Weekly Overview: Europe's Energy Utilities on the Back Foot

Going back some 15 years there was a wave of public indignation in the UK when its once state-owned utilities were snapped up by foreign investors. E.ON bought Powergen, RWE bought National Power and other companies moved in on what looked like a low-risk way of making money; while their own assets – mostly in Germany and France – were virtually untouchable by virtue of size or law.

This was seen as the UK selling off the family silver cheaply, to the benefit of foreign companies who enjoyed a monopoly in their own markets. Only two survived the mergermania: Centrica; and Scottish & Southern Energy.

However the indignation did not lead households to vote with their feet. The Big Six – in a field of 30 – continue to supply 90% of households.

Possibly satisfied with the regulator’s occasional scalp – Ofgem has levied some £200mn in fines from the sector since 2010 and – aware that green levies and other costs such as network charges are beyond their suppliers’ control – they continue to stick with what they know.

Which means that during all the time that competition has been allowed, some 24 suppliers have managed to win over just 10% of the market, or 2.8mn accounts, between them.

The trouble is that when it comes to saving money, the costs are perceived to outweigh the benefits, and with low wholesale prices, that is not going to change. “Hard-pressed households” and “struggling families,” as the politicians term the public, are plucking lower-hanging fruit instead.

And while the Competition & Markets Authority (CMA) might have called for the vertically integrated giants to be broken up following its lengthy investigation which concluded this week, the fact that it has not suggests that the market is working, up to a point at least. In other words, as Centrica says, there is not perhaps as much fat in the system – £2.5bn (€3.2bn) in notional overpayments last year – as the CMA assumes.

If there were, the new entrants would be working it off, taking advantage of low spot prices to compete against those with higher weighted average costs of gas.

But instead of reporting bloated profits, RWE, owner of Npower, is reportedly making 2,500 of its UK staff redundant, citing low power prices and problems in its supply business: hardly an enticing example to follow. Its UK power station fleet made a loss of £55mn, and it wrote down the value of assets by £450mn.

Customer inertia in the retail market also suggests that when smart meters, which monitor power prices instantaneously, are introduced to UK households in the UK over the next five years in a multi-billion pound exercise, there will be yet more apathy for policy-makers to contend with.

Most of the public will not want to turn on the washing machine at odd hours of the day or night to do the laundry more cheaply than otherwise, partly because it may suspect that everyone else is doing the same thing, creating demand for power; but mainly because it does not yet believe that the savings can possibly outweigh the effort. The other alleged advantage is the customer’s freedom from inaccurate bills. But correct meter readings can be sent to the supplier; and any accumulated imbalances restored, using existing metering.

Meanwhile on the continent, most of those large utilities have become shadows of their former selves, thanks to a mix of regulatory and market developments. The industrial recession created a surplus of oil-indexed gas that had to be paid for while spot prices fell; the wave of subsidised renewable generation played havoc with the carefully controlled power market, even leading to negative prices on sunny Sundays; nuclear capacity in Germany was turned down in the aftermath of the earthquake in Japan; and coal was driven out of the US by cheap shale gas. It fetched up in Europe, where the cost of carbon is virtually zero – again a consequence of the recession – and damaged the cause of gas in the power sector.

Now, none of these once-mighty utilities appears master of its own destiny. A report by Moody’s has just pointed out: “Electricity prices in Europe have declined in tandem with oil prices, pressuring unregulated European utilities and power producers,” the ratings agency said in the week that saw E.ON and RWE report heavy losses or impairments to assets.

Even state-owned EDF has so far to prove it is capable of building a nuclear plant using untested technology in the UK, doing its reputation no good as the financing drags on. Whether it will be able to raise capital or cut debt is uncertain, as the French monopoly has also this week lost its finance director.

Moody’s said: “The global oversupply [of oil], combined with additional exports coming from Iran and Opec members producing at capacity, has led to a fundamental shift in the energy industries. Moody's price estimates for oil reflect this shift and is in the process of concluding ratings reviews of issuers in these industries owing to the deterioration in credit conditions linked to persistently low oil prices.”

Change or be changed

Addressing the challenges of the future, E.ON has already split into two companies, retaining its customer-facing assets and networks in one arm and hiving off all its fossil fuel and hydro plant and global energy trading businesses – with the attendant long-term contracts, gas production and other elements essential to energy security – into Uniper with effect from January.

For RWE, a strategic restructuring of the group is "on schedule." This will see a new subsidiary that groups renewables, grids and retail operations in Germany and internationally start operating from April 2016, it said this week.

And in France, Engie has embarked on a three-year transformation plan to “become leader of the world energy transition as it focuses on low carbon activities and on integrated customer solutions, while improving the efficiency of the group,” it said last month. How low-carbon remains to be seen: presumably gas is a part of that, given its continuing commitment to Nord Stream 2.

Looking forward to the next 15 years, the breaking up and spinning off of divisions and businesses is only going to intensify, if the European Union’s commissioner for energy and climate change, Miguel Arias Canete, is correct.

He told the Florence Forum on March 3 that the EU was “behind the times.” He said the EU had been “unable to adapt our market framework quickly enough to the challenges that decarbonisation, and in particular the massive roll-out of variable renewable generation, have brought along. And we have been slow to grasp that a framework built around vertically integrated utilities and fossil-fuel based generation will not work under the new circumstances. And the journey is only just beginning. By 2030 our energy system will have to look completely different from what it does now.”

Warming to his theme, and relying heavily on the promises made by politicians at COP21 being honoured by their successors, he said that our “clean energy commitments in Paris mean that in 2030 half of generation will come from renewables, and in round about 35 years it will have to be completely carbon-free. That is within one generation of power plants. And alongside that we will see increasingly decentralised and variable production patterns and more flexible demand.”

As he also said, that will require an entirely new approach to regulation, with the Agency for Cooperation of Energy Regulators given greater powers in order to take a regional, not a national, approach to supply and demand, which would mark an even more radical change to the way we have grown used to doing business. 

William Powell