RWE plays catch-up with renewables split


December 7, 2015

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We have not always had much time for Europe’s big utilities. Most have been slow to adapt to the growing importance of renewables in the energy mix, and preferred to sit on the sidelines complaining about how bad the changes were for their fossil fuels assets.

But we are always happy for a company to change strategy and challenge our views. We were positive when German giant E.On announced at the start of December 2014 that it planned to restructure in 2016 to focus its core business on renewables, including wind. And we are also positive now its big German rival RWE has set out its plans to go down a similar path.

Now, we do not believe that either is particularly happy to make their huge structural shifts. It takes a great deal of time and money to make fundamental changes like these to a large company, and they are only doing so because their hands have been forced by renewable-friendly policies in Germany and at EU level; and by their struggles raising finance as more investors shun fossil fuels.

The likes of E.On and RWE see restructuring as a way to protect their investments and raise more capital. Making these changes
makes business sense — and, for us, that is as good a reason as anything else for them to embrace renewables.

RWE’s announcement last week also showed major similarities with the approach taken by E.On. To re-cap, E.On is looking to leave renewables and nuclear in a firm that keeps the main E.On name, while moving fossil fuels assets into new company Uniper.

Superficially, RWE’s approach looks opposite to this, because it is putting renewables into a new subsidiary. It is keeping fossil fuels as RWE’s focus while spinning off its operations in renewables, transmission grids and retail into a new subsidiary.

It then plans to list 10% of that subsidiary on the stock market in late 2016, which it hopes will attract investors who currently avoid RWE because of its exposure to fossil fuels. On first look it might look like RWE is moving renewables away so it can sideline them.

But that is not the case, and this is no puny subsidiary. That new company will end up being around twice the size of the fossil-fuels-focused parent, with 40,000 of RWE’s 60,000 staff set to move.

It’s official presentation about the split clarifies the relationship between the two firms. The new renewables-focused company will be the platform for RWE’s future growth, while the fossil fuel assets in the main RWE business will be the back-up for renewables.

It is a proven approach. At Italian utility Enel, for instance, the growth of renewables arm Enel Green Power has been so successful that it is now set to be reintegrated into the parent firm.

And yet, we still have doubts about whether RWE can emulate this. RWE has come late to the renewables party, with only 5% of its electricity generation last year from renewables. Its planned split may bring in more investment, but it needs deep market knowledge and an entrepreneurial spirit if it is to spend it wisely.

It will also face tough competition from those with a longer track record in wind and solar. Still, if this restructuring does succeed, we will look back to December 2015 as a vital turning point.

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