RWE, the German utility known for its reliance on large lignite, coal and nuclear power stations, and its high CO2 emissions, is undergoing a fundamental transformation. “We want to use our leading market position to take our customers into a new future”, explains RWE’s Dutch CEO Peter Terium in an exclusive interview with Energy Post. “My dream, my vision is that RWE will put solar panels on your roof, a battery in your shed, a heat pump in your cellar, and we will also manage this complex energy system for you. We want to be the holistic energy manager of the future.”
A casual observer could easily get the impression that RWE, by many regarded as the quintessential “dinosaur utility”, relying on centralised coal power, lignite and nuclear power production, is still fighting tenaciously against “the energy transition” to preserve its dominant position in the German and European market.
After all, RWE is part of the “Magritte group”, a lobbying effort of large European utilities who have warned that the EU’s energy and climate policy is having a disastrous effect on the power production sector. And the company’s chief executive, Peter Terium, often shows himself an outspoken critic of the way the Energiewende in Germany is being carried out.
In a speech he gave on 14 March at the Clingendael International Energy Programme (CIEP) in The Hague, Terium said that “without good planning and management, the Energiewende will fail due to its own internal contradictions”. He noted that “subsidised renewable electricity from Germany is flooding the European energy market. That is a problem for coal and gas, which we will continue to need when the wind does not blow and the sun does not shine.”
Terium said that while the wholesale electricity price is going “down, down, down” as a result of subsidised renewable energy, prices for consumers and industrial users know only one direction (as a result of surcharges and taxes): “up, up, up”. As a result, he said, “many gas and coal-fired power stations are not profitable anymore, but these are the only sources that can ensure security of supply”.
However, despite these criticisms, Terium is not pleading for a return to the old days. On the contrary. RWE, he made it clear in The Hague, has accepted that the role of centralised electricity production, whether it is based on coal or gas, will in future be largely confined to providing “assured capacity”. RWE, he said, does want to play a prominent role in these unfolding “markets for assured capacity” in Europe (or in future perhaps a single European capacity market).
But this role as capacity provider is only one of the five “pillars” that the “new RWE” will rest on, Terium said. And it probably won’t be the most important one in the future.
Terium distinguished four other main activities for RWE: distribution grids, renewable energies, commodity trading and “sales” (including retail).
It is in the “sales” business that the Dutchman sees the biggest change happening. Indeed, he spoke of a “transformation” taking place in the energy market. “I compare it to the IT sector. People said that IBM would disappear when mainframes were replaced by PC’s. But what we see today is that there have never been as many mainframe computers as there are now. At the same time, there have never been as many PC’s. And then we also have tablets and smartphones. I see something similar happening in energy. We will get a lot more decentralised production. But centralised production will also continue to play a role. And you will get various interactions between the different systems, which will have to be managed. This is where our core competence lies and where we can play a key role: as system enabler.”
“RWE will be a four-cylinder engine running on three cylinders. Not ideal, but you can still get far on three cylinders”
Terium added that “managing this kind of complexity, I would not like to leave to a government institution. I think the market is better equipped for that – more innovative and inventive. This is where we believe we can add value and this is what we are preparing our business model for.”
From “sales” it is a natural transition to RWE’s second “pillar”, its extensive distribution network. According to Terium, the distribution grids play a central role in the new energy system. “Through our network we will offer the intelligent solutions that the Energiewende needs”, he said. As an example, he noted that much of the wind power produced in Germany is loaded onto the distribution networks rather than the high-voltage grid. “We have 300,000 renewable energy sources connected to our distribution grids in Germany. You cannot accommodate these flows with more copper. It requires handling with IT systems – with smart grids. That is another core competence of us.”
About RWE’s third pillar, commodity trading, Terium said this is more important to RWE than most outside observers realise. “We are one of the largest commodity traders in Europe playing in the same league as the global banks and hedge funds.” RWE buys large amounts of natural gas and coal for its power stations. “We buy nearly 40 billion m3 of gas annually for the whole group”, said Terium, “largely imported from Russia and Norway. That’s more than half of the entire gas consumption of the Netherlands.”
But RWE also (re-)sells gas to customers. For example, the company has an agreement with Ukraine’s Naftogas for an option to sell up to 10 billion m3 of gas to Ukraine! “The optimisation of such trading processes is something that we are very good at”, said Terium. “For example, we have exported our European electricity trading knowledge to Australia. It works well so far there.” At this moment, said Terium, commodity trading in Europe is stagnant, but “as soon as volatility returns in the market, we will be ready to make use of it.”
Incidentally, Terium also told the audience in The Hague that his company has deliberately chosen not to invest in assets in Russia, so that it can operate independently from Russia in its trading activities. He said that RWE was able to negotiate a “compensation” of some €1 billion last year from Russia on its long-term, oil-price-linked Russian gas contracts.
“I love this job. If I did not have €30 billion in debt, I’d enjoy myself even more.”
Given RWE’s broad range of activities, Terium said he was in no doubt that the company, after posting a unique € 2.8 billion net loss last year, can look forward to a profitable future. “For this year, we have said we will post a recurrent net income of between €1.3 and €1.5 billion. So you can hardly say we are a company in distress.” He added that, “RWE will survive, even without a capacity market. But, unless action is taken, the system in Germany may find it hard to do so. And then I am talking also about the municipal utilities and the many smaller players.”
After his presentation in The Hague, Energy Post had an interview with Peter Terium, who elaborated on RWE’s strategy in the changing European energy market.
EP: From your presentation I got the impression that RWE is still adopting a somewhat defensive attitude towards the energy transition. Do you want to follow the transition or do you want to lead it?
Terium: It is a pity that you got that impression. This is not what I intended to show. In addition to the role that we see for ourselves in the capacity market, we want to grow in our other main activities, especially in renewables. You can only grow if you are a leader. If you set the tune. We are already offering many innovative products in the German, UK and Dutch retail markets that show that we are leaders. Smart thermostats for example or our HomePower solar product. We want to use this leading market position to take our customers with us into a new future. Customers need help to deal with the energy transition. And they trust us to take on this role.
EP: Do you really have such a good image in Germany?
Terium: Certainly. 90% of our customers are satisfied or highly satisfied with our online services. Overall, 70% are satisfied with RWE. That is a high number in a commodity market. Don’t forget that during all the time that the media talked about RWE as dinosaur, because of our nuclear and coal power stations, we did not lose a lot of customers. Apparently we are doing something right.
EP: But aren’t other, smaller companies better equipped to supply thermostats and products such as Home Power Solar? Is this where RWE’s competitive advantage lies?
Terium: We will not produce things like thermostats, no. We can buy those from Nest or Bosch. What we aim to be is the energy manager of the future. A kind of holistic energy manager who connects things with each other, who fits different pieces together into a sensible whole. My dream, my vision is that RWE will put solar panels on your roof, a battery in your shed, a heat pump in your cellar, and we will also manage this complex energy system for you. We have the technical competence to manage the equipment and the commercial competence to optimise consumption patterns. Sometimes electricity from the roof has to go to the battery, sometimes it makes more sense for it to go to back to the grid, sometimes you will need some gas – we can optimise this system on a continuous basis throughout the day.
EP: Is this the vision of Peter Terium or is it the vision of the entire company?
Terium: It is part of our common strategy. Absolutely. I don’t believe in dogmatic top-down leadership. That does not work anymore in the complex world of today. No CEO or Executive Board can manage the kind of complexity that we encounter today. You need to engage the entire company for this.
EP: So would you say this is a fundamental transformation?
Terium: Yes, this is the great culture shift. We used to manage processes from above. Today, we rather set frameworks to enable all our staff to find solutions and be creative.
EP: RWE has not been a leader in the generation of renewable electricity. Did you miss the boat there?
Terium: That’s difficult to say. Maybe we started too late. Every company has its strengths and weaknesses. As a company relying on large lignite and nuclear power plants, we were already strongly dependent on political decision-making. We felt that renewable energy with its subsidies would make us even more dependent on the government. That’s why we were wary initially. We didn’t want to get ahead of the pack in renewables.
EP: Are you now focusing on offshore wind in particular?
Terium: You have to look at what your strengths and weaknesses are. Solar panels are installed on the roof by small companies that we cannot easily compete with. What we can do is manage the system. And what we are also good at is building large projects like offshore wind parks. This requires large investment and technical and organisational capacities. Pension funds have the money, but they can’t actually put wind turbines in the sea.
EP: There is already overcapacity in the power generation sector in North West Europe. Does it make sense to invest in offshore wind capacity in this situation?
Terium: If you want CO2-free generation, you have to do something. Wind can be a solution then. Of course as long as you have a subsidised market and prices of 35 euros per MWh, offshore wind cannot be competitive. But if prices rise to 60-65 euros, you get reasonably close to break-even. You will need higher prices anyway to build new gas-fired stations as back-up.
EP: Could prices go lower still?
Terium: In the Netherlands they may, as more interconnection with Germany becomes available. But in Europe I think they are pretty much at the bottom. I don’t see them go down any further.
EP: Still, I get the impression that you are filling the gaps in renewables, but you are still big in coal, lignite and gas. Has RWE really changed?
Terium: Look at where we came from. Some ten years ago, we were an extremely CO2-intensive company. We had a lignite power plant fleet that was not state of the art at all anymore. In five years’ time, we changed our CO2-profile from outlier to average. We did this by investing in renewables and gas-fired power, and by implementing new technologies in coal power plants. Coming from 100% conventionally generated power, now our portfolio includes 6% renewable capacities. We had to do all this in a very short time. Note that last year we had to buy €1.2 billion in CO2-certificates. If these had cost €30 per ton, RWE would have been in big trouble.
EP: So what does your future look like? What will the energy mix of RWE look like? You still have a share of over 50% coal-fired power. (RWE’s energy mix in terms of production in 2012 was 28% lignite, 21% coal, 10% nuclear, 13% gas, 4.2% renewable energy, 1% pumped storage and 23% what it calls “electricity purchases”. Editor)
Terium: There are a number of things that you have to take into account here. Germany decided to phase out nuclear power. A country like Germany cannot get out of nuclear power and coal power at the same time. That’s just impossible. Germany is an industrial country. Industry needs reliable power supply at affordable prices. You can’t guarantee that with windmills, not yet anyway. In Germany 25% of electricity now comes from renewables. You still need 75% from other sources. So we took our responsibility and decided that we wanted our coal-fired power to be as clean as possible. For example, we chose highly flexible technology for our new-built plants. In the Netherlands we are building a plant that has two blocks of 800 MW each, rather than one big one. That’s a bit more expensive to operate, but it gives us more flexibility. It also makes it easier to use biomass. We now have the most modern fleet in Europe. If we are going to have a capacity market, I’d rather be in the heart of Europe with the most modern fleet. That has been a deliberate strategy. So in combination with our renewables portfolio and our other activities our position is not too bad.
EP: Still your assets are being hit hard. What is your strategy to deal with this?
Terium: That strategy is fairly simple, but the question is whether it helps Germany or Europe. Our strategy is taking the old technologies out of operation. We have a list of old power plants in Germany and the Netherlands that are being closed. This is good for us; some of them are even cash-negative. In this way – and by cutting costs wherever possible – we will manage to get our generation division break-even very soon. Then we have to see how we will continue the journey. We will try to generate additional business through our other pillars. RWE will be a four-cylinder engine running on three cylinders. Not ideal, but you can still get far on three cylinders. For this year we have said we are expecting operational result of € 4.5 to 4.9 billion and a recurrent net income of €1.3 to 1.5 billion. So we are hardly destitute.
EP: Do you like this job despite all the pressures you are under?
Terium: I love it, it’s a great job. Our P&L and business model are basically in good shape. The problem is we have debts carried over from the past. If I did not have €30 billion in debt, I’d enjoy myself even more. I have to carefully balance my investments. But then there’s nothing wrong with that. I have learned that scarcity drives creativity. We are now looking for creative solutions – capital-light solutions, involving customers, setting up partnerships – that are very suitable for us.
EP: Still, is RWE the right instrument for this strategy? Couldn’t it be better carried out if the company were split up into smaller companies, for example?
Terium: The kind of network that we have cannot be cut into little pieces. That would be highly inefficient. If every town has to operate its own network, service costs would be very high. And if you look at product development and innovation, what you see is that even municipal utilities with 100,000 customers are too small to invest adequately in this. You need economies of scale. What we discovered in our strategy meetings last year is that the integration of competences is very important. The connection between small and large systems. With our ability to connect building blocks in the energy system we clearly provide added value.
EP: Does this imply you become a more information-driven company?
Terium: Oh, yes, but that has been going on for some time. It is a trend throughout society. If you look at the amount of data that is pushed through our network, that’s phenomenal. We can use this to learn more about our customers’ needs.
EP: How do you see European policy evolving? Do you think harmonisation of support schemes for renewables will be enforced in future?
Terium: I think harmonisation will come more or less automatically. The German feed-in tariff has an effect on other countries. That can’t be ignored. What I see is that European leaders are beginning to realise that energy keeps returning to the priorities list on their agenda. They are also discovering that climate targets are all very well, but they don’t square with the ambition to have more industrial production. That conflict was not quite clear in the past. It is now clearly on the table. There are no solutions yet, but at least various avenues are being explored. What I also see is that European leaders are becoming more inclined to pursue European solutions.
Peter Terium on the urgent need for a rational capacity market
During his presentation in The Hague, Peter Terium went into some detail on the need for a capacity market. “The industry in Europe is now rapidly closing power stations that we will need again in the future to ensure security of supply. That’s why we urgently need to set up a rational capacity mechanism”, he said.
He pointed out that although there is now some oversupply in the market, that situation will not last, in view of the many power stations that are now being closed as a result of the market circumstances and the nuclear phase-out. “If current trends continue, we will need new capacity again at the end of this decade in Germany and also in the rest of North West Europe. That’s why we need a capacity market now, to prevent the closure of power stations that we will soon need again as backup.” According to Terium, in recent years in Europe 10,000 MW of power generation capacity has already been closed. This is leading to a “dangerous situation”, he said.
The RWE chief strongly disagrees with the suggestion that a capacity market should favour certain types of power stations over others, e.g. gas-fired over coal-fired. “That would make rational investment impossible for us. A capacity market should be aimed at providing backup capacity and not serve other purposes. Suppose we have to decide between modernising a coal-fired power station for €50 million or spending €450 million on a new gas-fired power station? The former may be the most rational choice for us. We have the Emission Trading Scheme to take carbon cost into account.”
Incidentally, Terium noted that it’s a “misconception” that gas-fired power stations are being taken out of operation in Germany because of competition of “cheap coal” from the United States. “That’s absolute nonsense”, he said. “The fact that many gas-fired plants are not running is simply because of competition from domestic solar power in Germany.”
Until recently, Terium explained, gas-fired power stations had always operated mainly in the daytime to supplement the base load from coal-fired and nuclear power stations. “You turned the gas-fired power plant on in the morning and off again at the end of the day. Mostly, you did not need it at night.” But with solar power now supplying massive amounts of additional electricity in the daytime, the gas-fired stations are priced out of the market. “The price system has been completely overturned”, said Terium. “That’s why it’s so important that we will get a capacity market.”
Who is Peter Terium?
Peter Terium was born in 1963 in Nederweert, the Netherlands. He graduated as chartered accountant in Amsterdam and worked as an independent auditor for the Dutch Ministry of Finance. In 1985 he became audit supervisor at KPMG in Eindhoven, Netherlands. From 1990 to 2002, he worked in various senior international finance positions in the packaging industry for Schmalbach-Lubeca AG, Ratingen, Germany. He joined the RWE Group on 1 January 2003, starting as Head of Group Controlling at RWE AG. In July 2005 he was appointed Chief Executive Officer of RWE Trading. In 2009 he became CEO of RWE’s newly acquired Dutch subsidiary Essent, with the task of integrating Essent into the RWE Group. He was appointed Member of the Executive Board and Deputy CEO of the Board of RWE AG on 1 September 2011. He has been CEO of RWE AG since 1 July 2012.
Source: Energy Post. Reproduced with permission.
