3.8 C
New York

Insight: Europe’s Utilities Squeezed By Creeping Nationalization

Vattenfall unplugged! With flyers, posters and an animated film of a bear disconnecting the Swedish utility that operates the Berlin electricity grid, campaigners tried to convince voters to put power distribution back in public hands.Europe's utilities

The November referendum in Berlin failed, but in September, citizens of Hamburg, Germany’s second-biggest city, voted to return their power grid, also run by Vattenfall, to public ownership.

The votes were organized by citizens’ groups who want municipalities to buy back electricity distribution networks from private utilities, because they say local authorities can provide a cheaper and better service.

The German movement is part of a Europe-wide reversal of the trends towards liberalization and privatization that have driven energy policy in the past decade.

While ostensibly backing free energy markets, many European governments squeeze utilities by intervening in power generation while also capping energy prices. This creeping renationalization cuts utilities’ profits by billions of euros.

The idea behind the EU-driven energy liberalization was to force the old monopolies to compete so that prices could fall and services improve.

Countries privatized utilities and split them into private power producers and independent, but government-regulated network operators. Energy retailing was also freed up for vendors to compete for household accounts.

But as Europe created a free market for power generation, it also brought back regulation by encouraging wind and solar power generation with generous state subsidies.

As renewable energies boomed, their priority access to the grid and cost-free operation crowded out the utilities’ traditional plants, to the point that gas-fired generation has become virtually uneconomical in Europe.

With their investment choices for producing power limited by government policies, utilities also saw their retail prices regulated. Spain and France limit energy prices for consumers, while Germany provides big discounts for industry.

But keeping prices low for consumers and industry, while also favoring green power generation and maintaining security of supply is just not possible.


Critics say that these mutually exclusive targets have made much of Europe’s energy regulation so inconsistent that private firms can no longer operate profitably. Investment in non-subsidized generation has virtually dried up.

“At some point the regulatory risk gets so bad that it might be better to give the political risk back to the policy makers by renationalizing the sector,” said Georg Zachmann of Brussels think tank Bruegel.

A country close to this point is Spain, where generous subsidies to the renewables sector and caps on energy prices have led to the build-up of a 30 billion euro power tariff deficit – the difference between the cost of energy and what utilities are allowed to charge for it.

Last month, the Spanish government scrapped plans to reduce the deficit by sharing it between utilities, consumers and the state, and pushed the debt back onto the balance sheets of utilities such as Iberdrola, Endesa and Gas Natural, which will have to hold it for 15 years.

For the Spanish utilities, this boils down to a creeping nationalization of their profits.

“They are renationalizing our revenues, but not our assets. That is worse,” Iberdrola CEO Ignacio Galan said.

Spanish Industry Minister Jose Manuel Soria told Reuters in November he does not think utilities should be renationalized and more competition is better for consumers.

But Spain might serve as an example of where other countries are heading, as more and more EU governments dictate investment choices through subsidies and regulate tariffs.

Britain – the cradle of European energy liberalization – seems like an unlikely candidate to lead the way: its Electricity Market Reform, to come into force this year, will introduce the “Contracts for Difference” scheme, which offers price guarantees for low-carbon energies.

The British package will also dictate which power plants receive public money to provide backup power generation.

In October, Britain agreed to give unprecedented loan guarantees and a 35-year power price guarantee in a deal with France’s EDF to build a nuclear plant at Hinkley Point.

This will reverse more than a decade of non-intervention in power generation and turn Britain’s low-carbon energy production – essentially offshore wind and nuclear – into a government-regulated activity.

Britain’s opposition leader Ed Miliband promised more regulation in September by saying he would freeze retail energy prices for 20 months if he were elected in 2015.

“The UK led the way in liberalization and I think it is leading the way – for better or worse – in changing its market framework towards having a much greater role for the state,” said Compass Lexecon energy consultant Fabien Roques.


The most radical renationalization drive in Europe is in Hungary, where the government wants to turn utilities into non-profit organizations.

Prime Minister Viktor Orban wants to nationalize six or seven utilities and if he is re-elected this spring he plans to make them “community-owned” within a year or two.

Most of Hungary’s energy sector is foreign-owned, mainly by German, French and Italian firms including E.ON, RWE, EDF, GDF Suez and Eni.

Late last year, state-owned energy group MVM bought E.ON’s gas trade and storage businesses and it is also in talks with RWE about buying its stake in Budapest gas utility Fogaz Zrt.

Hungary does not confiscate the foreign-owned firms, but pays for the assets, albeit at prices depressed by a tough regulatory regime and state-imposed energy price caps.

RWE East chairman Martin Herrmann says Hungary’s moves are unacceptable and has spoken of “expropriation”.


Germany’s movement to put local power networks in municipal ownership is relatively benign, as it allows utilities to sell their assets at market prices and redeploy capital elsewhere.

“It is not renationalization but remunicipalisation that we are after. Energy issues should be dealt with on a local level,” said Stefan Taschner, head of BurgerBegehren Klimaschutz which drove the Berlin campaign.

Taschner thinks all power distribution networks should be in municipal hands, although he does not object to “a good mix” of public and private ownership for power generation assets.

After losing the Berlin referendum, the group is now helping citizens’ groups in cities such as Essen and Karlsruhe wrest distribution networks from private ownership.

“I have been in the industry 25 years and I have seen cities go three times private and three times public so I would not overinterpret the moment,” E.ON CEO Johannes Teyssen told Reuters, adding that public owners would face the same cost pressures as private utilities.

Teyssen is part of the dozen-strong Magritte group of utilities CEOs, which represent half of Europe’s electricity generating capacity. They say European energy policy is a failure, as retail power prices are higher than ever, security of supply has weakened and investment has stalled.

The group wants an end to subsidies for “mature” renewable energies such as onshore wind and solar.

Two of its proposals – strengthening the European carbon market and the establishment of EU guidelines for capacity remuneration mechanisms – actually offer more regulation and would increase the role of the state in energy policy.

Capacity mechanisms – under which utilities are paid, and sometimes forced, to keep idle plants on standby – are the most recent development in EU utilities regulation.

In Germany, where utilities are already told by government in which assets to invest (renewables) and which not (nuclear), they are now also told where not to divest.

Utilities must get approval from the regulator to close plants and can be forced to maintain unprofitable operations to minimize blackout risk.

Dirk Uwer, partner at German law firm Hengeler Mueller, said utilities can no longer take plants off grid for economic reasons, since grid operators and regulators can order them to stay online in exchange for compensation payments.

“We have arrived at a planned economy,” he said.

(Additional reporting by Christoph Steitz and Vera Eckert in Frankfurt, Tracy Rucinski in Madrid and Karolin Schaps in London; Editing by Giles Elgood)

Latest news
Related news