Germany: Decline of fossil fuel generation is irreversible

German energy giant RWE has taken a massive loss of €2.8 billion – it’s first loss in 60 years – after admitting it got its strategy wrong, and should have focused more on renewable and distributed energy rather than conventional fossil fuels.

RWE, like other major German utilities, has spent much of the past decade fighting against the country’s “energiewende”, the energy transition that is seeing it dump nuclear energy and transform the electricity system of Europe’s biggest manufacturing economy to one dominated by renewables.

Last night, Peter Terium, who has been CEO for less than two years, conceded that the company had got it wrong. He admitted that the change in electricity markets, which has seen earnings from conventional generation gutted by the impact of solar and wind energy, was “unstoppable”. It was now time to change strategy, and focus on what the electricity market will look like in the future.

“I grant that we have made mistakes,” Terium said in a prepared speech to a media conference accompanying his result. “We were late entering into the renewables market – possibly too late.”

Analysts have been pointing this out for years. Indeed, the big three German utilities have accounted for just 7 per cent of the renewable energy installations that now account for more than one quarter of the country’s generation, and which have transformed the market. Most renewable capacity has been installed by home and industrial consumers, and smaller and smarter energy companies.

Instead, RWE ploughed on with coal and gas. Now, Terium says, it is making  less and less money from its conventional power stations, and it is closing nearly 7GW of capacity. “This trend will continue in the next few years and it is irreversible,” he says.

Conventional power stations are being driven out by solar PV, particularly during peak load, and the huge expansion of renewables has pushed the market price of electricity to less than €37 per megawatt-hour, where it is virtually impossible to operate conventional power stations economically.

The question is what to do now. Terium says it is not all bad news, because much of the new plant that has been installed is highly flexible; designed to fit in and around a renewables-dominated grid. For instance, he said, the entire 10,000MW capacity of power stations in the Rhenish region can be reduced and increased again by about 5,000 megawatts within 30 minutes. (Interestingly, RWE cut is Co2 emissions from generation by 9% in the last year).

However, to secure its future, RWE – as was revealed in this insightful piece by Energy Post’s Karel Beckman – is going to focus more on future technologies: renewable energy, distributed generation and smart, enabling systems.

Terium says centralised generation is losing its primacy and the decentralised energy world needs an ‘integrated energy manager’.

“In other words, someone to coordinate the many activities of the individual market players: someone to look after networking the various individual initiatives involved in the transformation of the energy system at a technical and economic level – to bring them all together as a single, integrated unit.”

Terium intends to try to join the “little pieces to form the bigger picture.”

This includes products such as the RWE SmartHome, which can manage and adjust domestic energy use such as heater controls; a “smartcompany” product to do the same with commercial and industrial users; a web-based trading scheme to allow corporate customers, regional energy providers and municipal utilities to participate in energy trading.

And it is looking at “decentralised energy bundles” for small and medium-sized municipal utilities and sees electric vehicles as a core element of the energy system, because of their ability to serve as decentralised energy storage units.

It is rolling out heat pumps to consumers, and it is offering solar PV systems and wind turbines to allow local energy communities.

Terium is betting the house – well, actually he has no choice – on the assumption that it is only large utilities like his that can manage such a transformation.

“This is something that only major energy utilities can manage. They are the only ones that bring all the necessary skills together under one roof. We have some new public participation models in mind in this regard.”

The tribulations of RWE are a lesson for the Australian utilities, who have been following on the same path to centralised fossil fuel generation, and pushing back against renewables. They are now suffering the same consequences as their German counterparts – losing money and being forced to close capacity. And this is being distorted by the absence of a meaningful carbon price signal and the high cost of gas.

Possibly the only difference in Australia is that the Australian government does not have the same resolve as Germany’s. As CCA chairman Bernie Fraser suggested in 2012, it is more likely to be influenced by vested interests.

But the lesson is that even the Australian government can’t stand in the way of global technology trends and consumer choice.

Terium, meanwhile, is still pushing the German government for regulatory changes – particularly the introduction of “capacity” markets, to guarantee the future of the fossil fuel generation that will be required over at least the medium term.

But at least he has given up trying to stop the unstoppable. “Despite the difficulties that we face, our focus is on the future. We are, and will remain, the partner for the transformation of the energy system, and are orienting our operational business accordingly.”