Europe’s largest energy utilities should brace for another tough year ahead as new, technologically advanced coal-fired power plants are introduced to the continent’s largest electricity market which “could put further downward pressure” on already weak wholesale prices, German giant E.ON warned on Wednesday.

The warning, part of E.ON’s annual report, came on the same day as one of Austria’s largest utilities, Verbund, told of a “difficult situation in the energy markets in the medium term”.

The new advanced coal plants, in tandem with an ever increasing volume of renewable power, paints a grim outlook for the energy market’s biggest trading names, some of which, including E.ON and Swedish-owned Vattenfall, have been forced into a full-scale strategic restructure to adapt to the shifting landscape.

Even the dominant mid-term bullish driver across the markets – the anticipated inflation of carbon prices as a result of structural reform of the EU emission trading system – will see its influence erode because the new, cleaner coal plants will require less EU allowances than dirtier plants that are being retired.

In the near- and medium-term, power prices in Germany will continue to be determined largely by the coal market, which will continue to be oversupplied, as well as by the price of carbon allowances, which is likely to increase, E.ON said in its annual report.

“However, the addition of more renewables capacity and numerous new, technologically advanced coal-fired power plants, which are scheduled to enter service in 2015, could put further downward pressure on prices,” the utility said.

But there was some positive news for German generators and other market participants in natural long positions: “This trend will be resisted to some degree by the rise in Germany’s exports of inexpensive renewables power, which supports domestic power prices, and by speculation about the possible closure of some coal-fired power plants due to environmental regulations,” E.ON said.

Restructure

E.ON itself was among the high-profile names forced into a strategic restructure by the changing face of the energy markets (see EDEM 1 December 2014). And this was even before the fall of crude oil into today’s drastically lower range.

Both E.ON and the new company created by spinning off its conventional energy business, will be legally and operationally independent from 1 January 2016, the German utility a said in its report.

“We intend to announce initial details about the two companies in the second quarter,” E.ON chief executive Johannes Teyssen said.

As of next year, the utility’s shareholders will own stock in both E.ON and the new company. But the spin-off ratio, which dictates what percentage of their shares will be transferred to the new company, will be determined in May 2016. At the same time, E.ON will decide how big its ownership share in the new company will be, said a spokesman for the utility.

E.ON’s shareholders will make the final decision about the spin-off in summer 2016 and its public listing is expected in the second half of the next year. E.ON plans to divest its remaining stake in the new company in the medium term.

After the spin-off, E.ON will focus on renewables, energy networks and customers. Conventional power generation including hydro, operations in Russia, global energy trading, and production of oil and gas will form the new company.

Financials

E.ON’s power generation declined 12% year on year to 215TWh in 2014. Generation from all conventional sources declined, but its wind power production increased. However, renewables still constitute a small part of E.ON’s portfolio, with most of its generation coming from gas and oil fired plants, followed by nuclear, hard coal and lignite production.

The company has already hedged most of its 2015 and 2016 power production.

Pre-tax earnings amounted to €8.3bn in 2014, 9% below 2013. The utility ended last year with a net loss of over €3bn, whereas in 2013 it made net profit of more than €2bn.

“The earnings performance reflects the persistently difficult situation on energy markets in Germany and Europe as well as currency-translation effects and portfolio changes,” E.ON said.

The utility expects an Pre-tax earnings of €7bn-7.6bn in 2015.

Verbund

One of the largest utilities in Austria, Verbund, also published annual results on Wednesday. Verbund’s power generation declined 4% to 34TWh in 2014. By the end of last year, it had hedged 70% of its 2015 planned generation.

Verbund’s earnings were down last year and the utility expects these to decline further in 2015. “The danger of further impairment losses remains high due to the difficult situation in the energy markets in the medium term,” the utility said.

Verbund plans to focus investment on the expansion of the regulated Austrian high-voltage grid, on improving the efficiency of existing facilities and on the completion of on-going hydro and wind power projects. Laura Raus