Published on October 24th, 2013 | by Zachary Shahan1
RWE Dramatically Changing Its Business Model, Making Radical Departure From Conventional Utility Approach
October 24th, 2013 by Zachary Shahan
Much has been written about the potential death of utility companies that don’t adapt to the distributed, clean energy revolution that is underway. They’ve been called dinosaurs, obstructionists, dummies, and much more. Well, it seems that German utility RWE, one of the largest utilities in the world, doesn’t want to fall into that lot and is eager to adjust to the needs of the day in order to avoid doing so. It is aiming to switch from “bad guy” to “one of us” — starting immediately — rather than struggling against the tide for years to come. Karel Beckman of Energy Post has more (h/t RenewEconomy):
RWE, Germany’s largest power producer, has decided to radically depart from its traditional business model based on large-scale thermal power production. Henceforth, the company will “create value by leading the transition to the future energy world” – a move revealed by confidential documents, discussed at a recent meeting of RWE’s Supervisory Board in Warsaw, and witnessed by Energy Post.
The new strategy was decided on at a meeting of RWE’s Supervisory Board in Warsaw on 19 and 20 September. It will be discussed more broadly within the company in video conferences scheduled for 29 October.
We could be jumping ahead of ourselves by reading into “future energy world” too deeply, right? RWE is one of the largest greenhouse gas emitters in Europe and could simply be eyeing a shift in focus to natural gas and fluffing it in positive language, right? Not really. For one, the natural gas story in Europe is much different than it is in the US. There are a lot more barriers, and no Halliburton Loophole, making natural gas more expensive there. Also, Karel actually got a hold of RWE’s “Strategic Roadmap,” which very clearly indicates a dramatic shift in the company’s whole business model, not just its fuel sources.
- “The massive erosion of wholesale prices caused by the growth of German photovoltaics constitutes a serious problem for RWE which may even threaten the company’s survival…”
- Decentralized, subsidized power will be “the only growth segment in the European power generation market” in the foreseeable future.
- “In a low-interest environment, it will not be possible for RWE to generate sufficient return within this subsidised industry. Our cost of capital will not be competitive against funding from private and institutional equity investors…”
- “The guiding principle is ‘from volume to value’ with technologies ranging from large-scale offshore wind and hydro to onshore wind or photovoltaic. But we will no longer pursue volume- or percentage- targets in renewables (x TWh/y % in 2025). We will rather leverage our skills set by taking a ‘capital light’ approach. Based on funds sourced largely from third parties, we will position ourselves as a project enabler, operator and system integrator of renewables.”
Wow, that’s a dramatic shift. Coming from a huge power company like RWE, this is a big deal.
RWE has 25 million customers across Europe, and its chief aim seems to be retaining those customers. The question it is now facing is how to continue serving them in a satisfactory way in the fast-changing retail electricity market.
“In the future RWE’s competitive edge will be determined by our ability to be a service company applying energy supply capabilities and information technologies intelligently,” the strategic roadmap states.
However, that’s all easier said than done. The roadmap notes three major challenges RWE faces in transforming itself in this way. Karel summarizes and quotes them here:
The first is “customer centricity”, which “will become a critical capability which we have not sufficiently addressed yet.”
Secondly, the strategy paper notes that “developing an innovative and profitable prosumer business model is a challenge we also need to address successfully as we see a billion-euro market emerging alongside our traditional value chain”.
Thirdly, it says that “we have to manage innovation more creatively and professionally in future. We need to establish a culture, structures and processes that allow us to develop new business models which go beyond incremental improvement of the existing value chain. In a highly uncertain and volatile business environment, we need to transform ourselves from a ‘risk mitigation’ to an ‘uncertainty management’ company.”
RWE’s strong positions in the electricity trading market as well as distribution grids are assets the company intends to continue developing and profiting from. However, it is outright in saying that its large thermal power plants are simply to become backup power providers. And its generation portfolio and business are “driven by the following convictions….”
[A]lthough we see a huge build-up of a renewable generation infrastructure ( … ) the demand for reliable capacity will not decline significantly any time soon. The system requires roughly 260 GW of reliable capacity in Central-Western Europe in 2013 and will not require much less in 2030.
The second conviction, which partly breaks with the targets of the present strategy, is that portfolio churn is not an option any more. We have to live with our assets and make the best of them.
Last but not least: Currently, backup capacity is needed but not adequately remunerated. This is the result of an ultimate and irreversible distortion of the present market design. This situation will end at the end of this decade at the latest.
RWE intends to immediately and consistently scale down and restructure its generation portfolio, shifting to a focus on flexibility and efficiency, in order to survive and excel in this new power market. [Next time a baseload/fossil-nuke troll pops up in a comment thread you are reading, be sure to refer them here!]
“[I]n a market still oversupplied with capacity cost, leadership and efficiency will be key differentiators in competition,” RWE writes.
RWE is also determined to fight for market-design policies that support its assets, but in a way that doesn’t portray the company as simply another greedy company.
In the long term, RWE with its present asset base should find its role as the most efficient capacity and base-load provider for Europe. Whatever market design replaces the present one, it is very likely that it will contain a significantly higher level of regulation and administrative intervention. That means that RWE needs to offer its expertise in order to contribute to the political opinion forming process in a credible, trustworthy but also self-confident way.
I think one thing that means is that RWE will continue fighting hard for policies that reward its backup power plants for the needs they supply. Karel notes that even just a couple weeks ago, the CEO of RWE was pressuring the EU to slow the development of renewable energy technologies through its “expert” perspective:
It is worth noting that Peter Terium, the 50-year old Dutchman who has been CEO of the German energy giant since July 2012, was among one of ten CEO’s of European energy companies who on 11 October gave a joint press conference in Brussels in which they warned that the EU’s energy and climate policy is having a disastrous effect on the power production sector, even leading to the risk of major blackouts.
Quite a different tone than the one included in their mission in the new roadmap: “[to] create value by leading the transition to the future energy world.” Basically, it seems that RWE will continue fighting for the greatest utilization and valuing of its thermal power plants, but it at the same time realizes that it needs to diversify in a big and dramatic way in order to actually pursue a profitable future.
RWE realizes that the view the public has of it, just as it has of most other utilities, is not a positive one. It wants to change that. It seems that it really wants to change that. And it wants to get in on the profits that will be available through a very different energy market based around distributed, clean energy. Here’s one final quote from the leaked roadmap:
[W]ith our mission, we emphasize that we are doing all in our power to become the most trusted, high-performing partner for the transition of the European energy landscape. To achieve this, we will enter into multiple dialogues to support a thorough and mutual understanding. Once there is a clearer understanding of what RWE is about and why we take certain actions, we believe we can move beyond being ‘tolerated’.
For more RWE news, check out our RWE archives.