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Europe's Energy Transition Paradox

By Andrew McKillop


Sun Up or Sundown On Energy Transition?

Hopes for energy transition draw on a range of motives, from national energy security and lower imports of energy, through global warming and cutting carbon emissions, to generating new jobs and activities and protecting the environment. Europe's official energy transition plans and programs are held by European politicians as a model for the world, and Germany's Energiewende or transformation plan is the most ambitious in Europe. Since 2011 it programs a total shutdown of all national nuclear power plants by 2022 and a totally renewables-based power system by the 2040s.

Set into the laws of each EU28 member state after the Dec 2008 European Parliament vote in favour of the climate-energy package, which set a goal of 20% of all European energy coming from renewables by 2020, the plan almost only focuses the electric power sector. Electricity in Europe, as Eurostat data indicates, covers almost exactly 20% of all types of energy used in the EU28 countries ­ making it necessary to move very fast with “greening” the power sector, to achieve the target of 20% of all European energy being renewable based by 2020. Reasons why electricity is focused include major problems for raising the role of renewable energy in transport, with biofuels, and developing the renewables in other economic sectors.

The transition paradox is complex but its components are simple. Achieving goals set in 2008, including at least 20% of all European energy coming from renewables by 2020 means the power companies must embrace a “new culture”, nearly the total opposite of their “legacy power business”. This featured large centralized power production, large numbers of captive customers, and a highly regulated operating environment assuring them good if not massive revenues and profits. Today, the power utilities are suffering investor retreat and are both unwilling and unable to invest in a completely new operating structure and system featuring the intermittent-supply new renewables, windpower and solar photovoltaic power, needing huge investments in power transmission and utility-scale energy storage which the utilities simply cannot afford. Power transport and energy storage are outside their core business area as previously defined, and also as defined in their new “unbunbled” role of generators-only, not operating throughout the electricity value chain.

Corporate Culture and Energy Transition

The European transition plan has plenty of opponents and critics, to be sure. One criticism is that it hopes for a lot too much from the financialized energy sector, in which European utilities are wrestling with investor retreat and lack of confidence, and have suffered often-huge losses of stock market value since 2008. Europe's carbon emissions trading scheme the ETS is another victim of financialization, with a near-meltdown in CO2 emissions permit prices through 2013, and major uncertainty as to whether ETS can survive. Germany's biggest power utility E.On says it has been a victim of its corporate faith in ETS and its hopes that ETS could set and maintain a high carbon price, enabling it to operate its fleet of recent low-emission natural gas-fired plants dependent on high-priced imported gas. These plants, in late 2013 were losing about 93 euro cents on every 1 euro of revenues they earned.

Continent-wide energy transition, concentrated in electric power, has suffered from power utilities being slow or near-absent in their support to new renewable-based power production. This also includes Germany, where in 2013 far below 10% of all new renewable-based power was produced by the country's Big 4 utilities, for reasons including basic corporate unwillingness or financial inability to invest. To be sure, the utilities see things differently, and say they are victims of “opaque and unsure” regulations and legislation, as well as “irrational” investor fear. They place the problem with governments for not defining what role they would have in the new European power system, other than serving as back up “suppliers of last resort” of electric power.

Due to rapid deterioration of their company finances and extreme low investor visibility going forward the potential is high that the utilities will need major aid from Big Government. Without state intervention and bail outs if needed, and state-guaranteed cover for all their financial risks, the utilities will not be able to invest for transition. European energy transition will not happen.

Europe's energy transition plan is now in uncharted waters, due to reform being sure and certain but in what shape or form being presently unknown. Targets may be diluted or stretched, the ETS system could be scrapped or replaced by a straight carbon tax, national initiatives and programmes could replace the central plan coordinated by the European Commission. Other alternatives also exist, but the action and inaction of the utility companies, dictated or constrained by their financialization will remain a key factor deciding what happens.

Rearguard Action

Writing for Energy Post, November 11 2013, an article by Peter Varadi of the US Solarex Corp said that Germany's Big 4 utility corporations are now, at last, “going green” as they each unveil their dedicated solar PV subsidiaries. He titled his article on their approach to the country's highly ambitious Energiewende transition program with the equally ambitious title: “The Future is Already Here”.

In fact since 2008, the Big 4 German power utility companies are among the major losers of market value in Europe's power sector. Most have lost an average of 50% of their market capitalization since 2008 ­ in a German and European equities market context that in 2013 had its most massive yearly gains since the year 1995. Investor retreat, signaling a large or total lack of confidence, is endemic for German utilities even more so than for utility companies in other EU28 countries which have also typically lost 33% - 50% of their stock value since 2008. Creating solar power subsidiaries can be seen for what it probably is ­ an attempt to rekindle investor interest.

In his article Varadi claimed that RWE, the nation's No 2 utility company, has now shed its old business model, like the other big utilities and now fully embraces Energiewende. He says the process is like the transition for telephone companies from centralized operations and wire-based services, to go-anywhere cellphones needing a countrywide system of microwave relay towers and their upkeep. As we know, and very comparable to the shift from centralized electric power to decentralized power, many countries have cellphone systems where calls are still metered and billed at several times the charge for landline “legacy telephone” calls. This is due to somebody having to pay for the dense, expensive, maintenance-intensive relay tower and repeater system ­ the new infrastructure - as well as deliver “stakeholder value” in the shape of sometimes extreme high profits for most operators. Also like the electric power transition, the legacy landline “copper wire” system has to be maintained, without which the newcomer cellphone system would impose even higher infrastructure costs for achieving nationwide coverage.

To be sure it can be and is claimed that “legacy phone systems” will have to disappear some day but for the present we have a hybrid transitional system setting higher total infrastructure costs. How long that transition lasts, and how much it costs are the key unknowns!

On the company organization side, national and European regulatory and legal systems have given way, often slowly, in the power business like they have in world telephony, to a “deregulated system” where doubt reigns and anything goes. One reason for this “creative chaos” is that the new emerging re-regulated power system has a lot more actors than previous, in what are called “unbundled power systems”. Unbundling separates power producers and generators, from grid transporters for high power transport, and from final power distributors. The claimed goal is to “encourage competition” for final consumer benefit, but while this might be true for cellphones it does not apply for European electricity.

Major reasons for this include, on the technical side, the infrastructure shortage for wide-area, low power, renewables-based power production and distribution. On the market structure side, as with the start-up of cellphone services, large areas of national territories do not have competing power supplier “players” and existing suppliers can extract a rent, or super-profits through pricing their power as if it was renewable-based. Conflicting business models and conflicts of interest are sure and certain, with new regulatory measures by governments (and in Europe through the European Commission and its agencies) certain to not satisfy some or many players.

Regulatory limbo is one result, and investors hate uncertainty. Another major factor, already important in Germany, is accelerating own-generation by large commercial and industrial power users, who are quitting the national “legacy power system” and grid supplied current. Their action, which has major political impact, is on the starkly simple basis of large power consumers not being able to pay present and prospective electricity tariffs and stay in business.

Corporate Culture Shift

Overall, the previous “legacy power system” in Europe has started splitting into many different, even incompatible parts. Putting the pieces back together in a new format which works, is the challenge.

This sets a learning curve experience for all actors, which is likely not strictly comparable with “legacy telephone corporations” who realized they were facing a revolution in telephony, and had to make the switch of “corporate culture” away from their previous wired phone businesses. One major and real difference is the size of the infrastructure issue and also the basic problem, and huge costs, of storing “utility scale” electricity produced by intermittent generators using sun or wind. Both of these are high-cost or very high-cost barriers to any easy, quick and low cost energy transition.

To be sure, as in Germany today some 5 years after the European Parliament vote, its Big 4 utility companies are creating solar (but not windpower) energy subsidiaries, similar to the corporate changes made by major national telephone companies. One major difference is they do not have the new power infrastructures (either energy transport or storage) in place, to operate the hybrid power system.

Varadi however cites German power utility executives and spokespersons who claim they have made their “culture shift” and can restore investor confidence and stakeholder value ­ meaning operating profits which increase instead of falling. He cites them as claiming:

“We (the power utilities) will be here 20 years from now to honor our guarantees, but one cannot be sure that our competitors will be around”

This in fact is a travesty of German utility corporate thinking, and their realworld actions. RWE, notably, has on several occasions in 2013 said that its corporate review process and policy making now includes the option, for the period to 2017-2020, of a complete retreat of RWE from the power business, at least in Germany and possibly everywhere else, also. Obviously it little matters if RWE's competitors of today are still around in 20 years ­ because RWE might not be there at all in 6 years! The other members of the Big 4 have not divulged a “total retreat” option, but they have likely developed contingency plans including that option. Under any hypothesis, their ability to make epic-sized new investment in new power infrastructure is very low.

All four of the Big 4 German utilities have now finally branched out into the jungle-type unregulated, decentralized solar electric business, but vastly later than anybody else in Germany. As latecomers, their prospects of reaping “first mover gains” are obviously low or zero. Their track record in renewable-based power generating is, as already noted, pitiful. In 2012, the Big 4 generated 6% of all renewable-based electricity in the country. Other generators produced the remaining 94%.

They now have no corporate option ­ other than abandoning the power business entirely, which they are keeping as their “zero option” - but to move out into renewable-based electricity. This is a very different thing from wanting to move in. Their solar subsidiaries' offers of installing PV systems on private home roofs and company buildings, and guaranteeing them for 20 years, have to be set against their published threat of simply abandoning the power business in less than 10 years. If they pull out, their guarantees will be worthless.

The Spanish Endgame Model for European Renewable Energy

Commentators suggest that in many ways, Germany's Big 4 are creating a context where the “Spanish endgame” for business users of solar PV, and collective users forming user associations could be replicated. This would end in bankruptcy for “solar hopefuls” - and potentially also for the Big 4.

The “business model” of the Big 4 in decentralized solar PV pitches the claim that their new solar subsidiaries can make houses and farms independent from the grid, but the Big 4 will not be financing the move! In fact, the Big 4 cannot afford to lose any customers. All of them have a critical need to maintain or increase revenues to stem their corporate losses, so the loss of even “small customers” is bad news ­ unless their financialized supply-and-service offer in the solar PV domain can bring in revenues at least equal to lost revenues when customers “go off the grid”.

Another major risk for this “going green” strategy is the utilities have no choice but to leave the funding of solar PV purchase and installation to the owners of the houses or farms, or from investors. The utilities themselves are both unwilling and unable to invest. In turn this means the German Federal government, and-or the Lander governments ­ exactly as in the Spanish model ­ will have to provide low interest loans, on one hand, and guarantee high, or very high Feed In Tariffs (FITs) for the solar electricity generated, on the other hand.

If not, the model collapses. In Spain this wipeout process completed itself by 2012-2013.

To be sure, the Big 4 say they have now realized they cannot fight PV, and in theory at least ­ but not so far in practice ­ could themselves sell or finance small or midsized PV systems, or develop a maintenance business for these decentralized off-grid PV power systems. In a certain number of highly-publicized cases, the Big 4 will do this or are already doing it, but the counterpart financing and insurance will quickly become a corporate money-loser or a very low financial performer ­ as happened in Spain with its “solar farms” the moment that FITs were reined-in, and extreme-low interest loans for “solar farms” were first reduced, then terminated by by central government.

The process of solar PV boom-bust in Spain is well known and well documented, and was already clearly under way even by end-2010. It is now irremediable. See for example,

Corporate Energy Transition and the Electric Ponzi

Certainly inside Germany, at high level within Angela Merkel's new CDU-SPD coalition, there is plenty of acrimonious comment, especially from inside the SPD and the Greens on the Big 4 power utilities and their “spoiler role” in Energiewende. Their current talk of “offering their customers the possibility to install a PV system on their home roofs” is derided by many political and business analysts who say this is corporate playacting, they have acted too slowly, “too little, too late”. The Big 4's real problem, and real defect is that they have acted so incompetently in restructuring their corporate power assets ­ and their rising liabilities in the form of non-performing assets.

The increasing probability, no longer only a possibility, is that the Big 4 will need Federal-level bailouts within 12-18 months ­ or will make massive job cuts if they do not receive state aid. This makes their corporate plight of national political significance in Germany, and makes it difficult for them to lie low. When or if there are high-profile national power brown outs or black outs, the subject will surge back into national media. One “zero option” is full scale re-nationalization of Germany's power sector.

The major problem is that a fatal combination of “crony government” and “crony corporations” has produced a lose-lose endgame. Only Big Government can save the day, but it also aided and abetted the financialization of the power sector, as well as other economic sectors. Very starkly in the German case ­ with the highest private and small scale consumer prices for electricity in Europe at 25.3 euro cents per kilowatthour in late 2013 (using Eurostat data) ­ the FITs needed for financial viability in the new “decentralized PV model” are set by analysts as around 40 ­ 45 euro cents per kWh. Big Government will have to subsidize the FITs for decentralized PV, and also continue heavily subsidizing the nationally-distributed mix of renewable-based and conventional electricity, as well as help Germany's struggling and undercapitalized grid operator companies. On current trends, overall costs of this are estimated by sources including the Federal Environment ministry as potentially able to reach 1000 billion euros by 2030.

At a rate of 45 euro cents per kilowatthour we are talking about energy-equivalent prices well above $800 per barrel of oil equivalent. German industry is adamant it will not, and will never pay electricity prices at anything like even the 25.3 euro cents/kWh rate. To what extent German households will continue paying extreme high power prices is not presently known, but the Big 4's hope is that small customers for overprices electricity will flock to producing even more extremely overpriced power themselves. This looks like an “Electric Ponzi” scheme with a very short lifespan!

To be sure, “greenwashed power” is likely to expand in Germany, but probably not much. Already in action, and fatally predictable, some smart operators will buy-in cheap(er) electricity, and then re-export it under green wraps, at a much higher tariff. To be sure, the upstream player in this, the Big 4's solar subsidiaries, can themselves play the greenwashing game but from a lofty and hard to attack, corporate level.

Varadi repeats some of the corporate propaganda coming out of Germany's utilities “going green”, repeating the Big 4's claim their new solar power consumer-producers will never have to worry about power cuts or blackouts, and will be “assured” by the utilities that they will pay the same amount as today for any “top up” electricity that they import ­ in 20 years time! In Varadi's own words: “They will not be affected by fuel cost fluctuations and will not be faced with blackouts because of grid overloading or a tree falling somewhere on a power line or a lightning strike into a transformer”. This laughable claim assumes the new small producers are 100% self-sufficient for power, but in fact the key motivation of small solar producers is simply covering themselves, by producing high-priced power, against the seeming relentless increase of prices for grid-supplied power.

The RWE Solar web site declares: “Switch now to smart energy. Make your roof a profit center”. E.ON Solar: “You should be your own electricity producer”. EnBW Solar: “Innovative all-round-carefree-package for Photovoltaic customers”.  Vattenfall Solar: “Without moving parts, noise and emission-free, thousands of plants in this country will provide electric power.”

Hard To Believe

Some commentators can say this apparent corporate policy turnaround is hard to believe, in the sense of a welcome corporate policy shift among power utilities, but in fact it is all that their financialization “strategy” allows them. Germany's Big 4 imagine they can make their customers “go solar” without the corporations spending a penny. All of the costs will be outplaced and transferred, and a certain slice of the profits will be internalized. This corporate wonderland, as we noted above, is based on the fond notion that solar PV power producers, with government aid paid by taxpayers and by national borrowing, can be paid $800 per barrel equivalent of energy for their output.

As Varadi notes several time in his article, Germany's Big 4 is now running a strategy they call a ‘capital-light’ approach. They believe or hope investors will crowd in to support a business model where Big Government will always pick up the difference between rational energy prices, and Alice in Wonderland prices. At one and the same time, they are trapped in their “legacy business” of a regulated and centralized electric generating system which they strive to keep intact, and are forced into an unregulated wonderland of unreal energy prices. Due to years of financialized loss of corporate value they are unable to invest their own money, and add any meaningful capacity of windpower or solar PV under their own name to their existing, financially fragile generating capacity.

Due to their rush to financialize themselves which ran at a peak in the 2004-2008 period, their current default approach is easy to understand, but in no way has to draw sympathy. It however leaves a long, and increasing list of legacy problems for Germany's Energiewende. One simple example is the surplus of solar PV capacity available ­ but not needed ­ on days of peak output of solar PV, but low national demand. This can reach 22 000 MW for a total national power production capacity of about 150 000 MW - but Germany's total grid capacity for internal or domestic high power electricity transport is about 9 000 MW. When solar output peaks on “good days” for solar producers, and bad days for the grid, the surplus has to be dumped. It has negative value.

Varadi at least concedes in his Energy Post article that “of course success is not guaranteed”. In fact, the decentralized nature of windpower and solar PV are seriously hurting the utilities’ bottom line and will force them to restructure their old business model, sooner or later, nolens volens. How long they take to do this is the focus for government energy policy, economic and job policy, and for corporate and market analysts. For Europe's energy transition however, focused and concentrated in electric power the betting on whether it will succeed has to be off, at this time.




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