Energy Transition Survival of the Cannibals

American investor Steve Westly, one of the early backers of Elon Musk and Tesla, applauds the bold strategy of E.ON boss Johannes Teyssen to spin off his traditional power plants and focus on green energy technology.
Johannes Teyssen (l) and Steve Westly talk shop at the Handelsblatt Pathfinder event in May.

If Johannes Teyssen was having any doubts about reinventing energy giant E.ON to fend off competition from newer and cleaner technology companies, the endorsement from U.S. investor Steve Westly should have put them to rest.

Mr. Westly, a strong advocate for companies to think radically or face extinction recently declared he would buy E.ON stocks “any day of the week.”

The German energy firm, he said, took precisely the correct course by spinning off old power plants and concentrating on the transition to greener energy. “Many suppliers in the world will follow this example,” he said.

Investors can rely on Mr. Westly’s instincts. Several years ago, he invested in a small start-up in California with just 30 workers but ambitious plans to build an electric car. People laughed at him at the time, he said with a note of pride. Today, Tesla is valued at €28 billion ($31.5 billion) and is on the verge not only of revolutionizing the automotive sector, but also the energy market.

Tesla is just one of many clean technology companies the venture capital fund, The Westly Group, has invested in. Mr. Westly also invests in solar cells, wind turbines, companies that are challenging classic electricity and gas suppliers like E.ON and showing them how money can be made with the energy transition.

If you don’t cannibalize yourself, somebody else will. Steve Westly, CEO, The Westly Group.

“The energy industry is changing fundamentally,” said Mr. Teyssen, Eon’s chief executive officer. It used to be that energy demand rose with economic growth of the economy. It used to be best to build power plants as big as possible, and to generate power centrally.

All of that is changing at a record pace. With the energy transition, consumers now can take charge of their own energy supply.

No classic industrial sector has ever experienced a historical upheaval as big as the energy industry. After over a hundred years, where the generation of electricity with huge power plants was the only way to go, the 21st century demands wind turbines off the coasts and solar roof panels on private houses to feed electricity into the system.

The energy revolution is not confined to Germany. Faced with the very real threat of global warming, a worldwide paradigm shift away from fossil fuels to green, decentralized energy is in motion.

This change has thrust E.ON into an existential crisis. Large power plants, which have generated huge  profits for the company for decades, are now gradually being phased out of the market by wind and solar energy. Last year, the company recorded a loss of €3.2 billion ($3.6 billion), the largest in its history.

Mr. Teyssen based his strategy on the most radical consequences of the move toward greener energy. E.ON SE, which he plans to continue to run, will concentrate on renewable energies and the decentralized generation of energy, marketing and distribution networks. Meanwhile, E.ON will spin off the conventional power plants into a new company, Uniper, in 2016.

Mr. Teyssen is clear on the fact that the power plants are still needed, but that E.ON can no longer take optimal advantage of both worlds simultaneously. “We have a large company, but I don’t believe we can do everything at the same time,” he said. Either you fight for the old system or you completely embrace the new world, he added, noting that in times of change, leaders must act radically. “Only then can you mobilize the talent and survive in competition,” he said.

It’s not unusual for energy companies to reinvent themselves, Mr. Teyssen said. Veba, one of the predecessor companies of E.ON, was a conglomerate with energy, chemical and telecommunication sectors. After the merger with the conglomerate Viag in 2000, E.ON became an energy giant and with the 2003 takeover of Ruhrgas, an electricity and gas company. “Now, we are just reinventing ourselves once again,” he said.

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The E.ON CEO has earned Mr. Westly’s respect. It takes enormous courage to split up one of the largest utility companies in the world, the American said, but many other firms including those outside the energy industry should take similar actions. “The world is changing ever more quickly,” he said. “This also results in the necessity of a new business model.”

Any industry that settles too comfortably into the status quo is likely to be passed by new competitors. The taxi business worldwide is under attack by Uber. AirBnB is plaguing the hotel business by arranging private accommodations for travelers. And now Google is setting its sights on the automobile industry with its interest in self-driving cars.

Companies must be ready and willing to take radical steps and must continually reevaluate themselves. “If you don’t cannibalize yourself, somebody else will,” said Mr. Westly. He recalled Steve Jobs, who first overturned the MP3-player market with the introduction of the iPod, then quickly moved on to create the iPhone.

Mr. Westly is no slouch at reinventing himself. He was chief financial officer of the state of California, which boasts the world’s seventh-largest economy, and has been active for 15 years in Silicon Valley, making venture capital available to new companies. He supported Barack Obama in his bid for the U.S. presidency. He ran for the office of California governor in 2006, but lost the Democratic primary. He plans to try again in 2018.

“Think big, take calculated risks, don’t be afraid to fail and act fast,” Mr. Westly said.

Tesla's Elon Musk is the prototype for the risk-taking entrepreneur in Mr. Westly’s view. First, Mr. Musk put the automotive industry into an uproar and now he is turning to Mr. Teyssen’s industry. Last week, Mr. Musk unveiled his revolutionary new battery, capable of storing electricity.

“Such a battery can be the solution to ensuring the success of wind and solar energy,” Mr. Westly said. “If we succeed in this, we will no longer need conventional power plants.” If so, Mr. Teyssen’s E.ON is investing in the right world.

 

Jürgen Flauger is a Handelsblatt reporter with a focus on the German energy sector. To contact the author: [email protected]