Merkel Losing Allies in $700 Billion Shift to Renewables

Photographer: Guido Bergmann/Pool/AP Photo

German Chancellor Angela Merkelflies over a wind farm on the Baltic sea, near Zingst, Germany, on May 2, 2011. Close

German Chancellor Angela Merkelflies over a wind farm on the Baltic sea, near Zingst,... Read More

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Photographer: Guido Bergmann/Pool/AP Photo

German Chancellor Angela Merkelflies over a wind farm on the Baltic sea, near Zingst, Germany, on May 2, 2011.

Chancellor Angela Merkel is losing support from her two biggest allies in the utilities industry as their mounting debt prompts a retreat from renewable-power expansion, undermining her $700 billion program to reshape Germany’s energy market.

EON SE and RWE AG (RWE) are reducing clean-power spending for the first time since 2009 to cut a combined 69 billion euros ($88 billion) in debt and curb costs. That limits funds for offshore wind energy, the centerpiece of Merkel’s plan to replace all atomic reactors by 2022 and triple renewables’ share by 2050.

With consumer power bills increasing and Merkel facing elections in September, Germany’s energy policy is rising on the political agenda. The cost of developing wind farms in the North Sea has surged following construction glitches and delays in linking turbines to the grid.

“The entire energy switch has derailed,” Marc Nettelbeck, an analyst at DZ Bank AG, said this week by phone from Frankfurt. “The difficulties connecting offshore wind farms to the power grid reduces their profitability and renders the original investment calculations of utilities invalid.”

Merkel has sought to spur development of wind farms at sea -- where gusts are typically strong enough to keep turbines generating around the clock -- because most renewable sources can’t provide constant, or baseload, power like nuclear plants.

The connection setbacks are “problematic for baseload power capacity and can lead to the failure or delay of the energy switch,” Nettelbeck said.

Spending Reduction

EON, the country’s biggest utility, said last month it will lower clean-energy investments to less than 1 billion euros in 2015 from 1.79 billion euros last year. RWE will cut annual renewables spending in half to about 500 million euros in the next two years.

EON rose 0.8 percent to close at 14.16 euros in Frankfurt, making it the only gainer in the benchmark DAX index. RWE was down 0.3 percent to 28.90 euros.

Both utilities are under pressure to reduce costs after Japan’s nuclear meltdowns two years ago prompted Merkel to close eight reactors. That wiped a combined 24.9 billion euros off their market value in the nine months following the disaster in Fukushima.

EON has sold almost 18 billion euros of assets ahead of schedule. RWE said last month it would sell its Dea oil and gas unit to cut capital spending after scrapping a 7 billion-euro target for disposals.

Overseas Investments

“RWE’s debt situation simply doesn’t allow greater investments, in part because its divestment program didn’t see major progress,” Daniel Seidenspinner, an analyst at B. Metzler Seel Sohn & Co. KGaA, said by phone from Frankfurt. “EON decided to put its money outside Europe where it sees greater chances for growth.”

EON, based in Dusseldorf, has recently added power assets in Turkey and agreed last week to boost its stake in Brazil’s MPX Energia SA (MPXE3) to 36 percent by acquiring 24.5 percent. Overseas investments may help counter weaker profit at home, where demand and new projects have stalled. EON’s 1 billion-euro Amrumbank West wind park has been pushed back by about 15 months to 2015.

While Amrumbank West shows a “clear commitment” to the offshore industry, the “enormous market challenges force us to reduce our total investments,” Carsten Thomsen-Bendixen, a company spokesman, said by phone.

RWE also has had to reduce investments in part because of the costs of Merkel’s nuclear exit, Martin Pack, a spokesman, said by phone. The connection of RWE’s Nordsee Ost wind farm to the mainland grid has been delayed by about two years to 2014.

Targets Scrapped

Thomsen-Bendixen and Pack didn’t comment further on whether the investment cuts threatened the government’s energy switch. The Environment Ministry didn’t respond to a call or e-mail seeking comment.

RWE will slow the development of offshore wind projects to “one park at a time” to reduce investment risks, Chief Executive Officer Peter Terium said in March. The Essen-based utility has abandoned plans to have 4,500 megawatts of renewable capacity under construction or in operation by 2014.

Both utilities have said they’re increasingly looking for partners in renewable projects as they cut spending. EON has already sold stakes in three U.S. wind farms to a Danish pension fund and seeks “sensible partnerships” also for its German projects, CEO Johannes Teyssen said last month.

Wind Risk

“We will no longer necessarily be both operator and sole owner of wind farms,” EON said in its annual report in March. “Instead, for projects where we find interested partners to be co-owners, we intend to concentrate on making our money through wind-farm design, planning, construction, and operation.”

Utilities’ withdrawal from renewables targets may threaten Germany’s goal to have 10,000 megawatts of offshore wind capacity by 2020, two years before the last remaining nuclear plants shut permanently. The government sees offshore wind at 25,000 megawatts by 2030 -- up from about 280 megawatts now --as it implements its 550 billion-euro plan to replace reactors.

“The offshore expansion in Germany is much slower than anticipated by politicians,” said Marc Oliver Bettzuege, head of Cologne University’s Energy Economics Institute. Without a focus on wind from “financially strong investors” such as EON and RWE, Germany will need to import a “large amount” of clean power to reach its goals, he said.

Slow Start

Germany’s four main utilities were at first slow to embrace clean energy. EON, RWE, EnBW Energie Baden-Wuerttemberg AG (EBK) and Vattenfall AB owned 61 percent of Germany’s fossil-fuel-fired generation capacity in 2011 and only 6.5 percent of renewable capacity, according to Bremen-based Trendresearch GmbH.

EON said late that year it would invest 7 billion euros in renewables over five years, while RWE said in early 2012 it would spend 5 billion euros in four years.

The subsequent decision to rein in spending “is not anti-renewable, it’s focusing on their best projects,” Chris Rogers, an analyst at Bloomberg Industries in London, said by phone.

The prioritization isn’t helpful to Merkel’s energy policy, he said. While it isn’t “doomed,” she may struggle to attract investors as cash-strapped utilities put their money in fast-growing markets such as Brazil and Turkey, he said.

To contact the reporters on this story: Stefan Nicola in Berlin at snicola2@bloomberg.net; Tino Andresen in Dusseldorf at tandresen1@bloomberg.net.

To contact the editors responsible for this story: Reed Landberg at landberg@bloomberg.net; Will Kennedy at wkennedy3@bloomberg.net.

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