Germany’s largest power generator RWE, following in the footsteps of its competitor E.ON, plans to split its company to bank on renewable energy and grid operations, which it says is the future for utility companies.

If approved by RWE’s supervisory board, the Essen-headquartered company that produces more than 40% of its power from hard coal and lignite power plants will transfer its renewables, grid, and retail operations in Germany and abroad to a new subsidiary that will be listed on the stock market by late 2016.

RWE AG will remain the new firm’s majority shareholder over the long term and consolidate it fully. The parent company, meanwhile, will focus on conventional thermal and nuclear generation and energy trading, RWE said in a statement on Dec. 1.

About 8%—3.7 GW—of RWE’s 49-GW fleet is renewables based. About 32% is natural gas–fired, 23% is lignite-based, 21% is hard coal, 8% is renewables, 8% is nuclear, and 9% is unspecifiedThe new firm will be an integrated energy group with a renewable portfolio of more than 3.5 GW “with a strong focus on wind power,” said the company. The new company will also operate a “modern” 550,000-kilometer-long distribution network and foster a retail business serving about 23 million customers in 12 European markets.

The new company, also to be based in Essen, will employ about 40,000 of RWE’s nearly 60,000 employees, it added.

The Next Logical Step 

According to RWE AG CEO Peter Terium, the restructuring move is in response to “the transformation of the European energy landscape.”

Three years ago, riddled with a €33 billion debt stemming from a “massive expansion” of its thermal power fleet, RWE was tackling a market saturated with renewables that had pushed out conventional power generation—especially gas plants—”faster and to a greater extent than expected,” he said.

The nuclear phase-out that had been decided upon just a year before had meanwhile rendered RWE’s long-term planning obsolete. “The government pushed through the energy transition, but there was no recognizable master plan. All of this created a great deal of uncertainty, not only for us but for the entire industry,” he said. “In the face of the scale of the problems, many chose to bury their heads in the sand and hope for better times to come.”

“Our top priority has been to make the company fit for the future. RWE was in danger of suffocating under the weight of costs and debt. We had to regain stability and credibility by making savings and reducing debt,” Terium said.

The decision to simplify the legal structure of the company came this August. “To put it in a nutshell: we have reached our turning point,” he said. “We are switching to growth mode and are building the energy company of the future.”

“Green” Companies Are Winning Investor Confidence

Terium said that the decision to bank on renewables was driven by investor signals. “It’s a matter of fact that today ‘green’ and innovative utilities are [receiving] a kind of bonus in their assessment compared to traditional utilities,” he said. “Investors reward the combination of regulated business with substantial capital expenditure in renewables. Investors seek for stability and growth perspectives at one stop. A prime example is Enel Green Power that has become a real growth engine for the Italian Enel Group.”

The new RWE subsidiary will have its own access to capital markets and improved growth prospects, he noted. “At the same time, we are convinced that conventional power generation will remain an irreplaceable partner for renewable energy for decades to come.” Power plants will play an entirely different role in this process than in the past, he said. “The conventional generation business in Europe is increasingly moving away from the production of as many megawatt hours as possible towards the provision of back-up capacity for renewables.”

He predicted: “This will cause a shift in income flows from the volatile margins in the wholesale business to market-oriented capacity premiums for security of supply.”

However, the greatest challenge for conventional power generation in Europe remains the low wholesale electricity price, Terium underscored. “It is our declared aim to make this business cashflow-positive in spite of the decline in the electricity price.” RWE will achieve this by increasing efficiency and identifying “considerable additional cost savings” in its power plant business.

Addressing skepticism about the future role of conventional power generation as backup power while there is currently excess capacity, Terium pointed out that in the coming years, considerable capacity will be removed from the market. “Nuclear is being phased out and the shut-down of a whole range of fossil-fired power plants has already been decided. The excess supply will shrink considerably as a result,” he said.

“We will also continue to stand by our responsibilities with regards to nuclear energy. This will not be affected by the new structure. On the contrary, the shares of the new subsidiary will be an asset that will make it easier for us to fund provisions in the future if necessary, whatever the circumstances.”

Following in E.ON’s Footsteps

RWE’s announcement comes just eight months after another giant German utility, E.ON, announced it would spin off its coal, oil, gas, and nuclear assets to a new company, Uniper, while retaining its renewable business at E.ON. Dusseldorf-based Uniper is gearing up to begin operations on Jan. 1, 2016, while E.ON will move to Essen.

Like RWE, E.ON has been forced to compete with subsidized renewables, posing hurdles for conventional generation in Germany. This March, for example, the company informed the Federal Network Agency of plans to shutter the 2010-built high-efficiency gas plants Irsching 4 and 5 effective April 1, 2016, as they are no longer profitable. The company has also reported losses from business in the UK, Sweden, and Italy.

Sonal Patel, associate editor (@POWERmagazine, @sonalcpatel)