Utility M&A Heats Up in Europe With Green Energy Shift

(Bloomberg) -- Europe’s utility industry is headed for a wave of dealmaking in the next five years as executives seek a new business models to cope with a shift toward green energy.

That’s the view of Markus Krebber, chief financial officer of RWE AG, one of the masterminds of a transaction that shook up Germany’s utility landscape. The move handed RWE’s grid management operations to EON SE in exchange for wind and solar assets. It also fired a starting gun on RWE’s race to transform itself from Europe’s biggest carbon dioxide polluter into a leading green energy player.

“The fully integrated utilities as we call them are more or less separating,” Krebber said in an interview with Bloomberg Television in Frankfurt. “We see different business models emerging.”

The remarks underscore the scale of the upheaval underway in an industry that once was a backbone of steady dividends linked to heavily regulated assets. Now, nations from Germany to the U.K. and Italy are working to slash greenhouse gases and may even vow to zero out emissions by the middle of the century. That, for Krebber, requires industry executives to find new ways to make profit, suggesting they also need different assets to do the job.

Underscoring Krebber’s point, the Finnish utility Fortum Oyj earlier this week agreed to pay 2.3 billion euros ($2.5 billion) to activist investors in order to get majority control of German utility Uniper SE after the management of the firms clashed over strategy. Fortum’s strategic vision for Uniper is similar to that of RWE, with natural gas seen plugging gaps in supply as Germany exits from both coal and nuclear power.

Utilities in southern Europe, notably Italian giant Enel SpA, have yet to break up the vertical utility model in which companies own both generation and grid assets. Smaller German utilities also continue to work under that model.

Krebber’s outlook helps flesh out the thinking in RWE’s executive suite behind a plan outlined in September to make RWE carbon neutral by 2040. That requires RWE to close its six coal power plants in Germany, which it expects to happen by 2038. To compensate for lost income in the fossil fuel business, RWE will quickly expand its renewables business both at home and abroad, Krebber said.

Over time, the company that has been a frequent target for environmental protesters, will also close cleaner-burning natural gas plants to meet the net-zero goal.

“Gas will play a more important role as a bridge fuel” in the next decade, he said. “In the end, natural gas will need to be replaced by green gas” such as hydrogen or plants backed by carbon-capture-and-storage units.

RWE has 1.5 billion euros a year to invest in green energy, backed by its own cash flow, and may be able to boost that sum 3 billion euros, he said. That firepower could be complemented with a sale of RWE’s around 15% stake in EON, Krebber said. RWE, he said, wants to recycle cash from the EON stake into other investments.

“The stake in EON is a financial investment, and in time we’re looking for opportunities to invest that in operating businesses, primarily renewables,” Krebber said.

©2019 Bloomberg L.P.

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