Question of the Week: Should utilities operate conventional and alternative power businesses together?

WORLDWIDE: Last week E.on announced plans to spin-off its conventional power business and focus on renewables. Windpower Monthly speaks to E.on, Ernst and Young and FTI Consulting about whether this is the right way to go.

E.on will sell off its conventional power business

Question: Can utilities operate conventional and renewable power divisions as part of one business?

Ben Warren, Environmental Finance Leader, Ernst & Young

Different technologies have different roles to play. So renewables and conventional generation need to live and operate in harmony in any balanced energy mix.

As we migrate to a future where renewables are increasingly affordable, the roles of conventional generation and renewables will shift - one from base load provider to back up capacity and the other from peripheral energy to mainstream. Renewables will become increasingly reliant on conventional generation to help it achieve increasing levels of penetration.

From a business point of view, therefore, there is no reason to think that there is a conflict of interest in IPPs, utilities or financial investors owning or operating both renewable and conventional generation assets. In fact, synergies in operations and maintenance already exist and are significant.

Looking ahead, synergies from balancing demand with supply across a portfolio of diverse assets, demand side management and carbon management, and energy trading, for example, are likely to increase. This would suggest common ownership and control and is a good thing, not least for energy consumers.

Perhaps the more urgent question is the potential conflict between generation businesses and energy supply businesses, which is now forming a major driver of unbundling policy across many energy markets in the world. For example, trying to encourage or enforce the uptake of energy efficiency and other demand reduction measures through incumbent vertically integrated businesses is a very real and serious area of conflict.

Aris Karcanias, managing director, Economic and Financial Conulting, FTI Consulting

Like other European utilities, E.on invested heavily in conventional generation just before the major drive for renewables in Germany and other EU markets. This shift was accompanied by a movement of the energy sector towards a decentralised energy model with an increasing reliance on smart systems.

As a result, there is now a misalignment between energy policy, electricity market design, and commercial reality. Utilities that were once safe bet investments backed by government, now find themselves holding a mix of the "old" (conventional generation, commodity trading, etc.), which has become higher risk, and the "new" (renewables, energy services, etc.), which has lower risk.

In that context, the logic of restructuring is to create two coherent investment propositions. E.on's newly announced break-up aims to develop a company in which pension funds can once again invest (renewables and its supply business) and a higher risk yet debt free nuclear and fossil company set to make huge gains if political support for conventionals prevails.

The incentive to unbundle will depend on the rate of development of capacity markets and the rate at which renewable energy subsidies are scaled back. A scenario where capacity markets are a reliable source of long-term income for conventional generation, while renewable subsidies face higher levels of risk, would see a convergence of risk that would limit the attractions of conventional-renewables divorce a la E.on.

Markus Nitschke, Political Affairs, E.on

European and global energy markets have undergone a dramatic transformation. There is the emergence of a new energy world, which is markedly different from the conventional energy world.

Obviously you do not run power generation in the same way as distribution networks or customer solutions. The new energy world has very different, distinctive characteristics compared to the conventional energy world. It is not centered on the system but on the consumer.

Key success factors are a sustainable and clean brand, rapid product development, innovative solutions, digital integration and smart distribution. In the conventional energy world, the key aim is to deliver security of supply.

Top quality assets in attractive locations are key success sectors. The conventional energy world functions as a very large integrated system. To deliver simultaneously in both the new energy world and the conventional energy world in a single integrated company will become increasingly difficult. Both energy worlds do have their own logics like different value drivers, opportunities, capabilities, cultures, potential partners and ways of thinking.

That is why both have their own development and growth opportunities. We're convinced that energy companies will have to make a choice and focus on one of the two energy worlds if they want to be successful in the future. Each of the businesses should have the right setup and the right strategy for its particular world.