Energy Transition Uniper Boss: Coal Has a Future

Klaus Schäfer of Uniper, the company E.ON has spun off to look after its fossil fuel business, says that coal power is vital to ensure the lights stay on in Germany as the country focuses on renewable energy sources.
Klaus Schäfer of Uniper.

Klaus Schäfer took office as chief executive of the new German fossil-fuel utility, Uniper, at the beginning of this month - just as politicians and think tanks discussed the possibility of moth-balling coal power plants. Officially still part of Germany’s largest energy firm E.ON, Uniper’s operations have been separated and it shares are scheduled to list on the stock exchange by the end of this year.

Mr. Schäfer, who climbed the ranks at E.ON and was its chief financial officer until last month, holds office in E.ON's former headquarters on the banks of the Rhine River in Düsseldorf.

He faces the daunting task of leading Uniper, whose separation from E.ON is still subject to shareholder approval in June, through Germany’s transition away from nuclear power and fossil fuels to renewable energy sources, such as solar and wind power.

Under the government’s Energiewende, or energy transformation program, Germany in 2011 announced plans to phase out nuclear energy by 2022 and draw at least 80 percent of energy from renewables by 2050. The decision was taken by the German chancellor, Angela Merkel, as a reaction to the Fukushima nuclear accident in Japan.

The electricity market is no longer supplying the necessary price signals. It's massively influenced by a wide range of regulatory elements. Klaus Schäfer, Uniper CEO

Since then, Germany has offered billions of euros in subsidies to makers of wind turbines and solar energy firms to build the nation’s renewable energy grid. The subsidies have led to a glut of electricity on the market, which has cut wholesale electricity prices in half and led to billions of euros of losses at E.ON, RWE and rivals such as Vattenfall from Sweden and Karlsruhe-based EnBW. Some utilities have closed down brand new coal power plants.

E.ON and its smaller rival RWE have decided to separate their fossil fuel and renewables businesses to cope with upheaval in their markets. In his first interview as Uniper’s chief executive, Mr. Schäfer explains what role his company can play.


Handelsblatt: Mr. Schäfer, E.ON Chief Executive Johannes Teyssen ran the show here until recently. Now he and half the company have left the headquarters building, leaving you and Uniper behind. How does it feel?

Mr. Schäfer: We decided to split up the company more than a year ago, and I was very intensively involved in the decision. In that sense, I had plenty of time to get used to the idea. I sense a real spirit of optimism among our employees, and that feels very good to me.

You were there in 2000 when E.ON was established. You have worked in many managerial functions for the company. Are you feeling a little nostalgic?

There is no reason for that. The decision is well thought out and, in my eyes, the best alternative. The old E.ON was simply so broad-based that it became difficult to find the right emphasis in the individual business areas. For the new E.ON, it will now be easier to find the right answers to challenges in its market – and the same holds true for Uniper.

Is there really a spirit of optimism at Uniper? While Mr. Teyssen took over the future-oriented part of the business, he left you the old power plants.

It's easy for the employees to identify with the new work. The company now has a clear focus. An important part of our business today is the security of supply. Our job is to make sure that the lights stay on in Germany and in the many markets where we are active. All of our areas of business, including the power plants, are at the center of our strategy once again. This motivates people. At the same time, the spinoff gives us the chance to reorganize our company. We are smaller and more streamlined, and we are closing ranks.

And how do you intend to successfully convey your story to the markets? In the public eye, Uniper is E.ON's "bad bank," the place where it disposes of its troubled power plants.

That's an unconvincing comparison.


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Why? Convince us of the value of your business.

Uniper has many facets. For instance, we operate the entire business of the former Ruhrgas, the wholesale natural gas business. Global energy trading, a business that is becoming more and more important, is part of Uniper. Looking at us through the lens of the German Energiewende truly falls short. We are an international energy provider, active in markets like Great Britain and Russia, for example. Despite the current situation, Russia is a truly exciting market. And in the power plant business, we are active in key technologies, including hydroelectric power in Sweden and Germany. I'm convinced that the combination of all of these things is very exciting for the market.

But the basic conditions are conceivably bad. The wholesale electricity price is currently stagnating at €25 ($27) per megawatt hour. What kind of a future do your coal and gas-fired power plants still have in Germany?

Everyone in the company knows that the market environment is challenging at the moment. As I said, you can't reduce Uniper to Germany alone. Uniper is a company that's active in Germany and also has its legal headquarters here, but we are also active in many other countries. People from more than 50 nations work for us, and the official company language is English. The German market is one of many.

But it's the largest one…

The German market remains the largest market, but it isn't a dominant market, neither on the electricity nor the gas side. In the case of power plants, whose market-related problems you addressed, the German share of our total capacity is less than a third.

Well, electricity prices aren't just low in Germany. Isn't the E.ON split coming at just the wrong time?

If not now, when? Market conditions are certainly challenging, but that's precisely why this is exactly the right time. We are now giving both companies more latitude to develop independently. Why should we do this at a time when everything is going well? There would be no incentive to do so.

It isn't just the electricity price but also the price of oil that's in free fall. That too is likely to cause problems for you.

Of course we feel it when the oil price declines, especially when it comes to our natural gas production in Siberia. On the other hand, we don't need to spend as much on gas and coal, which both react to the low oil price. For us, the spread we achieve between fuels and electricity prices is critical.

Given all the problems, what are the growth opportunities with which you intend to attract investors?

I am convinced that the security of supply issue will become increasingly important in Europe. The expansion of renewable energy is important and the right thing to do, but it has to be safeguarded with power plants that can be controlled and regulated. And companies that can do this in a reliable way will benefit. And when it comes to natural gas, Europe will have to give more thought to the future supply, because our own production is declining significantly. At the same time, markets in Europe, Asia and America will be connected by LNG, or liquefied natural gas, which will increase the importance of the global trade. And although conventional power plants may be having a tough time in Europe at the moment, the demand for these plants remains high in emerging economies. The demand for energy is still growing rapidly in those markets – and it isn't just the demand for renewable energy that's on the rise, but also for coal and gas-fired power plants. The question of affordability of energy is especially relevant in emerging economies.

Are you saying that European power plant operators could offer their expertise there?

Well, there is certainly demand for that. We will be looking at the issue of where conventional power plants are being built worldwide. As a plant operator, as a service partners, as an energy supplier and, in select cases, even as a shareholder.

Unfortunately, E.ON already tried that – and failed. The attempt to operate in Brazil was a fiasco.

E.ON undoubtedly paid dearly there, but it also learned a few lessons. It makes more sense to make several smaller commitments and, most of all, to contribute competency instead of capital.



The clear separation between E.ON and Uniper may have been logical. But what stops Uniper from investing in renewable energy?

It would be unusual if we were to get into the business E.ON is in now. But of course this is just a snapshot in time. Strategy is a dynamic process. There will certainly be areas in which E.ON and Uniper will compete in the future. Why should we limit ourselves?

They may still be building coal-fired power plants in emerging economies, but what future do fossil-fuel power plants still have in Germany and Europe?

There is a goal of what's called de-carbonization, and the overall use of fossil fuels is being reduced. The important thing is that the overall development takes place within a reasonable time frame. Based on what we know today, I would not assume that there are any plans to build a new coal-fired power plant in Europe anymore.

In Germany, the Greens, think tanks and even Environment Minister Barbara Hendricks are calling for a plan to phase out coal. Does this worry you?

There are many politicians, including many real and self-appointed experts, who are speaking out on the issue. But we shouldn't force things, and we need to approach the issue in a reasonable way. There is certainly a long-term goal to expand renewable energy, but we also need to ensure that the energy market continues to function in the coming decades. The security of supply must remain paramount. For a major industrialized nation like Germany, a power outage, even one that lasts only a few minutes, would be a real problem. We are not just talking about the interests of the energy economy, but of the entire economy as well as all of society. Reliable energy is and remains the basis for our current and future prosperity.

How realistic is phasing out coal-based power generation in an industrialized country like Germany?

It isn't about a specific fossil fuel at all, but about the right technology. To be able to safeguard renewable energy, with all its strengths and weaknesses, we need technologies that generate electricity reliably and can also be used flexibly. They need to be able to quickly compensate for failures in the power supply as well as a sudden oversupply. It will be up to the markets to decide whether power plants will then be fired with coal or natural gas.

Last year, the German government decided not to establish a capacity market for fossil-fuel power plants. It would compensate plant operators for keeping otherwise unprofitable power plants available as a backup. Were you disappointed by that?

I'll say this very clearly: We will need a capacity market. The electricity market is no longer supplying the necessary price signals. It's massively influenced by a wide range of regulatory elements. In addition, while markets in the European countries are increasingly interconnected, there is no coordination in regulating these markets. The market is so strongly influenced that price signals no longer show any effect – or at least they are not a basis on which power plant operations can make investment decisions.

And a capacity market would correct that?

Yes. I am firmly convinced that we will also have it in Germany. This has long been recognized in many other markets where we are active, such as England, France and Russia. Although Germany took on a pioneering rule with its Energiewende, it is unfortunately not leading when it comes to the conditions needed to make it a success. I think that's difficult.

Well, Germany simply has too many old power plants.

The excess capacities will be reduced. The market will regulate that. If operating a plant no longer makes sense economically, the operator has to shut it down and remove it from the market. Unfortunately, this is also where the government is intervening. The regulation on reserve power plants deprives us of the freedom to close a power plant if it is classified as relevant to the system. We are experiencing this with our power plant in Irsching, in Bavaria. We expect to be forced to keep it in operation, even though this is unprofitable for us and we and our partners have already decided to disconnect it from the grid on April 1.

Will you take steps to oppose this decision?

We need to discuss the issue with our partners. In my opinion, however, this is an incomprehensible regulation, and if that's how you see it, you have to fight it legally.

Is it advantageous to be interacting with lawmakers under a new name? After all, E.ON was constantly being pilloried.

The operational split we complete is much more important. We can now present our position more clearly, concisely and pointedly. In other words, we have the chance to make our position clear here. This applies to both of us, to Uniper and E.ON.


Jürgen Flauger covers the energy market for Handelsblatt, including electricity and gas providers, international market developments and energy policy. Klaus Stratmann is the deputy bureau chief of Handelsblatt in Berlin and covers the energy market. To contact the authors: [email protected] and [email protected]