Is RWE-E.on deal creating a 'Google of the grids'?

Smaller players are alarmed at concentration of market power, as wind sector worries what will happen when its priority grid access is scaled back from 2021.

Power player… Concern over the asset swap has focused on E.on’s dominance of much of Germany’s grid and influence in shaping the future energy market (pic: Innogy)

A group of independent German regional and municipal energy companies is preparing legal action as E.on and RWE’s asset-swap deal draws to a close.

The deal — in which the two German energy majors effectively divide up the national energy market between them — was rubberstamped by the European Commission in September.

RWE’s transmission grids and renewables subsidiary Innogy has been broken up. Its electricity-distribution networks and consumer-solutions businesses have gone to E.on, while RWE is taking over E.on’s renewables and nuclear plants.

It also takes a 16.7% stake in E.on. The commission is satisfied that all is well.

But energy players are on red alert over the impact on the home market. "There has never been such a concentration of power in the German energy market," said Gero Lücking, managing director of Lichtblick, the country’s largest green-energy provider, with more than 600,000 customers.

Hessen-based Mainova, Thüringer Energie AG (Teag) and other regional energy companies are awaiting the commission’s written consent document — expected before the end of the year — before moving ahead with legal action against the energy majors’ asset swaps.

Too few degrees of separation?

Wind-project developers seem unconcerned, but renewable-asset operators will have to watch out for potential discrimination.

Advancing digitalisation could undermine the legally required "unbundling" — the strict separation of transmission-grid operation from electricity generation and sales, essential to ensure a level playing field for all parties using the grids.

An analysis carried out by consultancy LBD for Lichtblick showed that taking over Innogy’s grid assets makes E.on Germany’s dominant electricity provider, with its electricity grids covering two thirds of the country and its electricity retail division supplying 70% of customers in its grid areas.

This means the firm can control competition and prices in those regional markets.

With 160 electricity brands and 840 electricity tariffs, the new E.on will supply 16 million electricity customers in Germany, many of whom may not realise that even when they switch supplier, they remain within the E.on fold.

The next largest players, Vattenfall and EnBW (including its Yello subsidiary), only have a few million customers, according to LBD.

In any committee discussing rules and regulations for future markets, be it e-mobility, smart meters or power-station redispatch, representatives from all E.on‘s direct and indirect electricity-network holdings will wield far more influence than any smaller grid players, say market sources.

E.on said it will pursue a constant and constructive dialogue with regulators and politicians, but also warns it is prepared to challenge federal energy regulator the Bundesnetzagentur in court if necessary.

After the asset swap, RWE will have 38.7GW of conventional power-plant capacity in Germany, a market share of 38%, and 8.5GW of renewable energy, 8% of the total.

With this portfolio, RWE would have influenced or dominated prices for electricity generation in about one in every six hours of the year in 2017 (17.8%), according to LBD’s calculations.

Depending on factors such as power-plant decommissioning, growth of RWE’s fleet and electricity imports, the company could potentially dominate the market in more than half of all hours of the year by 2030, LBD concluded.

The biggest concern among wind-farm developers their access the distribution grid.

"As long as electricity from renewable sources has priority uptake to the grid and cannot be squeezed out by fossil-fuel or nuclear generation, who owns the grid makes no difference," said Peter Alex, head of investor relations at Energiekontor.

Challenged by a dominant E.on, "consolidation among Germany’s many distribution network companies could even result in synergies and higher economic efficiency", he pointed out.

Knowledge bank

But for wind-project owners and operators, there are other issues at stake.

E.on has big data on gigawatts of wind-power generation connected to its grids, when transmission bottlenecks trigger curtailments and other information non-grid operators do not possess.

Combining Innogy’s 2.1GW with the 4.25GW of renewables generation, mainly wind, E.on already markets in Germany, puts the company ahead of Vattenfall with 5.6GW, and on a par with Enercon’s Quadra Energy at 6.5GW, albeit still way behind Statkraft’s 11.48GW of mainly wind capacity.

Whether E.on’s grid dominance and data will give it an advantage — for instance in pooling plants for corporate power purchase deals, where offtakers tend to prefer larger volumes of power — remains to be seen.

"Unbundling" rules to strictly separate transmission grids from electricity generation and sales within energy companies such as E.on will also need close monitoring to maintain fair competition and prevent discriminatory treatment. Some fear E.on could become an all-dominating "Google of the grids".

In acquiring Innogy, E.on is well placed to dominate in digitalisation, internet-platform economy and decentralised business, argued 12 independent German regional and municipal energy companies, including Mainova, Stawag and Teag.

But their appeal to the European Commission in August to mandate measures to prevent the concentration of market power in Germany was unsuccessful.

For its part, E.on says it will transform from an energy-network operator into a "holistic system provider."

Redispatch concerns

Wind-sector sources are also concerned that E.on’s grid interests, and its continued link with RWE as a major conventional power-station operator, could turn redispatch decisions against wind projects.

To prevent network congestion, grid operators can ask for output to be curtailed to eliminate the bottleneck.

Renewables are being integrated into the redispatch mechanism for conventional power stations, and from October 2021 their output must be curtailed if the only alternative is to curtail considerably more conventional generation, at much higher costs.

Whether redispatch decisions taken close to real time will be slanted to hit wind more than conventional capacity will be hard to monitor.

Sources say wind farms are easy and cheap to curtail compared with gas-power stations, where operators commit to buy and use gas and face penalties they pass on to grid operators when the gas is not used.

With around 70% of Germany’s renewables generation feeding into its grids, E.on will become the dominant "manager" of decentralised energy generation, with its own virtual power stations and grid controls, warned the independent energy companies as they prepare to launch a legal fight-back before the European General Court, part of the European Court of Justice.