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Public Utilities in Trouble

Public utilities are struggling with digitalization and the switch to green power. A very different landscape will emerge from a period of consolidation and reinvention.

The analysis was as ruthless as it was overdue. Chief executive Susanna Zapreva told the supervisory board that Hanover’s public utility was struggling with both digitalization and the transition to green energy.

Ms. Zapreva, 44, took the company’s top post a year earlier and has been working on a new strategy ever since. She’s trying to prepare the utility for the future by capitalizing on the major trends transforming the energy sector: decentralization, digitalization and decarbonization.

Ms. Zapreva says Stadtwerke Hanover has a lot of catching up to do on all three. Coal accounts for 77 percent of the power it supplies, compared to just 14 percent from renewable energy sources. Just 24 percent of electricity contracts are made online — with Enercity, the utility’s in-house brand — compared to 60 percent nationwide. The utility is all but absent from new growth markets like electric mobility and intelligent household automation.

All this came as sobering news to the utility’s board. With close to €2 billion ($2.27 billion) in revenue, Stadtwerke Hannover is one of Germany’s largest public utilities. Many of the country’s other 900 or so local utilities — or “Stadtwerke” — face similar analysis.

Competition from subsidized renewables, low wholesale power prices, and the shift to a more intelligent, decentralized system have hit Germany’s energy giants hard. RWE and E.ON have both split their traditional power generation and new renewable and digital activities into separate businesses.

But municipal utilities and regional energy suppliers are coming under pressure, too, as analysis by Euler Hermes Rating shows. The independent European rating agency predicts financial indicators for two-thirds of Germany’s public utilities will “deteriorate considerably” by 2020.

The average margin on earnings before interest, tax, depreciation and amortization will drop from 10.8 percent last year, to 8.4 percent in 2019. The return on capital employed (ROCE) will decline from 8.2 to 2.5 percent over the same period. Conversely, leverage will increase from 53.3 to 61 percent, while equity capital shrinks throughout the industry. This is likely to significantly reduce the creditworthiness of public utilities.

Read full article at Handelsblatt