Recently, one of Germany’s largest utilities, E.On made the decision to leave the business of nuclear, natural gas, and coal power plants. According to E.On’s CEO, Johaness Teyssen, utilities need to make a decision on whether they want to remain producers of greenhouses gasses to generate energy or focus on renewable energy such as solar and wind power and work towards creating a more sustainable future.
The E.On Company plans to take this transition gradually. This includes placing nuclear, oil, and gas production in the new unit, maintaining power and gas distribution to retail and industrial customers, while also having renewable operations subsidized by the government. The forward step towards renewable energy is a big move for company and the plan is currently in the works to be presented at the annual shareholders’ meeting in 2016.
Renewable energy has E.On contributing to a sustainable future
RBC Capital Markets analyst John Mush said this “brave but progressive move” will provide E.On’s investors with two separate strategies focusing on operations. Bernstein Research analyst Deepa Venkateswaran said that E.On’s action can be comparable to a gambit with its creation of a “bad bank” to hold a financial institution’s risky assets.
Still according to Teyssen, the differences between the new and old businesses made it difficult to run them both well at the same time. A narrowed down focus will make E.On a “faster and more agile” company and while also making it attractive as a partner of mergers and acquisitions (M&As).
European utilities, including that of Germany’s, struggle with the sluggish demand for power. This is not to mention the competition they encounter from renewable sources of generated electricity which have reduced the power pricestypically obtained by the utilities and undercut competitiveness of power stations largely powered by gas. Utilities and other heavy users of energy are being pressured to reduce greenhouse gas emissions from 1990 levels by the year 2030.
Economics putting pressure on companies to utilize renewable energy
The European Union (EU) has pledged to cut these emissions by 40%, making it difficult for producers of traditional energy. In Germany, companies like E.On have found the transformation in energy usage particularly sweeping. Known as “Energiewende,” this includes policies with ambitious and costly efforts to boost renewable sources and phase out nuclear-powered stations.
E.On’s share price in the recent afternoon trading rose to about 5% even as it struggles to adapt with these changes in renewable energy use. Other companies have shut down their operations for gas and nuclear-fired power stations and curtailed investment budgets. This development has created concerns of a power crisis that may happen in Europe in the future.
E.On steps away from fossil fuel resources to avoid liability in future
E.On plans to establish a new company to include its coal, gas-fired and nuclear power stations in Russia and the rest of the European continent to hold gas and oil production in that country and the North Sea. As yet unnamed, E.On’s new company will inherit the majority of its liabilities as a result of the decommissioned nuclear plants in Sweden and Germany.
Meanwhile, E.On announced it will add €4.5 billion in writedowns for this year, notwithstanding €700 million which was announced previously. This is substantial loss for 2014, a contrast to the company’s reported profit of €2.5 billion and a sales figure of €122 billion. Rivals such as RWE and other utilities are expected to closely watch strategies of E.On Company as they struggle with similar issues.
