Restructuring RWE Power Provider's New Playbook

RWE, Germany’s second-largest utility, is planning an ambitious overhaul and streamline of its complex structure. Although its changes don't go as far as E.ON, the company will face strong opposition.
Streamlining RWE for the clean energy transition.

RWE, Germany’s second-biggest power provider, has become the next major utility to launch a major reorganization of its structure in the face of Germany’s ambitious transition away from fossil fuels and towards renewable energy sources.

If follows from the steps taken half a year ago by Johannes Teyssen, chief executive of Germany’s biggest power provider E.ON, who announced he would divide his firm into two, one focused on renewable energy sources and the other on the traditional power business that used to be the industry’s bread and butter.

Although Peter Terium, chief executive of competitor RWE, long denied he was making similar plans, an e-mail seen by Handelsblatt to senior management shows that significant restructuring is ahead for the company.

RWE has been forced to act as renewable energy sources boom in Germany’s energy transition, sidelining traditional power generation – and leaving providers stuck with expensive nuclear power plants and other assets that they need to wind down.

We’re on the right path but we have to move faster. Senior Manager, RWE

Mr. Terium intends to streamline the company and bundle subsidiaries. He will present his proposals to the company’s non-executive supervisory board on August 10 at an extraordinary meeting.

A project group has been working on the organizational changes since March. Mr. Terium’s e-mail stated that, “at their core, the changes will simplify legal structures by either bringing together or removing companies.”

“We’re in the home straight and soon will have a concrete proposal we can present to the supervisory board,” he wrote.

Mr. Terium will simplify the complex network of companies that make up RWE; he hopes this will generate savings. Though a company spokesperson refused to provide further details, it is likely that the company’s sales business, which is currently organized into numerous subsidiaries, is at the heart of the changes.

According to sources close to the company, the department responsible for sales and developing new services and products will be the focus of the restructuring. At the companies affected – RWE Deutschland, RWE Effizienz and RWE Vertrieb – there is corresponding unrest about what the plans might mean for them.

RWE Deutschland is the parent company, and the two others subsidiaries. As a whole, the unit generates €25 billion in sales.

RWE Deutschland has holdings in five regional providers, 80 public utilities and several network companies – along with the two sub-departments offering services and energy saving approaches. The numerous levels within the company are a challenge for Mr. Terium and others.

“If we want to develop a new product, it has to be approved by three or four board members,” one manager said.

RWE is under significant pressure because of its brown coal business which has until now been profitable. Mr. Terium has for months battled plans by the government to tax coal-fired power plants. While the proposal was superseded by a pack of measures announced last week, he will have to close several power stations nonetheless.

The company’s electricity business is also struggling in the wake of the swift transition to renewable energy in the aftermath of Japan's Fukushima nuclear disaster. The decision upended the  traditional utility industry, as the German government introduced billions of euros in subsidies for the construction of wind farms and solar panels.

The explosion in renewable production led to a glut of electricity on the German market, which has driven down the wholesale price of electricity and thrown the nation’s largest utilities, E.ON, RWE and Vattenfall of Sweden, into an existential quandary.

Faced with billions in losses and writedowns, the companies are changing their structures.

As Mr. Terium tries to slim down RWE to better fit the new, green, decentralized energy business, his problems will start with his company’s structure. RWE is one of the most complex of all the companies listed on Germany's DAX blue-chip exchange as municipalities own a quarter of the company’s stock and are strongly represented in its non-executive supervisory board with four seats.

The supervisory board, which has the power to hire and fire management and in March tasked the company's executives to come up with changes, will have to approve any new major strategic direction taken by the company.

Strapped for cash, the municipalities are likely to oppose major changes, especially if these affect their power. Mr. Terium’s plan to reduce the number of smaller companies within his business will mean some board member posts are no longer needed.

In making changes, Mr. Terium acknowledges he may face opposition not only from employees but also the municipalities who are shareholders in the company.

“My colleagues on the executive board and I are aware that there has been significant speculation about the possible changes under consideration – and that so far you haven’t been able to provide them with many details,” Mr. Terium wrote in the e-mail to 150 managers, that has been seen by Handelsblatt and Frankfurter  Allgemeine Zeitung. “It’s a difficult situation for everyone involved.”

In March, the supervisory board – the non-executive board responsible for strategic decisions and hiring and firing chief executives – had tasked the executive board with finding a new way to reduce internal bureaucracy.

In his e-mail, Mr. Terium wrote that the planned changes would address structures in Germany but would not affect companies abroad, regional network companies and minority holdings.

RWE’s profits are falling: When Mr. Terium took up the post of chief executive in 2012, RWE earned €49 per megawatt hour for electricity; that price has fallen to €30. The company’s profits have fallen correspondingly, with earnings in 2014 down to €4 billion, down by a quarter. Mr. Terium anticipates a further drop to €3.6 billion for 2015.

The company has further plans to save: Mr. Terium adjusted his target for savings by improving efficiency from €1.5 billion to €2 billion.

As the company searches for new sources of profit, the electricity department is proving a new source of stability. While conventional electricity production only generated a return on capital expenditure of 5.2 percent in 2014, sales and distribution networks in Germany generated 11.3 percent.

But Mr. Terium will need to develop new products and services to earn more from RWE’s 25 million customers. It has a range of smart products to regulate electricity use in people’s homes but is competing with smaller start-ups in this market.

“We’re on the right path but we have to move faster,” one senior manager said.

Despite the uncertainties they will cause, in his email, Mr. Terium wrote that his attempts to streamline the company would not shake its foundations. Whether this holds true will be watched closely by power holders – both in the company and especially in the municipalities.

 

Jürgen Flauger is a Handelsblatt editor, covering electricity and gas providers, international market developments and energy policy. To contact the author: [email protected]