Local German utilities to keep fending off rivals

Since liberalisation in 1999, the German market is as open to new entrants as the British market. Giants such as E.ON or RWE have added retail market share in Britain in recent years, while they have lost ground at home to municipal utilities and new market entrants.

The population with the second-highest savings rate in Europe after Switzerland, which coined the phrase “stinginess rocks”, has largely stuck with its roughly 800 municipal utilities rather than hunt for bargains on the power market.

Public opposition also has prevented the sale of at least 19 local utilities, mostly owned by the municipalities in which they operate, over the past 10 years, according to “More Democracy”, a movement that promotes direct democracy through referenda.

“It hasn’t been difficult to gather majorities against the privatisation of local utilities,” said Lars Holtkamp, a professor at Hagen University who specialises in municipal budgets and politics.

Germans’ preference for these so-called Stadtwerke is based on more than price competition. They give communities leeway to offer jobs to young people and finance loss-making services such as swimming pools and public transport, Holtkamp said.

“A local utility is closer to the citizen and can act differently when it’s under municipal control than when it’s owned by a corporation,” said Uwe Wiemann, spokesman of an intiative that prevented privatisation of the utility in the small town of Bad Salzuflen.

Germany’s wholesale energy market is dominated by E.ON, RWE, Energie Baden-Wuerttemberg and the German unit of Sweden’s Vattenfall, which control 80 percent of its power plants and more than half of its gas market, according to the cartel office, the country’s antitrust agency.

Keeping market share
But in the retail market, households and small businesses have been able to choose from dozens of big and small suppliers for more than 10 years, and more than half of them chose to stay with their local utility, their default provider, as of 2008.

In the retail gas market, three percent of customers changed their supplier in 2008, according to the Federal Network Agency, which oversees customer switches of suppliers.

In Britain, by contrast, the retail market is dominated by six large providers, four of them owned by companies based outside Britain, and incumbent suppliers had already lost more than half of their power and gas business by 2007, according to regulator Ofgem.

Germans even are in favour of higher power prices when they are needed to finance wind or solar generation, a survey from polling agency forsa showed.

“Being able to influence the local energy supply towards sustainable solutions is important to us,” said Reinhard Richter, managing director of the Energieverbund Dresden, a city business that holds the municipal utility.

The city of Dresden decided in March to buy back its local utility.

“Owning our municipal utility in the medium term contributes significantly to the city’s budget. Part of the reason is that we can rely on loyal customers,” Richter said.

The move by Dresden is part of a trend to reverse the privatisation of local utilities.

Last year a group of municipal utilities bought Thuega, a holding company with stakes in some 100 local energy suppliers. Now municipal suppliers are in the running to buy RWE’s gas grid and the power plants of Evonik, which holds Germany’s fifth-largest generation portfolio.

Publicly owned ventures are usually well run businesses, according to a study by Datamonitor. It compared large state and investor-owned utilities, and found that public utilities “post above-average profit margins and energy volume returns”.

It found that operating income per employee was lower, indicating the role the utilities play in local labour markets.

Successful acquirers of local ventures on Europe’s largest power market and second-largest gas market have either been owned by local governments or have adjusted strategies to consumer preferences.

“More than in other takeovers, buyers have to make sure they understand the ecological, social and regional interests of the municipal utility and its communal owners,” said investment banker Michael Hegel, managing director of Hegel Karbenn.

Hegel in 2008 advised the municipal owners of EWE, Germany’s fifth-largest utility, when they sold a quarter of the utility to Energie-Baden Wuerttemberg, the country’s fourth-largest power company, for €2bn.

In another example of strategy, MVV, the energy provider majority-owned by the southern German city of Mannheim, bought into eight local utilities, confining itself to minority stakes in all but three of them.