The new company will be responsible for RWE's 3.5GW of renewable energy capacity, a distribution network of more than 500,000 kilometres and the utility's 23 million customers.
Approximately 40,000 of the company's 60,000-strong workforce will be employed by the new, as yet unnamed, company.
RWE AG, the parent company, will continue to focus on conventional power generation and energy trading.
"We are creating two viable companies under one roof. The new subsidiary will have its own access to the capital market and improve our growth prospects," said group CEO Peter Terium.
A 10% sell off of the new company is expected by the end of 2016, RWE said. The initial public offering (IPO) will allow the new company to invest in renewables.
"The major emphasis will be on renewables," RWE said in its statement. Terium said conventional power still had a role to play in the energy mix.
"We are convinced that conventional power generation will remain an irreplaceable partner for renewable energy for decades to come. Our conventional power stations are the backup for renewables," he said.
Terium used the example of Enel Green Power, the renewables arm of Italian power company Enel, as a case study for how a renewables subsidiary can be a "growth engine" for a parent company.
In October, RWE completed financing for the revived 336MW Galloper offshore project. RWE, Macquarie Capital, the UK's Green Investment Bank and Siemens Financial Services have each taken a 25% stake in the project, 27km off the UK's east coast.