Analysis: E.on separates clean from dirty

EUROPE: E.on has taken the dramatic decision to split its renewables, distribution networks and customer solutions from its conventional energy business by 2016.

No longer with the green: E.on's conventional power assets have been spun off into a separate company
No longer with the green: E.on's conventional power assets have been spun off into a separate company

The announcement is probably the clearest signal yet that traditional energy majors are being forced to radically review and act on the new dynamics that ever cheaper renewables generation, especially wind energy, are creating worldwide.

In the past, E.on had believed a combination of conventional and renewables would create more value. But on announcing the company split, E.on chief executive Johannes Teyssen said: "We've now come to the conclusion that it will become increasingly difficult for a company with a broad portfolio to be successful and to grow in both the new and the conventional energy world. We're already experiencing how difficult it is to combine these two very different cultures in a single organisation."

Approaches clearly differ, however. German municipal energy company MVV Energie said after acquiring the first of two German wind project developers, Juwi and Windwärts: "We cover the whole value-added chain in the renewables sector and, at the same time, couple the renewables and conventional energy pillars of the future energy system under one roof, creating the pre-conditions for a cost and target oriented implementation of the Energiewende" – that is, Germany's transition to increasing reliance on renewables energies.

Still, alongside the electricity distribution networks and customer solutions divisions, the renewables division in the future E.on – mainly the wind and solar activities of what is currently E.on Climate & Renewables – "will show stronger growth in wind onshore and offshore, will expand and build in new geographies, and significantly improve it position in solar photovoltaic," the company said.

In this context, renewables — mainly wind energy – will be the smallest player, however. Of the future E.on's three divisions' combined earnings before interest, tax, depreciation and amortisation (EBITDA) in 2013 – the actual figure for which is not revealed – the renewables share was just 12.5%, with the regulated electricity networks business contributing 65% and customer solutions roughly 24%.

After the split, the renewables/networks/customer solutions E.on will have 4.4GW of wind capacity, with 1.1GW onshore and 700MW offshore in Europe and 2.5GW onshore in the USA. Biomass adds about 800MW to its portfolio, small hydro and solar accounting for only 25MW and 62MW respectively.

The portfolio was reduced in late November with the divestment of 80% of two US projects totalling 505MW to US company Enbridge and the sale of 400MW in Spain to Australian investment firm Macquarie. But E.on's wind portfolio will expand again when the 288MW Amrumbank West and 219MW Humber Gateway offshore wind farms come online in 2015.

The US wind divestment was a deal "consistent with E.on's build-and-sell strategy, the company said at the time. It has not said whether this approach will be continued into the future.E.on  will invest an additional €500 million in the three core sectors in 2015, but does not reveal how the money will be split. For renewables, the company merely said, "we'll further expand our wind business in Europe and in other selected target markets, and strengthen our solar business."

Conventional generation

In contrast, the new company split off will have much bigger conventional generation assets, amounting to about 51GW. Yet all E.on company bonds — capital market liabilities that were reported with a fair value of €17.75 billion at end September 2014 — are to be placed with the renewables-based E.on company. This is equivalent to more than half of the current E.on's overall net debt of a massive €31 billion. Yet the negative impact on the company's rating is expected to be limited to "one notch".

The new company for conventional generation, in contrast, "won't have any capital market liabilities and, thanks to its solid financing, will be financially robust." It will have "a positive net financial position" and "rating at comfortable investor grade," E.on said, also stressing existing provisions for the dismantling and disposal of nuclear – politically, a sensitive issue – and conventional assets are fully covered in the new company's balance sheet.

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