Size matters

E.ON Chief Executive Wulf Bernotat explains how the world’s number one energy firm plans on leveraging its scale to go from biggest to best.

Keener competition in the power and gas markets, continued high energy prices worldwide, and growing regulatory pressures are increasingly prominent features of the operating environment for Europe’s energy firms. But despite this difficult environment, Europe’s largest investor-owned energy company continues to go from strength to strength. E.ON’s results for the first quarter of 2008 maintained the high level of the previous quarter, while earlier this year the energy giant announced it had increased annual sales to €68.7 billion. Impressive stuff.

So it’s another case of a corporate job well done, right? Wrong. “We need to do an even better job convincing people that a company like E.ON – precisely because of its international presence, size, technological potential, and financial strength – is the right partner for them, a partner they can trust and rely on,” says the company’s forthright CEO Wulf Bernotat, who intends to deepen E.ON’s dialog with the public. “This is the only way we’ll be able to convince people that Europe needs to design balanced strategies for a sustainable energy supply.”

Huge investments will be needed to implement these strategies and make Europe’s energy supply even more environmentally friendly, secure and reliable, and E.ON has therefore increased its planned investments for 2007-2010 by €9 billion; in the period 2008-2010 alone, the company now plans to invest roughly €50 billion. Of this figure, €38 billion is earmarked for power generation and supply. E.ON is currently planning to build 17 new coal-fired and gas-fired power plants in Europe and Russia, five of which are in Germany. Renewables also represent a key investment focus, with Bernotat planning to double the firm’s planned renewables investments to €6 billion for the period 2007-2010. “Our investments in state-of-the-art power plants, renewables, energy infrastructure, and gas procurement will help secure Europe’s energy future,” he says. “E.ON is a pacesetter in our industry.”

Renewable growth

For instance, the company has won the right to build Rödsand II, a large offshore wind farm south of Lolland Island in Denmark. The Danish Energy Board gave E.ON the green light to build the flagship project, and on completion in 2010 it will be the largest offshore wind farm in E.ON’s portfolio with a capacity of around 200MW. It will provide enough clean, renewable energy to power 200,000 homes – a full two percent of the total Danish power demand. The total investment will be approximately €400 million. E.ON is already a part owner of the Rödsand I wind farm, which has a capacity of 160MW, three kilometres east of the new project.

“The development of renewables is essential for climate protection and an important part of our growth strategy,” says Bernotat. “By 2010 we want to invest about €6 billion in this sector alone, more than any other European company. Following the acquisition of the wind energy companies Airtricity in the US and E2 Renovables Ibéricas in Spain last year, E.ON is already the seventh largest wind power company worldwide. With the Rödsand offshore project we are reinforcing our global position and expanding our experience and expertise in the field of offshore wind power.”

E.ON, in cooperation with Dong, originally won the right to build the Rödsand II project two years ago. However, like many offshore schemes, it was adversely affected by increasing capital costs of several plant items. Given the unfavourable financial conditions, E.ON reluctantly withdrew from the project in December 2007 and the Danish Energy Board started a new tendering process in February of this year. E.ON was once again successful in the new tender process and, with a revised and robust economic case, is now able to progress the project. Most of the preparation work has already been done, which means that the start-up of the wind farm is planned for 2010. Rödsand is a great location to build offshore capacity, given its shallow waters, its proximity to the Danish coast, and its excellent wind resources.

Indeed, Bernotat is confident that E.ON is uniquely positioned to drive the next phase of the renewables agenda and deliver a sustainable and balanced portfolio for generations to come. “Energy has to continue to be secure and affordable in the future,” he says. “Above all, if we want to get to grips with climate change, we have to make sure that its generation is much more climate-friendly. Renewables are going to play a key role. They are CO2-free, independent of any fuel resources and can be profitable in the long-term without any subsidies. This does however require current capacities to be expanded quickly and extensively as well as further technical innovations.”

Bernotat adds that only companies with the experience, scale and strength of E.ON are positioned to plan, invest and execute industrial-scale projects to take renewables to the next level. “E.ON has doubled its investment budget into renewables to €6 billion by 2010,” he says. “This accounts for a good 10 percent of the entire investment programme of around €63 billion by 2010. There is hardly any other company in Europe investing as much in this field as we are today. We are taking our responsibility to the community and our consumers very seriously.”

Closing the generation gap

According to the EU Commission and the German government, renewables are to be expanded considerably in the coming years. By 2020, the share in Germany alone is set to rise to 25-30 percent of the total energy mix. But as Bernotat points out, this still leaves a significant challenge in terms of making up the difference. “It means that we have to generate 70-75 percent from non-renewable sources,” he explains. “As much as we all may like the idea that we will be relying on renewables exclusively one day, we are going to have to be asking ourselves regularly in the years to come how we intend to secure our energy supply. To ensure we keep the lights on across Europe, we are going to need a balanced energy mix for decades to come with nuclear power, coal and gas all playing an important role.”

The company’s subsidiary, E.ON Climate & Renewables, has made swift progress since the decision was taken to found the company in May 2007. Since then, installed capacity has been increased by acquiring the renewables business of Dong in Spain and Portugal, as well as Airtricity in the US and Canada, and by implementing new construction projects that have increased capacity from around 500MW to 1300MW. Including hydropower, E.ON now has renewable generation capacity in excess of around 7300MW – 12 percent of a total installed capacity of 60GW. By 2015, capacity will increase to at least 16,000MW.

Bernotat believes such growth represents a major opportunity – along with significant construction challenges. “The market for renewable energy is growing rapidly,” he says. “Potential in 2020 is likely to exceed €200 billion. We are currently seeing growth rates per year in excess of 15 percent in wind, 12 percent in bio natural gas and 20 percent in solar energy. At the moment we are in a transition into a new phase. Boutique-scale projects are now increasingly being replaced by industrial-size projects. Our priority at E.ON is therefore to quickly build large – and most importantly, affordable – capacities to our usual high quality. We are not limited to wind power. Our objective is to have all promising renewable energies in one diversified and global portfolio. Given the different stages of technical and economic maturity, we need to have strategies for each source. But we are fully dedicated to building on our market position to ensure that we are getting closer to the global leaders by 2010.”

The share of renewables at E.ON – according to an E.ON generation scenario presented at a recent conference in Madrid – could even triple compared to today’s levels to 24,000MW by 2030. This would account for almost a quarter of E.ON’s global electricity generation capacities, which according to the 2030 scenario is to increase to more than 100GW installed power plant capacity. “One of our general climate targets is to cut our specific CO2 emissions by at least 50 percent against 1990 levels by 2030,” says Bernotat. “We can only achieve this with a broad energy mix in 2030, which is then going to be generating more than 50 percent of electricity without CO2 emissions.”

Expanding horizons
In addition to renewables, nuclear power should contribute 19 percent to E.ON’s total energy mix, while the generation portfolio will continue to include highly efficient gas and coal-fired power plants. “We are going to be pushing every technical possibility to make electricity from coal-fired power plants CO2-free,” says Bernotat. “If CO2 capture is technically possible and economically feasible, no coal-fired power plant should be built from 2020 on without carbon capture technology. By 2030, 10 percent of our generation capacity would then come from CO2-free coal-fired power plants.” Bernotat adds that in addition to being climate friendly, this energy mix would make a major contribution to ensuring that energy is affordable and secure by being less dependent on fossil resources and ultimately energy imports. “We are going to be carefully monitoring and focusing on the three targets of energy supply: security of supply, climate protection and economic efficiency.”

E.ON is already the world’s seventh-largest wind-power company and with the formation of its climate and renewables business unit aims to rapidly rank among the leaders. In just a short time, E.ON has achieved the smooth integration of its renewables operations and employees worldwide and also considerably expanded its renewables generating capacity, particularly in wind power. Elsewhere, the company’s new Energy Trading market unit also took over responsibility for managing all of the E.ON Group’s energy trading operations earlier this year, and will even more systematically seize new earnings opportunities in the commodity trading business.

“The rapid way we’re implementing our clear strategy provides impressive evidence of E.ON’s huge potential and commercial possibilities,” concludes Bernotat. “We’re sending a message to all our stakeholders – particularly our employees and the capital markets – that E.ON is committed to growth and performance. E.ON’s positive development in the current year confirms that we’re on the right strategic course.”

Investment in power plant construction
Gazprom and E.ON recently signed a Memorandum of Understanding on joint construction and operation of a gas-turbine electric power plant in the area of Lubmin in Germany. Lubmin is near the landfall of the future Nord Stream pipeline, through which the gas needed for this power plant is to be delivered. According to the memorandum provisions, the parties will make the final investment decision in 2009. The planned capacity of the gas-turbine electric power plant will be 1200MW, and the facility is scheduled for start-up in 2011. Gazprom and E.ON will set up a joint venture on a parity basis to implement the project.

Gazprom and E.ON have a longstanding history of cooperation in long-term gas supplies and see this project as an important element of collaboration on sales markets for Russian gas. The Gazprom group will be engaged in the whole added value chain: from gas deliveries to the sales of generated electricity. For E.ON, the investment forms part of the company’s ambitious €60 billion investment programme for new markets, modern gas and power infrastructure and efficient, forward-looking power station technologies.

Key targets

• Expanding share of renewables to 24 percent by 2030
• If technology is available, to only build new CO2-free coal-fired power plants
• Reducing the specific CO2 emission by at least 50 percent by 2030

Factoid: €68.7 billion
Total value of E.ON’s 2007 sales