Business Model at Risk Nuclear Phaseout Could Spell Disaster for German Energy Giants

With the government's decision to phase out nuclear energy, Germany's four biggest utility companies face an uncertain future. Profits could tumble this year by as much as 30 percent and the companies are also becoming increasingly vulnerable to takeovers. Are the days of giant energy companies numbered in Germany?

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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."


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