RWE’s income slips as impact of German shift to renewables grows

RWE’s net income for the first quarter fell by more than a third as Germany’s switch to renewable energy continued to batter the company’s business model.

In a letter to shareholders, Peter Terium, the chief executive of Germany’s second biggest utility by market value, blamed the “crisis in the conventional electricity generation business” for the decline.

Recurrent net income, the measure on which the dividend is based, declined by 35.5 per cent from €1.3bn to €838m. Shares were down 2 per cent at midday.

Earnings before interest, tax, depreciation and amortisation fell 15 per cent to €2.59bn. Eon, Germany’s biggest utility by market value, on Tuesday posted a 12 per cent year-on-year drop in core earnings for the first quarter.

Renewables now account for nearly a quarter of Germany’s electricity consumption. Subsidised solar and wind energy is increasingly taking the place of fossil fuels, hammering the profits of conventional power generators.

A decrease in the price of hard coal and the switch to renewables had led to a drop in wholesale electricity prices in Germany, RWE said.

In the first quarter of this year, a megawatt hour of base load power sold for an average of €33 on the spot market, €9 less than in the same period a year ago. RWE said it saw no indication of electricity prices on the German wholesale market posting a substantial rise over the rest of the year.

The mild winter in Europe led to a collapse in the demand for gas, further denting RWE’s earnings. 

In a conference call with journalists, RWE’s chief financial officer Bernhard Günther said the company shared Eon’s view that a new market design for electricity supply in Germany was urgently required to ensure security of supply and “to avoid further economic inefficiency”.

Power stations that can offer security of supply are being mothballed because they are no longer earning money, Mr Günther said.

“Later we will have to build new power stations, to do exactly the same thing that the mothballed ones would have done,” he said. 

The utility has adjusted its outlook for 2014 to exclude its oil and gas production arm Dea, which it has agreed to sell to investors led by Russian billionaire Mikhail Fridman. RWE revised ebitda down to a range of €6.4bn to €6.8bn. When it announced 2013 results in March, its ebitda forecast was between €7.6bn and €8.1bn.

Nathalie Casali, equity research analyst for European utilities at JPMorgan, said the sale of Dea was a “very good move” on the part of RWE’s management as it significantly reduces the group’s refinancing needs.

She said: “Does that make [RWE] an attractive investment case for investors? I don’t think so. In order to take a more positive view of RWE shares, one needs to see significant upside to German power prices.”

RWE posted a net loss of €2.8bn in financial results for 2013, the first time since the Federal Republic of Germany was established that the power generator has posted an annual loss.