European Utilities Suffer from Increased Renewables

Several German utilities reported losses on their electricity generation business as the increased penetration of renewable energy lower electricity prices and capture market share. German utility giant RWE reported a loss of $3.8 billion for 2013, its first loss in over 60 years. The company hopes to shift towards renewable energy in order to compete in the future.

Renewable energy has priority access on German grids, and more and more wind and solar are driving down wholesale prices for electricity – at times even forcing them to go negative. The lower power prices have led to nearly 5 billion euros in write-downs for RWE. Since 2008, the company has lost more than 70% of its share value. "I grant we have made mistakes. We were late entering into the renewables market - possibly too late," said RWE Chief Executive Peter Terium, according to Reuters.

RWE hopes to focus more on distributed renewable energy as well as non-generation business opportunities, such as software and energy efficiency initiatives, or energy “services.”

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Another Germany utility, E.ON, has also been hit hard in recent years. And it’s not just Germany. French utility GDF Suez posted a 15 billion euro write-down last week.

Unfortunately for big utilities in Europe, they may be entering a period of what analysts have called the “utility death spiral,” – more off-grid renewable energy means fewer customers, forcing the utility to raise rates on its remaining customers, which drives more customers off-grid. Astonishingly, one in every sixth German company now generates its own electricity.

There are a few forces working against the utilities. Companies can generate their own power, by say, installing solar panels on its roofs. In doing so, they are eligible for subsidies. But even more, by going off-grid, companies can also avoid a 22% tax on electricity – which is levied to cover the cost of funding renewable energy. Taken together, companies that generate their own power in Germany can cut their electricity bills by nearly 50%.

That is a remarkable incentive for businesses. About 16% of German businesses generate their own power. Another 23% of companies are considering doing the same.

By James Burgess of Oilprice.com