Utility Divestitures in Germany: A Case Study of Corporate Financial Strategies and Energy Transition Risk

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). 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 can cause substantial costs. If these are not clarified and allocated ex ante, policy makers find themselves forced to either burden tax payers or endanger utilities that are of systemic relevance to the energy sector.