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March 05, 2014
European Energy Companies Failing to Adapt
    by Robert Kropp

A report from Greenpeace cites analysts who find that to maintain even diminished profits, the largest European Union utilities will have to shut down most of the fossil fuel capacity added in the last ten years.


The concept of stranded assets—the fossil fuel reserves that will have to stay in the ground if global temperature increases are to be limited to two degree Celsius—helped launch the student divestment movement in the US and elsewhere, and has led to the filing of at least ten shareowner resolutions addressing the issue this year.

But if the track records of the world's largest energy companies are any indication, those companies will persist in their business as usual models until every last bit of profitability is pocketed. Instead of lobbying and other expenditures financing climate skepticism, fossil fuel companies would have been well-advised to embrace the inevitability of renewable energy; yet by and large they failed to do so.

A new report from Greenpeace, focuses on the recent financial performance of Europe's ten largest energy companies. “After decades of growth and profitability, the past few years have impacted their earnings substantially,” the report states. “Ironically, it is their power generation business – traditionally a gold-mine – that is pulling them down.”

Greenpeace found that since the financial crisis in 2008, Europe's ten largest energy companies have lost half their share value, to a great extent because they have failed to adapt to government policies and market conditions.

“Utilities have invested large amounts during the past decade and even doubled their capital expenditures after the financial crisis,” the report observes. “But instead of using these resources to fund a genuine change of business model, they have done the opposite: they have over-invested in fossil fuel capacities, thereby missing a chance to build up controlling stakes in renewables.”

Ignoring a persistent decrease in peak energy demand by customers in the European Union, energy companies continue to add fossil fuel capacity to their portfolios. Over-capacity is now “so high that Europe’s utilities need to shut down about 50 GW of their total fossil power capacity by 2017 if they want to maintain even their diminished 2012 profit levels,” Greenpeace found. Only four percent of the power produced by the ten utilities is from renewables.

“Now, facing the consequences of their mistaken asset-allocation decisions, utilities are reaching for the usual remedies,” the report states: lobbying for subsidies and against renewable energy. “Governments must send energy companies clear and unequivocal signals in order to direct them towards new economically and environmentally sustainable business models,” the report concludes.

In a recent article entitled This Is What the Utility Death Spiral Looks Like, Stephen Lacey focuses on the financial condition of German utilities in particular, and describes it as a “death spiral”: “As grid maintenance costs go up and the capital cost of renewable energy moves down, more customers will be encouraged to leave the grid,” Lacey writes. “In turn, that pushes grid costs even higher for the remainder of customers, who then have even more incentive to become self-sufficient. Meanwhile, utilities are stuck with a growing pile of stranded assets.”

The German utility RWE lost almost $4 billion in 2013, Lacey reports. And how does the CEO of the utility characterize the reasons for the loss?

“I grant we have made mistakes,” Peter Terium said. “We were late entering into the renewables market -- possibly too late.”

“American utilities have the benefit of learning from that first-mover experience,” Lacey concludes. “Will they use it to land safely in a wonderland of distributed generation and consumer empowerment?”

 

 
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