E.ON's decision to reinvent itself as a renewables and clean tech specialist could mark a watershed moment for the European energy sector
It is possible to overstate the significance of E.ON's surprise announcement that it is to split itself in two in a bid to refocus the business on renewables, smart grids, and energy efficiency. After all, the company is not about to shutter its coal and gas plants, while the management is at pains to point out that the new 20,000-strong spun out fossil fuel, nuclear and hydro business will still have a crucial role to play in the transition to a low carbon economy. In addition, there are no guarantees that this drastic shake-up of one of Europe's largest utilities will work. And it is the renewables company that will be laden with E.ON's existing debts, granting the new fossil fuel-focused firm with the freedom to invest once again in expansion. It is also worth noting that the energy market remains staggeringly volatile and complex and E.ON is attempting to make its "bold new beginning" from a position of not inconsiderable financial stress.
But those caveats aside, the decision by one of the Big Six to align itself so explicitly with the transition to a low carbon economy still feels like a watershed moment. In one stroke of a pen, E.ON will soon recreate itself as a 40,000-strong green corporate powerhouse focused exclusively on renewables generation, distribution networks, with a particular focus on smart grids, and services for its 33 million customers, which translates as smart meters, energy efficiency upgrades, and microgeneration installation and maintenance.
The reasoning behind this dramatic bet on the primacy of renewables in E.ON's core markets reads like it was written by Greenpeace, rather than the board of one of Europe's largest utilities. "We are convinced that it's necessary to respond to dramatically altered global energy markets, technical innovation, and more diverse customer expectations with a bold new beginning," said chief executive Johannes Teyssen. "E.ON's existing broad business model can no longer properly address these new challenges. Therefore, we want to set up our business significantly different. E.ON will tap the growth potential created by the transformation of the energy world."
E.ON will "place a particular emphasis" on wind energy and "strengthen" its solar business, while making energy distribution networks smarter "so that customers can take advantage of new products and services in areas like energy efficiency and distributed generation", continued the company.
This new vision has numerous implications, almost all of which are encouraging for the green economy. Firstly, it throws some more investment muscle behind Europe's low carbon transition with the company confirming it will increase capex for next year by €500m on top of the €4.3bn already planned for 2015. This, in turn, tilts the Brussels, Berlin and Westminster lobbying battlefields a few degrees in favour of clean energy and away from fossil fuels. One of the many fascinating questions raised by E.ON's new strategy is how long will it remain a member of those industry lobby groups that pay lip service to the idea of decarbonisation while quietly arguing against green policies?
E.ON's bold decision also creates overnight a case study that everyone in the European utility sector will be watching with hawk-like vigilance. In recent years, I've lost count of the number of times executives at Big Six energy companies have explained their desire to see their companies become energy services firms. Now one of them looks set to back up this rhetoric with real action. We are about to find out if a giant energy company can profitably reinvent itself as a green energy services powerhouse.
One of the reasons E.ON is confident it can make this transition is that it will start to give customers what growing numbers say they want. The new renewables-focused E.ON will continue to sell its customers a mix of fossil fuel and renewable energy, but it would stand to reason that this mix will now start to decarbonise at a faster rate. Meanwhile, this greener energy will be offered alongside smart meters, onsite generation technologies, and other services, all of which are designed to give people easier access to the clean energy that a majority of people in the UK and Germany consistently say they want. This transition is also likely to be mirrored in the business market, where E.ON and the rest of the Big Six have spent several years watching large blue chip clients get increasingly frustrated at the inability of mainstream suppliers to give them the green power they want.
Most importantly, however, the new strategy is a massive vote of confidence in the EU's energy and climate change strategy and the general direction of travel for energy policy across the bloc. In splitting the company, E.ON is to an extent hedging its bets and backing both the renewables and the fossil fuel horses. But the balance of the workforces at the revamped E.ON and the new spun off business indicates where the board sees the long term future lying.
For years, many within the energy industry have continued to invest huge sums in fossil fuel infrastructure on the assumption that Europe's politicians were bluffing when they said the bloc would have to rapidly decarbonise. When that bet started to look shaky they spent millions more on lobbying to try and ensure politicians did indeed end up bluffing. E.ON's planned transformation is what happens when a large company recognises that policymakers aren't bluffing, clean technology improvements aren't slowing, and the transition to a low carbon economy is really happening.
It is possible to overstate the significance of E.ON's transformation, but it could yet prove to be an important turning point in Europe's transition to a genuinely low carbon economy.