Germany’s energy market is unique – not least because of the government’s bold decision in the wake of the Fukushima in 2011 to eliminate nuclear generation by 2022. However, the way the country’s energy companies have responded to an unprecedented period of change offers potential lessons for the rest of Europe as it grapples with change.
“Germany has become a leading market for renewables, with about 35% of energy generated by renewables sources and about 50% of installed capacity. This position is due largely to Germany’s long-term focus on energy transition since the early 2000s, the nuclear phase out and the strict commitment of the German government to the Paris Agreement to limit greenhouse gases,” explains Helena Hartmann, relationship manager at ING in Germany and co-author of the German language report for PwC on the German energy sector called Innovativ. Integrativ. Intelligent (Auf dem Weg in die Energiewirtschaft 4.0). “As a result, German utility companies have had to become more flexible and agile and change their business models,” adds co-author Ute Dewitz, trade solutions advisor at ING in Germany.
The utility market in Germany has historically been divided between the big four players – E.ON, RWE, EnBW and Vattenfall – and smaller municipality-owned entities. The relatively small size of the latter and their limited exposure to conventional generation has given them the flexibility to enter the renewables market aggressively. In contrast, the big four companies have had to manage both conventional generation (and to a large extent legacy nuclear capacity) and create new renewable capacity.
“To adapt to the new environment, some of the bigger utilities are restructuring their businesses by separating conventional and renewable generation,” says Hartmann. Last year, for example, E.ON separated its fossil fuel assets into a new company, called Uniper, to enable the main company to become more agile, according to Johannes Teyssen, chief executive of E.ON. “This liberates us from continually having to make compromises,” he says.
Separating renewables from conventional capacity not only allows a greater focus on innovation but facilitates improved access to capital markets, according to Hartmann, who notes that Fitch assigned a higher credit rating to RWE’s renewables, network and retail spinoff innogy than to RWE. Given innogy’s plans to invest €6-€7 billion between 2016 and 2018, mainly to adapt grid infrastructure for digitised energy generation and use, this rating differential could prove valuable.
In Germany – as elsewhere in Europe – one of the main challenges facing the energy sector is how to manage the unreliability of renewables. “The concept of a virtual power plant, which incorporates decentralised renewables generation and storage in batteries or electric vehicles for example, as well as improved infrastructure and big data analysis will be critical,” says Hartmann. “We are still some way from putting this concept into action though there is an increased focus on digital solutions. It will change the focus of utilities from generation to infrastructure.”
The structure of Germany’s power market may offer a fortuitous solution to the challenges of matching generation capacity and energy use. “The obligation placed on municipal authorities to provide public services, including the provision of energy, district heat, and public transport is encouraging a more holistic view on smart cities and prompting initiatives such as electric public transport and car sharing schemes,” says Hartmann. “In the long term, these could help to manage the balance of generation capacity and demand.”
More generally, Germany’s energy companies are taking a proactive approach to business change. For example, some have formed partnerships with startups or tech giants such as Google in order to build platforms that enable them to better manage grid capacity and demand. Municipal firms have also formed consortiums to allow them to bid for large-scale projects, invest in digitisation, trade energy and compete with the big four utilities.