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The 1,000 municipal utilities that are the last link in the German energy supply chain are feeling the pinch of record-high energy prices, raising fears that some of them might go bankrupt.
While large energy companies like Uniper and E.ON receive plenty of attention from German politicians, municipal utilities – local suppliers of gas, water and electricity – are essential links in the energy supply chain.
“The municipal utilities look with great concern at the drastically rising energy procurement prices,” explained a spokesperson for German Association of Local Public Utilities (VKU).
Utilities find themselves “in a sandwich position: they are dependent on their suppliers and at the same time have delivery obligations to their customers,” the spokesperson told EURACTIV.
When energy prices rise, the up-front costs of energy trading increase, the spokesperson explained.
Utilities trade energy ahead of time to ensure they reach a given price, a process that requires a “minimum margin” to safeguard against default. A “margin call” occurs if the funds in the account fall below the minimum margin requirement for a trade, forcing the company to secure it with more cash. When energy prices go up, the cash collateral required also goes up.
Multiple shortages
“We already have a situation that is characterised by multiple shortages: energy, raw materials, and most dangerous, a lack of personnel,” explained Markus Lewe, president of the German association of cities, in an interview with DLF on 3 September.
According to Lewe, their importance is being ignored by Germany’s federal government.
Smaller energy companies tend to be disproportionately hit by massive changes in pricing. They are also more likely to miss out on payments if their customers go bankrupt.
In October 2021, OTIMA, a midsized utility based near Berlin, was the first German energy and gas supplier to file for bankruptcy following electricity price spikes.
Their business model was “based on stable and predictable developments in energy prices within ‘annual normal fluctuations’,” the company said in its filings. OTIMA and other utilities had contractually agreed to supply energy at fixed prices, but with wholesale prices spiking, their business model collapsed.
Utilities that survived this initial spike continue to deliver energy to their customers, although some were forced to raise prices.
“The situation of municipal utilities in Germany varies,” said Lewe from the cities’ association. The main difference, he said, is where they get their gas from and the duration and terms of their contracts.
Some municipal energy utilities, like the one in Bielefeld, credit their continued survival on their ability to keep prices low thanks to their three-year procurement strategy.
“Thanks to our good procurement strategy, we can cushion the burden on citizens,” CEO Rainer Müller said.
The cheap contracts purchased before the energy crisis may not last forever, though.
“The worst is yet to come,” a municipal utility source told EURACTIV.
Protecting utilities
There “is a need for a protective shield for municipal utilities,” a VKU spokesperson insisted, given the liquidity risks that may arise even for the ones in good health.
VKU lists three options for the government to help keep municipal utilities afloat: a “temporary moratorium on insolvency,” a “guarantee framework to cushion the massively increased collateral requirements” in energy trading and, “if necessary,” subsidies to keep them in business.
The German government has, so far, not responded to those demands.
A spokesperson for the ministry of economy and climate action told EURACTIV that aid would be limited to cases where there is “an important interest of the federal government” and where the purpose sought “cannot be better and more economically achieved by other means”.
“There is no legal entitlement to stabilisation; decisions must be made on a case-by-case basis,” the spokesperson added.
German authorities only have to look across the border to see how bad things can get.
Wien Energie, Vienna’s local municipality and the largest energy supplier in neighbouring Austria, has urgently called for a €6 billion bailout in recent days.
Wien Energie’s trading activities had gone awry due to energy price spikes. If Wien Energie defaulted on its payment, it would be excluded from stock exchange trading, said the Austrian finance ministry on 29 August.
On 31 August, the Austrian government negotiated a €2 billion credit framework for the ailing company.
