nuclear power

An announcement from Germany’s biggest power utility has exposed how out of touch Foreign Minister Julie Bishop is with her weekend endorsement of nuclear power for Australia.

In a huge change in strategy, German power utility E.ON said on Sunday night it would split, spinning off its coal and nuclear power businesses into a new company and heading down the renewables track.

While it’s a move that has been dictated by what is happening in the German utility market — thanks to government policy on nuclear power and subsidising renewables, especially solar — it’s also confirmation that the days of the integrated power utility are coming to an end. But the company, which has been reported as selling some of its assets, such as those in Spain and Italy, has gone a lot further than anyone had foreseen.

The split isn’t aimed at cutting jobs — some 20,000 people will work in the new company and 40,000 will remain with E.ON, which has just over 60,000 employees. It is going to cost a lot money to do this split — E.ON said it would impair the value of its assets by a massive 4.5 billion euros for 2014, on top of the 700 million already announced in earlier quarters this year. But it is clear the company sees coal and nuclear energy as having limited futures — much in the way that BHP Billiton is spinning off mining assets, including most of its thermal coal mines, because of their poor future.

There’s an Australian link in all these moves. E.ON said Australian bank Macquarie Group would buy E.ON’s Spanish and Portuguese assets for an enterprise value of 2.5 billion euros (i.e. including debt). These include power and gas distribution, and power generation. E.ON said it was also exploring the disposal of its assets in Italy and was reviewing the future of its exploration and production business in the North Sea. In 2007, E.ON paid 11.5 billion euros for power plants and energy distribution assets in Spain, Italy and France, and has since written down the value of those assets by 1.5 billion euros. Much of the new round of asset write-downs will be applied to the Spanish and Portuguese assets.

E.ON’s profits have been squeezed by Germany’s transition to renewable energy, under which electricity from clean sources is subsidised by bill payers and given favourable access to the grid. At the same time, the German government has committed itself to closing the country’s nuclear power stations over the next few years. Said E.ON’s statement:

“E.ON will tap the growth potential created by the transformation of the energy world. Alongside it we’re going to create a solid, independent company that will safeguard security of supply for the transformation. These two missions are so fundamentally different that two separate, distinctly focused companies offer.”

In its new setup, E.ON will increase its investments already for the next year by about 500 million euros over the previously planned 2015 capital expenditures of 4.3 billion euros. E.ON says it will “place a particular emphasis on expanding its wind business in Europe and in other selected target markets. It will also strengthen its solar business”. In other words, it is going to invest in heavily expanding its renewables business, as well as trying to make the whole operation more energy efficient.

E.ON reported a 25%  fall in profits in the first nine months of 2014, and the new impairment charge of 4.5 billion euros will plunge the company into a loss for this year. But operating earnings remain strong, and directors were confident enough in what they were doing to recommend the payment of a dividend of 50 euro cents for this year and 2015. That’s half the 2012 level of one euro a share, which does underline the downward pressure on profits from the rapid rise of renewables and the problems with coal. And there are the costs of idling the company’s six nuclear power stations to be worked out with the government.

The German government closed eight power plants in 2011 when the decision to quit nuclear power was reconfirmed by German Chancellor Angela Merkel. E.ON had six of the nine remaining plants. Earlier this year E.ON said it would close its Grafenrheinfeld nuclear power station as early as May 2015. The plant’s operating licence expires at the end of 2015. That will now be a problem (conveniently) for the new company.

Peter Fray

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