RWE’s Thomas Birr on Corporate Strategy in a Changing German Electricity Ecosystem

RWE AG is Europe’s third-largest electricity and fifth-largest gas marketer, with holdings in upstream oil and gas production, power grids, and energy trading. Its German power subsidiary has been the utility poster child for the effects of the Energiewende, the transformation of the Germany power system away from nuclear and coal toward renewable energy and energy efficiency. Faced with mounting losses in its conventional generation line, RWE is trying a rapid switch to become a 21st-century “integrated energy manager.” Head of Group Strategy & Corporate Development Thomas Birr spoke about the company’s current challenges and strategy changes.

Q: RWE posted its first loss last year since it was founded. What happened?

Birr: We are in an extremely difficult phase right now. The fact you mentioned, that for the first time since the Federal Republic of Germany was established, in other words, in more than 60 years, we have posted a loss again, is enough to show how serious the situation is: Our net income for fiscal 2013 was minus €2.8 billion.

One reason is impairment losses totaling €4.8 billion. These are essentially due to the crisis in the conventional power generation segment. More than anything, they are a reflection of the greatly worsened earnings prospects in the continental European power station sector. We are making less and less money with our conventional power stations, especially those based on gas and coal. This trend will continue in the next few years, and it is irreversible.

Q: Dr. Bernhard Günther, the CFO of RWE, has said there is a “crisis in conventional power generation” in Germany. What is causing that crisis? And how is RWE responding to it?

Birr: First, the conventional power stations are not being used to their full capacity, because they are being driven out by photovoltaics, especially during peak load hours. Second, the huge expansion of renewables has pushed wholesale prices for electricity down even further. At the current market price, it is virtually impossible to operate conventional power stations economically. Third, in 2013 the EU member countries abolished the free allocation of CO2 emission allowances for electricity generation [under the European Trading Scheme]. The consequence for us has been substantial financial burdens. In specific terms, 20% to 30% of our power stations currently cannot even cover their operating costs. It goes without saying that this cannot be left to continue. This is why we decided to remove about 4,400 megawatts of power station capacity from the market, at least temporarily.

In view of our difficult economic situation, we are continuing to do all we can to bolster our financial strength. By now we completed savings of €1 billion during 2013, which was much faster than we expected. Second, we are fairly confident that we can accomplish our savings goal for 2017—a total of at least €1.5 billion—a year earlier than originally planned. The Conventional Power Generation Division will contribute about half of this figure. And divestments also form part of our package of measures. At the end of March 2013, we sold the Czech gas transmission system operator NET4GAS for €1.6 billion. In addition, we will gradually bring our investments down to about €2 billion a year by 2016.

Q: There is a lot of talk in the U.S. about the need for a new business model for utilities. What does the new business model look like for RWE?

Birr: The decentralized energy world needs an “integrated energy manager.” In other words, someone to coordinate the many activities of the individual market players, someone to look after networking the various individual initiatives involved in the transformation of the energy system at a technical and economic level—to bring them all together as a single, integrated unit. We are taking care of this. We are joining all the little pieces to form the bigger picture. We have the necessary expertise to achieve all this.

This involves products such as RWE SmartHome, a convenient system to manage domestic energy use. Until now, the heating component has been limited to adjusting heater controls. Now we are bringing smart power down to the basement. In the future it will be possible to directly control Internet-capable condensing boilers. A second example is “RWE SmartCompany,” a product that makes it easy for small and medium-sized enterprises to record their consumption data at different locations, and to reduce their costs by up to 20%.

Also, electric vehicles are a core element in the transformation of the energy system. Not only are they CO2-free, they can also serve as decentralized energy storage units, which is a key element in stabilizing the distribution network. We are pressing ahead with the concept of electric mobility in cooperation with Schneider Electric, the global specialist in power management and system solutions for electric mobility. In the future, RWE and Schneider will bundle their expertise to provide innovative charging infrastructure solutions for electric vehicles.

We also need to continue the task of integrating renewables swiftly and reliably. We are therefore driving forward technologies that will combine the “electricity” and “heat” sectors. We call this “Power to Heat.”

In the future, we intend to focus even more on innovation in our activities. This is why we have created a new unit within our CEO’s department that will deal specifically with this subject. One example is our cooperation with Nest—the company that is now owned by Google. RWE npower is the only utility in the UK to sell the Nest Learning Thermostat. And we are looking to do even more with Nest: We are confident that the thermostat is the right product not only for the UK but also for our other markets in Europe.

Besides products such as the ones just mentioned, the further expansion of renewables remains a strategic growth area for us. We are focusing on wind energy in our core European markets. We are, however, moving away from quantitative targets. Instead, our expansion goals in the area of renewables are focused much more strongly on the potential for adding value to the Group.

And finally, we are working on new models for partnerships with potential investors. Getting investors on board enables us to recycle existing invested capital, to a certain extent, and turn our project pipeline into reality despite the limited financial resources. New financing models permit further growth for renewables and make it possible to spread the investment risk.

—Bentham Paulos, a freelance writer specializing in energy issues, conducted this interview in Berlin for POWER.