The financial and economic crisis means Europe’s utilities need to take urgent action. We must brace ourselves for fluctuating demand, mounting political pressure and higher financing costs. However, the utility sector is generally less susceptible to severe economic downturns than other branches of industry. Our investments in new power plants, grids and oil and gas production demonstrate the long-term nature of the energy utility business. We should think in terms of decades, not years. This is why, in addition to the demands currently placed on us, we always keep a watchful eye on the fundamental challenges facing the energy industry that have lasting effects. The following trends are of special importance to us:
- Need for substantial investment: Major investments must be made in Europe’s energy infrastructure, especially in new generation capacity, electricity and gas grids, and gas storage facilities. The thrust is two-fold: ageing power stations have to be replaced and companies have to prepare themselves to cope with the growing demand for electricity and–more importantly–gas imports.
- Development of energy prices and security of supply: Tasks to be handled by companies such as RWE are not limited to managing risks associated with increasingly volatile electricity and gas prices. They also include ensuring the physical availability of electricity and gas in Europe. The Russian-Ukrainian gas dispute and tight supply in numerous European electricity markets underscore the importance of this topic.
- Climate protection: The European Union’s greenhouse gas reduction target of 20 % by 2020 will lead to a significant expansion of Europe’s renewable energy base. At the same time, the resolutions passed by the EU in the December 2008 climate package will have an effect on both the future energy mix and the competitive situation.
- Political intervention: Policymakers are increasingly influencing pricing policy and investment decisions made by the energy industry, in some cases contradicting the EU goal of liberalizing the energy market. The main topics besides climate protection are the promotion of renewable energy, the German nuclear phase-out, and political intervention in end-customer prices. This is rounded off with the regulation of electricity and gas grids.
- Consolidation: Europe’s energy market is increasingly converging. This is resulting in the formation of a “premier league” of European companies, including RWE. Critical mass is important not only from a cost perspective. Energy has become a global issue where size is a decisive differentiating factor.
- Market convergence: One way in which energy markets are becoming intertwined is through crossborder trade and denser logistical networks. In addition, the markets for primary energy–particulary electricity and gas–are growing closer together. Many energy companies are now active in both markets, not least as the result of acquisitions.
- Competition and deregulation: Competition is becoming fiercer across all parts of the value chain–from energy generation to the sale of electricity and gas. Willingness to switch suppliers is rising in the end-customer business.
- Fluctuating margins along the value chain: Differing developments in sub-markets–primarily in generation and supply–and regulatory intervention give rise to the expectation that margins in individual parts of the value chain will continue to change significantly in the future. Vertically integrated companies which cover the entire value chain have a clear competitive advantage.