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EDI Quarterly Volume 5, No. 2+3, October 2013

Contents 2 5 9 11 11 12

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Interview with Eneco’s Bram Poeth The conundrum for EU power utilities Energy Cooperatives - Citizens, communities and local economy in good company EDI’s Upcoming Courses Conferences until the end of 2013 Recent Publications

Editor’s Note by Jacob Huber

Welcome to the October edition of the EDI Quarterly! This issue focuses on the changing business environment for European utilities. In the first piece Bram Poeth, Managing Director at Eneco Energy Savings Company, discusses his and Enenco’s vision of the future of energy and their evolving business model in this context. Koen Groot, a researcher at the Clingendael Institute, gives us his view on market conditions in Europe and the broader challenges utilities are facing. Finally, Dr. Andreas Wieg and Dr. Julia Veßhoff discuss the case of German energy cooperatives, organization of energy services on a more local scale. In the next edition of the Quarterly we will continue with a focus on developments in the European energy market and the ways in which utilities are responding. Should any of our readers be interested in writing on either of these topics please contact us at the address below. We hope that you enjoy the informative contributions in this issue. quarterly@energydelta.nl

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EDI Interview with Eneco’s Bram Poeth by Jacob Huber Energy Analyst Energy Delta Institute

In the following interview Bram Poeth, Managing Director at Eneco Energy Savings Company, shares with us his and Eneco’s vision of the future of energy. He discusses the need for greater cooperation with consumers and the business models he is examining to ensure Eneco’s future. In particular he focuses on Eneco’s own particular version of the energy service company (ESCo, see sidebar) concept and how this represents a paradigm shift in customer service for utilities. What is your focus within Eneco and what changes do you see in the world of energy and utilities? I was managing director at Eneco ESCo and I am now becoming managing director for the business markets of Eneco. Until now our business has been organized along product lines including business units for supply of electricity and gas, installation, heating and cooling, agriculture and our ESCo activities. We are going to integrate all of these business units in line with our new strategy and that is now my role. In 2007 Eneco decided to go fully sustainable which meant hard choices; no coal or nuclear plants and gas only as a transition fuel. We have been investing heavily in wind, solar and everything related to sustainability. We decided that we were not only going to be sustainable, but that our vision would be sustainable energy for everyone. In this vision we see the energy market transforming from a central model to a more decentra­ lized one and thus our strategy became “Sustainable, decentralized and together.” These are our buzzwords, in Dutch “Duurzaam. Decentraal. Samen.” or “DDS.” Together this means that we must reposition our­ selves; normally an energy company puts itself at the center of the universe and decides what it thinks is best for the world. They build big power plants and distribution networks and just because one receives a bill one must pay it. We think that this concept is old and that if we want to have a position in a decentralized world we must not put ourselves in the center but be part of an ecosystem where we work with consumers to build on solutions rather than products. Two years ago I was put in charge of investigating new business models in the context of this vision. At that time, the unit was called “Eneco Shared Energy Solutions” and I transformed it into Eneco ESCo. I was looking into various business models from those related to energy neutral cities and regions to participation models. We have windfarms and we sell participation in these to people living near the turbines, but we also work on the ESCo model (Editor’s note: See sidebar for a description of the ESCo business model). I investigated a number of models but decided that if you want to do something really well, you have to focus and I rather put 15 people on one good model than 15 people on 15 models. We said goodbye to

Energy service companies (ESCos) An energy service company is a business providing energy solutions including design and implementation of energy savings projects, energy conservation, energy infrastructure outsourcing, power generation and energy supply, and risk management. An ESCo, or energy service company represents the most prominent business model in the context of energy efficiency. Definitions vary from country to country, but ESCos are generally differentiated from other firms offering energy services by the concept of performance-based contracting (called energy performance contracting, or EPC) where the ESCo’s payment is directly linked to the amount of energy saved. Contracts allow facility owners to upgrade their buildings with efficient equipment, with no need for upfront capital. The figure below demonstrates the cash flows by which the energy savings are funded, and where ESCo profits originate. Services provided by an ESCo include energy audits, energy management and supply of equipment or energy and energy services (process or space heat, lighting, etc.). ESCos differ from Energy Service Providing Companies (ESPCs) in that they guarantee savings for their clients, and their profit is linked the performance of a project, and they often arrange financing. In general, ESCOs develop, design, and finance energy efficiency projects; install and maintain the equipment installed; measure, monitor and verify the project’s savings; and assume the risk involved in the expected amount of savings. 

Image source: Johnson Controls. “From Energy to Energy Efficiency: The business model of Energy Service Companies,” Smart Cities and Communities Initiative – Launch conference: Brussels, 21 June 2011. http://ec.europa.eu/energy/technology/initiatives/ doc/20110621/10_stephane_le_gentil_johnson_controls.pdf

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some models because we decided they were something our other business could do and this was also part of transforming the organization as we put some of the things we discovered back into the old business in its transformation into the new one. You can see this happening now and in effect we are trying to use all the power we have (2.2 million customers and billions in revenue) to organize everything according to the new strategy. Of course, we must take old things into consideration because we do not want to lose old sources of revenue and we still make a lot of money in those lines of business. At this point, though, we are concentrating on the ESCo model for the future. We have looked at other ESCo markets and what you see is that in many the market did not really take off. It is a very interesting business model because the customer is guaranteed to save energy and they do not have to invest themselves. In theory it sounds good, but the question is why does it not take off? You see significant ESCo markets in Brazil, the US and in Germany. When the market becomes big it is because the government makes it work, so it gives incentives or regulates the market in a way that encourages ESCos. In Brazil all utilities are required to put 1% of their revenues into energy efficiency and if they don’t do so they receive a big fine. This forms a very strong driver for ESCos in that market. In Germany the government built the Berlin Energy Agency as a vehicle to upgrade a basket of buildings. They found out if they made the contracts small and not too complex projects were more likely to succeed and by aggregating buildings they minimized transaction costs, which is often a large barrier to the implementation of ESCo projects. ESCo projects have a lot of development expenses and you cannot enter into a project of just 1000 m2 because the energy savings you can achieve do not outweigh these transaction costs. If you are investing as an ESCo you are going in for ten, fifteen years and many companies are not able to take that long of a time horizon, it can be scary for them. The Berlin Energy Agency, as a government company, decided that they can take such long time horizon, as they will still be around in twenty years to manage long term contracts. When negotiating an ESCo contract you must talk to several people within the customer’s company and this is another barrier. You do not deal with just the purchasing manager, you need to build a really good relationship with decision makers within the company, often the CFO or CEO. Building these sorts of relationships takes time, because you are not just tendering a supply contract for electricity, something the purchasing manager can do. If an investment is going to be made into the company then everyone gets involved and the legal guys start to ask who own this, or what happens if we go broke. What then happens to the ESCo? The things you invest in, such as lighting, are very difficult to remove if a company were to go bankrupt. In an ESCo project you enter into a company and invest and all of these issues need to be included in a contract, including financial guarantees. Customers are no longer choosing many products and they want to make sure the choices the ESCos make serve their needs. Sometimes you sell a customer solar panels which do nothing for their business and just make up a PR stunt. After two years the customer asks why they were sold solar panels and are unlikely to continue a relationship with the company that sold the panels. We have to take more interest and more responsibility in what we deliver to the customer. At the same time, the ESCo needs to make sure that the customer does not abuse any equipment that is installed. At the end, the thing that makes this model work for the ESCo is when they are really good at outsourcing. If I compare it to the computer business there are hardly any companies that invest for themselves in data centers or computer equipment, it is all outsourced. You see the

same sort of optimization within Eneco, we outsource to Capgemini and they take care of everything. At the end of the day, installation of equipment is not our core business. The ESCo model is an outsourcing one and if you look at the market from that perspective and not only the energy saving guarantee and EPC the market becomes very big and that is why I think it could be so powerful for Eneco. At the same time, to do well in this market you have to do many, many things well and contribute more added value than that of an energy company. You have to have knowledge in a lot of different areas where utilities traditionally have little experience. These days many ESCos are built from installation companies, the Cofelys of this world, but they cannot handle the supply side. They are not able to do the things we can as a supply company. We are in the middle of this, directing installation companies, building up contracts with customers but we do not have our own installation companies. We work with a number of different parties, including construction companies but we take the lead and make the contracts giving the energy saving guarantees. These contracts make your business model and if we are good at managing these guarantees then we can make money but if not you also stand to lose a lot, but that is the nature of the business model. At the same time it is important to harmonize your interest with those of the customer because if you are the only one making money and the customer is the only one losing money they will not be happy for long. In line with our mission (DDS) we enter into transparent partnerships which represents a drastically different way of working than the old relationship between a supply and customer. We do not simply enter into a supply contract and say, ok, you bought something from us and we supply it, so now the relationship is gone. No, we enter into a contract because we think that we can help you manage your business in the long term. If we want to make sure that our relationship continues beyond the ten or fifteen year duration of the contract our service level must be perfect. This asks a lot of our company, but this is what we are trying to achieve. The main driver is a focus on the needs of the building owner as well as the tenant. We focus on budget management (energy savings), increased productivity, environmental compliance, property values, brand building, customer service, and especially tenant comfort. It’s not only delivering the product that is important, but also keeping the customer happy during the 15 years of the contract. You really must understand how their business works and realize that during such a long contract things may change. We need to stay very alert and make sure to not constantly enter into contractual discussions because things change. We have to know how energy impacts the business of the customer better than they do, and this is something not many companies can do. Energy is of increasing importance because of its scarcity and all the new technologies emerging and there will be a huge number of new techniques, compared to the old world where we essentially only had coal, gas and nuclear. All these technologies will require investments for more than one or two years and I believe that making investments over such time horizons is not the desire of customers. The opportunity for Eneco to do so represents a huge market, but also new risks and the development of a variety of new capacities within our organization. You can no longer just be good at administration or supplying gas and electricity, you also need people on board who really understand technical assets in a building from HVAC to lighting and building support systems. This is a new world for us, unlike the Privas and Johnson Controls of this world, but we also need to get there. All of these things are necessary to be successful in the DDS world and in ESCos. ESCos could represent our main model and it is crucial that we look at this concept beyond the implications of EPC.

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Can you give some example of what you are working on? We now focus on buildings such as offices. We are working with Chalet Group on three buildings of 2000 m2, not too big but we are in the beginning so we want to learn small before we make any unmanageable mistakes. Here we are selling a fixed amount per square meter, which means we take all responsibility if the energy consumption increases over the level of previous years. Our customer is a real estate company who has several renters in the offices and they face some unique challenges. Normally if a renter changes they only get the energy bill after a year so the owner must go back to the renter and say “you were here a year ago and this is still your bill because you used more energy and the energy company is only now giving us the info.” This problem is solved in our system because the company just pays a fixed amount per meter and if they use more it becomes our responsibility, not the real estate company, not the owner, not the renter so this solution is really beneficial to all parties. It is also really easy to sell this contract with building, it is an attractive concept for owners. Building on this concept reveals benefits beyond those traditionally associated with EPC. We are also working on the Kunsthal in cooperation with another contractor, Dura Vermeer, and an installation company, Roodenburg. The Kunsthal is a museum in Rotterdam owned by the municipality. This is a somewhat larger building than the other project and, although I cannot mention exact numbers, annual building exploitation costs are in the range of € 0,5-1 million. Around €200.000 are related to energy and the rest are related to the buildings. We said we can save 25% on the total and will guarantee this level of savings for fifteen years, but we need to make significant investments. Part of the investment is related to energy (25%) and we will invest that as Eneco but the other 75% must come from the owner because neither we nor the other contractor wish to invest in the stones themselves. The municipality agreed to invest €4.5 million and we will invest €1.5 million and after around three months of detailed planning we were comfortable with this plan. We are currently in the process of renovating and improving this building and again, it was really the side benefits, beyond cost savings, that were the main driver of this project. The owner and renter were struggling to overcome a sort of catch-22 situation, and our ESCo concept helped them resolve these difficulties. The owner was not getting enough rent to cover the building costs, and so they were losing money each year and were not able to invest in maintenance. The building was starting to deteriorate which meant that there were energy leaks and the renter’s energy bill was growing and growing. The renter, of course, did not want to pay more rent until the building was fixed, but the owner did not want to fix the building until the rent was raised. You see a similar situation with many buildings in Holland, as the owner is often a different party than the resident. We see a huge potential for these sorts of “deep-retrofits” as we call them. The “shallower” concept mentioned previously is based on a payment per m2 and in this concepts are done mostly in lighting and insulation. In the deep-retrofit concept you go all the way into the stones and take on even greater responsibility than in shallower retrofits. This demonstrates the range of possibilities for ESCo projects but in all models Eneco takes on much greater responsibility than in the past and is much closer to the

customer, upon whose demands each unique ESCo concept is built. It is a really huge concept in Holland and it works great because you have a value proposition for everyone, both the renter and owner, and if you do your work properly you can also make money. What is your long-term vision for these concepts? I started with two sectors, commercial real estate and housing corporations. In a housing corporation you have a company that has 40k residential houses and transaction costs are lower per unit. Here we can work on smaller houses but in bigger lots and investigate a scalable model for the lower end of the market. Our mission and vision is to build ESCos into a very large part of our business. We have the ambition to build out toward 2020 and become the number one outsourcing party in the energy land by that time in the Benelux. We are going into Belgium and are looking into entering the UK in around two years. First I want to build the model in Holland and we focus here on commercial real estate, but next year we are going into hospitals, schools, the recreation business and hotels. We are doing market research into these new areas but for residential house owners we work with a different model. It is really tough to start with the full ESCo concept in this market but we are making a start with the Toon. The Toon is a smart thermostat with a link to your energy bill and not many other products have this ability. We build from there within the residential market, first with supply and then with the Toon to give customers insight into what they really use. After this we start building on the ESCo model to offer additional services. Say you currently pay €250 per month for energy and with solar this could be €200. We will come with a concept where you continue paying €250 for five years, after which you will own the solar panels without involving the bank and will continue to save €50 per month from that point on. There is the potential to offer a number of additional services in a similar manner, such as lighting, a new CV or some other new technology. Clearly our business model is different here, while we start with the full concept in the larger market in the residential market we must start with small steps because there are not that many customers ready to have the full ESCo model in their house. Bram Poeth has been working with Eneco since 2002 in several commercial and director roles. In his current job at Eneco ESCO he developes new businessmodels in the heart of the new strategy “Duurzame Decentraal Samen” (Sustainable, Decentral, Together). This means co-creation with customers on the strategic concepts Energy Savings, Co-generation (sustainable) and sustainable supply of energy. Eneco ESCO delivers integral customer propositions like Energy Service Companies (Commercial Real Estate, Cure & Care, Education, Sports & Leisure and Housing Corporations), Energy­neutral city areas (such as Heijplaat in Rotterdam) and Energy co-operations. Furthermore, Bram holds positions outsides Eneco; he is member of the RvC of Coöperatie Gebieden Energie Neutraal, the Council of the Rotterdam Climate Initiative, the Economic Development Board Rotterdam, the Board of Deltalinqs Energy Forum and “de Groene Zaak”.

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The conundrum for EU power utilities1 by Koen Groot Researcher Clingendael Institute

The growth and uptake of renewable generation sources in various EU Member States, the nuclear disaster in Fukushima Japan, the prolonged economic crisis in Europe and shale gas boom in the United States; all these events have affected the EU power sector.2 Driven by these and other changes in the external environment of the European power majors3, the outlook for these firms has become uncertain. The profit margins of individual plants and entire generation portfolios are under pressure and as a result, firms retire generation assets –whether by mothballing, wet-reserving, fully decommissioning or even putting up entire divisions for sale. Neither the current market conditions, nor the prospects for the future seem to provide much relief.

A sector determined by external developments

Developments external to the EU electricity market have exerted significant influence on the EU power sector, driving the Atomausstieg in Germany, for example. Following the outbreak of anti-nuclear protests triggered by the Fukushima disaster, the German government decided to phase out nuclear power generation before 2023. After the announce­ ment in Germany, other EU Member States have followed the policy to limit or abolish nuclear power production in the near future.8 This has forced a number of firms into major write-offs on assets and goodwill impairments.

A sector shaped by policy

Throughout the past two decades, EU energy policy has played a formative role in the structuring of the electricity sector in Europe. In the late 1990s, EU policy emphasised the creation of a single market4 and the implementation of this agenda has led to several changes in the structure of the EU power sector. Power companies have focussed on the development of international portfolios, leading to a phase of cross border mergers and acquisitions in Europe. These strategies were propelled by continuing growth of the internal market, as a result of the EU enlargement strategy. Anticipating the accession of Central and Eastern European states, major power utilities in Europe continued their foreign investments and acquisitions there.

Figure 1. EU primary energy consumption and power generation Change in percentages Source: BP statistical review of world energy 2012

In the course of the 2000s, the emphasis of EU energy policy shifted to sustainability and climate change abatement, resulting in the integrated energy and climate change package. This package outlined the effort to be shared by all Members States: to strive for three targets to be attained in 2020 with corresponding policy tools including the Renewable Energy5, Energy Efficiency6 and Emissions Trading Directives.7 In response, European utilities ventured into renewable energy projects, investments mainly driven by direct and indirect subsidies provided through different National Renewable Energy Action Plans. Although some of the major utilities had specific strategies to develop renewable champions without subsidies, many of these investments would not have been viable without them.

A second external development with significant ramifications for the EU power sector is the economic crisis. The subsequent recession in Europe has resulted in lower primary energy demand (Figure 1), as well as a decline in electricity consumption, both by industrial consumers and households.9 Besides affecting EU electricity market fundamentals, the crisis has also forced governments to tighten their budget, cutting back on RES support. Another effect of the economic crisis is the impact of the economic downturn on ETS prices. The decrease in total economic production contributes to an oversupply of carbon credits, with the

1 This article is based on the Clingendael Energy Paper, ‘European Power Utilities Under Pressure?’, May 2013. Available online at: http://www.clingendaelenergy.com/inc/upload/files/CIEP_ paper_2013-03_power_sector.pdf. 2 This article focuses on the Central Western European Market, although the portfolios of utilities active in this markets include assets in adjacent markets. 3 In the power sector of the European Union, seven firms stand out in size when it comes to installed capacity, electricity production and revenues. These include E.On, EDF, Enel, GDF Suez, Iberdrola, RWE and Vattenfall 4 The EU went through three waves of legislation focussed on the creation of a single market. The first set of directives (96/92/EC and 98/30/EC) in 1996 for electricity and 1998 for gas; the second package in 2004 (Directive 2003/54/EC for electricity and Directive 2003/55/EC for gas) and most recently the third energy package (Directive 2009/72/EC) adopted in 2009 and implemented in 2011. 5 Directive 2009/28/EC on the promotion of the use of energy from renewable sources.6 Directive 2012/27/EU on energy efficiency. 6 Directive 2012/27/EU on energy efficiency. 7 Directive 2003/87/ establishing a scheme for greenhouse gas emission allowance trading within the Community. 8 The Belgian government has decided to phase out nuclear power production completely by September 2025; in Switzerland, the last nuclear power generator will go offline by 2034; in France, discussion is on-going to reduce the share of nuclear energy in the power mix from 75% to 50%. 9 In Germany industrial sales are down noticeably, while Spanish industrial demand has fallen 7% and electricity volumes sold in Italy declined by 10% year on year (The Wall Street Journal, 14 November 2012, Germany’s Utilities caught in a Perfect Storm). In the Netherlands year on year electricity consumption has declined by nearly 3% (Tennet, 2013, Energieverbruik in December gedaald).

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result of weaker prices for EU emission allowances (EUA).10 The low price of EUAs has the adverse effect of not stimulating investment in innovative climate change abatement technologies by the major EU power utilities. The impact of the economic crisis has also directly affected several of the major European power majors through the public holdings in these firms11, as downgrades in sovereign bond credit ratings influence firm’s valuations.12 Similarly, firms face downward adjusted credit ratings caused by the impoverished economic outlook.13 Both aspects complicate the refinancing of on-going operations and financing of new investment by these firms. A third external shock for producers in the EU electricity market includes the effect of the US revolution in shale gas production on coal prices in Europe. In the US lower prices for natural gas enabled fuel switching from coal to gas14 and has triggered substantial increases of coal exports, contributing to lower prices for thermal coal in Europe.

The rise of renewable generation

In the past ten years the share of electricity generation by renewable energy sources has increased substantially and developments in Germany are exemplary for the influence of the growing share of RES in power. By March 2013, the installed capacity of solar power equalled 33.41 GW and wind power capacity totalled 30.29 GW15; enough to supply up to 50% of German demand at times. Under favourable conditions, this capacity comes online simultaneously, forcing conventional generators to switch off. This not only occurs in the country of origin (i.e. Germany), but also affects neighbouring countries. Besides displacing other generation sources, renewable production affects the profit margins of conventional power generation. When large swaths of electricity produced by rooftop solar panels (as well as

windmills) find their way to market, wholesale electricity prices are depressed. Due to this and fuel price dynamics, margins for conventional power generation have deteriorated substantially and many gas-fired power plants and coal-fired power plants are financially underwater. The intermittency of renewables (especially solar) represents a third challenge for conventional power generators. The peaks for solar power generation perfectly coincide with peak demand as can be seen in Figure 2, and solar generation replaces conventional sources during these most profitable generation hours. The deterioration of wholesale prices and displacement of conventional generation by renewables, provide an increasingly challenging environment for major power utilities. To a large extent, this is attributable to the configuration of their business portfolios, which predominantly consist of thermal generation and only a small amount of wind and solar generation capacity. A final issue is the affordability of RES support, which is becoming increasingly contentious in the context of budgets constrained by the economic crisis and the ever-increasing bill for RES support.

Competitive pressures

In the competitive environment of the EU power majors, more is going on still, as firms face substitution issues from increased RES capacity and declining sales due to energy efficiency measures and the recession. Social and technological developments are leading to the increased independence of electricity consumers from the electricity grid and small-scale renewables in combination with micro storage capacity (to bridge short-term intermittency gaps), is already possible with existing micro-generation technologies.16 Higher retail power prices combined with decreasing prices for renewable energy generation equipment create the conditions for so-called “socket parity” when the cost of local RES is lower than power from the grid for household consumers.

Figure 2. Electricity Production in Germany (MW) Change in percentages Source: Fraunhofer ISE (2013)

10 Supply/demand balances in the EU ETS are presently not tight, resulting in low prizes for EUAs. This is exacerbated by the continued addition of renewable generation capacity to the market, primarily driven by renewable support mechanism, rather than market signals. 11 The French government is a majority shareholder in EDF and large shareholder in GDF Suez; the Swedish government fully owns Vattenfall; the Danish government is the majority shareholder in DONG Energy; the Italian government is a shareholder in Enel. 12 In the case of several Irish, Greek, Italian and Spanish power utilities, credit ratings have been downgraded in the past three years . This is the case for Enel, Endesa and Iberdrola (Eurelectric, 2012, ‘Powering Investments: Challenges for the Liberalised Electricity Sector’). 13 The shares of E.On and RWE were downgraded in 2012 (Bloomberg, 27 July 2012, Germany’s Largest Utilities Downgraded by S&P on Weak Profits). 14 From 2011 to 2012 by 22.8% (EIA, 2013, Electric Power Monthly). 15 Fraunhofer ISE, 15 July 2013, Electricity production from solar and wind in Germany in 2013. 16 E.g the Power Router by Nedap, http://powerrouter.com/, accessed 20 February 2013.

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In addition to the substitution of centralized power supply by individual consumers, we see the rise of cooperative power generation ventures organised on the level of housing blocks. Industrial power consumers are also investing in renewable generation technologies to leverage expected slopes in energy costs in the future. This emancipation of the electricity consumer has the potential to eradicate a fair share of the retail market for conventional utilities. EU power majors also face competition from established energy firms thus far lacking a significant major presence in the EU power sector. These range from sub major power utilities operating in the EU power markets (especially from Central and Eastern Europe), energy firms from other parts of the value chain that vertically integrate into the EU power sector, or power companies from outside the EU. Additionally the scaling back of centralised energy production to the level of munici­ palities could pose a threat. In Germany, portfolio restructuring by some of the EU power majors has resulted in the return of power generation ownership to the level of the municipality, as Stadtwerke compete for market share in Germany. The arrival of new competitors, some with different business models, combined with the substitution of electricity demand by self-generating consumers and energy efficiency, contributes to uncertainty regarding the potential for future power demand in the EU and the ability of the majors to serve this demand. This contributes to yet another source of pressure for these EU power majors.

Figure 4. Major EU power utilities installed capacity geographical mix in the EU and production mix by generation technology Source: CIEP research 18 Figure 3. Major EU power utilities core data Source: CIEP research 17

EU power majors’ portfolios

Although we refer to the EU power utilities as a group, when taking a look at Figure 3, inherent differences between these firms become visible. From Figure 4 it becomes clear these firms are also different in terms of exposure to specific problems in the EU, its member states´ markets and different types of generation assets. In most cases, these firms still derive the majority of their income from activities in the EU power sector. However, their geographical focus within Europe differs. Nearly all EU power majors still have the largest share of their generation fleet installed in their home country. Nevertheless, all firms have established significant production facilities in other EU countries through mergers, acquisitions and direct investments. This has contributed to more exposure to risks inherent in these markets and has a direct effect on how changes in their external environments affect their businesses.

Several power majors have also gained ground in geographical markets outside of Europe. On top of this divergence in geographical focus, the activities of these firms that are outside of the power generation industry also give way to more inherent differences between firms. Typical nonpower generation activities of EU power majors include energy services and upstream activities in oil, gas and coal.

EU power majors’ performance

The financial performance of EU power majors provides an ambiguous picture (Figure 5). While total revenue of the seven firms has increased significantly over these five years, their combined net income has declined. The growth in turnover is partly the result of the integration of acquired business units and companies by the major power utilities over this period19 and trading activities provide another explanation. From the net profit figures, however, it is clear that firms are substantially affected by the current market conditions, which hamper their profit margins (see figure 5).

17 Revenue and Net Profit 2012 data, others, estimation based on 2011 data. (Annual reports and corporate websites of respective firms; Financial Times Markets Data by Thomson Reuters, http://markets.ft.com/research/Markets/Companies-Research). 18 Annual reports and corporate websites of respective firms. 19 Amongst others Essent by RWE, Nuon by Vattenfall, Endesa by Enel, British Energy by EDF, International Power by GDF Suez and Edison by EDF.

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Strategic reorientation

Driven by the effects of a changing European power system, all major European power utilities are in a reorientation process. This takes place to a significant extent through ad hoc reactions focussed on easing the current pressures. In addition to impairments, lay-offs, gas contract renegotiations and divestitures have been instrumental in dealing with the changes in income of EU power majors. In order to improve capital positions, virtually all the power majors are deleveraging through divestitures, while postponing or outright cancelling investments in non-subsidized generation activities in Europe.

Figure 5. Net income and total revenue of the seven major EU power utilities Source: CIEP research 20

A part of the decrease in net income relates to impairments in generation portfolios. This can be related to specific events, such as the Atom­ ausstieg, to market conditions deteriorating the profitability of gas- and coal-fired generation assets, or to the macroeconomic conditions in specific EU markets such as Spain. While struck by the changes in their external environment, various power firms were already in the process of updating or even transforming their portfolios. Counting on growth in power demand, but unsure what the future power source of choice would be, firms invested in capacity additions focussed on differentiation. Now some years on and faced with deteriorated market conditions, the EU power majors are trapped in new generation projects for which the final investment decision was made years ago. The outlook per firm changes depending on the composition of its portfolio, both technologically and geographically. Firms with portfolios focussed in Northern Europe face different problems from those predominantly positioned in Southern Europe. Those with large shares of old coal generation are likely to have a better short-term outlook than those with large shares of gas generation capacity. As long as the economic downturn overshadows Europe, the outlook does not appear positive.

Apart from a response to current pressures, the actions taken by firms allude to a process of strategic reorientation. Power utilities deleverage in certain markets while investing in others. Firms focus on their core competences while engaging in the development of new markets. Clearly, firms seek to develop or strengthen a strategic focus. In developing such focus, firms re-emphasize their extended home-market; focus on extra-European (power sector) expansion; and/or seek to expand their energy services business units. Generalising, the major European power utilities are restructuring their portfolios from highly differentiated activities in different generation and geographical markets into much more focussed portfolios. As a result, a new context has emerged in which the earlier premises of EU energy policy and corresponding corporate strategies no longer hold. Compelled by challenging conditions, the major EU power utilities are engaged in strategic reorientation. Where this process of adaption to new circumstances will take us is uncertain, but the restructuring of the EU electricity sector seems inevitable.

20 Annual reports of respective firms; Financial Times, 2013, ‘Markets Data by Thomson Reuters’, http://markets.ft.com/research/Markets/Companies-Research accessed 26 September 2013.

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Energy cooperatives – citizens, communities and local economy in good company by Dr. Andreas Wieg and Dr. Julia Veßhoff German Cooperative and Raiffeisen Confederation

Over the last few years numerous citizens’ groups, local town councils and businesses have gotten together to launch renewable energy projects in their region. Energy cooperatives are one increasingly popular means of organising these projects. Cooperatives provide all sorts of opportunities and scope for participation. What is more, each member of a cooperative has one vote. Projects can be carried out democratically with many equal partners, each with their own local roots. Around 650 successful new cooperatives have been founded in the field of renewable energies in Germany in recent years – and the numbers are rising all the time. More than 130,000 members, most of them private people, have already invested 1.2 billion euros in renewable energies. Photovoltaic cooperatives, for example, enable many citizens to make a modest financial contribution to developing renewable energies in their own local area. PV systems are often launched jointly by decision-makers in local authorities, public institutions and regional banks. Systems can also be mounted on roofs – such as public buildings, including nurseries or schools – which are not used by individuals. These systems are frequently installed and maintained by trade businesses based in the region. As well as providing energy from the sun and other renewable energy sources, cooperatives also run district heating and electricity networks. Indeed, cooperatives have operated as regional energy utilities in many parts of Germany for well over 100 years. In many cases it is energy cooperatives which are providing important impetus for the decentralised energy transition. Cooperatives facilitate the collective commitment of various local players and bring together broader social, business, municipal and environmental interests. They also help renewable energy projects to gain more widespread acceptance in the region. The following two examples illustrate the different advantages of energy cooperatives.

Friedrich Wilhelm Raiffeisen Energie eG (FWR).

“What’s impossible for the individual can be achieved by many.” This cooperative principle from the nineteenth century neatly sums up the approach taken by those managing the Friedrich Wilhelm Raiffeisen Energie eG (FWR). How can we combat climate change? What can we do locally to ensure our own energy self-sufficiency in future? And what role can environmentally friendly and sustainable solutions play in regional development? “This is something we have to tackle together at a local level”, thought Michael Diestel, managing director of the Rhön-Grabfeld district branch of the Bavarian Farmers’ Association, and the district chairman Matthias Klöffel. “The best option would be a cooperative.” Their motto: take practical steps, rather than just debate about climate change. In the

process, the founders of the cooperative consciously focused on the self-help approach of the cooperative movement’s pioneer, Raiffeisen. The cooperative was founded in Bad Neustadt an der Saale in June 2008. Here in the Franconian Rhön region, groups of individuals are busy promoting cooperatively-owned facilities that generate renewable energy. The cooperative provides private individuals wishing to invest in renewable energy sources and support their use through modest financial contributions with the chance to link up with like-minded people. This not only concentrates available capital, but also legal and economic expertise. After all, not everyone has the necessary expertise and experience required for the construction and operation of such facilities. An energy cooperative not only pools the interests of private individuals, but also motivates the owners of suitable rooftops to have photovoltaic systems installed. A farmer may toy with the idea of installing a system like this on one of his barns, but frequently the effort and risk required is too great to consider going it alone, especially if the project is likely to entail considerable investments additionally to his farming ones. The investment project would not only considerably restrict his financial flexibility for his core business of farming, it would also involve administrative and insurance costs, not to mention associated risks – none of which should be underestimated. These responsibilities are more easily and more effectively handled in a cooperative context. Cooperatives offer a major advantage in that they can tap into the potential of sites to which private individuals would never gain access on their own. “In rural areas there are plenty of unused rooftops. Lots of churches, supermarkets, farm or community buildings could be fitted out with solar systems”, Diestel comments on the enormous potential of suitable sites. The owners of these rooftops can either allow the FWR to use these areas for free, or rent them to the FWR, even if they themselves do not wish to be financially involved. The FWR’s first photovoltaic system was installed on roofs belonging to the Bad Neustadt municipal works yard in November 2008. Overall nearly 1.1 million euros have been invested in the project. Two thirds have been financed by borrowed capital and one third by equity. Every Bad Neustadt resident is entitled to be involved in the energy project, the minimum share in the investment being 2,000 euros. For each share, one hundred euros goes to the cooperative as a share, while the remaining 1,900 euros are invested as a subordinated loan (20-year maturity) to finance the project. Based on a conservative estimate of electricity yield, the effective interest rate of this investment will be 5.5 percent per annum. If this estimate is exceeded in sunnier years, every member will be awarded a bonus of up to four percent. The production of renewable energy is also intended to support the region. “Our motto is to use local resources and feed the profits generated back into the local community and for the benefit of residents”, explains Diestel. “In this way we adhere to the traditional principle of the rural loan associations: ‘the money of the village for the good of the village’.” Accordingly, local tradesmen are responsible for

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installing and maintaining the technical facilities and a regional bank handled the loan arrangements. The shares in the solar system too were offered first to Bad Neustadt residents, then to residents in the outlying area, and only then to investors from outside the region. The initiators term this the ‘onion skin principle’. The aim of this is to involve as many people as possible and yet as few as necessary. The community also benefits: from additional trade tax income. One major benefit of the cooperative model is that liability is limited to the extent of the personal investment. “You simply sleep better when you know that an expert is regularly checking the books, especially in the case of such a capitalintensive project”, says Diestel. The expert in this instance is the regional cooperative association, which monitors the commercial interests of all its members. “For us, being audited by the cooperative association is an essential advertising tool. We associate it with a promise of quality, which is crucial when it comes to winning people’s trust”, Diestel continues. And he already has other plans up his sleeve, “The mediumterm aim is to expand Friedrich Wilhelm Raiffeisen Energie eG to such an extent that inhabitants of the Rhön region will use their own green electricity. To achieve this, we will not be confining our activities to solar energy in the future.”

Energiegenossenschaft Lieberhausen eG

Autumn 1997: In Lieberhausen, a satellite of Gummersbach in the Rhineland, the board of the village association was holding a meeting. The community was planning to update its sewage system. The discussion centered on whether the opportunity could also be used to install a new energy network based on renewable sources. But how do you get from a freshly dug ditch to an energy supply for the entire village? Where do you start with such a project? “The first step was to approach our regional utility company”, recalls Bernd Rosenbauer, co-initiator and today chairman of the Lieberhausen eG energy cooperative. “We asked how much the construction of an environmentally friendly energy network would cost each resident. When we heard the price, we dismissed the idea immediately.” Each household connection would cost approximately 12,000 euros. Another way had to be found if the original vision was not to simply disappear. So it was important to get the residents of Lieberhausen actively involved. Initially, the reaction of the residents was one of extreme caution and scepticism. Several times Rosenbauer was asked whether Lieberhausen was being used as a guinea pig. Thereupon, the initiators, accompanied by interested residents, visited two wood-based heating systems which were being used to supply several residential buildings with heat via a distribution network. These fact-finding missions were a major factor in persuading the villagers to install their own local heating network. A feasibility study was conducted – and the project was approved at the very next annual meeting of the village association. With the support of EnergieAgenturNRW, various possibilities concerning the project’s implementation and financing were discussed. At least 40 households would need to take part for the system to pay off. To the surprise of the initiators, 42 households agreed to be involved, although the calculated energy price was more that the current cost of their own oil heating. But even then, it was obvious that the price of fossil fuels was going to continue increasing. “Our neighbours reached a very rational decision. All those involved agreed that this wasn’t about a political debate, but

about the common future of our village”, explains Rosenbauer. These days, 92 of a total of 108 houses in Lieberhausen are connected to the local heating network. In April 1999 the Lieberhausen eG energy cooperative was founded as the body responsible for the heating plant and local heating network. This legal form provides the perfect context: for a type of organisation that accommodates the requirements of a local heating network – i.e. many users – while relying on resident participation. “The villagers themselves needed to have a direct say – after all we wanted to get everyone actively involved. A project by residents for residents, where no-one could come from outside and tell us what to do”, continues Rosenbauer. Thanks to the villagers’ own initiative, they saved themselves a great deal of money during the planning, construction and operation of the plant. The bio-heat is generated by a woodchip-fired heating plant, fed by material from local forests. The idea was Rosenbauer’s, who had asked himself ever since he was an apprentice forester whether it wouldn’t be possible to change from oil to wood as a source of energy. Lieberhausen has proved that this is possible. In the run-up, several residents were worried that the local forest would have to be felled to provide enough wood for the plant. But that is not the case: enough wood is made available from the region’s forests by regular forestry maintenance. The cooperative gets its supply from the various forestry offices responsible and fosters close links with the Lieberhausen forest enterprise community, as well as larger private forestry commissions in the area. A total of 1.7 million euros had to be raised for the heating plant and 6,230 metres of piping. The members bought shares in the cooperative to the tune of 90,000 euros. The cooperative fee for each member was set at 1,050 euros, and an additional network fee of 1,500 euros also had to be paid. Each house connection cost approximately 3,000 euros, meaning that each household had to invest a total of 5,500 euros in the project. The network enables a family living in an older property to save approximately 1,000 euros a year in energy costs – by the sixth year, the plant has already started to pay its way. Moreover chimney sweep fees were a thing of the past, and it was no longer necessary to store hazardous substances in the home. Since the oil tank and boiler were now also gone, home owners could enjoy additional cellar space. The plant was financed with a loan from the Kf W banking group and with a subsidy amounting to 700,000 euros. Thanks to the dedicated involvement of the Lieberhausen residents, it was possible to complete the project swiftly and affordably. They spent more than 5,000 hours assisting voluntarily in the construction of the plant, and dug the ditches for the pipeline connections to the houses themselves. Much of the plant operations and accounting are also in voluntary hands. The plant is monitored by the residents on a 400-euro job basis. In addition, the furnace needs to be cleaned every three months – this work is also done by the members. This keeps running costs down and strengthens the sense of community within the village. “A lot has changed here in ten years”, admits Rosenbauer. “Having maybe smirked at our idea initially, the utility company now comes to us for fuel and expertise. The cooperative has also changed the way the villagers work together: in the old days the tone was one of heated debate and dispute – these days, decisions are reached far more quickly. The cooperative’s decision to invest in a photovoltaic system, for instance, was reached within ten minutes.

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EDI’s Upcoming Courses 29-30 October: Groningen, the Netherlands

Gas Transport & Shipping Course http://www.energydelta.org/mainmenu/executive-education/specific-programmes/gas-transport-shipping-course

11-15 November: Essen, Germany

Underground Gas Storage Course http://www.energydelta.org/mainmenu/executive-education/specific-programmes/underground-gas-storage-course

11-15 November: London, United Kingdom

Executive Master module: Large Energy Projects (part 1) http://www.energydelta.org/mainmenu/executive-education/executive-master-programmes/executive-master-of-gas-business-management/ large-energy-projects-course

25-29 November: Vienna, Austria

Fundamentals of Gas Strategy http://www.energydelta.org/mainmenu/executive-education/specific-programmes/gas-strategy-course

9-12 December: Aachen, Germany (part 1)

International Mini MBA Energy Transition & Innovation http://www.energydelta.org/mainmenu/executive-education/executive-master-programmes/international-mini-mba-energy-transition-andinnovation

Conferences 2013 October 30 – 31 The European Energy Summit Istanbul, Turkey http://cemea.economistconferences.com/event/european-energy-summit#.UlPqrFCnp5z

November November 4 – 8 World Shale Oil & Gas Houston, USA http://www.world-shale.com November 18 – 21 14th Annual World LNG Summit Paris, France http://world.cwclng.com November 19 – 20 Energy Convention 2013 Groningen, The Netherlands http://www.energyacademy.org/index.php/energy-convention November 27 – 28 Shale Gas World: Europe 2013 Warsaw, Poland http://www.terrapinn.com/conference/shalegaseu

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Recent Publications Amrita Sen, September 2013. US tight oils: prospects and implications The Oxford Institute for Energy Studies.

This paper examines the implications of the rapid growth in US tight oil production for US and global energy markets. The behavior of US crude markets is analyzed, with a particular focus on changing arbitrage dynamics.  This publication is available at: http://www.oxfordenergy.org/wpcms/ wp-content/uploads/2013/10/WPM-51.pdf

Koen Groot & Jacques de Jong. August 2013. A regional EU energy policy. Clingendael International Energy Programme

The 2007 European Council conclusions set three basic objectives for European energy policy: competitiveness, sustainability and supply security. These objectives have since been translated into a variety of policy packages. Very often, however, the ambition at the European level to coordinate policies is not matched by a similar drive at the level of implementation. Yet the fact that national policy-making remains dominant means that potential cross-boarder benefits are being missed. This and other issues are addressed in this paper. This publication is available at: http://www.clingendaelenergy.com/inc/ upload/files/CIEP_paper_2013_06_1.pdf

David Robinson, July 2013. President Obama’s Climate Action Plan. The Oxford Institute for Energy Studies.

On 25 June 2013, President Obama issued his Climate Action Plan. This is his Administration’s best effort to tackle the issues, as it defines a US agenda for action to deal with climate change.  It sends important signals to the rest of the world, and gives the EU a reason to put climate change back on the list of policy priorities. This publication is available at: http://www.oxfordenergy.org/wpcms/ wp-content/uploads/2013/07/President-Obamas-Climate-Action-Plan.pdf

Howard Rogers, July 2013. UK shale gas – hype, reality and difficult questions. The Oxford Institute for Energy Studies

The shale gas phenomenon has transformed the US from a prospective LNG importer to the current expectation of it becoming a major LNG exporter. In the UK the recent upgraded estimates by the British Geo­ logical Society of shale gas resources in the north of England have unleashed a wave of speculation in the media which includes an antici­ pation of lower prices and eliminating the need for natural gas imports. Drawing on US data, this Comment seeks to highlight the practicalities to be faced in developing the UK’s shale gas resources and addresses the drilling intensity and timescale required to achieve meaningful levels of production. This publication is available at: http://www.oxfordenergy.org/wpcms/ wp-content/uploads/2013/07/UK-Shale-Gas-GPC1.pdf

IEA, 2013. Natural gas information 2013.

A detailed reference work on gas supply and demand covering not only the OECD countries but also the rest of the world, this publication contains essential information on LNG and pipeline trade, gas reserves, storage capacity and prices. This publication is available at: http://www.iea.org/W/bookshop/add. aspx?id=629

David Buchan, July 2013. Why Europe’s energy and climate policies are coming apart. The Oxford Institute for Energy Studies

The European Union’s integrated energy and climate policy is coming apart. This is due to the effects of recession, and the impact of national renewable energy and back-up generation schemes, on the EU blueprint for a single energy market. New Commission guidelines will seek to Europeanize these national schemes, but this Europeanization effort assumes faster progress in cross-border integration than has been achieved so far. To mesh intermittent renewables with conventional energy back-up, and to maintain the geographical unity of Europe’s energy sector, may require a new concept of energy markets. This publication is available at: http://www.oxfordenergy.org/wpcms/ wp-content/uploads/2013/07/SP-28.pdf

Koen Groot. May 2013. European Power Utilities under Pressure? Clingendael International Energy Programme.

The European power sector is challenged by a series of developments. These range from planned changes to the institutional environment and the functioning of the market, to unforeseen external shocks like the decline of demand as a result of the economic and financial crisis and the German decision to completely phase out nuclear energy after all. These challenges also include the unexpected results of foreseeable develop­ ments, such as the impact of renewable energy sources (RES) on business models terms of profit margins and system requirements. Lower demand for electricity, energy efficiency measures and the rapid expansion of RES has strained the power major’s business models, whereas in many cases operating margins are under pressure and the returns on investments are poor. It is the confluence of circumstances, which has already been referred to as ‘a perfect storm’ for power utilities in Europe that is creating stress among the existing power majors. These and other issues are addressed in this paper. This publication is available at: http://www.clingendaelenergy.com/inc/ upload/files/CIEP_paper_2013-03_power_sector.pdf

IEA, 2013. World Energy Outlook Special Report 2013. Southeast Asia Energy Outlook.

Energy demand in Southeast Asia has expanded by two-and- a-half times since 1990, its rate of growth among the fastest in the world. Economic and demographic trends point to further growth, lifting the region’s energy use per capita from just half of the global average today. But how will Southeast Asia’s fuel mix evolve? And what will the region’s supply and demand balance mean for oil, gas and coal trade? The International Energy Agency, in co-operation with the Economic Research Institute for ASEAN and East Asia, has studied these issues in consultation with ASEAN member governments and leading commentators, industry representatives and international experts. This special report, in the World Energy Outlook series, presents the findings. This publication is available at: http://www.iea.org/publications/ freepublications/publication/name,43534,en.html

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The EDI Quarterly is published in order to inform our readers not only about what is going on in EDI, but also and in particular to provide information, perspectives and points of view on gas and energy market developments. Read the latest developments in the energy industry, published daily on the website of EDI. Editor in Chief Catrinus J. Jepma Scientific director EDIAAL* Editors Jacob Huber Nadja Kogdenko Klaas Kwakkel Milan Vogelaar Niels Rop EDI Quarterly contact information Energy Delta Institute Laan Corpus den Hoorn 300 P.O. Box 11073 9700 CB Groningen The Netherlands T +31 (0)88 1166800 F +31 (0)88 1166899 E quarterly@energydelta.nl

*EDIAAL is an Energy Delta Institute program that aims to gather, edit and make available independent knowledge on the role of gas in the transition to a low carbon economy. The EDIAAL project is partly made possible by a subsidy granted by The Northern Netherlands Provinces (SNN), Koers Noord. EDIAAL is co-financed by the European Union, European Fund for Regional Development and The Ministry of Economic Affairs, Agriculture and Innovation, Peaks in the Delta.

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EDI Quarterly Vol. 5 No. 2 + 3