The slow death of Europe's utility icon

Over the past decades, being a shareholder in Rheinisch-Westfälisches Elektrizitätswerk AG, one of Europe’s largest utility companies, was a pleasurable thing. Recessions and upswings came and went, but one thing was certain: each financial year, RWE would post a decent profit.

Headquartered in Essen, incidentally this columnist’s hometown, RWE enjoyed a reputation for being super-solid. Jobs with RWE were thought to be for life; the company’s political connections to all tiers of government were excellent; the company was part of the furniture of post-war corporate Germany.

That was all valid until last week. This is when RWE reported its first net loss since 1949. It was not just a small loss, or a temporary blip in the company’s history. The €2.76 billion ($A4.3 billion) that RWE lost last year (down from a profit of €1.3bn the previous year), are a massive blow to a company already burdened by corporate debt in excess of 30 bn euros. Its share price, which was between €90 and €100 only five years ago, has plunged to under €30.

Perhaps surprisingly, RWE’s downfall is not all its own fault. To a large degree, the company has fallen victim to Germany’s dramatic energy policy shifts of the past decade. With its arsenal of fossil fuel and nuclear power stations, RWE simply cannot compete against politically favoured renewable energies.

Since the late 1990s, Germany has been pushing the development of alternative energies. Wind, solar, hydro and biomass have been subsidised by energy users on the basis of the Renewable Energies Act, which guarantees the producers of greener forms of energy that their electricity will be bought and determines the price. The prices per kilowatt hour are not only several times higher than conventional electricity but also fixed for up to 20 years in advance.

For traditional utilities such as RWE it was hard enough to compete against such political headwinds. However, the situation got a lot worse after the nuclear accident at Fukushima, which prompted Angela Merkel’s government, in a mixture of panic and opportunism, to quickly take Germany’s nuclear reactors off the grid. Suddenly RWE had no power stations that were politically acceptable anymore.

But just having unprofitable, undesired and unneeded power stations does not mean that the company could just easily shut them down. These power stations are still needed in case the wind does not blow and the sun does not shine. Each time Germany’s large utilities want to retire or mothball one of their power stations, they have to get permission from the network regulator. So even though they may only be running for a few hours a year, some power stations still have to be kept operational -- at great expense to their owners.

This, in a nutshell, is RWE’s predicament. It now commands a collection of power stations which cannot succeed against the unfair competition from green energies, but it cannot easily say goodbye to its old business model either. And because all of this is costly for RWE, it does not have enough resources to venture into renewables itself.

All of the above would be disastrous for RWE, its shareholders (of whom about a quarter are local governments) and its 66,000 employees. However, one might argue that in the quest for green, clean and renewable energies, sacrifices have to be made -- the disappearance of a dinosaur fossil and nuclear fuel driven utility such as RWE would not be a big loss.

Unfortunately, there is no reason for such complacency. As it turns out, sacrificing RWE on the altar of sustainable energy does nothing to save the planet. This is because of the way in which Germany has structured its energy policies.

There is a small but basic flaw in the logic of the Renewable Energies Act, which renders it useless. Not a single gram of carbon dioxide is prevented despite billions of subsidies paid out to renewable energy producers.

The problem with these subsidies is that they do not result in a cut of carbon emissions but only in a reduction of the price of carbon emission certificates. Since Europe has installed an emissions trading scheme, the total amount of carbon emissions is capped. The purpose of such a cap-and-trade scheme is to let the market discover the cheapest ways of avoiding emissions by trading the rights to pollute.

If a government then introduces additional subsidies for certain forms of energy, these subsidies do not change the total amount of emissions at all. It only frees up emissions certificates which can then be sold on to other companies across Europe. In this way, a German renewables subsidy may only have the effect of increasing emissions in other countries.

Economists have long pointed out that it is nonsensical to combine emissions trading with subsidies for renewables and that therefore the Renewable Energies Act should be abolished. The academic advisory council to the economics ministry concluded as much in 2004; the competition advisory body Monopoly Commission concurred in a 2011 study; and just last month a government expert commission on research and innovation also called for an end to the Act.

Of course, it will not come to this. After one and a half decades of promoting renewables, the industry has become a formidable political force with strong political allies. Farmers, for example, are now supplementing their agricultural earnings with green energy sales from biomass and solar.

What is far more likely is something else. There is much talk in Germany and at the European level about a new subsidy scheme for traditional utilities to pay them for keeping their fossil fuel powered stations operational. In this way, government would first make such power stations uncompetitive and then pay their owners for keeping them as a capacity reserve. All of this, one needs to repeat, for zero environmental gain.

In witnessing the first annual loss of RWE, we are watching the decline of a once great company. It has been brought down not by mismanagement but by political forces beyond its control. As such, it is a textbook example of political risk.

Dr Oliver Marc Hartwich is the executive director of the New Zealand Initiative.