The European power sector was a-flutter last week after Germany’s biggest utility, E.ON, announced plans to split itself in two: in particular, its conventional generation, and mid- and upstream businesses will be spun off into a new entity, while the ‘new E.ON’ will retain its renewables, distribution and retail units, with the last two activities accounting for over 80% of projected earnings. The restructure is due to be completed by H2 2016.
Bloomberg New Energy Finance analysed the implications of the announcement: the new E.ON will still be one of the largest distribution network operators and energy suppliers in Europe. These activities will account for over 80% of the company’s projected earnings, though the era of long-term predictable returns for grid businesses may be coming to an end. While renewables will be a runner-up in revenue terms, these technologies will be a core focus of the new E.ON, which will still be a top wind developer. It also said it would "strengthen its solar business", although it will start from a much more modest position in that sector.
The new entity, separated off, will be one of the largest generators in Europe but will face the growing challenge from renewables, faltering power demand and unfavourable commodity market conditions. Observers have suggested the spin-off is equivalent of a ‘bad bank’: indeed, its generating fleet will be relatively old compared with its peers and the company will be left with E.ON’s nuclear assets – together with the EUR 16.8bn provisions for nuclear waste management obligations.
The question now is whether other energy companies will follow suit: in our view, E.ON’s move does not mean the end of the integrated utility as some will continue to value having the natural hedge between generation and supply.
E.ON will also be affected by another big development last week, after Germany’s Cabinet passed a new climate package to ensure the country meets its 2020 target to reduce emissions by 40% from 1990 levels. The energy efficiency plan is expected to deliver the biggest cut in greenhouse-gas output, of 25-30Mt a year by 2020. But the power sector will still have to achieve a 22Mt annual reduction, though generators will be able to decide how to best to do this. Our Analyst Reaction published the following day found that generators will switch from hard coal with gas, a development that is likely to benefit smaller companies as they generally own a larger share of gas-fired generation. E.ON’s split of assets suggests it would benefit more than some of Germany’s other large generators. The package must now be approved by the Parliament next year.
In addition, the government has said that an ambitious reform of the EU ETS would be required, suggesting the region’s biggest economy will be willing to back the market stability reserve (MSR) in EU negotiations. If implemented, the MSR will likely mark a tipping point for the European carbon market. Our new market stability reserve model suggests that if Germany’s proposal is implemented, carbon prices could reach EUR 20-30/t levels by the early 2020s, as the market prices in future scarcity. Under this proposal, the MSR begins in 2018 (rather than 2021, as suggested by the European Commission) and the 900m backloaded allowances will not be returned to the market. We expect the MSR to be passed into law next year, with a 2017 start date increasingly likely.
Elsewhere in the world, South Korea’s Hanwha SolarOne had a bumper week for announcements: on 2 December, it said it was building a factory in its home market for $12m. The facility will have enough capacity to make 230MW of panels a year, increasing the company’s total capacity to 2.23GW. The following day, Hanwha announced it had delivered 20MW of modules to Haike Engineering Holding for solar projects in Gansu Province, China; and a day later the South Korean company said it had won an order to supply 20MW of modules to Hong Solar for a project in Inner Mongolia. This confirms the finding of the 2014 Climatescope report – that while China has robust value chains for clean energy, Asia more broadly is becoming a manufacturing hub for these technologies.
In the Americas, two state-owned companies, Petrobras and Electrobras, secured all the contracts in the energy auction in Brazil on 5 December. They will receive BRL 3.2bn ($1.23bn) for selling nearly 16.4GW of power. The auction is one of the government’s measures to reduce distribution companies’ exposure to high power prices due to low hydro reservoir levels. If you are interested in reading more about Brazilian energy, see below for an extract of our interview with Antonio Tovar, head of the renewable energy department at the country’s development bank, BNDES.
In the meantime, nearly 200 countries are now in their second week of this year’s UN climate talks in Lima. Continuing the negotiations’ history of unfathomable jargon, Brazil has proposed “progressive caps” to help break the deadlock. What this would likely mean in practice is another get-out clause for developing countries to avoid committing to binding emission-reduction targets under a global framework. Read our guide to the UN climate talks, which end on 12 December.
*All dollar figures are in $US
Graph of the week: Germany has been on a trajectory to miss its target to cut emissions (Mt) by 40% by 2020 on 1990 levels.
Originally published by Bloomberg New Energy Finance. Reproduced with permission.