Disruption in the German Energy Sector: E.ON and RWE take a major repositioning step

The announcement came as a surprise this Monday: Previously key competitors, E.ON and RWE have agreed that E.ON will acquire RWE's renewables subsidiary Innogy, and the two utilities will exchange large parts of their assets to focus their activities. The €20bn deal will see E.ON concentrate on distribution grid and end-customer focused (retail) utility business while RWE will focus on energy generation, including renewables as well as fossil-fired (coal and gas) power plants. RWE's objective is to become “a leading European utility for renewables and security of supply with a broadly diversified portfolio of renewable and conventional generation assets”.

The German energy sector has seen unprecedented disruption over the past years: nuclear phase-out, decarbonization, the increase of renewables resulting in a decentralization of energy supply, as well as the evolution of new digital technologies, leading to new, innovative competitors. All this has created immense pressure on the traditionally more conservative, largely protected, and slow-moving energy companies.

This latest move by E.ON and RWE can be seen as an act of liberation. Despite recent initiatives including the splitting up of renewables and fossil fuel business and investing in new business areas and geographies, the companies (esp. innogy) continued to struggle. In this deal, innogy will now be disintegrated.

It is to be seen if and when the deal comes through, as it has anti-trust implications not only in Germany, where E.ON and RWE are dominant players, but also in the UK and in Eastern Europe (Czech Republic, Slovakia, Hungary). Furthermore, as job cuts are expected, clearly the trade unions and workers councils will have an impact. The initial feedback from all sides seems positive. All going to plan, the transaction is intended to be finalized in late 2019.

What are the implications for IT operations and digital innovation in the two companies? Hard to say at this point, but while the deal specifics are being discussed, there will likely be a lot of uncertainty and distraction from day-to-day business - and from much-needed IT modernization and digital business innovation. It will be key for the companies to keep up the momentum, continue to drive current IT modernization initiatives and create an agile, flexible environment for future investment in innovation and new digital business models.

Once the transaction is finalized, the refined business areas are more focused and PAC sees a better chance for the newly-formed energy companies to regain their competitive edge.

We will keep you posted.

SITSI subscribers can read more on the German utilities sector here.