Germany's largest energy companies set out opposing views on how to profit from selling electricity in their $27 billion (22 billion-euro) reshuffling of the industry.
In the second major restructuring of the utility business in as many years, EON and RWE are struggling to cope with Chancellor Angela Merkel's drive to slash fossil fuel pollution and spur clean power generation that cost them billions in writedowns.
By carving up the assets of the renewables developer Innogy, RWE will focus on generating and trading power while EON will build up its grid and its business to supply 50 million customers across Europe. The moves detailed on Tuesday in Essen where the three companies are based give investors clear choices in negotiating an upheaval in the industry brought on by the green revolution and the rapid advance of energy technologies.
"They have two different profiles," said Juan Camilo Rodriguez, equities analyst at AlphaValue SAS in Paris. "EON will attract more conservative investors looking for yield and stable earnings like pension funds. RWE is a more volatile option that depends on power price expectations, security of supply, and capacity constraints."
Investors embraced all the companies involved in the deal, driving up the shares of each since word of the agreement was first reported by Bloomberg News on March 10. EON surged more than 6 percent in Frankfurt trading on Tuesday, continuing the biggest two-day increase in more than a year. RWE was up almost 3 percent after a 14 percent gain Monday, and Innogy was little changed just below the 40-euro-a-share offer price.
The breakneck speed of change across the utility industry stems from a plunge in the cost of wind turbines and solar panels. That emboldened Merkel's government to work toward closing all of Germany's coal and nuclear plants -- the majority of RWE's current power generation fleet.
With cheap renewables flooding the grid, wholesale power prices plunged and forced the early closure of more power plants. RWE's bet is that enough of those power plants will shut in the coming years to stabilize the cost of electricity -- and that even if prices remain volatile RWE is well placed to negotiate the turmoil through its trading operation.
"EON seems to expect Europe's fundamental oversupply in power will continue," said Meredith Annex, senior associate at Bloomberg New Energy Finance. "In this case, getting out of upstream areas like renewables, and increasing retail exposure makes sense. Yet RWE expects generation markets will tighten. Investors can now choose their exposure to each energy future."
EON Chief Executive Officer Johannes Teyssen will focus solely on the downstream aspect of the business -- grid networks and selling power directly to consumers. It will own and operate networks and retail businesses. It joins companies such as Centrica Plc in the U.K. in forsaking renewable generation.
"If we focus on the smart grids and the customers we can offer better product," Teyssen said in a Bloomberg Television interview. "We don't build big power stations. We only do things that directly matter for the customers. We enable the smart industrial sites of tomorrow. We are the enabler of the true energy future."
EON believes it will profit from "energy mega trends" such as adding digital technology to power networks, the rise of electric cars and efforts by companies to reduce their own emissions. It already spun off its traditional power generation business into Uniper SE two years ago. Teyssen said the Innogy deal takes EON "a step further."
At RWE, CEO Rolf Martin Schmitz is building up his power-generation capacity, which at 40 gigawatts makes the company Germany's biggest producer. To date, RWE is most reliant on nuclear and coal plants, with lignite, which is the the most polluting form of fossil fuel, making the biggest chunk.
The Innogy deal brings RWE 8 gigawatts of renewable power plants and another 1.5 gigawatts of clean energy under construction, exposing it to the quickest growing forms of generation.
"In a nutshell, we will turn RWE into one of Europe's leading power producers," Schmitz said at a joint press conference with EON. "Renewables provide huge opportunities for growth. Many countries opt for the expansion of renewable energy in order to achieve climate protection goals."
The mix will allow RWE's fleet of fossil fuel generation to provide back-up when the wind isn't blowing and the sun isn't shining.
"RWE will continue to be the safety net of the energy transition," Schmitz said. "Our flexible generation fleet provides stability for an energy system that has to digest an increasing amount of volatile feed-ins of wind and solar power."
In an interview with Bloomberg TV, RWE's Chief Financial Officer Markus Krebber said the moves are "creating here two new leading European energy companies which will in future focus on their core activities -- EON on networks and distribution business, and RWE on power generation, trading and security of supply."
--With assistance from Brian Parkin and Anna Shiryaevskaya