Assessing the impact of increased renewable energy on traditional businesses

Chris Bryant writes a good article in the Financial Times about the impact of the low carbon transition on some of the major companies in Europe.

 

European industrial groups hit by push to renewable energy

After years of painstaking development, Siemens was triumphant in 2011 when its new H-class gas turbine, the world’s largest and most efficient, went into regular operation at an Eon power plant in Irsching, Bavaria.

But in March this year, Eon said it planned to shut down the turbine in 2016 — because German laws that prioritise solar and wind energy in the electricity grid mean it is left switched off much of the time and has no prospect of operating profitably.

The transition from fossil-fuel-based power to renewable energy — Germany is pursuing one of the most radical policies in the world — has created big opportunities for European companies that supply wind turbines, solar panels and smart electricity grids.

But for suppliers of equipment and services to the conventional power industry based on coal and gas, the pain is really starting to mount. Orders and profit margins are falling, triggering restructuring and job cuts.

“The way in which Germany’s energy transition is being handled has made it impossible for us ever to sell our fossil-fuel-related production and solutions in Germany,” Joe Kaeser, Siemens chief executive, said in May.

German utilities are reluctant to invest in new fossil power technology because their existing coal and gas units operate well below capacity on sunny and windy days. Surplus German electricity is exported at low cost, which has also deterred new power plant investment in neighbouring countries such as Poland, industry officials say.

Furthermore, across continental Europe a combination of weak power demand, increasing energy efficiency and an uncertain regulatory environment has weighed on spending on conventional power generation, even though fossil-fuel-based plants will be required for years to come to ensure there is no interruption in electricity supplies.

In 2014 the European Union added some 5.6 gigawatts of coal and gas generation capacity but decommissioned almost twice that total. In contrast, some 19.8GW of solar and wind capacity was installed that year, according to the European Wind Energy Association.

“Most countries in continental Europe will probably not build new fossil power plants this decade,” Andreas Willi, analyst at JPMorgan, says.

Capital spending by utilities accounts for almost 20 per cent of the revenues of European capital goods companies for which JPMorgan analysts provide coverage. The spending drought is therefore a big headache for suppliers and service companies such as Siemens, Alstom and Bilfinger.

Gas turbine demand has been hard hit in Europe because it was cheaper to burn coal imported from the US after the shale revolution there. New gas turbine orders slumped last year to 1.1GW of capacity in Europe, excluding Russia, from a peak of 15.6GW in 2007, according to McCoy Power Reports, a research company.

Siemens has sold 75 of its top-of-the-range H-Class turbines since 2011, but primarily in the US, South Korea and Egypt; it has sold only three in Europe, including two in Germany.

Over the past 12 months the German engineering conglomerate has therefore announced some 2,500 jobs cuts in the power and gas division — primarily in Germany — as it seeks to adjust its footprint to reflect weak spending by European utilities and much better prospects overseas.

“Utility spending has been very weak in Europe for some time, putting considerable pressure on suppliers,” says James Stettler, analyst at Barclays. “Siemens is significantly reducing manufacturing capacity in Europe, and I would expect other vendors to follow suit.”

Rival General Electric is awaiting European Commission approval to complete a €12.4bn takeover of French peer Alstom’s power business. Responding to Brussels’ concerns that the deal would distort competition in large gas turbines, GE has noted that there is almost no demand for the technology in Europe. A decision by the commission is expected in September.

New energy orders including gas plants fell 12 per cent at Alstom in the year to March 31 due to weak demand. The French group burnt through €1.2bn of cash between 2010 and 2014, and announced 1,300 job cuts in late 2013. GE declined to comment on whether there was a need to further restructure manufacturing capacity at Alstom, as the deal has not closed.

Power equipment suppliers make a big part of their earnings from service contracts, but utilities have tightened their belts and mothballed plants require less maintenance.

The impact has been most apparent at Bilfinger, the German engineering and services group, which has slashed profit guidance six times since mid-2014.

Bilfinger’s power division, which builds, modernises and maintains power plants and sells related components, derives more than two-thirds of its sales from Europe, but the group’s order backlog has shrunk by a quarter over the past year. Its competitors include Alstom, Ansaldo Energia and Mitsubishi-Hitachi Power Systems Europe.

Under new management, Bilfinger has written down the value of its lossmaking power division, which has 11,000 employees, and put the unit up for sale. Bilfinger’s stock has declined 60 per cent since a peak in March last year.

“The energy transformation in Germany has led to a completely uncontrolled decline in investment in fossil-fuel-based electricity generation,” Herbert Bodner, then interim chief executive of Bilfinger, told investors in May.

“Uncertainty hinders any willingness to invest. Our customers in the power business segment are in this situation, not only in Germany, but in neighbouring countries too. German energy policy has been infectious.”

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