Jürgen Grossmann loves playing the role of the lone knight. Speaking in Düsseldorf last week, the veritable giant of a man declared that neither the German government nor Chancellor Angela Merkel herself could "divert him from his nuclear plans." As the CEO of RWE, Germany's second-largest electricity producer, Grossmann has an enormous responsibility toward both his company and its 70,000-strong workforce. He says job security is close to his heart, and because of this, he has vowed to fight for his employees.
And fight he must. The Japanese nuclear disaster at Fukushima and the subsequent debate about nuclear safety have plunged Germany's energy industry -- in particular the country's four biggest utilities, RWE, E.on, EnBW and Vattenfall -- into a hitherto unimaginable crisis.
Profits now look set to plummet. According to internal company estimates, after-tax earnings could fall by up to 30 percent this year alone. That's partly because customers are fleeing in droves to the big four's environmentally friendly rivals, such as Lichtblick and Naturstrom, companies that offer electricity free of nuclear or coal sources. The share prices of electricity companies have been on the decline for months. As a result, the stock exchange darlings of yesterday may now be the takeover candidates of tomorrow.
As if to add insult to injury, the German government this week announced it would permanently reverse its plans to extend the lifespans of nuclear power plants in the country. A post-Fukushima "moratorium" had already taken the seven oldest of Germany's 17 nuclear power plants off the grid. They will now stay permanently offline, as will another plant that was already out of operation following an accident in 2009. Under the plan agreed by Merkel's Christian Democrats (CDU) and the business-friendly Free Democrats (FDP) on Sunday, Germany's remaining nuclear plants will also be shut down between 2021 and 2022.
The government has handed a small olive branch to nuclear energy producers by allowing them to transfer their allotted energy production from the plants that are currently offline to newer ones that will continue to operate until 2022. But the utilities had also hoped that the government would scrap the nuclear fuel tax it had introduced as part of an austerity package passed last year. The tax is intended to generate around €2.3 billion a year through 2016 for the government to help pay off its public debt. With the current closure of the eight plants, that sum is already expected to drop to around €1.3 billion annually, but it is a sum the Finance Ministry has refused to do without.
Doom for Germany's Big Four Utilities
Berlin's nuclear exit strategy spells doom for the utilities. Atomic energy expert Wolfgang Pfaffenberger from Jacobs University in Bremen estimates that the eight plants that are being shut down this year generate annual profits of over €1.5 billion and revenues of at least €3 billion. All of Germany's 17 nuclear plants together generate around €4 billion in profits and €7.5 billion in turnover -- all revenues that will disappear by 2022 at the latest.
In addition, nuclear energy produces few carbon emissions. With an increasing reliance on fossil fuel sources until renewable energy sources can be expanded, the number of certificates the companies are required to purchase for the right to emit CO2 could rise dramatically. Today the companies obtain approximately 70 percent of those certificates for free. Energy researcher Uwe Leprich at the University of Applied Sciences in Saarbrücken, Germany, has calculated that the German coal industry will have to pay around €4.2 billion a year starting in 2013 for emissions certificates. A large part of that will be borne by the four main energy companies.
The uncertainty over the future of nuclear power in Germany has depressed these companies' share prices in recent months. Shares in E.on and RWE have lost 20 percent of their value since mid-March, with the downward trend continuing. And analysts at state bank LBBW estimate that the two companies' shares will lose an additional 6 to 11 percent of their value by 2012, making them even easier takeover candidates.
In stark contrast to past decisions on energy policy, the bosses of the big four producers were not given a seat at the negotiating table this time around. Nor did they have the ability to broker the type of backroom deals allegedly made last summer as the government considered extending plant lifespans. "This is a genuinely political decision," Environment Minister Norbert Röttgen emphasized last week.
A Business Model in Decline
As the uncertainty over their future persists, RWE and E.on are becoming increasingly nervous. After all, much more is at stake than possibly losing billions in revenues from nuclear power. Their main worry is whether their very business model, which is based on generating electricity centrally at huge power plants, is viable in the long term -- or if it will ultimately lead to their demise.
Pushed into a corner, they are taking action against the government, too. On Tuesday, the board of E.on announced it would sue Berlin over the government's decision to keep the nuclear fuel tax. "Adhering to the tax while at the same time significantly shortening the operating lives of nuclear power stations raises additional legal issues," the company said in a statement. E.on said it "expects to receive due compensation for the financial damages associated with these decisions, which is expected to amount to billions of euros."
E.on CEO Johannes Teyssen said he expected "damages in the double-digit billions" as a result of the shortened lifespans of nuclear power plants and their shutdown. The company is arguing that the tax violates constitutional and European law because it is only applied to nuclear power and thus puts it at a disadvantage over other energy forms.
Officials at RWE, which is already suing the government for damages over Merkel's three-month moratorium, said the company is also considering a lawsuit over the phaseout.
Vulnerable to Takeover
Meanwhile, rating agencies have already threatened to downgrade the German utilities further, increasing fears about possible takeovers. Potential buyers include formerly state-owned French utility GDF Suez and even Russian giants such as Gazprom.
Germany's biggest utility, E.on, is especially vulnerable. About 40 percent of E.on's electricity is nuclear in origin, making it the country's biggest producer of atomic energy. The company is at least part owner of a total of 11 nuclear power plants, including six which it operates alone.
Germany's nuclear power plants include problem-plagued ones like the Krümmel plant near Hamburg, which has been offline since 2009, as well as several old plants such as Unterweser in Lower Saxony, which came online in 1978 and was due to be taken off the grid next year.
Because E.on's second economic pillar -- gas imports from Russia -- is generating millions in losses, CEO Teyssen is desperately negotiating with the government to try to save whatever he can.
Teyssen needs, for example, support for another major but precarious project: the coal-burning Datteln 4 power plant in North Rhine-Westphalia, which cost more than €1 billion to build. Work on the nearly completed plant was halted over a year ago by a court injunction because of planning errors by E.on.
Teyssen knows full well that unless he gets significant political backing, this ultramodern coal-fired plant could become one of Germany's most expensive white elephants. And that would cut even bigger holes in his balance sheet because E.on would have to pay for both the demolition of the plant and waste disposal.
While Teyssen continues to lobby in public but says internally that he could easily go down a very different path, RWE boss Jürgen Grossmann has thrown all caution to the wind. At a meeting of a group of executives aligned with Merkel's party, the conservative Christian Democratic Union (CDU), last week, Grossmann flatly stated that the government's energy policies were wrong. He said Germany now faced an "environmental dictatorship."
Reducing Reliance on the German Market
Grossmann hasn't merely complained about Merkel's new energy policies. For months now, he's been trying to reduce his company's reliance on the German market and politicians. Ideally he'd like to move parts of the company abroad -- or even merge with an international partner.
That would make RWE less dependent on its German operations and could pave the way for importing electricity from power plants near the German border. Grossmann has therefore been pulling out all the remaining stops, sounding out companies from Russia and the Czech Republic to France.
He seemed to have found a partner almost two weeks ago when he bought a 30-percent stake in the Borssele nuclear power plant in the Netherlands. The Dutch government is considering constructing a new nuclear power plant right next to the existing one, which was built back in 1973. RWE could also become involved in the project, but it would probably be only the opening move in a far greater gambit. Grossmann showed what he's capable of in talks with Spanish electricity utility Iberdrola three months ago.
The RWE CEO spent weeks seriously negotiating a merger with Iberdrola, which specializes in supplying renewable energy. As part of this deal, the German was prepared to demote his firm to the role of a junior partner in the resulting company and even suggested moving its corporate headquarters abroad. The plans were ultimately scuppered because of Spanish concerns that unions might have too great a say in the company's decision-making.
Just like his E.on rival Teyssen, Grossmann also plans to divest parts of his business. According to RWE, this could net the company about €8 billion.
The Rise of Municipal Utilities
This selloff has been triggered because Germany's abandonment of nuclear power and the expansion of the use of renewable energy sources affects more than simply the way the utilities generate part of the electricity they sell. Up to now, the big four's massive coal-fired and nuclear power plants have enabled them to undercut smaller municipal utility companies and then use the profits to entrench their position at the top of the pecking order.
In contrast to the municipal utilities, the energy giants have invested very little in renewable energies and forward-looking technologies, at least in Germany. They've even failed to keep their own, self-imposed pledges to build sufficient numbers of wind farms off Germany's coasts. And why should they? Coal-fired and nuclear power plants have been earning them billions in profits.
All that will change now that nuclear power is being phased out in Germany. The government wants the energy of the future to come from a few reserve power plants and many small, decentralized and intelligently interconnected units harvesting wind, solar, hydroelectric and biomass power. That's an area the electricity utilities know very little about. Worse still, as Environment Minister Röttgen told the RWE CEO 18 months ago, it is one where the giant companies will no longer even be needed.
More and more local authorities are trying to set up community wind farms as a way to develop their own mini-grid. The approximately 900 municipal works in Germany, who serve as the energy giants' biggest customers, are already jumping ship. Only a few months ago, a consortium of seven municipal works secured itself a majority shareholding in power plant operator Steag for €651 million. The aim: greater independence from RWE and the other leading utilities.
The city of Münster's municipal works are trying to dump supply contracts with RWE so that they can offer their customers nuclear-free power. In Hamburg, residents are trying to buy back the electricity network of operator Vattenfall, a Swedish company with mass operations in Germany. And even Germany's largest municipal power provider, Munich-based Stadtwerke München (SWM), plans to switch its production to renewable energies by 2025.
In an attempt to meet this ambitious target, SWM has been investing across Europe. CEO Kurt Mühlhäuser says, "We couldn't meet our targets solely in our own region." Even so, Mühlhäuser is also active in Bavaria.
Less and Less Room
It remains to be seen whether projects such as these will be able to hold their own and indeed supply an industrial economy like Germany with sufficient electricity.
It is certain, however, that there will be less and less room for the energy giants. Even top managers in Germany are now convinced the big four will be unlikely to escape a further downturn in fortunes unless they reinvent themselves and are prepared to make big sacrifices, including in the boardroom.
That could come quicker than expected at RWE. The company's supervisory board has called a surprise special meeting in early August with only one item on the agenda: Germany's energy revolution and Grossmann's related strategy.