It’s adapt or die now in the energy world, it seems. E.ON has decided to divide and conquer. It is undergoing a complete overhaul of its entire business. If everyone thought banks were too big to fail, then take a closer look at energy!
Every utility in Europe is under pressure and one of the many reasons is that energy companies are just too big. They are unable to customer service, the respective governments keep changing their minds and ministers, a lot of countries have poor energy infrastructure—the list goes on!
“We are the first to resolutely draw the conclusion from the change of the energy world,” stated Chief Executive Officer Johannes Teyssen of E.ON. “We’re convinced that energy companies will have to focus on one of the two energy worlds if they want to be successful.” And the market has shared that sentiment.
Companies that have solely invested in coal or which were heavily oil revenue focused are now struggling. Coal is undergoing legislation change driven by environmental concerns. In the EU this is driven the by LCPD (Large Combustion Plant Directive) where the majority of coal fired power plants will have to be taken offline. They have also been given a quota of hours that they are allowed to run till 2020.
Oil exploration and production companies are under strain with oil prices falling over 35% in 2014 to date. The low price now puts the viability of some projects in jeopardy, with some already working at a loss.
The problems vertically integrated companies currently face are ‘good’ and ‘bad’ assets. E.ON has decided to separate the two, similar to the ‘bad bank’ ideas set up for the finance industry. The benefit for splitting up creates further employment and independent strategy.
“We firmly believe that creating two independent companies, each with a distinct profile and mission, is the best way to secure our employees’ jobs. Our new strategy therefore isn’t a job-cutting program,” Teyssen said.
So how will the new E.ON look? Renewables, distribution and customer solutions will be E.ON as we currently know it. So for most of us, this will not be any different. The capital intensive projects and more regulated assets will be put into a new company that has yet to be named. This will include the exploration and production of oil and gas, hydro projects, as well as all exposure to Russia and Brazil and the trading of global commodities. In essence: the high risk portfolio.
E.ON’s divestment has been one of many stories in 2014 where traditional or conventional energy producers have decided to shift into renewables. Earlier in the year we saw the Rockefeller family, founders of Standard Oil (known today as Exxon-Mobil, Amoco and Chevron), deciding to rid themselves of all oil related investments and reinvest a significant portion into renewables.
With rising energy prices and competition, utilities need to become more service orientated. No longer can consumers accept these rises without assistance. Creating a separate entity or looking at long term energy strategy going forward will not only save costs in the long term, it will also boost profitability.