Every new solar panel installed on European rooftops chips away at power utilities’ centralized production model. Unless they reinvent themselves soon, these giants risk becoming the dinosaurs of the energy market.
The industry faces drastic change as renewable energy turns consumers into producers and hollows out the dominance of utilities. With their stocks at decade lows and a millstone of debt around their necks, Europe’s utilities have little margin for error.
In Germany, where 22 percent of its electricity came from renewable sources in 2012, the big four utilities – E.ON, RWE, EnBW and Vattenfall Europe – are nearly absent in this new sector.
Of the 71 gigawatts of renewable energy capacity installed at the end of 2011, the four owned just 7 percent, environment ministry data show. A gigawatt roughly corresponds to the capacity of one nuclear plant.
Individuals owned 40 percent of renewables capacity, energy niche players 14 percent, farmers 11 percent, various energy-intensive industrial companies 9 percent, and financial companies 11 percent. Small regional utilities and international utilities owned another 7 percent.
In the solar industry the big four are even more marginal, having ceded 97 percent to investors from outside the power industry, Lueneburg University researcher Mario Richter said.
“Utilities produce electricity, and here’s a new technology for producing electricity, and they are not in there. They have completely missed the opportunity,” Richter said.
Richter, who has interviewed 20 German utilities managers about the impact of renewables on their firms, said it has taken them years to acknowledge the potential of solar and wind.
In Bavaria alone, 200,000 of the 2.3 million electricity users have their own solar panels, turning 8.5 percent of electricity consumers there into independent producers.
In Italy and Spain, where solar also contributes around 3 percent of total power, the situation is similar to Germany.
In countries like France and the UK, with solar at just 0.4 and 0.1 percent of generation, centralized production still reigns supreme, but decentralized production by corporations and municipalities – with biomass and windmills – is eating into utilities’ market share.
“ERODING BUSINESS MODEL”
Peter Terium, CEO of RWE, acknowledges that the move from large conventional power stations towards decentralized plants and renewables is a fundamental change that is hurting the economic viability of RWE’s power plant fleet.
“We have to adjust to the fact that, in the longer term, earning capacity in conventional electricity generation will be markedly below what we’ve seen in recent years,” he said, adding that this put strains on RWE’s business model.
The renewables wave could not have come at a worse time.
The liberalization of Europe’s energy markets has sparked a rush for consolidation among utilities, leaving the continent with about a dozen big but highly indebted behemoths.
Worse, electricity demand, already hit by the drive for energy efficiency, has shrunk since the eurozone crisis began.
As a result, utilities shares have been the worst performers among 19 major sectors since early 2008.
The Stoxx Euro 600 Utilities index, with its January 1, 2008, level rebased to 100, now trades at 46, compared with 81 for the all-industry Stoxx Europe 600. The eurozone-only utilities index is at 35 and has lost 312 billion euros ($407 billion) in market cap.
“A REAL REVOLUTION”
Gerard Mestrallet, CEO of French gas utility GDF Suez, said that 10 years ago the European energy world was a juxtaposition of regional monopolies. “Those days are gone forever,” he told reporters this month.
“Some consumers have become producers; it is a real revolution,” he said.
GDF Suez is adapting its strategy to this new world, embarking on three new lines of business, all of which have been tried by other utilities in Europe, with varying success.
The first was to seek growth in energy-hungry emerging markets, where the model of centralized production in thermal plants still works – 40 percent of GDF Suez’s 116 gigawatt generation capacity is now in high-growth markets.
Secondly, it set up a division to help institutional clients use energy more efficiently. The unit, with more than a third of GDF Suez’s 220,000 staff, operates heating and cooling systems, including in landmark skyscrapers like Dubai’s Burj Khalifa.
“Our philosophy is to embrace energy efficiency and renewable energy and, more fundamentally, to be energy partners for our customers,” Mestrallet said.
Thirdly, like nearly all its peers, it is building up its own renewables business, but it is behind the curve. Renewables represent only about 3 percent of its generation capacity, compared with over 30 percent for Spain’s Iberdrola. Many utilities have set up renewables units, and some have listed, like Italy’s Enel Green Power.
Ultimately, utilities could become aggregators of electric power, much as Google aggregates content, with the difference that regulators will require that power keeps flowing and the lights stay on. Several countries, including France, Spain and the UK, are preparing legislation to set up capacity mechanisms, under which utilities would be paid for keeping capacity on standby.
“In a future electricity system, the electricity network company could essentially be an insurance company, providing insurance against not having sunshine when you need power,” said International Energy Agency economist Laszlo Varro.
Meanwhile, utilities have not quite figured out how to engage with Europe’s sun-harvesting citizens, which Varro says number about a million, mainly in Germany and Italy.
Utilities could benefit greatly if they did not treat rooftop solar as competition for their thermal plants but as a gateway into that new market, Richter argues.
Utilities could sell solar panels, provide financing and grid connection, and build a service relationship to generate a revenue stream.
But while there is a lot of talk about this model, working examples are few and far between. In the United States, Austin Energy and New Jersey’s PSEG have experimented with helping customers run solar panels on a small scale.
“It is overly optimistic to think that utilities could offset reduced consumption or increased renewable micro-generation simply by creating value for customers in managing that decrease,” said Liberum Capital analyst Guillaume Regdwell.
The most likely scenario is that value lost by utilities will be captured by non-utility players who sell products that enable more energy autarky.
WINNERS IN THE POWER GAME
If utilities are the losers in this game, the winners are solar panel and windmill makers, the hundreds of small firms that install solar systems, and the thousands of consumers who have turned their roofs into mini-power plants.
Other winners are companies in the energy efficiency business: building materials firms like Saint Gobain that sell double glazing, chemical firms like Recticel that sell insulation, and heating systems manufacturers like privately owned Vaillant and Viessmann, which sell heat pumps, solar systems and energy-saving equipment.
As if to illustrate the power shift from once-mighty utilities, GDF Suez this month lost its place in the blue-chip Stoxx Europe 50 index to Schneider Electric, a specialist in energy management systems and smart grids.
Even renewables fans agree that centralized generation will not disappear, as renewable energy will need the back-up of traditional power plants.
But the longer renewables are subsidized, said Redgwell, allowing them to obtain critical mass and become cheaper, the greater the possibility that their price will rival retail electricity prices, in a classic threat of substitution.
“In the long term, competitive, non-subsidized renewables could be a big win for society. And a big loss for utilities.”
Renewable energy is constantly evolving and challenging traditional utilities but one growing sector could make home-generated power much easier to use and cut customers’ dependence on energy companies dramatically – solar batteries.
A major conundrum with solar panels has always been how to keep the lights on when the sun isn’t shining.
Solar batteries allow homes and businesses to store solar power to use in the hours of darkness and can also help to create “smart grids” that react to sudden power swings and free stored energy when needed.
The technology is still expensive and not widely used but with energy bills soaring for consumers, it could quickly gain market share and reduce dependence on utilities, which are already struggling with overcapacity and weak demand.
Italy has some of the highest power prices in Europe and is looking at how to cut costs to allow its businesses to compete.
Nicola Cosciani, head of energy storage at Italy’s top industrial battery maker Fiamm, says heavy power users like cement and steel makers are looking at generating and storing their own solar power – and even selling excess power from their batteries on to the grid.
“Germany and Italy will be explosive markets for residential storage and big energy users are also starting to show an interest. This is a game changer,” he told Reuters.
By 2020, the EU aims to get 20 percent of its energy from renewables. That compares to 12.5 percent of the EU energy mix in 2010 and 8.1 percent in 2004, according to most recent EU statistics. Batteries will be crucial in reaching this target.
In Germany, the world’s largest solar market and Europe’s largest energy consumer, about 40 percent of all modules sold have been installed in homes, directly hitting demand for power from E.ON and RWE.
A four-person household can cut the amount of power it uses from the grid by 30 percent per year if it uses solar panels and another 30 percent if it uses a solar battery, leaving it to buy only 40 percent of supplies from utilities.
With power bills rising and solar subsidies and battery prices falling, power storage is expected to expand dramatically within the next 2-4 years.
Solar batteries look like a large car battery and are usually installed in the basement of a house, hooked up to a solar panel outside and on to the grid with an inverter.
That allows the batteries to charge up and store excess energy during the day and release it in the evening. They can also release surplus energy on to the grid.
The kit is still expensive but the price of solar panels has already dropped two thirds in the last two years and the price of batteries is expected to halve in the next few years.
A single solar battery costs about 800 euros per kilowatt hour (kWh), so an average 6kWh battery costs about 5,000 euros ($6,500).
Including installation, tax and components to connect it to the grid, an average household – which consumes 3,500 kWh per year – would pay about 10,000-20,000 euros per storage system.
“We believe that lithium batteries will be available for 400-500 euros per kilowatt hour (kWh) in a few years, featuring a lifespan of 20 years,” said Martin Rothert, product manager at SMA Solar, Germany’s largest solar company.
Solar batteries use either lead-acid or lithium-ion.
Germany plans to support the installation of solar batteries with at least 50 million euros in credit lines which will also support a greater roll-out.
Italian energy consultant BIP said the battery market will reach at least 9,000 megawatts (MW) of capacity by 2020 from today’s 270 MW.
“Due to rising supply and awareness, we expect several tens of thousands of these systems to be sold in Germany this year,” said Norbert Hahn, board member at IBC Solar.
Batteries are also needed to develop smart grids, which adjust power supply to satisfy demand across the network.
Seeing the writing on the wall for traditional generation and distribution, Italian utility Enel has done a deal with Japan’s NEC – one of the world’s leading energy storage system makers – to roll out new generation smart grids.
Developing smart grids can help cut costs and allow independent renewable energy providers to sell their power into the grid. Renewable energy, once capital costs are amortized, is cheaper and more secure.
“The idea is to apply the same principles of the Internet to electricity networks – any device hooked up can send and receive content,” said Ugo Govigli, vice president for European smart grid solutions for NEC Italia.