Leaders’ Perspectives with Leonhard Birnbaum: More pragmatism! More openness to technology! More market orientation!
Fabian Billing, McKinsey Managing Partner Germany & Austria
July 2, 2024
To enhance competitiveness, leaders are looking for ways to accelerate profitable growth and strengthen resilience. They seek to make changes that won’t just evolve their business but truly transform it. This requires decisive leadership.
In my series “Leaders’ Perspectives,” I explore these topics together with inspiring thought leaders. Today, I’m pleased to share my conversation with Leonhard Birnbaum, Chief Executive Officer of E.ON SE.
Leo, the energy transition is crucial for Germany's competitiveness. A huge transformation with the aim to establish a decarbonized yet secure and affordable energy supply. Where must priorities lie?
Over the past decade, the focus has been on scaling up renewables. That has worked. Globally, more is being invested in renewables than conventional systems. But we have used up any reserves in the infrastructure.
This is why we must now expand distribution grids throughout Europe in particular. As President of Eurelectric, I presented a study in June that clearly shows this. It is not the expansion of renewables – which will of course continue – that will bring us closer to transformation, but quite literally their “interconnection.” The “Grids for Speed”[1] study provides a complete overview of the investment requirements for the expansion of distribution grids in the EU-27 and Norway. In order to implement the energy transition, we will have to almost double the annual investment in distribution grids in Europe, from the current EUR 36 billion to EUR 67 billion. This is a vast investment, but one that will pay off in the long run. We estimate that forward-looking investment in the grids and efficient use of the systems could save a further 12 billion or so.
Incidentally, grid expansion is also crucial for the success of the next “wave.” This is because the conversion of the heating supply will increasingly become the focus of attention in the coming years. It needs to be largely electrified for decarbonization.
McKinsey calculations show that both the expansion of wind power plants and the electricity transmission grids must be accelerated fivefold to achieve targets set in Germany. Necessary investments and shortages in skilled labor and raw materials pose a challenge. What catalysts could unleash the momentum needed to accelerate the transformation?
We must all pull together: politics, regulation, companies, society.
In Germany in particular, we need a different way of thinking and tackling problems. More pragmatism! A simple solution that can be implemented quickly beats a perfect but slow one. More openness to technology! Regulation on a case-by-case basis always stifles innovation and is inefficient. More market orientation! Markets are more efficient at allocating capital than any government. Investors will also need to assume more risk again.
Germany is already dependent on electricity imports from abroad during the hours of highest electricity consumption. Available capacities could be expanded via hydrogen-capable gas-fired power plants close to consumption centers in southern Germany. As a positive effect, fewer complex and cost-intensive power lines would be required. Can a power plant strategy help to get the system costs of the electricity price under control?
The power plant strategy serves to ensure security of supply. It only helps with costs to the extent that it can help avoid any false alarms regarding scarcity. The future energy system needs reserve power plants as backup, but also as storage facilities. We also need to take advantage of the flexibility the decentralized structure offers with numerous energy consumers tapping into and energy providers feeding into a smart, digital grid. Then we can succeed in building a highly efficient energy system that is much more resilient. The power plant strategy announced by the German government at the beginning of the year is a first step in this direction. However, I am not yet familiar with the details. What I do know makes me skeptical that it will help rein in electricity prices. I would personally prefer a market-based, technology-neutral capacity market. Ideally, ONE blueprint would be designed at the EU level instead of 27 individual mechanisms.
Sharp rises in household electricity prices could jeopardize acceptance of the energy transition. You have also expressed this fear several times. How can we achieve greater acceptance?
First, with transparency. The transformation is an investment in the future. It also already makes sense today for all households in a position to invest. This does not apply to everyone, however, especially not to those without the means to invest. Politicians must make this clear and provide support where needed – and only to the extent needed. This means nothing like subsidizing wallboxes for homeowners. That move was a misallocation of taxpayer money. During this process, we will also need to address employee concerns as to whether they will still have good jobs in a transformed economy. A study published by our E.ON Foundation in mid-June shows precisely this. Acceptance hinges on questions like these.
What role do companies play in this?
Companies must implement political objectives efficiently. But this can only work if climate protection remains economically viable. We at E.ON are working on precisely such solutions in various business areas. Such efforts are booming because so many companies see a business opportunity behind the challenge of climate protection.
Artificial intelligence (AI) can help manage demand more flexibly and master the energy system’s increasing complexity. What does it take to exploit the potential of AI across all stages of the energy sector’s value chain and become a take global pioneer in digitizing the energy transition?
At a societal level, we first need a mindset that new technologies harbor opportunities. The European Union’s AI Act, in sharp contrast, primarily regards AI as a risk to be regulated. In Brussels, they seem to actually believe that they can regulate their way to the cutting edge of innovation. That’s not going to work – and that needs to change.
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At E.ON, in contrast, we cannot imagine energy’s future – and particularly future power grids – being anything but digital. That’s why a large proportion of our investments in networks and solutions are – to visualize this – not just in copper, but also in silicon. Over the next few years, we will standardize, digitize, and automate all processes across the company. And in this order: from the connection request for a customer who wants to feed in renewable energy to billing processes and procurement processes. And we will use any technology that makes sense. AI is already part of it.
The speed at which generative AI has established itself so far emphasizes how imperative it is to accelerate workforce training and further development. How can we achieve this at such scale – and what is E.ON doing specifically in this area?
We have set ourselves the objective of developing E.ON into a learning organization and anchoring continuous learning in our corporate culture. The benefits are better adaptability, innovation, speed, and higher performance. All of this is necessary to advance our E.ON strategy. Learning is not merely an option, it is a business-critical factor in remaining competitive. I’m optimistic based on my experience. It's not that complicated. The “learning” comes with the “doing.” And if you do a lot, you learn a lot.
What does all this mean for managers and leadership? How can we take people along with us into this new world so that they can actively shape the ongoing change?
Always look for the opportunities and only then think about the risks. Always be a role model in your curiosity for new approaches and pathways.
Above all: Don’t forget to make the company more profitable. If you make more profit, you can grow more. And if you can grow more, you can offer employees more options.
What will determine your future strategy?
I work in an industry that needs to grow massively for years to come. Entire sectors are converging towards us; transportation is going electric, heat is going electric. The resulting digital expansion of our networks is undoubtedly the core of our strategy. For us, this means enormous growth – and above all, sustainable growth – over the coming years.
It is an incredibly complex time to be the CEO, but I also believe that there has never been a better opportunity to make lasting impact. What advice would you give to the next generation of managers?
Find your own way. What works for me might by no means be the right thing for others.
Be modest. Having been successful in the past increasingly means nothing for the future.
And don't take yourself too seriously.
Thank you, Leo. This was very insightful. I so appreciate your time.
Dr. Leonhard Birnbaum was born in Ludwigshafen, Germany. He studied chemical engineering in Karlsruhe. After a subsequent period of academic work at the Karlsruhe Research Centre, The University of Cottbus awarded him his doctorate.
Leonhard Birnbaum began his professional career at McKinsey in Düsseldorf. After holding various positions, he was Senior Partner for the energy and industrial sector. In 2008, he joined RWE AG and was appointed to the Board of Management the same year. He served as Chief Strategy Officer and as RWE Group’s Chief Commercial Officer until 2013.
In 2013, Leonhard Birnbaum was appointed as member of the Board of Management of E.ON SE and took on a variety of responsibilities within the Board. From 2019 to 2020, he was also Chairman of the Board of Management of innogy SE.
In 2021, Leonhard Birnbaum was appointed to his current role as CEO of E.ON SE.
Leonhard Birnbaum is Vice-President of the Executive Committee of BDEW, the German Association of Energy and Water Industries, a member of the Executive Committee of the Federation of German Industries (BDI) and President of Eurelectric, the European Electricity Association, and Vice Chair of the World Energy Council.
The E.ON Group is one of Europe's largest operators of energy networks and energy infrastructure and a provider of innovative customer solutions for approx. 47 million customers.