German utilities from RWE AG to EON SE may struggle to convince investors they can adapt to the renewable energy revolution even after the industry’s unprecedented shakeup in 2016.

Headwinds range from a power price rally that’s forecast to fade this year to a multi billion-euro nuclear clean-up bill. While planned spending curbs and thousands of job cuts are seen as necessary by some investors and analysts, the utilities are operating in an environment RWE’s Chief Executive Officer Rolf Martin Schmitz has described as “ tough.”

Last year left its mark on Germany’s utilities as the landmark shift from nuclear and fossil-fuel generation spurred Europe’s biggest IPO since 2011, a company spinoff and the largest single sale of lignite plants. EON shares fell for the sixth time in seven years and while Essen-based RWE eked out its first annual increase since 2012, it still underperformed the nation’s DAX benchmark.

“Efficiency enhancements have become and will continue to be a permanent subject” that utilities aren’t used to, said Sven Diermeier, an analyst at Independent Research GmbH. “At some point they’re left with the choice between restructuring, selling or closing business areas.”

EON and RWE, Germany’s once-largest utilities, have been among the biggest decliners on the benchmark DAX index since 2011 when Chancellor Angela Merkel forced them to start closing some of their most profitable power plants in the aftermath of the Fukushima nuclear disaster. Wholesale electricity prices have fallen 45 percent in the same period.

Sideways Move

While power markets rallied in 2016 to post the first annual gain in six years, prices will stay broadly stable in 2017, mainly due to an expected decline in coal costs, according to analysts surveyed by Bloomberg News.

It’s a view echoed by Elchin Mammadov, an analyst at Bloomberg Intelligence in London. Prices “will be the main catalyst, the biggest driver” for utility valuations, he said.

With wholesale rates flattening, cutting costs will be a priority, according to Guido Hoymann, an analyst at B. Metzler Seel Sohn & Co. KGaA.

RWE, which sold a stake in its green energy and grid business Innogy SE in an October initial public offering, plans to eliminate 2,300 jobs, or one in six, at its conventional generation unit by 2020. EON and its Uniper SE fossil-fuel spinoff seek cost cuts of 400 million euros ($423 million) each. That’s on top of Uniper’s planned capital spending cuts and asset sales of at least 2 billion euros by year-end.

Uniper spokesman Georg Opperman said the split from EON will provide “clarity” for investors, without being more specific. Innogy referred to Chief Executive Officer Peter Terium’s comments last month that he sees a “clearly better” year for the grid business, while EON declined to comment.

EON slid 0.8 percent to 6.588 euros at 9:26 a.m. in Frankfurt, taking this year’s decline to 1.7 percent. RWE fell 1.5 percent to 11.625 euros and has dropped 1.5 percent this year.

The upheaval isn’t confined to Germany. Engie SA in Paris is in the “toughest phase” of a plan to reduce exposure to oil and power prices and focus on energy services, renewables and gas pipelines, Chief Executive Officer Isabelle Kocher said Friday in Paris.

Dividends

Cost cuts and capital-raising may leave more cash for dividends. RWE last year suspended payments to most shareholders for the first time in at least half a century.

The company is expected to pay 50 euro cents a share for 2016, according to John Musk, an analyst at RBC Capital Markets. The utility is one of the bank’s top-30 global stocks for this year, citing an attractive valuation of the stock. RWE hasn’t yet decided on the dividend for 2016, according to Lothar Lambertz, a spokesman.

But defensive stocks such as utilities risk falling out of favor as investors turn to sectors that do well when the economy is expanding. Inflationary pressures are building in Europe, eroding the value of bonds and sending German 10-year yields to the highest in almost a year in December.

“The biggest problem is the trend that bond yields increase,” said Lueder Schumacher, an analyst at Societe Generale SA. “That especially affects regulated utilities,” he said, such as EON and Innogy that get more than half their income from government-controlled prices.

Another concern for investors is the cost of Germany’s exit from nuclear power by 2022. Utilities have provisioned for most of their waste storage liabilities, but they still must fund a 6.2 billion-euro “risk premium” to cover unexpected costs. EON has said it may seek fresh capital for its 2 billion-euro share of the premium.

“I don’t see a strong increase of German utilities’ share prices this year,” said Independent Research’s Diermeier.

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