Germany's major energy corporations RWE AG (OTCPK:RWEOY) and E.ON AG (OTCQX:EONGY) face very difficult market conditions for some time now. Despite the headwinds, both RWE and E.ON trade around their 52-week highs. RWE shares are up 28% and E.ON's shares are up 16% YTD. I strongly believe that, on a fundamental basis, these two companies are not a good long-term investment. The companies face lower demand, lower energy prices and fierce competition from small scale solar photovoltaic systems (hereafter: PV systems) In this article, I will argue that RWE and E.ON need to adapt their long-term strategy and business model in order to even be considered a good long-term investment.
Lower demand and prices
PV systems are often used for small scale solar systems. Because of the system's small scale, more and more consumers have their own PV system at home, generating their own energy. For example, Germany currently counts 1.4 million small scale PV systems. On sunny days, these PV systems generate over 50% of Germany's electricity demand (source: cleantechnica.com). This trend is a real threat for RWE's and E.ON's business model. Due to the increased competition from PV systems, consumers will demand less energy from companies like RWE and E.ON in the future.
Further, global warming will not favor RWE and E.ON either. This year's winter was relatively soft and therefore consumers demand for energy was lower. It is generally known that global temperatures will keep on rising in the future. Therefore, the demand for energy will decrease even further. In economics, lower demand result in lower prices. As a result, RWE and E.ON need to cut costs and waive expensive investments aggressively in order to stay profitable and compatible. In my opinion, this is not a sustainable business model and both companies need to adapt their long-term strategy in order to return to a sustainable business model.
Storage and distribution
I believe that our current society will shift to a more self-sustainable society in which energy independence is an important factor. More and more people will start generating their own energy, especially with small scale PV systems at their homes. The traditional energy companies will be harmed by this trend in the next decades. Since Germany does not have much fossil reserves and shut down their nuclear energy production completely (source: huffingtonpost.com), the German consumers will start generating their own energy even faster. As a result, the business model and revenue of German energy companies, like RWE and E.ON, will be affected faster as well.
The rise of small scale PV systems at home provide opportunities for RWE and E.ON as well. For example, the characteristics of energy from solar PV systems is that it peaks during the day. During the day, the solar PV systems generate more energy than the consumers need. However, at night the systems generate not enough energy to support demand. This creates the need for large scale energy storage and distribution in order to maximize the value of solar PV systems. RWE and E.ON should use their scale benefits, since both companies have already a nationwide infrastructure in place. I suggest that RWE and E.ON adapt their strategy and focus on the storage and distribution of energy, rather than generating and selling their own energy to consumers.
Considering my arguments above, I currently have no confidence in RWE and E.ON and I do not consider both a good long-term investment. I would like to see these companies acknowledge the upcoming challenges regarding the competition from self-sustainable society. In my opinion, RWE and E.ON need to invest in the storage and distribution of energy. This is where RWE and E.ON can use their scale benefits over the small scale PV systems at home and provide additional value for its consumers. However, as long as generating and selling own energy is the key focus of RWE and E.ON, I would not invest in both companies.
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