to resolve the crisis (letting allowances be removed or replaced to control price), but chaotic divisions in January within the European Parliament meant a start date could not be decided, which suggest that future progress will be anything but easy.
"It was bad enough three years ago, when the prices were quite stable. Now, despite them being so low, the EU’s aim is to get them up to about €30-40 a ton," says Amisha Patel, head of power, renewables and nuclear at the UK trade association Energy Industries Council.
"Without a strong CO2 price signal, it’s difficult to encourage investment away from coal and towards renewables. So the politicians will have to strengthen the ETS quite a lot and set it at a very high level. It’s not like the UK, where no more coal is allowed to be built. Europe is much more reliant on this carbon price signal."
More growth to come
Yet despite her reservations over the ETS, Patel is confident that clean energy investment will grow over the coming years. "Having a major utility such as E.ON come out and say it wants to focus on renewables sends a positive signal down the supply chain and lends credibility to Germany’s plans to spend money on clean energy. Across Europe, government policy drivers and EU targets will also help," she says.
"Market forces are also key. For example, France, Germany and the UK are currently competing for offshore wind – it’s about who’s going to be able to bring the costs down quickest."
In 2014, Bloomberg New Energy Finance put total European clean energy investment at $66 billion. Although only a 1% increase on 2013, the year saw seven separate billion-dollar offshore wind projects reach a "final investment decision", including the 350MW $1.7-billion Wikinger project in the German part of the Baltic Sea, the 402MW $2.6-billion Dudgeon array in British waters and the 600MW $3.8-billion Gemini undertaking off the Dutch coast. Separate Bloomberg figures also showed green bond issuance in 2014 hit $38 billion, 2.5 times the previous year’s total.
But as E.ON’s decision to retain much of its conventional capacity shows, energy security requires intermittent renewables to be supported by a more consistent fuel supply. Gas plants have traditionally provided this power source, yet, while there is a clear mid to long-term need for their energy, poor market conditions, driven by a capacity overhang and low coal prices, are putting off investors.
The gas challenge is exacerbated by Europe’s growing need to reduce reliance on Russian imports amid continuing tensions with the Kremlin. The former Soviet Union supplies about 30% of EU gas and up to 75% of the gas and/or oil imports for some member states. What’s more, the current fall in oil prices is weakening European capex. This is most apparent in the North Sea, where Wood Mackenzie has estimated £2 billion of investment will be at risk over the next two years. But projects in Romania, Cyprus and Greece are also reportedly under threat, making the region even more import-dependant and further weakening security.
Some European nations are actively seeking solutions. In the UK, a capacity auction – whereby generators are paid to guarantee power availability – was held in December, partly to incentivise new, more efficient power stations. But success was limited: only one new gas plant, the planned Trafford Power Station, received a contract. Germany is currently discussing implementation of a similar policy.
An energy union
At the international level, Donald Tusk, president of the European Council, is keen to create an "energy union", which would see large contracts jointly negotiated, and more storage capacity and cross-country connections. Not only would this improve security by preventing Russia from playing European nations off against one another, it would also get rid of what he calls the continent’s inefficient energy islands by lowering waste and cutting prices. It is an ambitious plan, but progress is being made: France and Spain finally agreed in December to boost electric power-line capacity between one another – albeit in the face of staunch French opposition.
Investing more in renewables could also boost Europe’s energy security by reducing its dependence on foreign imports – a point highlighted by trade bodies in an open letter to then-president of the European Commission José Manuel Barroso in May last year. The letter’s signatories have said the current minimum target of 27% renewables by 2030 would only reduce gas imports by 9%, suggesting that more needs to be done. The EU spent €545 billion on energy imports in 2012.
As far as E.ON is concerned, this combination of market forces, government policy and energy security concerns suggests its decision to focus on renewables, while maintaining much of its conventional power production, is the right one in the long run. And with the move widely regarded as the first of many, Europe’s energy landscape seems to be slipping inexorably towards a renewables-focused future. For the region’s wind sector, the question is simply how far and how fast?
