European utilities getting squeezed by growing clamour for nationalisation

Written by Reuters | Paris | Updated: Jan 20 2014, 07:50am hrs
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.

The November referendum in Berlin failed, but in September, citizens of Hamburg, Germanys 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 Europes 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.

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.