Gone are the days when utilities were a steady, albeit boring sector. E.ON has just sent investors scrambling for cover after canning its earnings forecast for the next three years. Shares in the German utility fell almost 13 per cent on a single day. But considering the political and economic uncertainty hanging over the sector, doom is likely to become the new norm.
E.ON's travails illustrate how significantly the business of generating and selling energy has changed of late. The German group, which also published quite decent numbers for the first three quarters of 2012, is being hit by a triple whammy of structural challenges that will weigh on its medium- to long-term prospects.
First, the German government's decision to close down all nuclear power stations within the next decade, taken in the wake of Fukushima, has ruined a profitable line of business. E.ON runs five of the nine nuclear power plants still operating in the country.
Second, policy makers are promoting green energy with the double lever of regulation and lavish subsidies. E.ON, however, has massively invested in modern gas power plants. While these facilities are needed to smooth out demand peaks, current regulations have turned them into huge loss makers.
Third, the recession in southern Europe has reduced energy demand in the crisis-hit countries. Energy sales in Spain are down by 7 per cent compared with last year, and in Italy they have shrunk by a stunning 10 per cent. This does not bode well for future prices.
Market experts have been expecting a review of E.ON's earnings forecasts for months because the company's assumptions were judged as too optimistic. So it is a bit puzzling that the announcement took markets by surprise. But the jumpy reaction may simply show that investors are only now waking up to the tectonic shifts affecting the utilities sector. Uncertainty and volatility – concepts unknown to the industry a few years ago – are going to be rampant. Investors will therefore ask for higher risk premiums than in the past. But E.ON and its competitors will be hard-pressed to deliver them.