RWE: Supply Risks, Power Crisis Bites

CEO says security of supply under threat; Germany should follow Britain, France in plant support scheme.

Germany's RWE reported a 40-percent plunge in first-half profits, blaming loss-making power plants and warning that power supplies were under threat unless an ongoing crisis in Europe's energy sector was fixed.

Germany's power sector has been in turmoil, hit by a prolonged period of weak energy demand, low wholesale power prices and a surge in renewable energy sources which continue to replace gas-fired and coal-fired power plants.

The country's decision to abandon nuclear power by 2022 has put more pressure on utilities, as they will have to switch off profitable nuclear plants while spending billions on renewables.

At the same time, some of their mostly-idle plants will be needed to provide round-the-clock power supply, or "baseload" steady power in situations when intermittent solar and wind power sources cannot produce electricity.

"More secured power station capacity will be taken offline than is added through capital investment. This does not bode well for security of supply," Chief Executive Peter Terium said on Thursday.

Earlier this week, RWE, Germany's largest power producer, said it was considering mothballing a further 1,000 megawatts (MW) of power plants that are unable to recuperate their costs as they only run a fraction of the time needed to be profitable.

Over the past six year, shares in RWE have lost nearly two thirds of their value, massively underperforming Germany's benchmark DAX index, which has gained more than 46 percent over the same period.

The energy sector's imbalance has sparked a debate among European governments and utilities companies about creating so-called capacity mechanisms.

The idea is to reimburse energy firms for plants that no longer cover their costs, but are needed to secure supply of gas and electricity when renewable power supplies cannot.

BARGAINING POSITION?

Britain and France are pressing ahead with such plans, while talks between the German government and the country's energy groups about a solution are planned for the second half of 2014.

RWE's Terium said Germany should follow Britain and France's example.

Heino Hammann, an analyst at NordLB who has a "hold" rating on RWE shares, said the situation in Germany's electricity sector could result in supply shortages.

"When this point is reached is unclear," he said.

"On the other hand, utilities are preparing their bargaining position. In the end the question remains: who will pay? Customers or the state?" Hammann said.

Since Germany announced its switch from stable nuclear and fossil fuel supply to renewables, the risk of power shortages in parts of the country has risen because reliable back-up capacity is being forced to shut, putting greater strains on the grid.

RWE said in March that 20-30 percent of its power stations could not cover their operating costs, after posting its first annual net loss in more than six decades.

Since the start of 2013, the company has closed 12,600 MW of capacity, nearly a quarter of its European portfolio.

In the first half of its financial year, the group said operating profit fell 40 percent to 2.27 billion euros ($3 billion), slightly lower than the 2.29 billion average forecast in a Reuters poll of banks and brokerages.

Like larger French peer GDF Suez, RWE's results were also hit by a mild winter.

Recurrent net income declined by nearly two-thirds in the period to 749 million euros, also lower than the 786 million average forecast.

RWE kept its outlook for the current financial year and still expects operating profit of 3.9-4.3 billion euros and recurrent net income of 1.2-1.4 billion.

The outlook excludes contributions from RWE's oil and gas exploration and production unit DEA, which it sold to a group of investors led by Russia's Mikhail Fridman earlier this year. RWE expects the deal to close by the end of 2014.

Shares in the group fell 2.7 percent in early trade and were down 2.2 percent by 1142 GMT, while Germany's blue chip index was up 0.5 percent.

By Christoph Steitz