A magic solution to European utility woes

David Appleyard Blog

The utility death spiral of late repute may not quite be a reality, but there’s no doubt that the European utility business model is under serious pressure.

The latest results to emerge from energy colossus RWE shows just how dire things have become, with its news that it plans to decommission more than a 1 GW of capacity as well as terminate around 500 MW of additional contracted capacity by 2017.

With the latest round of closures, RWE says that the total capacity it is either totally or partially taking offline now amounts to around 9 GW.

Continued subdued demand - electricity generation declined by 11% year-on-year to just over 100 TWh - coupled with low wholesale electricity markets led to a significant decline in RWE’s earnings for the first half of 2014 with gross earnings (EBITDA) down by 32% year-on-year, while the operating result was down 40% to EUR 2.3 billion.
Commenting on the figures Peter Terium, CEO of RWE AG, observed: ‘Conventional power generation is losing ground – not just at RWE’.

‘Figures from the Federal Network Agency indicate that, up to 2018, more secured power station capacity will have to be taken offline than is added through capital investment. This does not bode well for security of supply, to which wind and solar can make little contribution’, he added.

In the UK, its major subsidiary RWE npower also reported dismal figures. RWE Generation UK posted a £74 million loss from its UK power station fleet for the first six months of 2014. This, the company says was mainly due to the continued problems with the economics of gas-fired power plant and the closure of older coal and oil-fired power stations at Didcot, Tilbury and Fawley in 2013. Overall RWE npower saw its profit fall more than 38% year-on-year, primarily due to the government obligated costs to improve domestic energy efficiency (including the installation of 10,000 new boilers) and increased costs in improving customer service levels – the company lost some 62,000 domestic consumers in the period.

As a solution to this dreadful situation, Terium has called for a market design which compensates companies that keep secured generation capacity on tap, saying: “With a capacity market that is non-discriminatory and open to all technologies, Germany could create an economically feasible basis to continue to operate indispensable generation facilities – and thus supplement the expansion of renewable energy.”

However, an alternative route to economic stability may perhaps emerge from a more distributed approach to the utility generation model. In the same week that RWE announced its results, Crow Wood Leisure, a leisure club and spar near Burnley, in the UK’s Lancashire, announced that it had signed a 15-year energy services agreement with EuroSite Power Inc.

This European subsidiary of American DG Energy Inc. has installed and is operating a 200 kWe CHP system at the site which generates around 2.5 GWh of total energy per year. EuroSite advances all capital investment and installs, operates and maintains the on-site equipment, as well as continuing to own it. The company simply sells the heat and electrical output from the CHP system, at a cost guaranteed to be lower than the incumbent utility supplier.

As Oliver Brown, director of Crow Wood Leisure, says: ‘The offer was compelling - no upfront investment from us and the club only pays for the energy used, while avoiding all operating and maintenance costs. We look forward to seeing immediate savings now the system is running.’

This on-site utility model appears to offer considerable scope for even the largest European player, given that it apparently resolves a number of challenges at a stroke. The energy efficient and economic nature of the product meets environmental objectives as well as cutting costs for increasingly distressed – and in some cases dwindling - consumers. Furthermore, utilities have considerable experience in investing in, installing, operating and maintaining power generation assets, albeit typically on a rather grander scale.

Europe’s utilities also have existing relationships and direct access to the bulk of the continent’s energy consumers and whatever the weather those consumers will still require the services of energy utilities. Indeed, utilities typically have an industrial and commercial division, an ideal locus to roll-out such a CHP venture.

Furthermore, with the emergence of ‘smart’ technologies an on-site utility, offering the efficient generation of electricity, heating and cooling at a variety of scales - whilst still supporting the stabillity of the transmission and distribution grid and the expansion of renewables - becomes a very real prospect. Could it also be an economic prospect too?

The Crow Wood site is apparently overlooked by Pendle Hill, famous for its 17th-century tales of witches, sorcery and black magic. Perhaps a little of the old black magic is what Europe’s utilities need to conjure up an economic future.

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