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Utility divestitures in Germany. A case study of corporate financial strategies and energy transition risk


Hörnlein, Lena (2019). Utility divestitures in Germany. A case study of corporate financial strategies and energy transition risk. SSRN 2019-04, University of Zurich.

Abstract

Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business.
The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers.
Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants).
Already weakened from record losses in their fossil fuel powered generation fleet due to low electricity prices, after 2011 the nuclear exit emerged as an additional challenge to the utilities. Investors doubted the adequacy of utilities provisions for decommissioning nuclear power plants and storing toxic waste, and feared major cost increases for which the utilities would be unlimitedly liable.
The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix might cause substantial costs. If these are not clarified and allocated ex ante, policy makers might find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.

Abstract

Germany is in the midst of a radical transformation of its power sector, which in 2016 led two of its main electric utilities, EON and RWE, to undertake dramatic restructurings. EON spun off its fossil fuel and trading segments, while RWE carved out its renewable energy, retail and grid business.
The paper examines the drivers of these divestitures. Building on corporate finance literature, the paper uses a mix of comparative descriptive statistics, interviews and event studies to test four groups of hypotheses. The evidence rejects drivers related to operations and management, biased investment and investor preferences and instead points to financing-related drivers.
Among the financing-related drivers, debt overhang and risk contamination seemed to have played the main role. Utilities restructured to save their healthy assets (renewables and grid infrastructure) from losses at their conventional power generation business (fossil fuel and nuclear plants).
Already weakened from record losses in their fossil fuel powered generation fleet due to low electricity prices, after 2011 the nuclear exit emerged as an additional challenge to the utilities. Investors doubted the adequacy of utilities provisions for decommissioning nuclear power plants and storing toxic waste, and feared major cost increases for which the utilities would be unlimitedly liable.
The paper uses existing research on divestitures in an empirical case that has implications for the evolution of European power markets. The results suggest that exiting conventional technologies as part of the transition to a more renewable energy mix might cause substantial costs. If these are not clarified and allocated ex ante, policy makers might find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.

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Additional indexing

Item Type:Working Paper
Communities & Collections:03 Faculty of Economics > Department of Banking and Finance
Dewey Decimal Classification:330 Economics
Language:English
Date:29 April 2019
Deposited On:03 May 2019 08:00
Last Modified:07 Apr 2020 07:20
Series Name:SSRN
OA Status:Green
Free access at:Official URL. An embargo period may apply.
Official URL:https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3379545
Other Identification Number:merlin-id:17774

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