RWE’s Race for Renewables Seen as Too Little, Too Late

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RWE AG Chief Executive Officer Peter Terium
RWE AG Chief Executive Officer Peter Terium said last year, the company entered the renewables market “possibly too late.” Photographer: Simon Dawson/Bloomberg

RWE AG, the German utility whose coal-fired plants make it Europe’s largest carbon emitter, officially started the company’s largest renewables project on Thursday: a wind farm in Liverpool Bay off Britain’s coast.

The trouble for RWE is the Gwynt y Mor project, able to generate enough power for about 400,000 homes, could prove too little, too late for a utility some investors say has failed to adjust to the transformation of Europe’s power industry.

RWE generated 4.8 percent of its electricity from alternative energy last year, less than half the proportion of competitor EON SE. In Germany as a whole, 26 percent of power came from renewables. Even in the U.K., where RWE is one of the top six power suppliers, the figure was 19 percent.

The Essen-based utility, forced to close its German nuclear reactors and grappling with power prices that have fallen every year since 2010, is getting left behind.

“RWE certainly hasn’t focused on renewables in time,” said Ernst Gerlach, director of Verband der kommunalen RWE-Aktionaere GmbH, a municipal investor association that represents 23 percent of the company’s shareholders.

In fact, the company’s cutting back on wind and solar investment. In order to shore up its finances, RWE’s reducing its annual capital expenditure on renewables to a third of 2013’s 1 billion euros ($1.12 billion) in the three years through 2017. There’s little prospect of the company ending its reliance on burning coal, especially lignite -- a soft type of the fossil fuel.

After this year’s disposal of the company’s oil and gas unit for 5.1 billion euros, including debt, Chief Executive Officer Peter Terium sees RWE in a “controlled offensive” on wind power, he told reporters on Wednesday in Dusseldorf.

Thursday’s inauguration catapults the company to No. 3 in Europe’s offshore market, he said in a speech at Gwynt y Mor’s operation center in Mostyn, North Wales.

Made Mistakes

While Terium admits RWE has made mistakes regarding renewables, including underestimating the development of solar power, “it’s reasonable not to spend more money than comes in,” he said.

According to Thomas Deser, a fund manager at Union Investment and a big RWE shareholder, “RWE lacks financial scope to significantly expand renewables and reduce the gap to more advanced competitors.”

The company “strategically has reached a deadlock because the business model to a big part is based on the production of lignite and the generation of electricity from it and from nuclear power,” he said.

Closed Reactors

While coal-fired production has held its market share in recent years because Germany needed both renewables and fossil fuels to compensate for closed nuclear reactors, there are signs that could be about to change.

Europe can’t afford to keep coal-fired plants going and meet stringent targets to reduce emissions. Germany’s government expects utilities to cut carbon dioxide output in the country by an additional 22 million metric tons by the end of this decade to help meet the nation’s target to reduce emissions by 40 percent from 1990.

Investors, including the world’s largest sovereign wealth fund, are also growing more hostile toward coal. Norway’s $890 billion state fund will be barred from investing in utilities or miners that base at least 30 percent of their business or revenue on coal from next year. RWE generated 60 percent of its electricity from coal last year.

Norway’s not alone. Investors from Stanford University to insurer Axa SA and the Church of England have pledged to reduce or scrap holdings of companies that rely on coal.

Worst Performer

The share price fell to the lowest in more than 12 years this week and the company has been the worst performer in Germany’s benchmark DAX index this year, dropping 24 percent.

For Gerlach, RWE’s future lies in expanding services for customers, plant engineering and, in the longer term, electricity storage.

EON has chosen a more radical course. It said last year it will focus on renewables, distribution and marketing and spin off conventional power generation, global energy trading and oil and gas exploration into a new company called Uniper.

It’s the most significant response yet to Germany’s Energiewende, or energy shift, the plan to derive as much as 45 percent of the country’s electricity generation from alternative sources by 2025.

Although RWE rejected a split in 2012, it hasn’t ruled out following EON’s example at some point.

In the meantime, the utility, with debts of 27.7 billion euros, needs money to expand renewables more quickly, Union Investment’s Deser said.

“The management board has to wonder what RWE can possibly sell to free up funds or whether a merger with another company would help,” he said.

For more, read this QuickTake: Wind Power

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