September 30, 2016
BRUSSELS INSIDER by Sonja van Renssen
The new EON, the new Johannes Teyssen: “The future is state-led renewables, stop dreaming of perfect Energy Union and Emission Trading System”
September 30, 2016
In one of his first in-depth interviews since the restructuring of EON, CEO Johannes Teyssen sets out a completely new vision of where he sees European energy markets and policies going. The future according to Teyssen is: distribution much more than transmission; state-led renewables auctions and capacity markets, not wholesale energy-only markets; carbon taxes or floor prices, not carbon trading or emission trading; higher energy efficiency targets, not higher renewables targets; and a total overhaul of the grid. Teyssen, who only three years ago told Energy Post he was opposed to national support schemes for renewables and wanted only the EU’s Emission Trading System as climate instrument, now says he is not much interested anymore in EU “dreams” of “a perfect world of an Energy Union with a perfect level playing field”: “I’d rather see some low-hanging fruit harvested”. His first priority now is “my customers”, the second EON. “Politics is a distant third.”
Less than two weeks after EON completed the spin-off of its conventional energy arm Uniper, Johannes Teyssen, the man who led this first radical restructuring of a major European utility company shaken by the energy transition, appears to be a new man himself. He has a very different vision of the future than he displayed nearly three years ago in an interview we did with him when EON was still an integrated company relying heavily on conventional power plants.
At the time, his main concern was for the EU to create a “market design” based on a free, competitive internal market, whose only climate instrument was the EU Emission Trading System (ETS). Now he believes that such a perfect market design is a dream. He argues that it may be better to replace the EU ETS with a carbon tax or a floor price.
He has also accepted that all countries will have their own support schemes for renewable energy. “For a long time to come we will have renewables auctions managed by the State,” he says, although he does hope the EU will create a “common rulebook for how member states can do their renewable energy auctions”.
He believes it is only natural that countries will also set up their own capacity markets: “In a world with growing renewables, you need capacity markets. You see them re-emerging everywhere…. In future, the capacity part of the market will grow and the energy part will decline.”
But Teyssen is much less concerned with politics these days. He is focusing on turning EON into a customer-centred company offering network services, renewables and customer solutions: “We have several million customers already buying products that are not commodities.” He notes that distribution networks will be much more important in the future than transmission networks. He believes the grid will need to “totally rebuilt”.
You can read the full interview on our premium newsletter Energy Post Weekly. If you don’t subscribe yet, no problem: you can register for a free trial here. If you want to know where European energy policies and markets are headed, in the vision of one of Europe’s most influential energy business leaders, don’t miss this candid interview.
Q: How do you see the energy market developing in Europe?
A: Some fundamental trends are going to continue. One is growing energy efficiency and thus declining consumption, to be counteracted by the increasing use of electricity in new applications and areas, but overall, we see rather stable or slightly decreasing consumption. We also see a continuous trend towards renewables. These trends are true for Europe at large and actually the world – 70% of all generation investments in the US last year were in renewables.
Q: How can policymakers keep the costs of this enormous roll-out of renewables in check?
A: I think some corrective measures have already been taken. For example, the European Commission pushed for a tendering process for renewables support. That is leading to steeply declining costs – look at the latest offshore wind auctions in the Netherlands and Denmark. The same is true for solar power.
Q: What is your new business model? How will you make money with very low wholesale power prices?
A: We are not speculating much more on wholesale prices. We are predominantly producing renewables and there we have specific price regimes, be it from auctions or from feed-in tariffs. On the customer side, our business is to procure power for them and sell at the best prices so the margin is what matters, not the wholesale price level. We don’t have an embedded interest in higher prices.
Q: So how do you make money in future?
A: We have three major businesses. The largest one is Energy Networks – this represents about half of EON’s assets and profitability. Obviously it’s driven by regulated regimes but more and more also by incentive regimes, so superior performance gives you superior profitability. We are leading across Europe in most countries where we are invested.
The second unit is Renewables. If you have a superior product and auction prudently, you can make money. The market is growing.
Third is Customer Solutions. This is everything around the consumer from traditional commodity sales to selling them different products, such as energy efficiency with localised generation, and advisory services. We have several million customers already buying products that are not commodities.
Q: What’s the big policy priority for you at the moment?
A: First, on the networks side I think it would be prudent if politicians understand that the most important network for the future is distribution, not transmission. The transmission network was important in the past because all the large power stations were linked to it and that’s where the market happened.
Today, in Germany, more than 70% of all distributed energy feeds into the distribution network and all consumers, if they exchange energy or invest in energy efficiency, it all happens at low-voltage levels. Yet the politics here in Brussels is still very often focused on transmission. It underestimates the proximity our lower voltage networks have to the customer and to distributed generation and that’s where the future lies.
Second, we would like the forthcoming EU renewables directive to set a common rulebook, or standards, for how member states can do their renewable energy auctions. Then they wouldn’t have to notify the specifics of every support scheme to the European Commission [under EU state aid guidelines] any longer. Today they always need to go back and forth to Brussels. It’s a lengthy, bureaucratic process that prolongs uncertainty for investors. A common rulebook would give clear guidance for how to move forward with renewables in Europe over the next decade.
Of course you should also allow for appropriate tendering processes. I think these should be specific to particular technologies.
Finally, for the customer business, I think energy efficiency still needs a push. We are supporting the leaked draft energy efficiency directive with a binding 30% energy efficiency target for Europe. If you ask us, it could be even higher than 30%.
Q: You don’t mention market design… For many stakeholders, the Commission’s proposals on market design are the most important policy package to look forward to this autumn. Isn’t market design key to integrating renewables into the energy market?
A: I have not given it that high priority because I’m a bit uncertain about far the process will get with here Brexit and other priorities. I’d rather see some low-hanging fruit harvested than dream up a perfect world of an Energy Union with a perfect level playing field across all technologies. I also think it’s very likely that the first focus will be on the wholesale [and not retail] market.
Q: Even proposals for the wholesale market will have consequences for renewables however, if the Commission issues a framework for capacity markets for example.
A: I think the power market of the future will be capacity-based markets. In a world with growing renewables, you need capacity markets. You see them re-emerging everywhere. I understand that the Commission is worried about each member state doing its own thing. It’s not that we are critical of doing something, just wondering how far we can get. I think Brussels should focus on things that can get done.
Q: Isn’t there a risk that we end up with two markets, a renewables market and a conventional energy market, and both of them more government intervention than market?
A: How are Contracts or Difference or feed-in tariffs any different from a capacity market? Renewables have had capacity regimes for a while. The only difference now is also conventional technologies get one. You can still have a market but it’s much more about intra-day trading, optimisation of dispatch and long-term sales.
In purely conventional worlds, you have energy-only markets. Wherever that is being heavily influenced by low-cost variable competition, you increasingly see the need to orchestrate some kind of capacity market. For me, it’s a reminder of the past. Thirty years ago every contract had a capacity charge and an energy charge. It reflects the cost structure of the industry. In future, the capacity part will grow and the energy part will decline because all renewables have close to zero marginal cost but significant capacity costs.
For low-carbon technologies like CCS [carbon capture and storage] and nuclear, the lion’s share is also capacity costs.
Q: So what drives investment in future?
A: More and more it is driven either by customer desire – we have a growing fleet of localised generation that is focusing on the needs of specific industrial parks and customers –or, for renewables, I think Europe will move towards a state-orchestrated tendering phase. For a long time to come we will have renewables auctions managed by the state. On the conventional side, nothing gets built. Because if you don’t have specific auctions with capacity payments or Contracts for Difference like in the UK, it’s impossible to finance.
Q: Another policy you haven’t mentioned is the EU ETS [Emission Trading Scheme].
A: A few years ago I said the EU ETS is bust. It hasn’t shown many healthier signs since. We believe as a company that we ought to take the pledge from Paris seriously and the only way to do so is via a carbon price.
But Europe has now tried for many years to find the right steering mechanisms through a system that limits [emission] volumes. After all those interventions – and no serious results – I ask myself whether you could also turn it around and regulate the price instead. You could do it as a tax or as a floor price. A carbon floor price could likely be done with a majority decision [while a tax would require unanimity among member states].
Otherwise we could suddenly wake up and find that others have made a difference and Europe is still reforming the EU ETS.
Q: So you are no longer calling for the EU ETS to take over from renewables and energy efficiency legislation?
A: Since Europe appears to be incapable of delivering anything through the carbon regime, renewables and efficiency legislation are substitutes. In the past I was critical and wanted one system, but one needs to admit we’re getting nowhere. To give all the others up would mean you are left with nothing and that is not a politically acceptable result.
Q: Do you support a more ambitious renewables target?
A: I don’t want to open Pandora’s box the next morning. Renewables are already running well. They are very often customer-driven. We sell a solar plus battery product in Germany for example. We have auction processes. I’m not so certain renewables need another round of targets. Energy efficiency is more important right now.
Q: How important is cross-border cooperation on renewables support?
A: This more coordinated approach needs to be done through bilateral agreements. Look at the debate around Desertec – the idea was that Europe sends its subsidies to the Sahara, gets power and shares the advantages and costs. It didn’t get anywhere. It’s very hard to convince taxpayers to pay elsewhere for something.
Q: To what extent can the grid cope with all these renewables?
A: In one grid area in eastern Germany we have up to three times more renewables production than consumption so our grid predominantly flows in the opposite direction to traditional use. In Bavaria we have one area overloaded with solar. We are coping, but there is more optimisation to be done. Can we do power-to-gas or power-to-heat? Can we transfer energy across industries? Can we optimise more locally? A lot of these options could avoid [needing to build] some of the [high-voltage] transport lines.
This is an area that needs high investments. We need to rebuild the grid totally. In the past it was for power to flow down but now it’s like the Internet of the energy transformation.
Q: Every energy company these days wants to go digital. I guess you do too?
A: We have over one million customers buying digitally from us. We have totally changed customer behaviour onto digital platforms. We’ve digitalised our internal processes and we’ve developed a variety of digital products. We offer consumers smart use tools so they can analyse the energy consumption of their electrical appliances, for example. But I don’t yet see in our industry the breakthrough of a digital technology that is really changing the world.
Q: What about e-mobility and electrical storage? Is that a big focus for you?
A: Yes. We run a significant fleet of charging stations with the biggest stakeholders in Denmark and we are right now working on a variety of e-mobility services. We have not yet fully decided with what product we can do the best business in e-mobility, but we believe in it.
We also won a UK tender for a 10MW grid-embedded battery and we are installing the same in US solar parks. We are growing market share with a mass consumer product that is solar plus battery in Germany too. We believe that big batteries will compete with conventional power stations in the energy system.
Q: Are you looking to expand further within the energy sector, to adjacent industries or internationally?
A: We would not go upstream in any way – trying to build our own solar panels, wind farms or appliances – but we are very open to partnerships. We are a customer-centric supplier. We want to offer open platforms. Our customers don’t just want EON products. We need to make sure we can offer them the best products from other vendors too. We will not be a technology company competing with Google, however.
In terms of outreach, we are very big in Europe and beyond that we have significant renewables businesses in the US and we are a fairly big supplier in Turkey. There we serve nine million customers with grid and commodity services, and we run hydro plants, wind parks and some conventional power stations. We own 50% of Turkey’s biggest utility. Growing more internationally is not a priority right now – we have enough to work on in the countries we are already serving.
Q: How does the future look for EON, since the split off of Uniper?
A: It’s a fundamentally different company. The split consumed our own energy quite drastically over the last two years and now that the process is finalised, we’re looking to renew EON. The split makes room for more customer proximity and local adaptation. My highest focus now is on my customers. My second is on the renewal of EON. Politics is a distant third.
Q: How will you deal with EON’s nuclear legacy?
A: It’s a non-core activity. We are obliged to be a prudent operator for these last three nuclear stations that we have and we will deliver on that. We sell their product to the wholesale market because we pledge to our customers that we will never force our nuclear power onto them.
My predominant focus will be the decommissioning. We have five stations ready for decommissioning and three that are active. We will industrialise the decommissioning process. It’s a big task but we have already done two so we’ve proven we can do it. Our ambition is to do it as cheaply and swiftly as possible. Moroever, a political deal on interim and final storage with the government has to be finalised. The big uncertainty was always what to do with the nuclear waste and that is gone from us if we settle with the German government. Decommissioning is an industrial task, nothing to do with nuclear. Capital and assets have been put aside for it – €8-9 billion – and Germany is not that bad at industrial tasks.