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09/10/2017

Is conventional generation dead? Not quite yet!

In their article “How to lose half a trillion euros” [1] from 2013 The Economist painted a bleak picture, of diminishing growth and market share going forward for the incumbent energy giants of Europe. 

To regain their competitive edge, between late 2014 and 2015, German giants Eon and RWE decided to split their centralized fossil assets from their renewable assets into different companies. The idea was that each company would perform better if they did not have to make compromises. The companies with renewable assets would contribute to a greener energy system, while the companies with conventional assets could focus on providing much needed flexibility and reliability to the grid.

In the case of Eon the conventional assets went to spin-off company Uniper, while RWE decided to keep their centralized assets and put their renewable assets in Innogy. With a European-wide push for renewables, what are the perspectives for centralized generation and companies like RWE and Uniper?

This article will look at the financial results until now, the drivers behind those results, and the outlook for centralized generation.

Division of the assets

Figure 1 Division of the assets

After the separation, the “green” and “grey” companies had a similar asset distribution (fig. 1). Two noticeable differences between the companies are the carbon footprint between Uniper and RWE. Uniper has a fleet largely based on gas, supplemented by hard coal. RWE relies heavily on the more polluting lignite.

As for the German nuclear plants, both Eon and RWE have to carry their costly burden, because German legislators prevented the old companies from dumping their ownership in a new entity. This means that Uniper has been able to retain the more profitable non-German nuclear plants and Innogy is unhindered by RWE’s nuclear legacy.

Financial results

Figure 2 Share value, Data: XETRA DAX

Since the split, each of the companies has been showing a steady rise in share value. The bold move of splitting the companies appears to have appealed to shareholders. While RWE and Innogy have shown a similar growth curve, conventional Uniper has clearly outperformed its green twin Eon on the XETRA DAX stock exchange (fig. 2).

Uniper’s success

With Fortum entering the picture, Uniper’s share value has almost doubled after its IPO. However, the strong rise of Uniper’s share has been present long before the take-over rumors, illustrated by the graph (fig. 2). So what has set Uniper apart?

Figure 3 Uniper Spokesman, Edwin Kotylak

Spokesman for Uniper Edwin Kotylak explains. “Investors have a growing appreciation for Uniper. Why? First, because they understand our business model better. Second, because we deliver on our promises, despite a persistently challenging market environment.

Our business model is based on ensuring security of supply. The example of “Dunkelflaute” has made that need evident.”

Sales for Uniper in European Generation segment rose by 468 million euro’s [2]. The increase in sales was primarily attributable to higher sales in France, reflecting better market conditions there. Those extra sales were largely the result of the nuclear outages in France and low renewable production, leading to day-ahead wholesale prices in excess of 900 €/MWh. While companies like Uniper and RWE can profit from these hours, Eon and Innogy cannot, because their renewable production units produce at a minimum during these peak hours.

Kotylak continues, “Our power stations are necessary over the long term to secure the power supply, because wind and solar systems do not always supply electricity due to large changes in weather. With our relatively clean conventional fleet we are well positioned in this regard.

The market is confident in our ability to pay dividends. By rapidly implementing our action plan we’ve substantially improved our cash and cost situation. Our economic debt is about one third lower than at the start of 2016. We’ve significantly reduced our controllable costs as well. This will enable us to generate free cash flow on a consistent basis and to create sustainable value for our shareholders.

Lastly, investors are betting that the price of electricity will rise following the shutdown of nuclear power stations and brown coal power plants.”

Conclusion

With the intermittency of renewable production, and our economy’s need for a reliable power system, the future for conventional power companies with the right assets is looking brighter than it has in a long time.

However, disruptions in the form of storage or demand response that can take over the balancing role of conventional assets, could prove to become the real game changer in the energy transition.

By adopting a more agile and sustainable approach also conventional giants can improve their outlook.

References

[1] https://www.economist.com/news/briefing/21587782-europes-electricity-providers-face-existential-threat-how-lose-half-trillion-euros

[2] https://ir.uniper.energy/download/companies/uniperag/Quarterly%20Reports/DE000UNSE018-Q2-2017-EQ-E-00.pdf

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