Winds of change blow through Europe’s power sector RSS Feed

Winds of change blow through Europe’s power sector

Falling cost of renewables sparks deals as traditional operators look for foothold

The upcoming privatisation of a Dutch utility highlights the changing landscape of Europe’s power sector.

Owned by more than 50 cities, analysts expect Eneco to fetch more than €3bn. However, the potential sale has sparked the interest of much larger rivals as Eneco has things many of them covet — a range of home energy services, from a smart thermostat to an electric car charging device that enables the utility to remotely decide when is the cheapest time to charge your vehicle.

Europe’s power sector is under pressure as never before — from changes in government policy to technological advances and the explosive growth and falling costs of renewables -— all of which are undermining the economics of traditional power plants. The model of sending electrons from a big gas or coal-powered plant through a central transmission grid to passive consumers is being left behind.

In the new world order, energy services will play a big role and snapping up Eneco could give a traditional utility or even an oil and gas major a lucrative foothold. It would be just the latest deal in an industry that is having to reinvent itself or face extinction.

Mark Lewis, head of research at not-for-profit group Carbon Tracker and previously head of European utilities research at Barclays, described what is driving the transformation in terms of “the three Ds”: decarbonisation, digitalisation and decentralisation. All three, he said, “are disrupting the entire sector, there is no respite at all”.

No one is predicting exactly how these forces will play out. But falling costs of renewable power are accelerating deal activity.

A recent forecast by the International Renewable Energy Agency predicted that on current trends, by 2020, “all mainstream renewable power generation technologies can be expected to provide average costs at the lower end of the fossil-fuel cost range”.

Sam Arie, utilities analyst at UBS, said: “The single most important trend we see is the plunging cost of wind and solar.” It is this trend, argued Mr Arie, that could change the structure of Europe’s industry “from a patchwork of regionally-focused utilities to one that will be dominated by larger, more global businesses that have the scale in renewables to achieve cost efficiencies”.

The break-up of Germany’s biggest utilities, RWE and Eon, into more narrowly focused companies is a case in point. Under the complex deal unveiled in March, Eon will shed its renewables business and focus on energy networks and retail customers. RWE, meanwhile, will add wind and solar power assets to its already formidable generating capacity.

“We will turn RWE into one of Europe’s leading power producers,” said Rolf Martin Schmitz, chief executive of RWE.

The Eon-RWE deal was “another consequence of the Energiewende,” said Frank Peter, the deputy director of Berlin-based energy think-tank Agora, on the government-mandated shift from conventional and nuclear power generation to renewables. Managing Germany’s power grid, he argues, has become more complex. The country’s growing reliance on wind and solar means the network has to deal with an oversupply of electricity when sun and wind are plentiful, and a sharp drop-off when they are not.

“There are very significant economies of scale regarding the required IT infrastructure. Building such a platform is costly and complex, and the bigger you are the more likely it is that the investment will pay off,” said Mr Peter.

The German break-up, however, has its critics. Francesco Starace, chief executive of Enel, Europe’s largest power company by market capitalisation, insisted his business will stay active across the entire electricity value chain.

“We believe time will tell which part of the value chain is better. The market has not yet made up its mind so we believe it is much better to be active across all the value chain through the transition rather than trying to anticipate how the market will develop.”

Read full article at Financial Times