Expensive Energy

Taking Back the Power

Supporters of the Our Hamburg - Our Grid movement back in 2013. Source dpa
"Our Hamburg - Our Grid" might not be that good for Hamburg after all.
  • Why it matters

    Why it matters

    • A trend toward the municipal repurchase of energy utilities in Germany has been a mixed bag, with many municipalities failing to realize the profits they had anticipated.
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  • Facts

    Facts

    • Small and large municipalities are trying to repurchase the energy grids they had sold to private operators years ago.
    • An analysis of the 2011 and 2012 financial statements of 270 municipal operators of power distribution grids showed that 101 municipal companies reported a negative result at least once.
    • The need for utilities to upgrade their lines to cope with the boom in wind and solar energy poses significant costs.
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    Audio

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“We have made history with this project,” Manfred Braasch, head of the Hamburg division of Friends of the Earth Germany said enthusiastically in September 2013. At the time, Mr. Braasch was also the spokesman for an initiative called “Our Hamburg – Our Grid,” and he had just achieved a momentous victory the day before. Friends of the Earth Germany, an alliance of environmental and consumer protection groups, had just won a referendum that required the Hamburg state government to commit itself to the repurchase of its energy grids.

It was a David versus Goliath victory. Friends of the Earth Germany had battled the utility Vattenfall, which operated the electricity and district heating grids, and natural gas grid operator E.ON, along with a seemingly superior alliance consisting of three major political parties, the Social Democratic Party, the Christian Democratic Union and the Free Democratic Party, business leaders and labor unions.

But the initiative had powerful arguments on its side: the purchase was financially worthwhile given the high profits grid operators typically generated. And it was also a matter of protecting the climate, maintaining fair prices and preserving jobs.

The Hamburg initiative was the culmination of a nationwide movement with the unwieldy name “re-municipalization.” Small and large municipalities are trying to repurchase the energy grids they had sold to private operators years ago.

According to the German Association of Local Utilities (VKU), about 100 municipal utilities have been newly established in recent years. In another 250 cases, the concession to operate the networks passed from a private company to an existing municipal enterprise.

But is re-municipalization truly worthwhile? Can municipal owners fulfill the high expectations? A study by the Handelsblatt Research Institute, commissioned by the Federation of German Industries (BDI), raises serious doubts about the movement.

It reaches the sobering conclusion that neither the anticipated guarantee of reliable profits nor the low energy prices touted as benefits of re-municipalization have materialized, and that there has been “no evidence to date” of positive effects on employment.

The study analyzed the annual financial statements of 270 municipal operators of power distribution grids from 2011 and 2012, the most recent data available on such a large scale.

The results are eye opening. In at least one of the two years, 101 municipal companies reported a negative result from ordinary activities. In other words, more than one in three grid operators was operating in the red. Some 56 companies – one in five – even posted a loss in both years. And although 169 companies turned a profit in both years, 105 reported a decline in profits.

“Re-municipalization is often associated with exaggerated and false expectations.”

Michael Bormann, Simmons & Simmons Law Firm

The electricity grid is one of the most heavily regulated sectors of the German economy. The Federal Network Agency sets strict rules under which operators must calculate the network fees they can charge for use of their lines. On the one hand, this makes the business predictable for them. The agency also allows a high rate of return on equity for new investments. On the other hand, it also forces companies to operate more and more economically through the so-called “incentive regulation.” For example, the upper limit on revenues is reduced by 1.5 percent each year.

This means that companies that are unable to control their costs also have trouble managing their constantly growing need for investment, which is considerable in the context of the so-called Energiewende, Germany’s phase-out of nuclear power and promotion of renewable energy sources.

The German Energy Agency (DENA) anticipates investments of €27.5 billion to 42.5 billion ($30.1 to $46.5 billion) in the regional power grid by 2030, as utilities upgrade their lines to cope with the boom in wind and solar energy.

This poses serious problems for the grid operators examined in the study. In 2012, 27 percent achieved a return on sales of at least 10 percent, but 38 percent saw a return on sales of less than 5 percent.

The study concludes that while it can be financially attractive for municipalities to operate their own power grids, “operating a grid is a risky business.”

Michael Bormann, an energy expert with the law firm Simmons & Simmons, which advises many municipal utilities, knows from experience that “re-municipalization is often associated with exaggerated and false expectations.” The fees are not nearly as attractive as anticipated, he added.

“Politicians often promise more than the municipal companies can deliver,” said Mr. Bormann. This also applies to their expectation that re-municipalization constitutes a positive contribution to the energy transition, since a non-discrimination policy requires grid operators to allow electricity from any source to pass through their lines.

Of course, local utilities association VKU disagrees. It argues that experiences in recent years have shown that re-municipalization projects “that are approached with economic, business and technical expertise have generated significant added value for cities, municipalities and municipal enterprises.” Providing energy locally is “often what the public wants,” argues the VKU. “And polls repeatedly confirm citizens’ high level of confidence.”

In Hamburg, the new grid owner is now trying to satisfy residents’ expectations. The city already took over the electricity grid, Stromnetz Hamburg, which it acquired from Vattenfall for about €550 million.

The new city-owned utility has already released its first annual financial statement, in which it proudly reported a net income of €34.5 million in 2014. However, the utility reported €40 million in income in 2013, when it was still owned by Vattenfall – and about €70 million in the year before.

 

Jürgen Flauger reports for Handelsblatt on the energy sector. To contact the author: flauger@handelsblatt.com.  

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