Can Germany’s energy giants change their DNA?
Conventional wisdom in Germany has it that the large utilities are doomed. The “Big Four” energy companies – E.ON, RWE, EnBW and Vattenfall – are in dire straits, facing slumping profits or even losses as conventional power plants take a major hit to their income. The “energy giants” have so far gained little foothold in the booming market for renewable energy that has come with Germany’s shift from nuclear – and ultimately coal – to green power.
The whole business model of the large, integrated utility is “finished” – says a man who should know: Johannes Teyssen, CEO of E.ON, currently still Germany’s largest utility in terms of turnover.
The Big Four, who collectively employ more than 150,000 people, mostly in Germany, are now well aware of the problems they face and have started to reform. The most conspicuous and radical action has been taken by E.ON, whose fossil and nuclear power stations, trading and exploration will be spun off into a new company called Uniper. “Old” E.ON will retain the grids, renewable energy and the new smart businesses. This year, E.ON will come up with a more detailed strategic direction for the split companies. (For an overview over the utilities’ situation see the Clean Energy Wire Dossier.)
The utilities have already taken some obvious steps to readapt to the new energy world, cutting tens of thousands of jobs and ramping up investment in green energy. Vattenfall is among the largest investors in wind energy in Europe and plans to sell its lignite power plants, which include some of the dirtiest on the continent. EnBW, based in Baden-Württemberg, wants to double the share of green energy in its generation capacity by 2020. E.ON and RWE have cut back on renewable investments recently because of a shortage of funds, but are determined to boost their green power generation, too.
But forging a new company is not just about changing the portfolio, says Klaus-Dieter Maubach, who left E.ON in 2013 after more than a decade at the company, and three years as its chief technology officer. He says the energy giants are fundamentally unready for the new energy world.
“From my experience, the most difficult challenge is to change the DNA of the company, to change the way people think and behave,” Maubach told the Clean Energy Wire. The energy giants have successfully employed large-scale technology for the last 70 years. “But now that business model is facing massive challenges. The new energy world will be more decentralised and based on data. Both distributed generation and data management are essentially new fields for the large utilities.”
Rooftop solar power is already far cheaper for many consumers than power from the grid. “This is a disruptive innovation,” Maubach says. And most of the time, incumbents have lost out to disruptive innovations. But there are some exceptions, Maubach points out. IBM struggled massively when personal computers began to replace the large, centralised infrastructure of computer mainframes. “It made an astonishing comeback, refocusing on IT services rather than hardware,” says Maubach.
RWE’s head of Group Strategy and Corporate Development, Thomas Birr, insists his company is on the right track for such a shift. “The energy business is changing fast and traditional business models need to be evolved or even disruptively changed. Therefore innovation is a key topic for us. We have created the RWE Innovation Hub, where we look for new business models for the future energy system – future meaning the next ten years, at least!”
RWE sees this future in products and services like RWE SmartHome – an in-house system to provide consumers with smart energy in combination with security and convenience applications – and teaming up with big players like Google Nest on the introduction of the Nest thermostat in the UK and the Netherlands.
Still, Maubach says RWE’s joint venture with Nest illustrates Big Four’s dilemma. “It could be that they end up as just a sales force for tech companies like Google, which are in control of the whole product, and, most importantly, the data and user profiles. That’s where the profits of the future are.”
So far, RWE’s SmartHome has not been a market success. But Birr points out that the company has one major advantage: a large customer base. “Our retail business has 23 million customers and that’s a good basis for growth, one we’ll definitely take advantage of,” he says, adding that RWE wants to become more efficient, centralising customer support and better understanding customer needs.
RWE’s newly founded Innovation Hub is supposed to act as a platform for close interaction and joint development of ideas between RWE and external partners, such as young start-up companies. RWE is also one of the founding members of the German Tech Entrepreneurship Center, an open innovation platform inviting start-ups and founders to their premises to foster cooperation.
But the company knows banking on innovation is a long shot, and a risky business. “Our innovation activities focus on things that nobody can image today. Take for example the rise of the smartphone: At the time of its introduction it was a mix of status symbol and fun device. But today nobody can imagine living without it. We expect the same from innovation in the energy business,” says Birr.
E.ON has also started a number of programmes aimed at changing the culture of the company. Christian Drepper, formerly a spokesman for E.ON, changed his career completely, thanks to an internal programme called Agile, which started in 2013. The following year, Drepper founded Enerji Almanya, an E.ON daughter company marketing power to Germany’s sizeable Turkish-speaking minority. “The board of directors was supportive right from the start,” said Drepper. While his company is not a disruptive innovation, Drepper says its success shows that the approach of the company has changed.
Agile initially only supported ideas from E.ON employees, but the scope has now widened. The Agile Accelerator supports small start-ups with expertise, access to its sales network and small amounts of capital (up to 20,000 Euros). For example, E.ON now cooperates with E-Bike-Finder.com, testing leasing options for e-bikes for E.ON customer.
And then there is E.ON’s Digital Transformation Unit (DTU), founded in October 2014 as part of the company’s shift to focusing on new business models. “We think about how we or others could destroy E.ON’s old business model,” says Thorsten Kühnel who heads the unit. “How are we being challenged in the market place, not just now, but in 10 or even 20 years? What can we do to anticipate disruptions or initiate them first?”
Kühnel says DTU, based in Germany’s start-up capital of Berlin, is meant to “irritate” E.ON HQ, which will move from Düsseldorf to Essen once the split is complete. “That is why we report to directly to the board of directors. Lower strata in the company are not meant to impede our disruptive approach.”
The DTU is currently focused on digitalising E.ON’s “old” business – for example standardising the retail businesses’ IT systems across the whole group in dozens of countries. But in the long run, that will probably not be enough. The main challenge, Kühnel says, is the growing importance of data for energy companies. Digital hubs that connect smart home and energy applications, like Revolv, which has recently been acquired by Google Nest, could be key in the future. “If you control the interface and the data, you are in a very powerful position in the new energy world,” Kühnel says.
And what would be E.ON’s position in the new market? “We don’t know for sure at the moment, but we try to monitor all opportunities and threats,” he says. One idea is that E.ON, which has little experience in building consumer appliances but a history of organising marketplaces, could become a central “energy marketplace”. “It would be the equivalent to owning a smartphone app store, but in the transformed energy business,” Kühnel explains.
Through its “Technology and Innovation” daughter company, E.ON invests and co-invests in companies that could change the energy market. The utility has acquired a share in Thermondo, a Berlin start-up that is making traditional retailers of heating systems nervous. Rather than relying on local companies, which are often tied to a few products that might not be ideal for their customers, Thermondo provides independent advice on which heating system is most efficient and saves the most money.
Critics say these small steps may be “too little, too late”. “The main problem is that Germany’s big utilities have invested for far too long in the old energy world, for example by building new coal power plants and lobbying for the life extensions of nuclear power stations,” Heinz-Josef Bontrup, professor of applied economics at the Westphalian University of Applied Sciences, told the Clean Energy Wire. “They have missed the crucial window of opportunity.”
Now, the companies carry too much debt to invest in new opportunities. E.ON has more than 33 billion euros in total debt (which will be shared between the two separate companies), and RWE has over 31 billion. Had it not been for the low interest rates, both companies would already be “crippled”, says Bontrup, who co-authored a study for Greenpeace on the causes of the Big Four’s malaise and their prospects for the future. He believes splitting up E.ON is not the sign of a proactive approach, but of “sheer desperation.”
Maubach, who was still at E.ON when many of the new initiatives were started, is less pessimistic. He sees them going through a “valley of tears”, but thinks they can recover. For one thing, the new energy world will still need investors that can manage large-scale projects. “Take offshore wind power as an example,” says Maubach. “An offshore wind farm is a large, complex project that costs up to billions of euros. That is home turf for the Big Four, who have successfully managed building and operating large power stations in the past.”
But they are still lagging behind on areas of business that will be less centralised, Maubach says. He cites SolarCity as an example, a US company that was co-founded by Elon Musk, CEO of e-vehicle manufacturer Tesla. SolarCity has revolutionised the distribution of small solar power systems in the US, offering consumers savings on their energy bills by installing the systems, which they sometimes still own – reducing perceived risk for customers.
“The large German utilities would not even need to have had the idea first. They would only have needed to be able to successfully emulate it for the German market,” Maubach says. “But they were too slow to see the opportunities, perceived only risks to their old business model and are now lagging behind.”
Belatedly, all four large energy corporations – RWE, E.ON, Vattenfall and EnBW – are now active in small-scale solar power. EnBW even uses crowdfunding to assess the demand for “sun umbrellas” with integrated photovoltaic modules that move with the sun and can store electricity.
Birr, RWE’s head of strategy, admits that RWE’s role in the energy system is challenged but he sees a way forward. “The whole energy system of the future will require a system manager, someone to organise the increasingly complex flows of energy and data. RWE will perform exactly this role. And that’s why we will gradually cease to be first and foremost plant owners and become primarily system managers.”
For now, the Big Four’s new business ventures are not nearly enough to compensate for the enormous losses in conventional energy production. None of the large utilities gives any insight into the financial cost or success of their ventures in new business fields; in income statements, these are not reported separately.
But there are indications of where they are headed. RWE predicts that its retail business, which includes distributed energy services, will generate 70 percent of profits in the mid-term, compared to less than 50 percent in 2012. Analysts have a hard time predicting how important new business areas will become and generally decline to give estimates of their future value. Heino Hammann, an analyst at the bank NordLB, thinks cutting costs, selling assets and reducing debt will be the priority until new business models are more developed. “At least,” he says, “they have started to take the initiative on finding a new business model”.
If some of the new ventures take off, the utilities could break out of their downward spiral, says Maubach. “In this case, they could probably successfully convince capital markets that there is, after all, a new ‘growth story’ in the energy sector.” That would attract new capital giving these new business fields a further boost.
“Germany’s utilities are in trouble, but not dead yet,” says Maubach. “They probably have one last chance to get a foot in the door to new energy markets. If they do, and it is a big if, they could stage a surprising comeback."
Jakob Schlandt is a freelance contributor to the Clean Energy Wire. He also writes for Europolitics and BIZZ energy today and his own blog http://phasenpruefer.info/.